ACCOUNTING TOOLS FOR BUSINESS DECISION MAKING 8TH EDITION BY PAUL KIMMEL, JERRY WEYGANDT, JILL MITCH by QuentinAxel

ACCOUNTING TOOLS FOR BUSINESS DECISION MAKING 8TH EDITION BY PAUL KIMMEL, JERRY WEYGANDT, JILL MITCHELL TEST BANK

CHAPTER 1 INTRODUCTION TO FINANCIAL STATEMENTS CHAPTER LEARNING OBJECTIVES 1. Identify the forms of business organization and the uses of accounting information. A sole proprietorship is a business owned by one person. A partnership is a business owned by two or more people associated as partners. A corporation is a separate legal entity for which evidence of ownership is provided by shares of stock. Internal users are managers who need accounting information to plan, organize, and run business operations. The primary external users are investors and creditors. Investors (stockholders) use accounting information to decide whether to buy, hold, or sell shares of a company’s stock. Creditors (suppliers and bankers) use accounting information to assess the risk of granting credit or loaning money to a business. Other groups who have an indirect interest in a business are taxing authorities, customers, labor unions, and regulatory agencies. 2. Explain the three principal types of business activity. Financing activities involve collecting the necessary funds to support the business. Investing activities involve acquiring the resources necessary to run the business. Operating activities involve putting the resources of the business into action to generate a profit. 3. Describe the four financial statements and how they are prepared. An income statement presents the revenues and expenses of a company for a specific period of time. A retained earnings statement summarizes the changes in retained earnings that have occurred for a specific period of time. A balance sheet reports the assets, liabilities, and stockholders’ equity of a business at a specific date. A statement of cash flows summarizes information concerning the cash inflows (receipts) and outflows (payments) for a specific period of time. Assets are resources owned by a business. Liabilities are the debts and obligations of the business. Liabilities represent claims of creditors on the assets of the business. Stockholders’ equity represents the claims of owners on the assets of the business. Stockholders’ equity is subdivided into two parts: common stock and retained earnings. The basic accounting equation is Assets = Liabilities + Stockholders’ Equity. Within the annual report, the management discussion and analysis provides management’s interpretation of the company’s results and financial position as well as a discussion of plans for the future. Notes to the financial statements provide additional explanation or detail to make the financial statements more informative. The auditor’s report expresses an opinion as to whether the financial statements present fairly the company’s results of operations and financial position. *4. Explain the career opportunities in accounting. Accounting offers many different jobs in fields such as public and private accounting, governmental, and forensic accounting. Accounting is a popular major because there are many different types of jobs, with unlimited potential for career advancement

1-2

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Difficulties: Easy: 143 Medium: 101 Hard: 12

Question List by Section Business Organization and Accounting Information Uses: Forms of Business Organization; 47, 48, 202, 246 Sole Proprietorship: 5, 44, 49, 58, 59 Partnership: 1, 4, 46, 56 Corporation: 2, 3, 45, 50, 51, 52, 53, 55, 57, 233, 245 Hybrid Forms of Organization: 60, 61 Users and Uses of Financial Information: 6, 7, 11, 74, 87 Internal Users: 62, 63, 64, 75, 77, 82, 234 External Users: 8, 9, 10, 12, 65, 76, 78, 79, 80, 81, 83, 84, 85, 86, 88, 89 Data Analytics: 66, 67, 68, 69, 70, 235, 236 Ethics in Financial Reporting: 71, 72, 73, 237, 255 The Three Types of Business Activity: 97 Financing Activities: 13, 15, 18, 90, 91, 93, 94, 95, 96, 97, 102, 109, 117, 118, 119, 238 Investing Activities: 14, 16, 98, 99, 115, 116 Operating Activities: 17, 19, 20, 100, 101, 103, 104, 105, 106, 107, 108, 110, 111, 112, 113, 114 The Four Financial Statements: Income Statement: 21, 22, 23, 24,127, 128, 132, 133, 134, 138, 142, 143 Retained Earnings Statement: 120, 122, 123, 124, 125, 126, 129, 130, 131, 135, 137, 139, 140, 141, 144, 145, 146, 147, 148, 149, 150, 154, 164, 169, 178, 181, 252 Balance Sheet: 25, 27, 28, 29, 30, 31, 32, 33, 34, 35, 136, 151, 152, 153, 163, 165, 166, 168, 170, 173, 177, 179, 180, 182, 185, 186, 187, 188, 199, 200, 201, 207, 208, 213, 214, 215, 216, 217, 218, 219, 220, 221, 222, 225, 229, 239, 240, 241, 253 Statement of Cash Flows: 26, 121, 171, 174, 183, 242, 249 Interrelationships of Statements: 155, 156, 157, 158, 159, 160, 161, 162, 167, 175, 176, 184, 250, 251, 256 Elements of an Annual Report: 36, 41, 192, 196, 197 Management Discussion and Analysis: 40, 191 Notes to the Financial Statements: 37, 42, 190, 193, 194, 198, 254 Auditor’s Report: 38, 39, 195

Introduction to Financial Statements

1-3

TRUE-FALSE STATEMENTS 1.

A business organized as a separate legal entity and owned by stockholders is a partnership.

Ans: F, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Partnership, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Corporate stockholders have no personal liability for the debts of the corporation.

Ans: T, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Corporation, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

The liability of corporate stockholders is limited to the amount of their investment.

The majority of U.S. business is transacted by partnerships.

Ans: F, LO: 1, Bloom: K, Section: Business Organization and Accounting Information Uses, Subsection: Partnerships, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Sole proprietorships in the United States generate more revenue than the other two forms of business enterprise.

Ans: F, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Sole Proprietorship, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Owners of business firms are the only people who need accounting information.

Ans: F, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Users and Uses of Financial Information, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Some users of accounting information are internal to the company while others are external.

Ans: T, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Users and Uses of Financial Information, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Management of a business enterprise is the major external user of accounting information.

Ans: F, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: External Users, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

External users of accounting information include managers who plan, organize, and run a business.

10.

The accounting information needs and questions of external users vary considerably.

Ans: T, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: External Users, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

11.

Accounting communicates financial information about a business to both internal and external users.

12.

Two primary external users of accounting information are investors and creditors.

1-4 13.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Financing activities for corporations include borrowing money and selling shares of their own stock.

Ans: T, LO: 2, Section: The Three Types of Business Activity, Subsection: Financing Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

14.

Investing activities involve collecting the necessary funds to support the business.

Ans: F, LO: 2, Section: The Three Types of Business Activity, Subsection: Investing Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

15.

The purchase of equipment is an example of a financing activity.

Ans: F, LO: 2, Section: The Three Types of Business Activity, Subsection: Financing Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

16.

Assets are resources owned by a business that provide future services or benefits to the business.

Ans: T, LO: 2, Section: The Three Types of Business Activity, Subsection: Investing Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

17.

Payments by the business to its owners are operating activities.

Ans: F, LO: 2, Section: The Three Types of Business Activity, Subsection: Operating Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

18.

The economic resources owned by a business are called stockholders’ equity.

Ans: F, LO: 2, Section: The Three Types of Business Activity, Subsection: Financing Activities Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

19.

Operating activities involve putting the resources of the business into action to generate a profit.

Ans: T, LO: 2, Section: The Three Types of Business Activity, Subsection: Operating Activities, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

20.

A business is usually involved in only two types of activities—financing and investing.

21.

Net income for the period is determined by subtracting expenses and dividends from revenues.

Ans: F, LO: 3, Section: The Four Financial Statements, Subsection: Income Statement, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

22.

A different set of financial statements is usually prepared for each user.

Ans: F, LO: 3, Section: The Four Financial Statements, Subsection: Income Statement, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

23.

The heading for an income statement prepared for the year ending December 31, 2025 will include the line “As of December 31, 2025.”

24.

Net income is another term for revenue.

25.

Cash is another term for stockholders’ equity.

Ans: F, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Introduction to Financial Statements 26.

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The primary purpose of the statement of cash flows is to provide information about the cash receipts and cash payments of a company for a specific period of time.

Ans: T, LO: 3, Section: The Four Financial Statements, Subsection: Statement of Cash Flows, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

27.

The balance sheet reports assets and claims to those assets at a specific point in time.

Ans: T, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

28.

The basic accounting equation states that Assets = Liabilities.

29.

One way of stating the accounting equation is Assets + Liabilities = Stockholders’ Equity.

Ans: F, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

30.

The accounting equation can be expressed as Assets - Stockholders’ Equity = Liabilities.

Ans: T, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: C, Difficulty: Easy, Medium: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

31.

The accounting equation can be expressed as Assets - Liabilities = Stockholders’ Equity.

Ans: T, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

32.

If the assets of a business total $150,000 and liabilities total $105,000, then its stockholders’ equity totals $45,000.

Ans: T, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $150,000 – $105,000 = $45,000 Total assets – Total liabilities

33.

If the assets owned by a business total $100,000 and liabilities total $65,000, then stockholders’ equity totals $25,000.

Ans: F, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $100,000 - $65,000 = $35,000 Total assets – Total liabilities

34.

Claims of creditors and owners on the assets of a business are called liabilities.

35.

Creditors’ rights to assets supersede owners’ rights to the assets.

36.

All publicly traded U.S. companies must provide their stockholders with an annual report each year.

Ans: T, LO: 3, Section: The Four Financial Statements, Subsection: Elements of an Annual Report, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

37.

Information in the notes to the financial statements has to be quantifiable (numeric).

Ans: F, LO: 3, Section: The Four Financial Statements, Subsection: Notes to the Financial Statements, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

1-6 38.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

An auditor is an accounting professional who conducts an independent examination of a company’s financial statements.

Ans: T, LO: 3, Section: The Four Financial Statements, Subsection: Auditor’s Report, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Professional Demeanor, IMA: Reporting

39.

The auditor’s report states the auditor’s opinion as to the fairness of the presentation of the financial position and results of operations and their conformance with generally accepted accounting principles.

40.

The management discussion and analysis (MD&A) section of an annual report covers various financial aspects of a company.

Ans: T, LO: 3, Section: The Four Financial Statements, Subsection: Management Discussion and Analysis , Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting

41.

Explanatory notes and supporting schedules are an optional part of an annual report.

Ans: F, LO: 3, Section: The Four Financial Statements, Subsection: Elements of an Annual Report, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting

42.

Examples of notes are descriptions of the significant accounting policies and methods used in preparing the statements, explanations of contingencies, and various statistics.

Ans: T, LO: 3,Section: The Four Financial Statements, Subsection: Notes to the Financial Statements Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting

43.

The demand for accountants was increased by passage of the Sarbanes-Oxley Act (SOX) which significantly increased the accounting and internal control requirements for corporations.

Ans: T, LO: 4, Section: Career Opportunities in Accounting, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting

MULTIPLE CHOICE QUESTIONS 44.

The sole proprietorship form of business organization a. must have at least two owners in most states. b. generally receives favorable tax treatment relative to a corporation. c. combines the records of the business with the personal records of the owner. d. is classified as a separate legal entity.

Ans: B, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Sole Proprietorship, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

45.

A business organized as a corporation a. is not a separate legal entity in most states. b. requires that stockholders be personally liable for the debts of the business. c. is owned by its stockholders. d. has tax advantages over a proprietorship or partnership.

Ans: C, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Corporation, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Introduction to Financial Statements 46.

1-7

The partnership form of business organization a. is a separate legal entity. b. is a common form of organization for service-type businesses. c. enjoys an unlimited life. d. has limited liability.

Ans: B, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Partnership, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

47.

Which of the following is not one of the three forms of business organization? a. Corporations b. Partnerships c. Proprietorships d. Investors

Ans: D, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Forms of Business Organization, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

48.

The main forms of business organizations include all of the following except a. Limited Liability Corporations b. Partnerships c. Sole Proprietorships d. Corporations

Ans: A, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Forms of Business Organization, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

49.

Most business enterprises in the United States are a. proprietorships and partnerships. b. partnerships. c. corporations. d. government units.

Ans: A, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Sole Proprietorship, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

50.

A business organized as a separate legal entity is a a. corporation. b. proprietor. c. government unit. d. partnership.

Ans: A, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Corporation, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

51.

Which of the following is not an advantage of the corporate form of business organization? a. No personal liability b. Easy to transfer ownership c. Favorable tax treatment d. Easy to raise funds

1-8

52.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

An advantage of the corporate form of business is that a. it has limited life. b. its owner’s personal resources are at stake. c. its ownership is easily transferable via the sale of shares of stock. d. it is simple to establish.

53.

Which of the following has the advantage of enabling a business to raise funds most easily? a. Entity b. Sole proprietorship c. Corporation d. Partnership

54.

Which of the following is an advantage of corporations relative to partnerships and sole proprietorships? a. Reduced legal liability for investors b. Harder to transfer ownership c. Lower taxes d. Most common form of organization

Ans: A, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Forms of Business Organization, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

55.

Which of the following set of characteristics describes a corporation? a. Shared control, tax advantages, increased skills and resources b. Simple to set up and maintains control with founder c. Easier to transfer ownership and raise funds, no personal liability d. Harder to raise funds and gives owner control

56.

A small neighborhood barber shop that is operated by its two owners would likely be organized as a a. joint venture. b. partnership. c. corporation. d. proprietorship.

Ans: B, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Partnership, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

57.

A local retail shop has been operating as a sole proprietorship. The business is growing and now the owner wants to incorporate. Which of the following is not a reason for this owner to incorporate? a. Ability to raise capital for expansion b. Desire to limit the owner’s personal liability c. The prestige of operating as a corporation d. The ease in transferring shares of the corporation’s stock .

Introduction to Financial Statements

1-9

Ans: C, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Corporation, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

58.

All of the following are advantages for organizing a business as a sole proprietorship except a. a sole proprietorship is a simple form of business to set up. b. a sole proprietorship gives the owner control of the business. c. a sole proprietorship receives more favorable tax treatment. d. a sole proprietorship allows for an easy transfer of ownership through stock sales.

Ans: D, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Sole Proprietorship, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

59.

Jack and Jill form a partnership. Jack runs the business in New York, while Jill vacations in Hawaii. During the time Jill is away from the business, Jack increases the debts of the business by $20,000. Which of the following statements is true regarding this debt? a. Only Jack is personally liable for the debt, since he has been the managing partner during that time. b. Only Jill is personally liable for the debt of the business, since Jack has been working and she has not. c. Both Jack and Jill are personally liable for the business debt. d. Neither Jack nor Jill is personally liable for the business debt, since the partnership is a separate legal entity.

Ans: C, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Sole Proprietorship, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

60.

Hybrid forms of business organization include a. limited liability companies. b. sole proprietorships. c. partnerships d. all of these are hybrid forms of business organization.

Ans: A, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Hybrid Forms of Organization, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

61.

Hybrid forms of business organization a. are not allowed in many states. b. account for the majority of U.S. business transactions. c. combine the tax advantages of corporations with the limited liability advantage of partnerships. d. combine the tax advantages of partnerships with the limited liability advantage of corporations.

Ans: D, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Hybrid Forms of Organization, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

62.

Which one of the following questions is most likely asked by an internal human resources director for the company? a. Which product line is most profitable? b. What price for our product will maximize the company income? c. What average pay raise is affordable for employees this year? d. Should any product lines be eliminated?

Ans: C, LO: 1, Source: Business Organization and Accounting Information Uses, Subsection: Internal Users, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

1-10

63.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Which of the following are reports that accounting provides to internal users? a. Forecasts of cash needs for next year only b. Financial comparisons of operating activity alternatives only c. Both forecasts of cash needs and financial comparisons d. Neither forecasts of cash needs nor financial comparisons

Ans: C, LO: 1, Source: Business Organization and Accounting Information Uses, Subsection: Internal Users, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

64.

Which of the following is the best description of an internal user of accounting information? a. Investors who use accounting information to decide whether to buy or sell stock b. Creditors, such as banks, that use accounting information to evaluate the risk of lending money c. Labor unions who use accounting information to examine the ability of the company to pay increased wages and benefits d. Managers who use accounting information to plan, organize, and run a business

Ans: D, LO: 1, Source: Business Organization and Accounting Information Uses, Subsection: Internal Users, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

65.

An external user of accounting information like the Internal Revenue Service is most commonly known as a a. taxing authority. b. labor union. c. customer. d. regulatory agency.

Ans: A, LO: 1, Source: Business Organization and Accounting Information Uses, Subsection: External Users, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

66.

Types of data analytics include all of the following except a. prescriptive. b. predictive. c. authoritative. d. diagnostic.

Ans: C, LO: 1, Source: Business Organization and Accounting Information Uses, Subsection: Data Analytics, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

67.

Predictive analytics can be used to answer the question a. “What is likely to happen?”. b. “Why did it happen?”. c. “What should we do about it?”. d. “What happened?”.

Ans: A, LO: 1, Source: Business Organization and Accounting Information Uses, Subsection: Data Analytics, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

68.

Prescriptive analytics can be used to answer the question a. “What is likely to happen?”. b. “Why did it happen?”. c. “What should we do about it?”. d. “What happened?”. .

Introduction to Financial Statements

1-11

Ans: C, LO: 1, Source: Business Organization and Accounting Information Uses, Subsection: Data Analytics, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

69.

Descriptive analytics can be used to answer the question a. “What is likely to happen?”. b. “Why did it happen?”. c. “What should we do about it?”. d. “What happened?”.

Ans: D, LO: 1, Source: Business Organization and Accounting Information Uses, Subsection: Data Analytics, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

70.

Diagnostic analytics can be used to answer the question a. “What is likely to happen?”. b. “Why did it happen?”. c. “What should we do about it?”. d. “What happened?”.

Ans: B, LO: 1, Source: Business Organization and Accounting Information Uses, Subsection: Data Analytics, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

71.

Which of the following statements is not true regarding the Sarbanes-Oxley Act (SOX)? a. The Act calls for increased oversight responsibilities for boards of directors. b. The Act has resulted in increased penalties for financial fraud by top management. c. The Act calls for decreased independence of outside auditors reviewing corporate financial statements. d. The goal of the Act is to decrease the likelihood of unethical corporate behavior.

Ans: C, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Ethics in Financial Reporting, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Ethics, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

72.

Which of the following is not a step for solving an ethical dilemma? a. Identify the alternatives and weigh the impact of each alternative on various stakeholders. b. Certify the ethical accuracy of the financial information. c. Identify and analyze the principal elements in the situation. d. Recognize the ethical situation and issues involved.

Ans: B, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Ethics in Financial Reporting, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Ethics, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Professional Behavior, IMA: Reporting

73.

What is the first step in solving an ethical dilemma? a. Weigh the impact of alternative solutions on various stakeholders. b. Identify the alternative solutions. c. Identify the stakeholders. d. Recognize an ethical situation and the issues involved.

Ans: D, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Ethics in Financial Reporting, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Ethics, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Professional Behavior, IMA: Reporting

74.

Which of the following is the most appropriate definition of accounting? a. The information system that identifies, records, and communicates the economic events of an organization to interested users. b. A means of collecting information. c. The interconnected network of subsystems necessary to operate a business. .

1-12

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

d. Electronic collection, organization, and communication of vast amounts of information. Ans: A, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Users and Uses of Accounting Information, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

75.

Which of the following would not be considered an internal user of accounting data for the Amazon? a. President of the company b. Production manager c. Merchandise inventory clerk d. President of the employees' labor union

Ans: D, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Internal Users, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

76.

Which of the following groups uses accounting information primarily to insure that the entity is operating within prescribed rules? a. Investors b. Regulatory agencies c. Labor Unions d. Management

Ans: B, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: External Users, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Professional Behavior, IMA: Reporting

77.

The users of accounting information charged with achieving the goals of the business are its a. auditors. b. investors. c. managers. d. creditors.

Ans: C, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Internal Users, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Industry/Sector Perspective, AICPA AC: None, AICPA PC: Decision Making, IMA: Reporting

78.

Which external group uses accounting information to determine whether the company can pay its obligations? a. Investors in common stock b. Marketing managers c. Creditors d. Chief Financial Officer

Ans: C, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: External Users, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

79.

Which external group uses accounting information to determine whether the company’s operating performance might result in a stock price increase? a. Investors in common stock b. Marketing managers c. Creditors d. Chief Financial Officer

Ans: A, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: External Users, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Introduction to Financial Statements

80.

1-13

Which of the following groups uses accounting information to determine whether a marketing proposal will be cost effective? a. Investors in common stock b. Marketing managers c. Creditors d. Chief Financial Officer

Ans: B, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: External Users, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Project Management, IMA: Reporting

81.

Which of the following would not be considered an external user of accounting data for the Tesla Corporation? a. Internal Revenue Service agent b. Management c. Creditors d. Customers

82.

Which of the following would not be considered an internal user of Patagonia’s accounting data? a. The president of the company b. The controller of the company c. Creditor of the company d. Salesperson of the company

Ans: C, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Internal Users, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

83.

Which of the following is an example of a primary user of Walmart’s accounting information with a direct financial interest in the business? a. Taxing authority b. Creditor c. Regulatory agency d. Labor union

84.

Which of the following is a user of accounting information with an indirect financial interest in a business? a. A financial adviser b. Management c. Investor d. Creditor

85.

Which of the following is not considered an external user of accounting information? a. Finance directors .

1-14

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

b. Regulatory agencies c. Creditors d. Stockholders Ans: A, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: External Users, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

86.

Which type of corporate information about Target Corporation is readily available to investors? a. Financial comparison of operating alternatives b. Marketing strategies for a product that will be introduced in eighteen months c. Forecasts of cash needs for the upcoming year d. Amount of net income retained in the business

Ans: D, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: External Users, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

87.

Which of the following statements concerning users of accounting information is incorrect? a. Management is considered an internal user. b. Present creditors are considered external users. c. Regulatory authorities are considered internal users. d. Taxing authorities are considered external users.

Ans: C, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Users and Uses of Financial Information, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

88.

External users of GameStop’s financial information want answers to all of the following questions except: a. Is the company earning satisfactory income? b. Will the company be able to pay its debts as they come due? c. Will the company be able to afford employee pay raises this year? d. How does the company compare in profitability with competitors?

89.

Which type of corporate financial information is not available to investors? a. Dividend history b. Forecast of cash needs for the upcoming year c. Cash provided by investing activities d. Beginning cash balance

90.

The liability created by Old Navy when it purchases cleaning supplies on credit from a supplier is termed a(n) a. account payable. b. account receivable. c. revenue. d. expense.

Ans: A, LO: 2, Section: The Three Types of Business Activity, Subsection: Financing Activities, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

91.

The right to receive money in the future is called a(n) a. account payable. b. account receivable. c. liability. .

Introduction to Financial Statements

1-15

d. revenue. Ans: B, LO: 2, Section: The Three Types of Business Activity, Subsection: Financing Activities, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

92.

Which of the following is not a principal type of business activity? a. Operating b. Investing c. Financing d. Delivering

Ans: D, LO: 2, Section: The Three Types of Business Activity, Subsections: Financing Activities, Investing Activities, Operating Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

93.

Borrowing money is an example of a(n) a. delivering activity. b. financing activity. c. investing activity. d. operating activity.

Ans: B, LO: 2, Section: The Three Types of Business Activity, Subsection: Financing Activities, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

94.

Issuing shares of stock in exchange for cash is an example of a(n) a. delivering activity. b. investing activity. c. financing activity. d. operating activity.

Ans: C, LO: 2, Section: The Three Types of Business Activity, Subsection: Financing Activities, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

95.

Debt securities sold to investors that must be repaid at a particular date some years in the future are called a. accounts payable. b. notes receivable. c. taxes payable. d. bonds payable.

Ans: D, LO: 2, Section: The Three Types of Business Activity, Subsection: Financing Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

96.

Which of the following activities involves obtaining the necessary funds to support the business? a. Operating b. Investing c. Financing d. Delivering

Ans: C, LO: 2, Section: The Three Types of Business Activity, Subsection: Financing Activities, Bloom: K, Difficulty: Medium Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

97.

Which one of the following represents the typical order of occurrence of the three business activities for a new company? a. Financing, investing, operating b. Investing, financing operating c. Operating, investing, financing .

1-16

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

d. Financing, operating, investing Ans: A, LO: 2, Section: The Three Types of Business Activity, Subsection: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

98.

Buying assets needed to operate a business is an example of a(n) a. delivering activity. b. financing activity. c. investing activity. d. operating activity.

Ans: C, LO: 2, Section: The Three Types of Business Activity, Subsection: Investing Activities, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

99.

Which activities involve acquiring the resources to run the business? a. Delivering b. Financing c. Investing d. Operating

100.

Which activities involve putting the resources of the business into action to generate a profit? a. Delivering b. Financing c. Investing d. Operating

Ans: D, LO: 2, Section: The Three Types of Business Activity, Subsection: Operating Activities, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

101.

Where can an investor find information about operating activities in a company’s financial statements? a. On the statement of cash flows only b. On the income statement only c. On the statement of cash flows and the income statement d. On all four financial statements

Ans: C, LO: 2, Section: The Three Types of Business Activity, Subsection: Operating Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

102.

The statement of cash flows would disclose the payment of a dividend a. nowhere on the statement. b. in the operating activities section. c. in the investing activities section. d. in the financing activities section.

Ans: D, LO: 2, Section: The Three Types of Business Activity, Subsection: Financing Activities, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

103.

Buying and selling products are examples of a. operating activities. b. investing activities. c. financing activities. d. delivering activities. .

Introduction to Financial Statements

1-17

Ans: A, LO: 2, Section: The Three Types of Business Activity, Subsection: Operating Activities, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

104.

Which of the following would not be considered an asset of Target Corporation? a. Cash b. Buildings c. Land d. Common Stock

Ans: D, LO: 2, Section: The Three Types of Business Activity, Subsection: Operating Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

105.

Expenses are incurred a. only on rare occasions. b. to produce assets. c. to produce liabilities. d. to generate revenues.

106.

The cost of assets consumed or services used is also known as a(n) a. revenue. b. expense. c. liability. d. asset.

Ans: B, LO: 2, Section: The Three Types of Business Activity, Subsection: Operating Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

107.

Resources owned by a business are referred to as a. stockholders’ equity. b. liabilities. c. assets. d. revenues.

108.

The best definition of assets is the a. cash owned by the company. b. collections of resources belonging to the company and the claims on these resources. c. owners’ investment in the business. d. resources belonging to a company that have future benefit to the company.

109.

Debts and obligations of a business are referred to as a. assets. b. equities. c. liabilities. d. expenses.

Ans: C, LO: 2, Section: The Three Types of Business Activity, Subsection: Financing Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

1-18

110.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Suppose that Forever 21 Company recorded the following cash transactions for the year: Paid $135,000 for salaries. Paid $60,000 to purchase office equipment. Paid $15,000 for utilities. Paid $6,000 in dividends. Collected $275,000 from customers. What was Forever 21’s net cash provided by operating activities? a. $125,000 b. $65,000 c. $140,000 d. $119,000

Ans: A, LO: 3, Section: The Three Types of Business Activity, Subsection: Operating Activities, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $275,000  $135,000  $15,000  $125,000 (Cash coll. – sal. paid – util. paid)

111.

Suppose that Ralph Lauren Company recorded the following cash transactions for the year: Paid $180,000 for salaries. Paid $80,000 to purchase office equipment. Paid $20,000 for utilities. Paid $8,000 in dividends. Collected $350,000 from customers. What was Ralph Lauren’s net cash provided by operating activities? a. $150,000 b. $70,000 c. $170,000 d. $142,000

Ans: A, LO: 3, Bloom: AP, Section: The Three Types of Business Activity, Subsection: Operating Activities, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $350,000  $180,000  $20,000  $150,000 (Cash coll. – sal. paid – util. paid)

112.

When expenses exceed revenues, which of the following is true? a. a net loss results b. a net income results c. assets equal liabilities d. assets are increased

Ans: A, LO: 3, Section: The Three Types of Business Activity, Subsection: Operating Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

113.

Which of the following is an asset? a. Mortgage payable b. Investments .

Introduction to Financial Statements

1-19

c. Common stock d. Retained earnings Ans: B, LO: 2, Section: The Three Types of Business Activity, Subsection: Operating Activities, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

114.

Which of the following is not a liability? a. Unearned Service Revenue b. Accounts Payable c. Accounts Receivable d. Interest Payable

Ans: C, LO: 2, Section: The Three Types of Business Activity, Subsection: Operating Activities, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

115.

Which of the following is an investing activity for Target? a. Issuing shares of stock for cash b. Purchasing inventory c. Paying warehouse workers’ salaries d. Purchasing computer equipment

Ans: D, LO: 2, Section: The Three Types of Business Activity, Subsection: Investing Activities, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

116.

Which of the following is an investing activity for Patagonia? a. Purchasing materials to make clothing b. Paying for social media advertising c. Purchasing manufacturing equipment d. Paying executive salaries

Ans: C, LO: 2, Section: The Three Types of Business Activity, Subsection: Investing Activities, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

117.

Liabilities a. are future economic benefits. b. are debts and obligations. c. possess service potential. d. are things of value owned by a business.

Ans: B, LO: 2, Section: The Three Types of Business Activity, Subsection: Financing Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

118.

Liabilities of a company are owed to its a. debtors. b. owners. c. creditors. d. stockholders.

119.

Stockholders’ equity can be described as claims of a. creditors on total assets. b. owners on total assets. c. customers on total assets. d. debtors on total assets.

Ans: B, LO: 2, Section: The Three Types of Business Activity, Subsection: Financing Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA

1-20

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

120.

Payments to stockholders are called a. expenses. b. liabilities. c. dividends. d. assets.

Ans: C, LO: 2, Section: The Four Financial Statements, Subsection: Retained Earnings Statement, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

121.

Which of the following financial statements is divided into major categories of operating, investing, and financing activities? a. The income statement b. The balance sheet c. The retained earnings statement d. The statement of cash flows

Ans: D, LO: 3, Bloom: K, Section: The Four Financial Statements, Subsection: Statement of Cash Flows, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

122.

The retained earnings statement shows all of the following except: a. the amounts of changes in retained earnings during the period. b. the causes of changes in retained earnings during the period. c. the time period following the one shown for the income statement. d. beginning retained earnings on the first line of the statement.

Ans: C, LO: 3, Section: The Four Financial Statements, Subsection: Retained Earnings Statement, Bloom: K, Difficulty: Medium , Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

123.

Ending retained earnings for a period is equal to beginning a. Retained earnings + Net income + Dividends. b. Retained earnings – Net income – Dividends. c. Retained earnings + Net income – Dividends. d. Retained earnings – Net income + Dividends.

Ans: C, LO: 3, Section: The Four Financial Statements, Subsection: Retained Earnings Statement, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

124. Suppose that American Eagle Company's records show the following for the month of January: Total retained earnings at January 1 ........................................ $432,000 Total retained earnings at January 31 ...................................... 450,000 Total revenues ......................................................................... 2,160,000 Total dividends declared .......................................................... 140,000 How much are total expenses for January? a. $2,002,000 b. $2,318,000 c. $1,984,000 d. None of the answer choices are correct. Ans: A, LO: 3, Section: The Four Financial Statements, Subsection: Retained Earnings Statement, Bloom: AP, Difficulty: Hard, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $432,000 + $2,160,000 - $140,000 - $450,000 = $2,002,000 (Beg. RE + Revenues – Div. – End. RE)

125.

Suppose that at the beginning of January 2025, Walgreens had a balance in its Retained Earnings account totaling $42,000. At the end of the year, the balance totaled $47,000. If $11,000 of dividends were declared and paid during the year, what was 2025 net income? .

Introduction to Financial Statements a. b. c. d.

1-21

$5,000 $16,000 $53,000 $6,000

Ans: B, LO: 3, Section: The Four Financial Statements, Subsection: Retained Earnings Statement, Bloom: AP, Difficulty: Hard, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $47,000 + $11,000 - $42,000 = $16,000 (End,. RE + Div. – Beg.RE)

126.

Which of the following items will be reported on the Retained Earnings Statement? a. Cash received from customers b. Amounts received from issuing stock c. Amounts owed to creditors d. Profits earned by a company

Ans: D, LO: 3, Section: The Four Financial Statements, Subsection: Retained Earnings Statement, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

127.

Which one of the following is not the correct date format for the respective financial statement? a. A balance sheet as of May 31, 2025 b. A Retained Earnings Statement as of May 31, 2025 c. An income statement for the month ended May 31, 2025 d. A statement of cash flows for the month ended May 31, 2025

Ans: B, LO: 3, Section: The Four Financial Statements, Subsection: Income Statement, Retained Earnings Statement, Balance Sheet, Statement of Cash Flows, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

128.

Which of the following statements is true? a. Amounts received from issuing stock are revenues. b. Amounts paid out as dividends are not expenses. c. Amounts paid out as dividends are reported on the income statement. d. Amounts received from issued stock are reported on the income statement.

Ans: B, LO: 3, Section: The Four Financial Statements, Subsection: Income Statement, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

129.

Dividends are reported on the a. income statement. b. retained earnings statement. c. balance sheet. d. income statement and balance sheet.

Ans: B, LO: 3, Section: The Four Financial Statements, Subsection: Retained Earnings Statement, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

130.

Dividends declared and paid a. increase assets. b. increase expenses. c. decrease revenues. d. decrease retained earnings.

Ans: D, LO: 3, Section: The Four Financial Statements, Subsection: Retained Earnings Statement, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

131.

The financial statement that summarizes the changes in retained earnings for a specific period of time is the a. balance sheet. .

1-22

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

b. income statement. c. statement of cash flows. d. retained earnings statement. Ans: D, LO: 3, Section: The Four Financial Statements, Subsection: Retained Earnings Statement, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

132.

To show how successfully its business performed during a period of time, Home Depot reports its revenues and expenses in the a. balance sheet. b. income statement. c. statement of cash flows. d. retained earnings statement.

Ans: B, LO: 3, Section: The Four Financial Statements, Subsection: Income Statement, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

133.

Net income results when a. Assets > Liabilities. b. Revenues = Expenses. c. Revenues > Expenses. d. Revenues < Expenses.

Ans: C, LO: 3, Section: The Four Financial Statements, Subsection: Income Statement, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

134.

Net income will result during a time period when a. assets exceed liabilities. b. assets exceed revenues. c. expenses exceed revenues. d. revenues exceed expenses.

Ans: D, LO: 3, Section: The Four Financial Statements, Subsection: Income Statement, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

135.

Retained earnings at the end of the period is equal to a. retained earnings at the beginning of the period plus net income minus liabilities. b. retained earnings at the beginning of the period plus net income minus dividends. c. net income. d. assets plus liabilities.

Ans: B, LO: 3, Section: The Four Financial Statements, Subsection: Retained Earnings Statement, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

136.

Which of the following financial statements is concerned with the company at a point in time? a. Balance sheet b. Income statement c. Retained earnings statement d. Statement of cash flows

Ans: A, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

137.

The company’s policy toward dividends and growth could best be determined by examining the .

Introduction to Financial Statements a. b. c. d.

1-23

balance sheet. income statement. retained earnings statement. statement of cash flows.

Ans: C, LO: 3, Section: The Four Financial Statements, Subsection: Retained Earnings Statement, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

138.

An income statement a. summarizes the changes in retained earnings for a specific period of time. b. reports the changes in assets, liabilities, and stockholders’ equity over a period of time. c. reports the assets, liabilities, and stockholders’ equity at a specific date. d. presents the revenues and expenses for a specific period of time.

139.

If Amazon’s retained earnings account increases from the beginning of the year to the end of the year, then a. net income is less than dividends. b. a net loss is less than dividends. c. additional investments are less than net losses. d. net income is greater than dividends.

140.

Target’s retained earnings statement would not show a. the retained earnings beginning balance. b. revenues and expenses. c. dividends. d. the ending retained earnings balance.

Ans: B, LO: 3, Section: The Four Financial Statements, Subsection: Retained Earnings Statement, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

141.

If the retained earnings account decreases from the beginning of the year to the end of the year, then a. net income is less than dividends. b. there was a net income and no dividends. c. additional investments are less than net losses. d. net income is greater than dividends.

Ans: A, LO: 3, Section: The Four Financial Statements, Subsection: Retained Earnings Statement, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

142.

Which financial statement is prepared first? a. Balance sheet b. Income statement c. Retained earnings statement d. Statement of cash flows

1-24 143.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

An income statement shows a. revenues, liabilities, and stockholders’ equity. b. expenses, dividends, and stockholders’ equity. c. revenues, expenses, and net income. d. assets, liabilities, and stockholders’ equity.

144.

In a study session, a classmate makes this statement “Dividends are listed as expenses on the income statement.” What is your best response to this statement? a. I’ve been struggling with that concept and I feel that dividends should be shown on the balance sheet as assets. b. You are right. Revenues and expenses are shown on the income statement. Dividends are a cost of generating revenues and that makes them an expense. Why else would a corporation pay dividends? c. Dividends represent a portion of corporate profits paid to the shareholders. They belong on the retained earnings statement. d. Dividends are deducted from retained earnings on the balance sheet.

Ans: C, LO: 3, Section: The Four Financial Statements, Subsection: Retained Earnings Statement, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

145.

Suppose that Uber Company began the year with retained earnings of $380,000. During the year, the company recorded revenues of $500,000, expenses of $380,000, and paid dividends of $40,000. What was Uber’s retained earnings balance at the end of the year? a. $540,000 b. $460,000 c. $840,000 d. $500,000

Ans: B, LO: 3, Section: The Four Financial Statements, Subsection: Retained Earnings Statement, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $380,000 + ($500,000  $380,000)  $40,000  $460,000 (Beg.R/E + (rev.- exp.) – div.)

146.

Kardashian Company began the year 2025 with retained earnings of $670,000. During the year, the company sold additional shares of stock for $1,000,000, recorded revenues of $600,000, expenses of $380,000, and paid dividends of $140,000. What was Kardashian’s retained earnings balance at the end of 2025? a. $1,030,000 b. $750,000 c. $1,130,000 d. $600,000

Ans: B, LO: 3, Section: The Four Financial Statements, Subsection: Retained Earnings Statement, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $670,000 + ($600,000  $380,000)  $140,000  $750,000 (Beg .R/E + (rev.- exp.) – div.)

147.

A1 Company began the year with retained earnings of $100,000. During 2025, the company issued $80,000 of common stock for cash. The company recorded revenues of $740,000, expenses of $640,000, and paid dividends of $40,000. What was A1’s net income for the year 2025? a. $60,000 b. $140,000 .

Introduction to Financial Statements

1-25

c. $100,000 d. $180,000 Ans: C, LO: 3, Section: The Four Financial Statements, Subsection: Retained Earnings Statement, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $740,000  $640,000  $100,000 (Rev. – exp.)

148.

Ace Company began the year by issuing $120,000 of common stock for cash. The company recorded revenues of $1,100,000, expenses of $960,000, and paid dividends of $60,000. What was Ace’s net income for the year? a. $80,000 b. $200,000 c. $140,000 d. $260,000

Ans: C, LO: 3, Section: The Four Financial Statements, Subsection: Retained Earnings Statement, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $1,100,000  $960,000  $140,000 (Rev. – exp.)

149.

Acme Corporation began the year with retained earnings of $310,000. During the year, the company issued $420,000 of common stock, recorded expenses of $1,200,000, and paid dividends of $80,000. If Acme’s ending retained earnings was $330,000, what was the company’s revenue for the year? a. $1,220,000 b. $1,300,000 c. $1,640,000 d. $1,720,000

Ans: B, LO: 3, Section: The Four Financial Statements, Subsection: Retained Earnings Statement, Bloom: AN, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $330,000 + $80,000 + $1,200,000  $310,000  $1,300,000 (End. R/E + div. paid + exp. – beg. R/E)

150.

A1 Supply Corporation began 2025 with total stockholders’ equity of $1,270,000, including retained earnings of $930,000. During the year, the company issued $1,260,000 of common stock, recorded expenses of $3,600,000, and paid dividends of $240,000. If A1 Supply’s ending retained earnings was $990,000, what was the company’s revenue for 2025? a. $3,660,000 b. $3,900,000 c. $4,920,000 d. $5,160,000

Ans: B, LO: 3, Section: The Four Financial Statements, Subsection: Retained Earnings Statement, Bloom: AN, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $990,000 + $240,000 + $3,600,000  $930,000  $3,900,000 (End. R/E + div. paid + exp. – beg. R/E)

151.

A balance sheet shows a. revenues, liabilities, and stockholders’ equity. b. expenses, dividends, and stockholders’ equity. c. revenues, expenses, and dividends. d. assets, liabilities, and stockholders’ equity. .

1-26

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ans: D, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

152.

The accounting equation may be expressed as a. Assets = Stockholders’ Equity – Liabilities. b. Assets = Liabilities + Stockholders’ Equity. c. Assets + Liabilities = Stockholders’ Equity. d. Assets + Stockholders’ Equity = Liabilities.

Ans: B, Section: The Four Financial Statements, Subsection: Balance Sheet, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

153.

Which of the following is not a satisfactory statement of the accounting equation? a. Assets = Stockholders’ Equity – Liabilities b. Assets = Liabilities + Stockholders’ Equity c. Assets - Liabilities = Stockholders’ Equity d. Assets - Stockholders’ Equity = Liabilities

154.

Ace Repair Shop started the year with total assets of $300,000 and total liabilities of $240,000. During the year, the business recorded $630,000 in revenues, $330,000 in expenses, and dividends of $60,000. Assuming that no common stock was sold during the year, stockholders’ equity at the end of the year was a. $360,000. b. $300,000. c. $240,000. d. $270,000.

Ans: B, LO: 3, Section: The Four Financial Statements, Subsection: Retained Earnings Statement, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($300,000  $240,000)  ($630,000  $330,000)  $60,000  $300,000 [Beg. tot. assets – beg. tot. liab.) + (rev. - exp.) – div.]

155.

Ace Repair Shop started the year with total assets of $300,000 and total liabilities of $240,000. During the year, the business recorded $630,000 in revenues, $330,000 in expenses, and dividends of $60,000. The net income reported by Ace Repair Shop for the year was a. $240,000. b. $300,000. c. $180,000. d. $570,000.

Ans: B, LO: 3, Section: The Four Financial Statements, Subsection: Interrelationships of Statements, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $630,000  $330,000  $300,000 (Rev. – exp.)

156.

Acme Inc. started the month of June 2025 with total assets of $210,000 and total liabilities of $120,000. During June, the business recorded $330,000 in revenues, $165,000 in expenses, and dividends of $60,000. Assuming that no common stock was sold during the year, stockholders’ equity at the end of June was a. $180,000. b. $165,000. c. $195,000. d. $105,000.

Ans: C, LO: 3, Section: The Four Financial Statements, Subsection: Interrelationships of Statements, Bloom: AP, Difficulty: Medium, Min: 3, AACSB:

Introduction to Financial Statements

1-27

Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($210,000  $120,000)  ($330,000  $165,000)  $60,000  $195,000 [Beg. tot. assets – beg. tot. liab.) + (rev. - exp.) – div.]

157.

Acme Inc. started the month of June 2025 with total assets of $210,000 and total liabilities of $120,000. During June, the business recorded $330,000 in revenues, $165,000 in expenses, and dividends of $60,000. The net income reported by Acme for the month of June was a. $120,000. b. $150,000. c. $195,000. d. $165,000.

Ans: D, LO: 3, Section: The Four Financial Statements, Subsection: Interrelationships of Statements, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $330,000  $165,000  $165,000 (Rev. – exp.)

158.

If total liabilities increased by $90,000 and stockholders’ equity increased by $30,000 during a period of time, then total assets must change by what amount and direction during that same period? a. $120,000 decrease b. $120,000 increase c. $150,000 increase d. $180,000 increase

Ans: B, LO: 3, Section: The Four Financial Statements, Subsection: Interrelationships of Statements, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $90,000  $30,000  $120,000 (Tot. liab. inc. + st. eq. inc.)

159.

The total liabilities of Acme Construction Co. decreased by $90,000 during the month of August 2025. Stockholders’ equity increased by $30,000 during this period. By what amount and in what direction must total assets have changed during August? a. $120,000 increase b. $60,000 decrease c. $60,000 increase d. $90,000 decrease

Ans: B, LO: 3, Section: The Four Financial Statements, Subsection: Interrelationships of Statements, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($90,000)  $30,000  ($60,000) (Tot. liab. dec. + st. eq. inc.)

160.

During September 2025, Ace Diner’s total liabilities decreased by $75,000 and its stockholders’ equity increased by $15,000. The company’s total assets must change by what amount and in what direction during that same period? a. $60,000 decrease .

1-28

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

b. $60,000 increase c. $75,000 increase d. $90,000 increase Ans: A, LO: 3, Section: The Four Financial Statements, Subsection: Interrelationships of Statements, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($75,000)  $15,000  ($60,000) (Tot. liab. dec. + st. eq. inc.)

161.

A1 Company’s total liabilities decreased by $105,000 and its stockholders’ equity decreased by $35,000 during a period of time. By what amount and in what direction must the company’s total assets have changed during that same period? a. $140,000 increase b. $70,000 decrease c. $140,000 decrease d. $70,000 decrease

Ans: C, LO: 3, Section: The Four Financial Statements, Subsection: Interrelationships of Statements, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($105,000)  ($35,000)  ($140,000) (Tot. liab. dec. + st. eq. dec.)

162.

If total liabilities increased by $69,000 during a period of time and stockholders’ equity decreased by $27,000 during the same period, then the amount and direction (increase or decrease) of the period’s change in total assets is a(n) a. $69,000 increase. b. $96,000 increase. c. $42,000 decrease. d. $42,000 increase.

Ans: D, LO: 3, Section: The Four Financial Statements, Subsection: Interrelationships of Statements, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $69,000  $27,000  $42,000 increase. (Tot. liab. inc. - st. eq. dec.)

163.

The balance sheet a. summarizes the changes in retained earnings for a specific period of time. b. reports the changes in assets, liabilities, and stockholders’ equity over a period of time. c. reports the assets, liabilities, and stockholders’ equity at a specific date. d. presents the revenues and expenses for a specific period of time.

Ans: C, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

164.

The retained earnings statement a. summarizes the changes in retained earnings for a specific period of time. b. reports the changes in assets, liabilities, and stockholders’ equity over a period of time. c. reports the assets, liabilities, and stockholders’ equity at a specific date. d. presents the revenues and expenses for a specific period of time.

Ans: A, LO: 3, Section: The Four Financial Statements, Subsection: Retained Earnings Statement, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Introduction to Financial Statements 165.

1-29

Common stock is reported on the a. statement of cash flows. b. retained earnings statement. c. income statement. d. balance sheet.

166.

Stockholders’ equity is comprised of a. common stock and dividends. b. common stock and retained earnings. c. dividends and retained earnings. d. net income and retained earnings.

Ans: B, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

167.

Acme Corporation began the month of May with $58,000 of obligations and $180,000 of economic resources. Stockholders’ equity increased by $22,000 during May because the company paid $123,000 of dividends and generated net income totaling $145,000. How much is total stockholders’ equity at the end of May? a. $33,000 b. $144,000 c. $122,000 d. $111,000

Ans: B, LO: 3, Section: The Four Financial Statements, Subsection: Interrelationships of Statements, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Sol: $180,000 - $58,000 = $122,000; $122,000 + $22,000 = $144,000 (Assets – Liabilities = Beg. equity + Increase in equity = End. Equity)

168.

Stockholders’ equity a. is usually equal to cash on hand. b. is equal to liabilities and retained earnings. c. includes retained earnings and common stock. d. is shown on the income statement.

169.

Retained earnings is a. the stockholders’ claim on total assets. b. equal to cash. c. equal to revenues. d. the amount of net income kept in the corporation for future use.

Ans: D, LO: 3, Section: The Four Financial Statements, Subsection: Retained Earnings Statement, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

170.

Which financial statement would best indicate whether the company relies on debt or stockholders’ equity to finance its assets? a. Statement of cash flows b. Retained earnings statement c. Income statement .

1-30

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

d. Balance sheet Ans: D, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

171.

The primary purpose of the statement of cash flows is to report a. a company's investing transactions. b. a company's financing transactions. c. information about cash receipts and cash payments of a company. d. the net increase or decrease in cash.

Ans: C, LO: 3, Section: The Four Financial Statements, Subsection: Statement of Cash Flows, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

172.

Claims of owners are called a. dividends. b. stockholders’ equity. c. liabilities. d. income payable.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

173.

Which of the following is not a common way that managers use the balance sheet? a. To analyze the balances of assets, liabilities, and stockholders’ equity throughout the accounting period b. To determine if the cash balance is sufficient for future needs c. To analyze the balance between debt and common stock financing d. To analyze the balance of accounts receivable on the last day of the accounting period

Ans: A, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

174.

Why are financial statement users interested in the statement of cash flows? a. It is the easiest financial statement to evaluate. b. It provides information about an important company resource. c. It is the first statement that is presented to users. d. It helps users decide whether assets such as office equipment should be replaced.

Ans: B, LO: 3, Section: The Four Financial Statements, Subsection: Statement of Cash Flows, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

175.

Why should the income statement be prepared first? a. The statement of cash flows should be prepared first because it determines the sources of cash. That information is then used in preparing the income statement. b. Net income from the income statement flows into the retained earnings statement. The ending retained earnings balance then flows into the balance sheet. c. The income statement does not have to be prepared first. Financial statements can be prepared in any order. d. None of these answer choices are correct.

Ans: B, LO: 3, Section: The Four Financial Statements, Subsection: Interrelationships of Statements, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

176.

Which one of the following statements is true concerning the interrelationships of financial statements? a. Net income on the income statement equals the cash balance at the end of the period on the balance sheet. b. The ending balance of retained earnings on the Retained Earnings Statement is .

Introduction to Financial Statements

c. d.

1-31

equal to net income on the income statement. The amount of net income on the income statement is added to the beginning retained earnings balance on the Retained Earnings Statement. The amount of cash used during the period on the statement of cash flows is equal to total expenses on the income statement.

Ans: C, LO: 3, Section: The Four Financial Statements, Subsection: Interrelationships of Statements, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

177.

Ace Company compiled the following financial information as of December 31, 2025: Service revenue $840,000 Common stock 180,000 Equipment 240,000 Operating expenses 750,000 Cash 210,000 Dividends 60,000 Supplies 30,000 Accounts payable 120,000 Accounts receivable 90,000 Retained earnings, 1/1/2025 240,000 Ace’s total assets on December 31, 2025 are a. $1,410,000. b. $1,020,000. c. $480,000. d. $570,000.

Ans: D, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $240,000  $210,000  $30,000  $90,000  $570,000 (Equip. + cash + sup. + A/R)

178.

Ace Company compiled the following financial information as of December 31, 2025: Service revenue $840,000 Common stock 180,000 Equipment 240,000 Operating expenses 750,000 Cash 210,000 Dividends 60,000 Supplies 30,000 Accounts payable 120,000 Accounts receivable 90,000 Retained earnings, 1/1/2025 240,000 Ace’s retained earnings balance on December 31, 2025 is a. $240,000. b. $330,000. c. $270,000. d. $ 30,000.

1-32

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution: $240,000  ($840,000  $750,000)  $60,000  $270,000 (Beg. R/E + (ser. rev. – oper. exp.) – div.)

Introduction to Financial Statements 179.

1-33

Ace Company compiled the following financial information as of December 31, 2025: Service revenue $840,000 Common stock 180,000 Equipment 240,000 Operating expenses 750,000 Cash 210,000 Dividends 60,000 Supplies 30,000 Accounts payable 120,000 Accounts receivable 90,000 Retained earnings, 1/1/2025 240,000 Ace’s stockholders’ equity on December 31, 2025 is a. $420,000. b. $450,000. c. $270,000. d. $510,000.

Ans: B, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $180,000  [$240,000  ($840,000  $750,000)  $60,000]  $450,000 (Com. st. + beg. R/E + (ser. rev. – oper. exp.) – div.)

180.

A1 Supply Company compiled the following financial information as of December 31, 2025: Service revenue $1,120,000 Common stock 240,000 Equipment 320,000 Salaries and wages expense 400,000 Rent expense 100,000 Depreciation expense 500,000 Cash 280,000 Dividends 80,000 Supplies 40,000 Accounts payable 160,000 Accounts receivable 120,000 Retained earnings, 1/1/2025 320,000 A1’s total assets at December 31, 2025 are a. $1,880,000. b. $1,360,000. c. $640,000. d. $760,000.

Ans: D, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $320,000  $280,000  $40,000  $120,000  $760,000 (Equip. + cash + sup. + A/R)

1-34 181.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

A1 Supply Company compiled the following financial information as of December 31, 2025: Service revenue $1,120,000 Common stock 240,000 Equipment 320,000 Salaries and wages expense 400,000 Rent expense 100,000 Depreciation expense 500,000 Cash 280,000 Dividends 80,000 Supplies 40,000 Accounts payable 160,000 Accounts receivable 120,000 Retained earnings, 1/1/2025 320,000 A1’s retained earnings balance at December 31, 2025 is a. $320,000. b. $440,000. c. $360,000. d. $40,000.

Ans: C, LO: 3, Section: The Four Financial Statements, Subsection: Retained Earnings Statement, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $320,000  ($1,120,000  $400,000 - $100,000 - $500,000)  $80,000  $360,000 (Beg. R/E + (ser. rev. – salaries and wages exp.- rent exp. – depreciation exp.) – div.)

182.

A1 Supply Company compiled the following financial information as of December 31, 2025: Service revenue $1,120,000 Common stock 240,000 Equipment 320,000 Salaries and wages expense 400,000 Rent expense 100,000 Depreciation expense 500,000 Cash 280,000 Dividends 80,000 Supplies 40,000 Accounts payable 160,000 Accounts receivable 120,000 Retained earnings, 1/1/2025 320,000 A1’s total stockholders’ equity at December 31, 2025 is a. $560,000. b. $600,000. c. $360,000. d. $680,000.

Ans: B, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $240,000  [$320,000  ($1,120,000  $400,000 - $100,000 - $500,000)  $80,000]  $600,000 (Com. st. + beg. R/E + (ser. rev – salaries and wages exp.- rent exp. – depreciation exp.) – div.)

Introduction to Financial Statements 183.

1-35

The heading on the statement of cash flows identifies all of the following except a. the preparer of the statement. b. the company c. the time period covered by the statement. d. the type of statement.

Ans: A, LO: 3, Section: The Four Financial Statements, Subsection: Statement of Cash Flows, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

184.

All of the following are interrelationships that are important to understand when preparing financial statements except a. the net income from the income statement is used in the retained earnings statement. b. the ending retained earnings from the retained earnings statement is used in the stockholders’ equity section of the balance sheet. c. the cash on the balance sheet should be equal to the cash at the end of the period on the statement of cash flows. d. all of the payments on the balance sheet should be equal to the cash payments for operating activities on the statement of cash flows.

Ans: D, LO: 3, Section: The Four Financial Statements, Subsection: Interrelationships of Statements, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

185.

Acme Services Corporation had the following accounts and balances: Accounts payable $30,000 Equipment $35,000 Accounts receivable 5,000 Land 35,000 Buildings 70,000 Unearned service revenue 10,000 Cash 15,000 Total stockholders' equity ? If Acme pays $5,000 of Accounts Payable in cash, total stockholders' equity would be a. $135,000. b. $120,000. c. $170,000. d. $130,000.

Ans: B, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: AN, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($5,000  $70,000  ($15,000 - $5,000)  $35,000  $35,000)  [($30,000 - $5,000)  $10,000]  $120,000 [A/R + Bldg. bal. + (cash bal. – A/P pd.) + equip. + land] – [(A/P bal – A/P pd.) + un. ser. rev.]

186.

Suppose that Old Navy had the following accounts and balances: Accounts payable $30,000 Equipment $35,000 Accounts receivable 5,000 Land 35,000 Buildings 40,000 Unearned service revenue 10,000 Cash 15,000 Total stockholders' equity ? If Old Navy paid $10,000 of Accounts Payable in cash, total liabilities and stockholders' equity would be a. $90,000. b. $78,000. c. $80,000. d. $120,000.

Ans: D, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: AN, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $5,000  $40,000  ($15,000 - $10,000)  $35,000  $35,000  $120,000 [A/R + Bldg. bal. + (Cash bal. – A/P pd.) + equip. + land] = Total assets = Total liabilities and stockholders’ equity

1-36 187.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Suppose that Ben & Jerry’s had the following accounts and balances: Accounts payable $30,000 Equipment $35,000 Accounts receivable 5,000 Land 35,000 Buildings ? Unearned service revenue 10,000 Cash 15,000 Total stockholders' equity ? If total stockholders’ equity is $95,000, what is the balance of the Buildings account? a. $35,000 b. $135,000 c. $145,000 d. $45,000

Ans: D, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: AN, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($30,000  $10,000  $95,000)  ($5,000  $15,000  $35,000  $35,000)  $45,000 (A/P + un. ser. rev. + tot. st. eq.) – (A/R + cash + equip. + land)

188.

Acme Construction Company had the following accounts and balances: Accounts payable $30,000 Equipment $35,000 Accounts receivable 5,000 Land 35,000 Buildings 75,000 Unearned service revenue 10,000 Cash 15,000 Total stockholders' equity ? If the equipment was sold for $35,000, what would be the total of stockholders' equity? a. $65,000 b. $90,000 c. $115,000 d. $125,000

Ans: D, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: AN, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $5,000  $75,000  ($15,000  $35,000)  $35,000  ($30,000  $10,000)  $125,000 (A/R + Bldg. bal. + cash + equip. + land) - (A/P + un. ser. rev.)

189.

A1 Services Corporation had the following accounts and balances: Accounts payable $30,000 Equipment $35,000 Accounts receivable 5,000 Land 35,000 Buildings ? Unearned service revenue 10,000 Cash 15,000 Total stockholders' equity ? If the balance of the Buildings account was $85,000, what would be the total of liabilities and stockholders' equity? a. $170,000 b. $175,000 c. $135,000 d. $125,000

Ans: B, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: AN, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $5,000  $85,000  $15,000  $35,000  $35,000  $175,000 (A/R + Bldg. bal. + cash + equip. + land)

Introduction to Financial Statements 190.

1-37

Notes to the financial statements include all of the following except a. descriptions of significant accounting policies used. b. explanations of uncertainties. c. projected accounting information. d. statistics needed to understand the statements.

Ans: C, LO: 3, Section: The Four Financial Statements, Subsection: Notes to the Financial Statements, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

191.

The management discussion and analysis (MD&A) section of the annual report covers all of the following aspects except the a. ability of the company to pay near-term obligations. b. certification criteria of the company's auditors. c. company's ability to fund operations and expansion. d. results of the company operations.

Ans: B, LO: 3, Section: The Four Financial Statements, Subsection: Management Discussion and Analysis , Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

192.

An annual report includes all of the following except a. management discussion and analysis section. b. notes to the financial statements. c. an auditor’s report. d. a list of all customers.

Ans: D, LO: 3, Section: The Four Financial Statements, Subsection: Elements of an Annual Report Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

193.

Which of the following clarifies information presented in the financial statements, as well as expanding upon it where additional detail is needed? a. Auditor’s report b. Management discussion and analysis section c. Notes to the financial statements d. President’s state of the company report

194.

The information needed to determine whether a company is using accounting methods similar to those of its competitors is found in the a. auditor’s report. b. balance sheet. c. management discussion and analysis section. d. notes to the financial statements.

Ans: D, LO: 3, Section: The Four Financial Statements, Subsection: Notes to the Financial Statements, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

195.

In Target’s annual report, where would a financial statement reader find out if the company’s financial statements give a fair depiction of its financial position and operating results? a. Notes to the financial statements b. Management discussion and analysis section c. Balance sheet d. Auditor’s report

Ans: D, Section: The Four Financial Statements, Subsection: Auditor’s Report, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

1-38 196.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Management’s views on the company’s short-term debt paying ability, expansion financing, and results of operations are found in the a. auditor’s report. b. management discussion and analysis section. c. notes to the financial statements. d. president’s state of the company report.

Ans: B, LO: 3, Section: The Four Financial Statements, Subsection: Elements of an Annual Report, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

197.

Which of the following statements is true? a. Publicly traded U.S. companies must provide an annual report to their shareholders when operating conditions change significantly. b. An unqualified independent auditor’s report must be included in the annual report. c. Notes to the financial statements do not need to be included in the annual report because that information is only for internal users. d. A company’s annual report normally includes the financial statements with notes, a management and discussion analysis section, and the independent auditor’s report.

Ans: D, LO: 3, Section: The Four Financial Statements, Subsection: Elements of an Annual Report, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

198.

Notes to the financial statements a. are optional. b. help clarify information presented in the financial statements. c. are generally brief and few in number. d. need not be read in detail if an unqualified opinion accompanies the financial statements.

Ans: B, LO: 3, Section: The Four Financial Statements, Subsection: Notes to the Financial Statements, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

199.

Based on the following data, what are total assets? Accounts payable………………………………………………………. Accounts receivable……………………………………………………. Cash……………………………………………………………………… Inventory…………………………………………………………………. Buildings…………………………………………………………………. Bonds payable…………………………………………………………... Supplies………………………………………………………………….. Notes payable…………………………………………………………… Equipment……………………………………………………………….. a. b. c. d.

$62,000 50,000 70,000 138,000 160,000 500,000 8,000 56,000 340,000

$822,000 $766,000 $758,000 $708,000

Ans: B, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $50,000 + $70,000 + $138,000 + $160,000 + $8,000 + $340,000  $766,000 (Total liab. – Total SE)

Introduction to Financial Statements 200.

Based on the following data, what are total liabilities? Accounts payable……………………………………………………….. Accounts receivable…………………………………………………….. Cash………………………………………………………………………. Inventory………………………………………………………………….. Buildings………………………………………………………………….. Bonds payable…………………………………………………………… Supplies…………………………………………………………………... Notes payable……………………………………………………………. Equipment………………………………………………………………... a. b. c. d.

1-39

$ 62,000 50,000 70,000 138,000 160,000 500,000 8,000 56,000 340,000

$618,000 $562,000 $556,000 $118,000

Ans: A, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $62,000 + $500,000 + $56,000 = $618,000 (Acc. Pay. + Bonds Pay. + Notes Pay.)

201.

Based on the following data and assuming that the common stock account balance is $48,000, what is the balance in retained earnings? Accounts payable……………………………………………………….. $ 62,000 Accounts receivable…………………………………………………….. 50,000 Cash………………………………………………………………………. 70,000 Inventory………………………………………………………………….. 138,000 Buildings………………………………………………………………….. 160,000 Bonds payable…………………………………………………………… 500,000 Supplies…………………………………………………………………... 8,000 Notes payable……………………………………………………………. 56,000 Equipment………………………………………………………………… 340,000 a. b. c. d.

$218,000 $162,000 $148,000 $100,000

Ans: D, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $50,000 + $70,000 + $138,000 + $160,000 + $8,000 + $340,000  $766,000; $62,000 + $500,000 + $56,000 = $618,000; $766,000 - $618,000 - $48,000 = $100,000 (Total assets – Total liab. – Com. Stk.)

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

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BRIEF EXERCISES Be. 202 Indicate in the space by letter whether each statement below applies to a sole proprietorship (S), partnership (P), or corporation (C). More than one answer may be appropriate. a. Simple to establish b. Shared control c. Easy to transfer ownership d. No personal liability e. Tax advantage f.

Easier to raise funds

Ans: N/A, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Forms of Business Organization, Bloom: C, Difficulty: Medium, Min: 5, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 202 a.

S&P

P&C

S&P

Be. 203 Indicate in the space provided by each item whether it would appear on the statement of cash flows as a(n): (O) operating activity, (I) investing activity, or (F) financing activity. a. Cash receipts from customers b. Issuance of common stock for cash c. Payment of cash dividends d. Cash purchase of equipment e. Cash payments to suppliers f.

Sale of old machine for cash

Ans: N/A, LO: 2, Section: The Four Financial Statements, Subsections: Statement of Cash Flows, Bloom: C, Difficulty: Medium, Min: 5, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 203 a.

Introduction to Financial Statements

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Be. 204 Ace Company had the following transactions during the month of April. Indicate in the space provided by each item whether it would be reflected in the statement of cash flows as a(n): (O) operating activity, (I) investing activity, or (F) financing activity. a. Collected cash from customers in exchange for services performed b. Borrowed money from the High Country Bank c. Purchased equipment for cash d. Purchased goods for resale by paying cash e. Paid cash to employees f.

Repaid loan to High Country Bank

Ans: N/A, LO: 2, Section: The Four Financial Statements, Subsections: Statement of Cash Flows,, Bloom: C, Difficulty: Medium, Min: 5, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 204 a.

Be. 205 Use the following information to calculate for the year ended December 31, 2025 (a) net income (net loss), (b) ending retained earnings, and (c) total assets. Supplies $ 1,500 Operating expenses 10,000 Accounts payable 11,000 Accounts receivable 4,000 Common stock 10,000 Retained earnings (beginning) 5,000

Service revenue Cash Dividends Notes payable Equipment

$19,000 15,000 6,000 1,000 9,500

Ans: N/A, LO: 3, Section: The Four Financial Statements, Subsections: Interrelationships of Statements, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 205 (a) $9,000

(b) $8,000

(Ser. rev. – Oper. exp.) ($19,000 – $10,000) $15,000 + $9,500)

(Beg. ret. earn. + Net inc. – dividends) (Sup. + Acc. rec. + Cash + Equip.) ($5,000 + $9,000 [from (a)] - $6,000) ($1,500 + $4,000 +

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Be. 206 Use the following information to calculate for the year ended December 31, 2025: (a) net income (net loss), (b) ending retained earnings, and (c) total liabilities. Prepaid insurance $ 1,000 Operating expenses 12,000 Accounts payable 9,000 Accounts receivable 3,000 Common stock 9,000 Retained earnings (beginning) 5,000 Equipment 50,000

Service revenue Cash Dividends Notes payable Equipment Bonds payable

$18,000 15,000 1,000 1,000 13,000 50,000

Ans: N/A, LO: 3, Section: The Four Financial Statements, Subsections: Interrelationships of Statements, , Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 206 (a) $6,000

(b) $10,000

(Ser. rev. – Oper. exp.) Bonds pay) ($18,000 - $12,000)

(Beg. ret. earn. + Net inc. – dividends)

(Acc. pay. + Notes pay. +

($5,000 + $6,000 [from (a)] - $1,000)

($9,000 + 1,000 + $50,000)

Be. 207 Listed below in alphabetical order are the balance sheet items of Acme Company at December 31, 2025. Prepare a balance sheet and include a complete heading. Accounts payable Accounts receivable Buildings Cash Common stock Equipment Land Retained earnings

$11,000 15,000 65,000 11,000 80,000 10,000 31,000 41,000

Ans: N/A, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Introduction to Financial Statements

1-43

Solution 207 ACME COMPANY Balance Sheet December 31, 2025 ASSETS Cash Accounts receivable Equipment Buildings Land Total assets

$ 11,000 15,000 10,000 65,000 31,000 $132,000 LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities Accounts payable

$ 11,000

Stockholders’ equity Common stock Retained earnings Total liabilities and stockholders’ equity

$80,000 41,000

121,000 $132,000

Be. 208 Listed below in alphabetical order are selected financial statement items of Ace Service Company at December 31, 2025, its first period of operations. Prepare the assets section of Ace Company’s balance sheet at that date. Accounts payable Accounts receivable Buildings Cash Common stock Insurance expense Land Equipment Rent expense Retained earnings (beginning) Service revenue Supplies

$ 7,000 5,000 95,000 9,000 100,000 2,000 35,000 40,000 12,000 -050,000 500

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 208 ACE SERVICE COMPANY Balance Sheet (partial) December 31, 2025 ASSETS Cash Supplies Accounts receivable Equipment Buildings Land Total assets

$ 9,000 500 5,000 40,000 95,000 35,000 $184,500

Be. 209 Indicate in the space provided by each item whether it would appear on the income statement (IS), balance sheet (BS), or retained earnings statement (RE): a.

Service Revenue

Accounts Receivable

Utilities Expense

Common Stock

Cash

Equipment

Accounts Payable

Advertising Expense

Supplies

Dividends

Salaries and Wages Expense

Notes Payable

Ans: N/A, LO: 3, Section: The Four Financial Statements, Subsections: Income Statement, Retained Earnings Statement, Balance Sheet, Bloom: C, Difficulty: Medium, Min: 5, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 209 a. b. c. d. e. f.

IS IS BS BS BS IS

g. h. i. j. k. l.

BS BS BS IS RE BS

Introduction to Financial Statements

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Be. 210 Ryan Seacrest was reviewing his company’s activities at the end of the year (2025) and decided to prepare a retained earnings statement. At the beginning of the year, his assets were $530,000, liabilities were $140,000, and common stock was $120,000. The net income for the year was $250,000. Dividends of $220,000 were paid during the year. Prepare a retained earnings statement in good form. Ans: N/A, LO: 3, Section: The Four Financial Statements, Subsections: Interrelationships of Statements, , Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 210 RYAN SEACREST COMPANY Retained Earnings Statement For the Year Ended December 31, 2025 Retained Earnings, Beginning Add: Net Income Less: Dividends Retained Earnings, Ending

$270,000* 250,000 520,000 220,000 $300,000

*(Assets – liab. – com. stock) = ($530,000 - $140,000 - $120,000) = $270,000

Be. 211 At January 1, 2025, the assets of Ace Construction Company were $1,030,000 and liabilities were $740,000. The balance in common stock was $150,000. During 2025, Ace earned revenue of $190,000 and had expenses of $110,000. Dividends of $50,000 were paid during the year. The company also purchased equipment in exchange for a $35,000 note payable. Prepare a retained earnings statement in good form. Ans: N/A, LO: 3, Section: The Four Financial Statements, Subsections: Retained Earnings Statement, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 211 ACE CONSTRUCTION COMPANY Retained Earnings Statement For the Year Ended December 31, 2025 Retained Earnings, Beginning Add: Net Income ($190,000 - $110,000) Less: Dividends Retained Earnings, Ending *(Assets – liab. – com. stock) = ($1,030,000 - $740,000 - $150,000) = $140,000

$140,000* 80,000 220,000 50,000 $170,000

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

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Be. 212 From the following list of selected accounts taken from the records of Grey Sloan Memorial Clinic, identify those that would appear on the balance sheet. a. b. c. d. e.

Common Stock Service Revenue Land Salaries and Wages Expense Notes Payable

f. g. h. i. j.

Accounts Payable Cash Advertising Expense Supplies Utilities Expense

Ans: N/A, LO: 3, Section: The Four Financial Statements, Subsections: Balance Sheet, Bloom: C, Difficulty: Easy, Min: 5, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 212 a, c, e, f, g, i Be. 213 Determine the missing items. Assets = Liabilities + Stockholders’ Equity $80,000 (b) $84,000

$56,000 $28,000 (c)

(a) $34,000 $55,000

Ans: N/A, LO: 5, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 213 a. $24,000

b. $62,000

(Assets – Liab.) ($80,000 - $56,000)

(Liab. + Stock. Equity) ($28,000 + $34,000)

c. $29,000 (Assets – Stock. Equity) ($84,000 - $55,000)

Be. 214 Determine the missing items. Assets = Liabilities + Stockholders’ Equity $66,000 (b) $54,000

$50,000 $18,000 (c)

(a) $30,000 $40,000

Solution 214 .

Introduction to Financial Statements a. $16,000

b. $48,000

(Assets – Liab.) ($66,000 - $50,000)

(Liab. + Stock. Equity) ($18,000 + $30,000)

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c. $14,000 (Assets – Stock. Equity) ($54,000 - $40,000)

Be. 215 Identify which of the following accounts appear on a balance sheet. (a) Service revenue (b) Cash (c) Common stock (d) Accounts payable (e) Rent expense (f) Supplies (g) Land Ans: N/A, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 215 (b) , (c), (d), (f), (g) Be. 216 For the items listed below, fill in the appropriate code letter to indicate whether the item is an asset, liability, stockholders’ equity, or income statement item. Code Asset Liability Stockholders’ Equity Income Statement

A L SE IS

1. Rent Expense

6. Cash

2. Equipment

7. Accounts Receivable

3. Accounts Payable

8. Retained Earnings

4. Common Stock

9. Service Revenue

5. Insurance Expense

10.

Notes Payable

Ans: N/A, LO: 3, Section: The Four Financial Statements, Subsections: Income Statement, Balance Sheet, Bloom: C, Difficulty: Easy, Min: 5, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 216 1. 2. 3. 4. 5.

IS A L SE IS

6. 7. 8. 9. 10.

A A SE IS L

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

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Be. 217 Classify each of these items as an asset (A), liability (L), or stockholders’ equity (SE). 1. 2. 3. 4. 5. 6. 7. 8.

Accounts receivable Accounts payable Common stock Supplies Retained earnings Cash Notes payable Equipment

Ans: N/A, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: C, Difficulty: Easy, Min: 5, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 217 1. 2. 3. 4.

A L SE A

5. 6. 7. 8.

SE A L A

Be. 218 At the beginning of the year, Gant Company had total assets of $660,000 and total liabilities of $300,000. Answer the following questions viewing each situation as being independent of the others. (1)

If total assets increased $225,000 during the year, and total liabilities decreased $100,000, what is the amount of stockholders’ equity at the end of the year?

(2)

During the year, total liabilities increased $215,000 and stockholders’ equity decreased $130,000. What is the amount of total assets at the end of the year?

(3)

If total assets decreased $60,000 and stockholders’ equity increased $150,000 during the year, what is the amount of total liabilities at the end of the year?

Ans: N/A, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 218 Total Assets (1) Beginning $660,000 Change 225,000 Ending $885,000

Total Liabilities $300,000 (100,000) $200,000

Stockholders’ Equity =

$685,000 (1)

(End. Tot. Assets – End. Tot. Liab.)

(2) Beginning Change Ending

Total Assets $660,000 $745,000 (2)

(End. Tot. Liab + End. Stock. Equity.)

Total Liabilities $300,000 215,000 $515,000

Stockholders’ Equity $360,000 (130,000) + $230,000

Introduction to Financial Statements Total Assets (3) Beginning $660,000 Change (60,000) Ending $600,000

Total Liabilities $300,000 =

$ 90,000 (3)

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Stockholders’ Equity $360,000 150,000 $510,000

(End. Tot. Assets – End. Stock. Equity.)

Be. 219 A1 Carpet Cleaning has the following balance sheet items: Buildings Accounts Payable Cash Supplies Accounts Receivable Identify which items are

Notes Payable Common Stock Retained Earnings Equipment Land (1) Assets (2) Liabilities (3) Stockholders’ Equity

Ans: N/A, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: C, Difficulty: Medium, Min: 5, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 219 (1) Assets—Buildings, Cash, Supplies, Accounts Receivable, Equipment, Land (2) Liabilities—Accounts Payable, Notes Payable (3) Stockholders’ Equity—Common Stock, Retained Earnings

Be. 220 On June 1, 2025, Ace Supply Company prepared a balance sheet that showed the following: Assets (no cash) .......................................................................... $125,000 Liabilities ................................................................................. 75,000 Stockholders’ Equity ................................................................. 50,000 Shortly thereafter, all of the assets were sold for cash. How would the balance sheet appear immediately after the sale of the assets for cash for each of the following cases? Cash Received for the Assets Cash A

$135,000

Cash B

120,000

Cash C

105,000

Assets $

Balances Immediately After Sale – Liabilities = Stockholders’ Equity $

Ans: N/A, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

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Solution 220

Cash A Cash B Cash C

Cash Received for the Assets $135,000 120,000 105,000

Balances Immediately After Sale Assets Liabilities = Stockholders’ Equity $135,000 $75,000 $60,000 (Assets – Liab.) 120,000 75,000 45,000 (Assets – Liab.) 105,000 75,000 30,000 (Assets – Liab.)

Be. 221 Compute the missing amount in each category of the accounting equation.

(a) (b) (c)

Assets $243,000 $183,000 $ ?

Liabilities $ ? $ 75,000 $212,000

Stockholders’ Equity $ 91,000 $ ? $310,000

Ans: N/A, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: AN, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 221 (a) $152,000: ($243,000 - $91,000 = $152,000). (Assets – Stock. Equity = Liabilities) (b) $108,000: ($183,000 - $75,000 = $108,000). (Assets – Liab. = Stock. Equity) (c) $522,000: ($212,000 + $310,000 = $522,000). (Liab. + Stock Equity = Assets) Be. 222 Compute the missing amount in each category of the accounting equation.

(a) (b) (c)

Assets $1,060,000 $85,000 $ ?

Liabilities $ ? $ 35,000 $21,000

Stockholders’ Equity $900,000 $ ? $42,000

Solution 222 (a) $160,000: ($1,060,000 - $900,000 = $160,000). (Assets – Stock. Equity = Liabilities) (b) $50,000: ($85,000 - $35,000 = $50,000). (Assets – Liab. = Stock. Equity) (c) $63,000: ($21,000 + $42,000 = $63,000). (Liab. + Stock Equity = Assets)

Introduction to Financial Statements

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

EXERCISES Ex. 223 Prepare an income statement and a retained earnings statement, for the month of October 2025 and a balance sheet at October 31, 2025 for the medical practice of Meredith Grey, MD, from the items listed below. Retained earnings (October 1) Common stock Accounts payable Equipment Service revenue Dividends Insurance expense Cash Utilities expense Supplies Salaries and wages expense Accounts receivable Rent expense

$15,000 30,000 6,000 29,000 23,000 6,000 3,500 11,000 700 2,800 9,000 10,000 2,000

MEREDITH GREY, MD Income Statement For the Month Ended October 31, 2025 Revenues

Expenses

Total expenses

Net income

Introduction to Financial Statements Ex. 223

1-53

(Cont.) MEREDITH GREY, MD Retained Earnings Statement For the Month Ended October 31, 2025

Retained Earnings, October 1 Add:

Less:

MEREDITH GREY , MD Balance Sheet October 31, 2025 Assets $

Total assets $ Liabilities and Stockholders’ Equity Liabilities $ Stockholders’ Equity $ Total liabilities and stockholders’ equity

Ans: N/A, LO: 3, Section: The Four Financial Statements, Subsections: Interrelationships of Statements, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 223 MEREDITH GREY, MD Income Statement For the Month Ended October 31, 2025 Revenues Service revenue ............................................................................. Expenses Salaries and wages expense ......................................................... $9,000 Insurance expense ........................................................................ 3,500 Rent expense ................................................................................ 2,000 Utilities expense ............................................................................ 700 Total expenses ........................................................................ Net income ...........................................................................................

$23,000

15,200 $ 7,800

MEREDITH GREY, MD Retained Earnings Statement For the Month Ended October 31, 2025 Retained Earnings, October 1 ............................................................. Add: Net income .................................................................................. Less: Dividends ................................................................................... Retained Earnings, October 31 ...........................................................

$15,000 7,800 22,800 6,000 $16,800

MEREDITH GREY, MD Balance Sheet October 31, 2025 Assets Cash ...................................................................................................... Accounts receivable ............................................................................ Supplies .............................................................................................. Equipment ........................................................................................... Total assets ...................................................................................

$11,000 10,000 2,800 29,000 $52,800

Liabilities and Stockholders’ Equity Liabilities Accounts payable ..........................................................................

$ 6,000

Stockholders’ Equity Common stock .................................................................................... $30,000 Retained earnings ........................................................................... 16,800 Total liabilities and stockholders’ equity .........................................

46,800 $52,800

Introduction to Financial Statements

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Ex. 224 Use the following accounts and information to prepare, in good form, an income statement and a retained earnings statement, for the month of August and a balance sheet at August 31, 2025 for Acme Industries. Accounts payable Accounts receivable Equipment Cash Service revenue Common stock Retained earnings (beginning)

$ 1,100 5,400 63,000 18,600 25,700 52,000 25,900

Dividends Insurance expense Supplies Notes payable Rent expense Salaries and wages expense

$ 3,000 1,200 1,400 3,300 3,400 12,000

ACME INDUSTRIES Income Statement For the Month Ended August 31, 2025 Revenues $ Expenses $ Total expenses Net income

ACME INDUSTRIES Retained Earnings Statement For the Month Ended August 31, 2025 Retained Earnings, August 1 Add:

Less:

Retained Earnings, August 31

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ex. 224

(Cont.) ACME INDUSTRIES Balance Sheet August 31, 2025 Assets $

Total assets $ Liabilities and Stockholders’ Equity Liabilities $ $ Stockholders’ Equity $ Total liabilities and stockholders’ equity

Solution 224 ACME INDUSTRIES Income Statement For the Month Ended August 31, 2025 Revenues Service revenue ............................................................................. Expenses Salaries and wages expense ......................................................... Rent expense ................................................................................ Insurance expense ........................................................................ Total expenses ........................................................................ Net income ..............................................................................

$25,700 $12,000 3,400 1,200 16,600 $9,100

Introduction to Financial Statements Solution 224

1-57

(Cont.) ACME INDUSTRIES Retained Earnings Statement For the Month Ended August 31, 2025

Retained Earnings, August 1 ............................................................... Add: Net income .................................................................................

$25,900 9,100 35,000 3,000 $32,000

Less: Dividends ................................................................................... Retained Earnings, August 31 ............................................................. ACME INDUSTRIES Balance Sheet August 31, 2025 Assets Cash …................................................................................................ Accounts receivable ............................................................................ Supplies .............................................................................................. Equipment............................................................................................ Total assets ................................................................................... Liabilities and Stockholders’ Equity Liabilities Notes payable ..................................................................................... Accounts payable ................................................................................ Total liabilities..................................................................................... Stockholders’ Equity Common stock ............................................................................... Retained earnings .......................................................................... Total liabilities and stockholders’ equity .........................................

$18,600 5,400 1,400 63,000 $88,400

$ 3,300 1,100 $4,400 52,000 32,000

84,000 $88,400

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ex. 225 At September 1, 2025, the balance sheet accounts for A1 Steakhouse Restaurant were as follows: Accounts Payable $ 3,800 Land $33,000 Accounts Receivable 1,600 Common Stock ? Buildings 66,000 Notes Payable 46,000 Cash 5,000 Supplies 3,600 Equipment 15,700 Retained Earnings 45,200 The following transactions occurred during the next two days: On September 2, stockholders invested an additional $20,000 cash in the business. The accounts payable were paid in full. Instructions Assuming these were the only two transactions during the first three days of September, prepare a balance sheet at September 3, 2025. Ans: N/A, LO: 3, Bloom: AP, Section: The Four Financial Statements, Subsection: Balance Sheet, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 225 A1 STEAKHOUSE RESTAURANT Balance Sheet September 3, 2025 ASSETS Cash Accounts receivable Supplies Land Buildings Equipment Total assets

$ 21,200 1,600 3,600 33,000 66,000 15,700 $141,100

LIABILITIES AND STOCKHOLDERS’ EQUITY Liabilities Notes payable Stockholders’ Equity $49,900 Common stock Retained earnings 45,200 Total liabilities and stockholders’ equity Cash ($5,000 + $20,000 - $3,800) = $21,200 Accounts Payable ($3,800 - $3,800) = $0 Common Stock = Beginning balance ($124,900a - $95,000b) $29,900 Additional investment 20,000 Ending balance (a–b) + addl. investment $49,900 a

Acc. rec. + Build. + Beg. Cash + Equip. + Land + Supp. = $1,600 + $66,000 + $5,000 + $15,700 + $33,000 + 3,600 = $124,900

Acc. pay. + Notes pay. + Ret. earn. = $3,800 + $46,000 + $45,200 = $95,000

$ 46,000 95,100 $141,100

Introduction to Financial Statements

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Ex. 226 This information relates to Acme Service Co. for the year 2025. Retained earnings, January 1, 2025 Advertising expense Dividends paid during 2025 Rent expense Service revenue Utilities expense Salaries and wages expense

$59,000 1,800 9,000 10,400 52,000 2,400 25,000

Instructions After analyzing the data, prepare an income statement and a retained earnings statement for the year ending December 31, 2025. Ans: N/A, LO: 3, Section: The Four Financial Statements, Subsections: Income Statement, Interrelationships of Statements, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 226 ACME SERVICE CO. Income Statement For the Year Ended December 31, 2025 Revenues Service revenue ............................................................................ Expenses Salaries and wages expense ......................................................... Rent expense ................................................................................ Utilities expense ............................................................................ Advertising expense ...................................................................... Total expenses ........................................................................ Net income ..........................................................................................

$52,000 $25,000 10,400 2,400 1,800 39,600 $12,400

ACME SERVICE CO. Retained Earnings Statement For the Year Ended December 31, 2025 Retained earnings, January 1 ............................................................. Add: Net income ................................................................................. Less: Dividends ................................................................................... Retained earnings, December 31 ........................................................

$59,000 12,400 71,400 9,000 $62,400

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ex. 227 Here are incomplete financial statements for Kardashian, Inc. KARDASHIAN, INC. Balance Sheet Assets Cash Inventory Buildings Total assets

$ 5,000 10,000 40,000 $55,000

Liabilities and Stockholders' Equity Liabilities Accounts payable $ 5,000 Stockholders' equity Common stock (a) Retained earnings (b) Total liabilities and stockholders' equity $55,000

Income Statement Revenues Cost of goods sold Administrative expenses Net income

$80,000 (d) 10,000 $ (c)

Retained Earnings Statement Beginning retained earnings Net income Dividends Ending retained earnings

$10,000 (c) 5,000 $24,000

Instructions Calculate the missing amounts. Ans: N/A, LO: 3, Section: The Four Financial Statements, Subsections: Interrelationships of Statements, Balance Sheet, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 227 First note that the retained earnings statement shows that (b) equals $24,000. Accounts payable + Common stock + Retained earnings = Total liabilities and stockholders' equity (a) $5,000 + a + $24,000 = $55,000 a + $29,000 = $55,000 a = $26,000 [Tot liab. & Stock. equity – (Acct. pay. + End. ret. earn)] (b) $24,000 = Ending retained earnings per Retained Earnings Statement (c) Beginning retained earnings + Net income – Dividends = Ending retained earnings $10,000 + (c) – $5,000 = $24,000 $5,000 + (c) = $24,000 c = $19,000 [End. ret. earn. + div. – Beg. ret. earn.] (d) Revenue – Cost of goods sold – Administrative expenses = Net income $80,000 – (d) – $10,000 = $19,000 $70,000 – (d) = $19,000 (d) Cost of Goods Sold = $51,000 .

Introduction to Financial Statements

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Ex. 228 Holly’s Hipcamp is a private camping ground near the Pisgah National Forest. It has compiled the following financial information as of December 31, 2025. Services revenues (from camping fees) Sales revenues (from general store) Accounts payable Cash Equipment

$132,000 25,000 13,000 13,500 108,000

Dividends Notes payable Administrative expenses Supplies Common stock Retained earnings (1/1/2025)

$ 8,000 50,000 133,000 2,500 40,000 5,000

Instructions (a) Determine net income for Holly’s Hipcamp for 2025. (b) Prepare a retained earnings statement and a balance sheet for Holly’s Hipcamp as of December 31, 2025. Ans: N/A, LO: 3, Section: The Four Financial Statements, Subsections: Interrelationships of Statements, Balance Sheet, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 228 (a) Service revenue ............................................................................ $132,000 Sales revenue ............................................................................... 25,000 Total revenue .......................................................................... 157,000 Administrative Expenses ............................................................... 133,000 Net income .................................................................................... $ 24,000 HOLLY’S HIPCAMP Retained Earnings Statement For the Year Ended December 31, 2025

(b)

Retained earnings, January 1 ............................................................. Add: Net income ................................................................................. Less: Dividends.................................................................................... Retained earnings, December 31.........................................................

$ 5,000 24,000 29,000 8,000 $21,000

HOLLY’S HIPCAMP Balance Sheet December 31, 2025 Assets Cash ................................................................................................... $ 13,500 Supplies .............................................................................................. 2,500 Equipment............................................................................................ 108,000 Total assets ................................................................................... $124,000

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Solution 228

(Cont.)

Liabilities and Stockholders’ Equity Liabilities Notes payable ............................................................................... Accounts payable .......................................................................... Total liabilities ........................................................................... Sto ckholders’ equity Common stock ............................................................................... Retained earnings .......................................................................... Total liabilities and stockholders’ equity ...................................

$50,000 13,000 $ 63,000 40,000 21,000

61,000 $124,000

Ex. 229 Ryan Seacrest is the bookkeeper for Idol Company. Ryan has been trying to get the company’s balance sheet to balance. It finally balanced, but now he is not sure it is correct. IDOL COMPANY Balance Sheet December 31, 2025 Assets Cash Supplies Equipment Dividends Total assets

$12,500 9,500 50,000 13,000 $85,000

Liabilities and Stockholders' Equity Accounts payable $18,000 Accounts receivable (12,000) Common stock 40,000 Retained earnings 39,000 Total liabilities and stockholders' equity $85,000

Instructions Prepare a correct balance sheet. Ans: N/A, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 229 IDOL COMPANY Balance Sheet December 31, 2025 Assets Cash .................................................................................................... Accounts receivable ............................................................................ Supplies ............................................................................................... Equipment ............................................................................................ Total assets ...................................................................................

$12,500 12,000 9,500 50,000 $84,000

Introduction to Financial Statements

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Solution 229 Liabilities and Stockholders’ Equity Liabilities Accounts payable .......................................................................... Stockholders’ equity Common stock .................................................................................... $40,000 Retained earnings .......................................................................... 26,000* Total liabilities and stockholders’ equity ...................................

$18,000 66,000 $84,000

*Retained Earnings – Dividends = $39,000 – $13,000 = $26,000

Ex. 230 Suppose that the following summaries of data for 2025 from the balance sheet, income statement, and retained earnings statement are for Walmart and Target: Walmart Beginning of year Total assets Total liabilities Total stockholders' equity End of year Total assets Total liabilities Total stockholders' equity Changes during year in retained earnings Dividends Total revenues Total expenses

Target

$110,000 80,000 (a)

$130,000 (d) 70,000

(b) 120,000 70,000

190,000 65,000 (e)

5,000 (f) 80,000

Instructions Determine the missing amounts. Assume all changes in stockholders' equity are due to changes in retained earnings. Ans: N/A, LO: 3, Section: The Four Financial Statements, Subsections: Interrelationships of Statements, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 230 (a)

Assets $110,000 (a)

= = =

Liabilities $80,000

(b)

Assets (b) (b)

= = =

Liabilities + Stockholders' Equity $120,000 + $70,000 $190,000 (Liabilities + Stockholders’ Equity) = ($120,000 + $70,000)

+ +

Stockholders' Equity (a) $30,000 (Assets – Liabilities) = $110,000 - $80,000

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 230

(Cont.)

Revenues

–

Expenses

–

Dividends

($225,000 $90,000

– –

$165,000) – (c) (c) (c) = ($90,000 - $70,000)

= = =

Ending Stockholders' Equity $70,000 $70,000 $20,000

(d)

Assets $130,000 (d)

= = =

Liabilities + Stockholders' Equity (d) + $70,000 $60,000 (Assets – Stockholders’ Equity = Liabilities = $130,000 - $70,000)

(e)

Assets $190,000 (e)

= = =

Liabilities + Stockholders' Equity $65,000 + (e) $125,000 (Assets – Liabilities = Stockholders’ Equity = ($190,000 - $65,000)

(f) Beginning + Stockholders' Equity $70,000 + (f) =

Revenues (f)

–

Expenses

–

Dividends

– $80,000 – $5,000 = $140,000 = ($125,000 - $70,000 + $80,000 + $5,000)

Ending Stockholders' Equity $125,000(e)

Ex. 231 This information is for Ace Corporation for the year ended December 31, 2025. Cash received from lenders Cash received from customers Cash paid for new equipment Cash dividends paid Cash paid to suppliers Cash balance 1/1/2025

$20,000 65,000 30,000 9,000 28,000 12,000

Instructions Prepare the 2025 statement of cash flows for Ace Corporation. Ans: N/A, LO 3, Section: The Four Financial Statements, Subsections: Statement of Cash Flows, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Introduction to Financial Statements

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Solution 231 ACE CORPORATION Statement of Cash Flows For the Year Ended December 31, 2025 Cash flows from operating activities Cash received from customers ............................................................ $65,000 Cash paid to suppliers ......................................................................... (28,000) Net cash provided by operating activities ...................................... Cash flows from investing activities Cash paid for new equipment ............................................................... (30,000) Net cash used by investing activities .............................................. Cash flows from financing activities Cash received from lenders............................................................ 20,000 Cash dividends paid ....................................................................... (9,000) Net cash provided by financing activities ........................................ Net increase in cash ............................................................................ Cash at beginning of period ................................................................ Cash at end of period ..........................................................................

$37,000 (30,000)

11,000 18,000 12,000 $30,000

Ex. 232 One item is omitted in each of the following summaries of balance sheet and income statement data for three different corporations, A, B, and C. Determine the amounts of the missing items, identifying each corporation by letter.

Corporation B

$410,000 250,000

$150,000 115,000

$199,000 166,000

460,000 280,000

195,000 95,000

205,000 169,000

79,000

78,000

Dividends

70,000

83,000

Revenue

195,000

187,000

Expenses

155,000

113,000

183,000

Beginning of the Year: Assets Liabilities End of the Year: Assets Liabilities During the Year: Additional Investment by stockholders

Ans: N/A, LO: 3, Section: The Four Financial Statements, Subsections: Interrelationships of Statements, Bloom: AN, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

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Solution 232 Corporation A ($50,000) Beginning stockholders’ equity ($410,000 - $250,000) Additional investments ($180,000a + $70,000b - $160,000c - $40,000d) Net income for year ($195,000 - $155,000) Less dividends Ending stockholders’ equity ($460,000 - $280,000) Corporation B ($182,000) Beginning stockholders’ equity ($150,000 - $115,000) Additional investments Net income for year ($183,000e - $35,000f - $79,000g) *[Revenues = $182,000 ($113,000 + $69,000h)] Less dividends Ending stockholders’ equity ($195,000 - $95,000) Corporation C ($79,000) Beginning stockholders’ equity ($199,000 - $166,000) Additional investments Net income for year ($187,000 - $183,000) Less dividends ($115,000i - $36,000j) Ending stockholders’ equity ($205,000 - $169,000)

$160,000c 50,000 40,000d 250,000 70,000b $180,000a $ 35,000f 79,000g 69,000h 183,000e 83,000 $100,000 $ 33,000 78,000 4,000 115,000i 79,000 $ 36,000j

Introduction to Financial Statements

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COMPLETION STATEMENTS 233. A business organized as a separate legal entity owned by stockholders is a

Ans: N/A, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Corporation, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

234.

of accounting information are managers who plan, organize, and run a business.

Ans: N/A, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Internal Users, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

235.

analytics focus on identifying what is likely to happen

Ans: N/A, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Data Analytics, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

236.

analytics focus on identifying why something happened.

237. The

was passed to reduce unethical corporate behavior and decrease the likelihood of future corporate scandals.

Ans: N/A, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Ethics in Financial Reporting, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

238.

activities involve collecting the necessary funds to start the business.

Ans: N/A, LO: 2, Section: The Three Types of Business Activity, Subsection: Financing Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

239. The reports the assets, liabilities, and stockholders’ equity of a business at a specific date. Ans: N/A, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

240. The claims of owners on the assets of a corporation are known as

Ans: N/A, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

241. The basic accounting equation is Assets =

242. The primary purpose of a is to provide financial information about the cash receipts and cash payments of a business. Ans: N/A, LO: 3, Section: The Four Financial Statements, Subsection: Statement of Cash Flows, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

243. The is prepared by an independent auditor stating the auditor’s opinion as to the fairness of the presentation of the financial statements. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

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Answers to Completion Statements 233. 234. 235. 236. 237. 238.

corporation Internal users Predictive Diagnostic Sarbanes-Oxley Act (SOX) Financing

239. 240. 241. 242. 243.

balance sheet stockholders’ equity Liabilities, Stockholders’ equity statement of cash flows auditor's report

MATCHING 244. Match the items below by entering the appropriate code letter in the space provided. A. Internal users B. Management discussion and analysis C. Annual report D. Sole proprietorship E. Dividends

F. G. H. I. J.

Corporation Assets Liabilities Expenses Investing activities

1. Distributions of cash from a corporation to its stockholders. 2. Consumed assets or services. 3. Ownership is limited to one person. 4. Officers and others who manage the business. 5. Creditor claims against the assets of the business. 6. A separate legal entity under state laws. 7. A report prepared by management that presents financial information. 8. A section of the annual report that presents management’s views. 9. Future economic benefits. 10. Involves acquiring the resources necessary to run the business. Ans: N/A, LO: 1,2,3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Answers to Matching 1. 2. 3. 4. 5.

E I D A H

6. 7. 8. 9. 10.

F C B G J

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SHORT-ANSWER ESSAY QUESTIONS S-A E 245 What are the advantages to a business of being formed as a corporation? What are the disadvantages? Ans: N/A, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Corporation, Bloom: K, Difficulty: Easy, Min: 3, AACSB: Communication, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 245 Advantages of a corporation are limited liability (stockholders are not personally liable for corporate debts), easy transferability of ownership, and ease to raise funds. Disadvantages of a corporation are increased taxation and government regulations. S-A E 246 Why would it be safer for a wealthy individual to set up his or her business as a corporation rather than as a sole proprietorship or partnership? Ans: N/A, LO: 1, Business Organization and Accounting Information Uses, Subsection: Forms of Business Organization, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communication, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 246 In the sole proprietorship or partnership organization forms, the owner(s) have unlimited liability. This means that they may be required to use personal assets to satisfy business debts. The liability of a corporate shareholder, however, is limited to his or her investment in the business. Therefore, it would be safer for a wealthy individual to set up his/her business as a corporation. S-A E 247 Your friend, Jaime, made this comment: “My major is biology and I plan to research for cures for major illnesses. Therefore, I have no need to study accounting.” What is your response to Jaime? Ans: N/A, LO: 1, Section: Users and Uses of Financial Information, Subsections: Internal Users, External Users, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 247 Jaime, you are entering a dynamic profession and you have the opportunity to make important contributions to society. While science will be your profession and major concern, you will not be able to escape the need to understand accounting. Accounting staff and professionals will always be available to assist you. Here are some areas that will directly affect you: As a manager, you will need to review accounting information (both internal and external) and make decisions. Budgets will be an important part of your research activities. As an employee, you will be concerned about the financial information of your employer. Thus, you will need to be able to read the company’s financial statements. In addition, as an investor, you will be interested in the financial statements of other companies. You will probably not be a preparer of the financial statements, but you do need an understanding of how they are prepared. You also need a good understanding of how to interpret the information on the financial statements.

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S-A E 248 The information needs of a specific user of financial accounting information depends upon the kinds of decisions that user makes. Identify the major users of accounting information and discuss what questions financial accounting information answers for each group of users. Ans: N/A, LO: 1, Section: Users and Uses of Financial Information, Subsections: Users and Uses of Financial Information Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 248 The major users of accounting information are internal users and external users. Internal users are those who manage the business. External users are those outside the business who have either a present or a potential financial interest. Financial accounting information may answer the following questions for internal users: 1. Is cash sufficient to pay our debts? 2. Can we afford to give employee pay raises this year? 3. What is the cost of manufacturing each unit of product? 4. Which product line is the most profitable? Questions answered by financial accounting information for external users include: 1. Is the company earning satisfactory income? 2. How does the company compare in size and profitability with competitors? 3. Will the company be able to pay its debts as they come due?

S-A E 249 The statement of cash flows for Acme Corporation reveals the following information: Net cash used by operating activities $(150,000) Net cash used by investing activities (200,000) Net cash provided by financing activities Issued common stock Issued note payable Net change in cash

$100,000 250,000

350,000 $ 0

Provide three comments about this information. Make your comments concise, yet thorough. Ans: N/A, LO: 3, Section: The Four Financial Statements, Subsection: Statement of Cash Flows, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting

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Solution 249 (1) Operating activities represent the ongoing activities of the company and are a result of its reason for being in business. The fact that this is a negative cash flow is a cause of concern. This may be a new company and future cash flows from operations may be positive. (2) The cash that was used for operating and investing activities came from the stockholders (issuance of common stock) and creditors (borrowing with notes payable). This is to be expected for a new company, or a company that is expanding, but should not be considered an ongoing way to finance the business. Cash from operating activities should be available to purchase assets and pay dividends to shareholders. (3) There is a concern that all proceeds raised from issuing stock and notes payable have been used. If operating activities cannot generate positive cash flows, can the corporation issue additional stock to raise cash? (4) The corporation owes on the note payable. Will there be sufficient cash from operating activities to pay the interest and repay the principal? (5) Does the corporation need to acquire additional assets for use in the business? If so, will it be able to get the cash to pay for these future acquisitions? The net of zero may be misleading. The reader may think that there are no potential problems because the cash flows netted to zero. The user of the Statement of Cash Flows needs to consider the activities of each of the sections – operating, investing, and financing.

S-A E 250 How are each of the following financial statements interrelated? (a) Retained earnings statement and income statement. (b) Retained earnings statement and balance sheet. (c) Balance sheet and statement of cash flows. Ans: N/A, LO: 3, Section: The Four Financial Statements, Subsection: Interrelationships of Statements, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communication, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 250 (a) Net income (loss) from the income statement is reported as an increase (decrease) to retained earnings on the retained earnings statement. (b) The ending amount on the retained earnings statement is reported as the retained earnings amount on the balance sheet. (c) The ending amount on the statement of cash flows is reported as the cash amount on the balance sheet.

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S-A E 251 A1 Corporation’s stockholders’ equity equals one-fourth of the company’s total assets. The company’s liabilities are $270,000. What is the amount of the company’s stockholders’ equity? Ans: N/A, LO 3, Section: The Four Financial Statements, Subsection: Interrelationships of Statements, Bloom: AN, Difficulty: Easy, Min: 2, AACSB: Communication, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 251 Assets = Liabilities + Stockholders’ Equity; (Assets) = $270,000 + ¼ (Assets) = ¾ (Assets) = $270,000; Assets = $270,000 ÷ ¾ = $360,000 (Assets). Thus, Stockholders’ Equity = ¼ x Assets, $360,000 = $90,000

S-A E 252 Which three items affect retained earnings, and how do they affect it? Ans: N/A, LO: 3, Section: The Four Financial Statements, Subsection: Retained Earnings Statement, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communication, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 252 Net income increases retained earnings, whereas a net loss and dividends decrease it. S-A E 253 The framework used to record and summarize the economic activities of a business enterprise is referred to as the accounting equation. State the basic accounting equation and define its major components. How are financial statements related to the accounting equation? Ans: N/A, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communication, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 253 The basic accounting equation is expressed as follows: Assets = Liabilities + Stockholders’ Equity Assets are defined as resources owned by the business. Liabilities are creditors’ claims against the assets of the business; or simply put, liabilities are existing debts and obligations. Stockholders’ equity is the ownership claim on the total assets of the business; it is equal to total assets minus total liabilities. The financial statements report the results and effects of transactions on the business' assets, liabilities, and stockholders’ equity. The balance sheet is a summary expression of the basic accounting equation. S-A E 254 What types of information are presented in the notes to the financial statements? Ans: N/A, LO: 3, Section: The Four Financial Statements Subsection: Notes to the Financial Statements, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communication, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting

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Solution 254 Information included in the notes to the financial statements clarifies information presented in the financial statements and includes descriptions of accounting policies, explanations of uncertainties and contingencies, and details too voluminous to be reported in the financial statements. S-A E 255 (Ethics) Jason Bates owns and operates A1 Burgers, a small fast food store, located at the edge of City College campus in Newton, Ohio. After several very profitable years, A1 Burgers began to have problems. Most of the problems were related to the expansion of the eating area in the restaurant without corresponding increases in the food preparation area. Jason does not have the cash or financial backing to expand further. He has, therefore, decided to sell his business. Katy Perry is interested in purchasing the business. However, she is located in another city and is unfamiliar with Newton. She has asked Jason why he is selling A1 Burgers. Jason replies that his elderly father requires extra care, and that his sister needs help with her hotel. Both are true, but neither is his primary reason for selling. Jason reasons that Katy should not have asked him anyway, since profitable businesses do not come up for sale. Required: 1. Identify the stakeholders in this situation. 2. Did Jason act ethically in not revealing fully his reasons for selling the business? Why or why not? Ans: N/A, LO: 3, Section: Business Organizations and Accounting Information Uses, Subsection: Ethics in Financial Reporting, Bloom: E, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 255 1. The stakeholders include: Jason Bates College and other customers Katy Perry Newton, Ohio purchase of A1 Burgers

Students of City City College Persons financing the

2. Jason did not act ethically in not revealing fully his reasons for selling the business. Students might be of the opinion that a purchaser should investigate a business before purchasing it, rather than relying entirely on the seller's assertions. However, students should realize that Jason should have said something about his problems. He might ethically be allowed to put these in the best possible light, perhaps, but failure to disclose them at all is certainly unethical. This is especially true, since family concerns might well cause someone to sell a business that is otherwise doing well. Jason has shown an intent to deceive that is unethical, and might be actionable in court as well.

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S-A E 256 (Communication) Paris Hilton is a friend of yours from high school. She decided to become a nail technician after leaving high school. She recently opened her own shop, and has contracted her services to a local hospital. She is paid a monthly fee for her services, and receives a small gratuity from each of the patients. She has just received her first set of financial statements from her accountant. She is quite upset. The statements show a cash balance of $3,600 at the end of the month, but a net income of only $500. She has written you a letter, asking you whether such a situation is possible, or whether she should find another accountant. Required: Write a short letter to your friend. Use proper form. Answer her question completely, but briefly. Ans: N/A, LO: 3, Section: The Four Financial Statements, Subsection: Interrelationships of Statements, , Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 256 Answers will vary. The instructor's requirements concerning proper form should be followed. The letter may be either business or personal. At a minimum, the letter should be in a recognizable form, and proper grammar and spelling should be used. Neat erasures and corrections might be allowed. A suggested personal letter follows:

1245 Sorrento Drive Los Angeles, CA 90210 (Date) Dear Paris, Congratulations on opening your business! I am sure you will do well, combining your creative genius with your talent for serving others. You asked about your financial statements. Of course, you realize that I am just an accounting student, but I do know that it is possible to have a large cash balance and little net income. You may have had expenses that were not paid in cash yet. These expenses reduce your income, but not your cash. I think that you should discuss the statements with the accountant who prepared them. He or she will be in the best position to explain the results. Thanks for the question. It really made me think. Sincerely, (signature)

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IFRS QUESTIONS 1.

Which of the following is not a reason one set of international accounting standards are needed? a. multinational corporations b. financial markets c. information technology d. All of these answer choices are reasons one set of international accounting standards are needed.

Ans: D, LO: 4, BT: K, Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Global and Industry Perspectives AICPA FC: Reporting IMA: Reporting

International standards are referred to as a. IFRS. b. GAAP. c. IASB. d. FASB.

Ans: A, LO: 4, BT: K, Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Global and Industry Perspectives AICPA FC: Reporting IMA: Reporting

U.S. standards are referred to as a. IFRS. b. GAAP. c. IASB. d. FASB.

Ans: B, LO: 4, BT: K, Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Global and Industry Perspectives AICPA FC: Reporting IMA: Reporting

International standards are developed by the a. IFRS. b. GAAP. c. IASB. d. FASB.

Ans: C, LO: 4, BT: K, Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Global and Industry Perspectives AICPA FC: Reporting IMA: Reporting

U.S. standards are developed by the a. IFRS. b. GAAP. c. IASB. d. FASB.

Ans: D, LO: 4, BT: K, Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Global and Industry Perspectives AICPA FC: Reporting IMA: Reporting

The United States and the international standard-setting environment are primarily driven by meeting the needs of a. investors and creditors. b. tax authorities. .

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c. central government planners. d. academic researchers. Ans: A, LO: 4, BT: K, Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Global and Industry Perspectives AICPA FC: Reporting IMA: Reporting

The internal control standards of Sarbanes-Oxley are applicable to a. all U.S. and international companies. b. U.S. and international companies listed on U.S. exchange. c. International companies listed on U.S. exchange. d. U.S. companies listed on U.S. exchange.

Ans: D, LO: 4, BT: K, Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Global and Industry Perspectives AICPA FC: Reporting IMA: Reporting

The concern about international companies adopting SOX-type standards centers on a. cost-benefit analysis. b. ethics issues. c. the governing authorities. d. comparability.

Ans: A, LO: 4, BT: K, Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Global and Industry Perspectives AICPA FC: Reporting IMA: Reporting

Financial accounting ethics violations are a. not a problem in the U.S or internationally. b. much more common in the U.S than internationally. c. much more common internationally than in the U.S. d. a major problem both in the U.S and internationally.

Ans: D, LO: 4, BT: K, Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Global and Industry Perspectives AICPA FC: Reporting IMA: Reporting

10.

IFRS, compared to GAAP, tends to be more a. detailed. b. rules-based. c. principles-based. d. full of disclosure requirements.

Ans: C, LO: 4, BT: K, Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Global and Industry Perspectives AICPA FC: Reporting IMA: Reporting

11.

GAAP, compared to IFRS, tends to be more a. simple in accounting requirements. b. rules-based. c. principles-based. d. simple in disclosure requirements.

Ans: B, LO: 4, BT: K, Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Global and Industry Perspectives AICPA FC: Reporting IMA: Reporting

12.

The conceptual framework that underlines IFRS a. is very similar to that used to develop GAAP. b. does not define assets or liabilities. c. does not define equity. .

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d. does not define income or expenses. Ans: A, LO: 4, BT: K, Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Global and Industry Perspectives AICPA FC: Reporting IMA: Reporting

CHAPTER 2 A FURTHER LOOK AT FINANCIAL STATEMENTS CHAPTER LEARNING OBJECTIVES 1. Identify the sections of a classified balance sheet. In a classified balance sheet, companies classify assets as current assets; long-term investments; property, plant, and equipment; and intangibles. They classify liabilities as either current or long-term. A stockholders’ equity section shows common stock and retained earnings. 2. Use ratios to evaluate a company’s profitability, liquidity, and solvency. Ratio analysis expresses the relationship among selected items of financial statements data. Profitability ratios, such as earnings per share (EPS), measure aspects of the operating success of a company for a given period of time. Liquidity ratios, such as the current ratio, measure the short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash. Solvency ratios, such as the debt to assets ratio, measure the ability of a company to survive over a long period. 3. Discuss financial reporting concepts. Generally accepted accounting principles are a set of rules and practices recognized as a general guide for financial reporting purposes. The basic objective of financial reporting is to provide information that is useful for decision-making. To be judged useful, information should have the primary characteristics of relevance and faithful representation. In addition, useful information is comparable, consistent, verifiable, timely, and understandable. The monetary unit assumption requires that companies include in the accounting records only transaction data that can be expressed in terms of money. The economic entity assumption states that economic events can be identified with a particular unit of accountability. The periodicity assumption states that the economic life of a business can be divided into artificial time periods and that meaningful accounting reports can be prepared for each period. The going concern assumption states that the company will continue in operation long enough to carry out its existing objectives and commitments. The historical cost principle states that the companies should record assets at their cost. The fair value principle indicates that assets and liabilities should be reported at fair value. The full disclosure principle requires that companies disclose circumstances and events that matter to financial statement users. The cost constraint weighs the cost that companies incur to provide a type of information against its benefit to financial statement users.

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Difficulties: Easy: 143 Medium: 101 Hard: 6

Question List by Section The Classified Balance Sheet: Current Assets: 1, 5, 56, 57, 58, 59, 61, 67, 69, 73, 75, 80, 90, 121, 204, 236 Long-term Investments: 6, 71, 77, 82, 92 Property, Plant, and Equipment: 66, 72, 76, 81, 91 Intangible Assets: 7, 60, 62, 70 Current Liabilities: 3, 63, 65, 68 Long-term Liabilities: 64 Stockholders’ Equity: 4, 87, 88, 89, 240 Analyzing the Financial Statements Using Ratios: Ratio Analysis: 224, 225, 226, 227, 228, 229, 241, 243 Using the Income Statement: 8, 107, 235 Earnings Per Share: 9, 10, 95, 96, 97, 98, 99, 100, 101, 102, 103, 104, 125, 129, 209 Using a Classified Balance Sheet Liquidity: 11, 20, 22, 106, 108, 110, 111, 118, 120, 133, 143, 206, 214, 230, 237 Working Capital: 15, 78, 83, 93, 113, 114, 119, 122, 123, 127 Current Ratio: 14, 16, 23, 79, 84, 94, 109, 112, 124, 128, 136, 137, 138, 139, 140, 141 Solvency: 12, 17, 19, 25, 115, 116, 132, 134 Debt to Assets Ratio: 18, 21, 24, 126, 130, 131, 135, 142 Financial Reporting Concepts: The Standard-Setting Environment: 26, 27, 28, 145, 147, 148, 149, 150, 151, 152 Qualities of Useful Information: 29, 30, 31, 32, 33, 34, 49, 51, 54, 144, 155, 159, 160, 161, 162, 163, 164, 165, 166, 167, 168, 178, 198, 207, 208, 244, 247 Enhancing Qualities: 35, 36, 153, 154, 158, 169, 170, 171, 172, 173, 174, 175, 176, 199, 248 Assumptions in Financial Reporting: 37, 40, 41, 42, 43, 44, 45, 46, 48, 55, 156, 157, 179, 180, 182, 184, 185, 186, 187, 188, 189, 200, 201, 209, 210, 232, 233, 245, 246 Principles of Financial Reporting: 238 Measurement Principles: 177, 181 Historical Cost Principle: 38, 190, 191, 192, 193, 196 Fair Value Principle: 39, 53, 194, 195, 197 Full Disclosure Principle: 47, 183, 250 Cost Constraint: 50, 52, 202, 203, 234

A Further Look at Financial Statements

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TRUE-FALSE STATEMENTS 1.

Cash and supplies are both classified as current assets.

Ans: T, LO: 1, Section: The Classified Balance Sheet, Subsection: Current Assets, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Long-term investments appear in the property, plant, and equipment section of the balance sheet.

Ans: F, LO: 1, Section: The Classified Balance Sheet: Long-term Investments, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

A liability is classified as a current liability if it is to be paid within the coming year.

Ans: T, LO: 1, Section: The Classified Balance Sheet, Subsection: Current Liabilities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Stockholders’ equity consists of two parts: common stock and retained earnings.

Ans: T, LO: 1, Section: The Classified Balance Sheet, Subsection: Stockholders’ Equity, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

It is possible for an asset to be a current asset even though the expected conversion of that asset into cash is to be longer than one year or the normal operating cycle.

Ans: F, LO: 1, Section: The Classified Balance Sheet, Subsection: Current Assets, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

The investment category on the balance sheet normally includes investments that are intended to be held for a short period of time (less than one year).

Ans: F, LO: 1, Section: The Classified Balance Sheet, Subsection: Long-term Investments, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

The main difference between intangible assets and property, plant and equipment is the length of the asset’s life.

Ans: F, LO: 1, Section: The Classified Balance Sheet, Subsection: Intangible Assets, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Profitability means having enough funds on hand to pay debts when they fall due.

Ans: F, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Using the Income Statement, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Risk Management, Analysis and Management, AICPA PC: None, IMA: Reporting

Earnings per share is calculated by dividing net income minus preferred stock dividends for the period by the weighted-average number of common shares outstanding during the period.

Ans: T, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Earnings Per Share, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

10.

Earnings per share measures the net income earned on each share of common stock.

11.

Liquidity ratios measure the short-term ability of a company to pay its maturing obligations and meet unexpected needs for cash.

Ans: T, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Liquidity, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

12.

Solvency ratios measure the ability of a company to survive over a short period of time.

Ans: F, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Solvency, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

13.

Profitability ratios measure the operating success of a company for a given period of time.

Ans: T, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Using the Income Statement, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

14.

The current ratio is computed as current liabilities divided by current assets.

Ans: F, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Current Ratio, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

15.

The excess of current assets over current liabilities is called working capital.

Ans: T, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Working Capital, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

16.

The current ratio takes into account the composition of current assets.

Ans: F, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Current Ratio, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

17.

Solvency ratios measure the short-term ability of the company to pay its maturing obligations.

18.

The debt to assets ratio measures the percentage of assets financed by creditors.

Ans: T, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Debt to Assets Ratio, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

19.

Solvency is a company's ability to pay interest as it comes due and to repay the balance of a debt due at its maturity.

Ans: T, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Solvency, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Risk Management, Analysis and Management, AICPA PC: Project Management, IMA: Reporting

20.

Working capital is a better measure of liquidity than the current ratio.

Ans: F, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Liquidity, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

21.

A high debt to asset’s ratio is undesirable from a creditor’s perspective.

22.

Some current assets are more liquid than others.

23.

A current ratio of less than 1:1 means that a company has fewer current liabilities than current assets.

24.

The debt to assets ratio is computed by dividing total liabilities by total assets.

25.

The current ratio is considered by creditors to be an indicator of solvency.

Ans: F, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Solvency, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Risk Management, Analysis and Management, AICPA PC: None, IMA: Reporting

A Further Look at Financial Statements

26.

2-5

The primary accounting standard-setting body in the United States is the Securities and Exchange Commission.

Ans: F, LO: 3, Section: Financial Reporting Concepts, Subsection: The Standard-Setting Environment, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

27.

Generally accepted accounting principles are rules and practices that are recognized as a general guide for financial reporting purposes.

Ans: T, LO: 3, Section: Financial Reporting Concepts, Subsection: The Standard-Setting Environment, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

28.

GAAP stands for generally accepted accounting procedures.

29.

To provide faithful representation, accounting information should predict future events, confirm prior expectations, and be reported on a timely basis.

Ans: F, LO: 3, Section: Financial Reporting Concepts, Subsection: Qualities of Useful Information, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

30.

In order for information to be relevant, it must be reported on a monthly basis.

31.

For information to be useful, it must be both relevant and demonstrate faithful representation.

Ans: T, LO: 3, Section: Financial Reporting Concepts, Subsection: Qualities of Useful Information, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

32.

Consistent use of the same accounting principles and methods is necessary for meaningful analysis of trends within a company.

33.

A major function of management is to provide the accountant with relevant and useful information.

34.

The advantage of accounting information is that it provides exact and completely reliable measures.

35.

Consistency in accounting means that a company uses the same generally accepted accounting principles from one accounting period to the next accounting period.

Ans: T, LO: 3, Section: Financial Reporting Concepts, Subsection: Enhancing Qualities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

36.

The convention of consistency pertains to the use of the same accounting principles by firms in the same industry.

Ans: F, LO: 3, Section: Financial Reporting Concepts, Subsection: Enhancing Qualities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

37.

The periodicity assumption states that the business will remain in operation for the foreseeable future.

Ans: F, LO: 3, Section: Financial Reporting Concepts, Subsection: Assumptions in Financial Reporting, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Risk Management, Analysis and Management, AICPA PC: None,

2-6

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e IMA: Reporting

38.

If a building is offered for sale at $100,000 and the buyer pays $95,000 cash for it, the buyer would record the building at $100,000.

Ans: F, LO: 3, Section: Financial Reporting Concepts, Subsection: Historical Cost Principle, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: REPORTING AND CONTROL

39.

The most generally accepted value used to report assets in accounting is fair value.

Ans: F, LO: 3, Section: Financial Reporting Concepts, Subsection: Fair Value Principle, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: REPORTING AND CONTROL

40.

For accounting purposes, business transactions should be kept separate from the personal transactions of the stockholders of the business.

Ans: T, LO: 3, Section: Financial Reporting Concepts, Subsection: Assumptions in Financial Reporting, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: REPORTING AND CONTROL

41.

The economic entity assumption states that economic events can be identified with a particular unit of accountability.

42.

The economic entity assumption states that assets should be recorded at their cost.

Ans: F, LO: 3, Section: Financial Reporting Concepts, Subsection: Assumptions in Financial Reporting, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: REPORTING AND CONTROL

43.

The monetary unit assumption states that transactions that can be measured in terms of money should be recorded in the accounting records.

44.

The monetary unit assumption has led to an increase in the notes to financial statements.

45.

The going concern assumption is that the business will continue in operation long enough to carry out its existing objectives and commitments.

Ans: T, LO: 3, Section: Financial Reporting Concepts, Subsection: Assumptions in Financial Reporting, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Risk Management, Analysis and Management, AICPA PC: None, IMA: Reporting

46.

When preparing financial statements, the accountant assumes that the business will stay in business for the foreseeable future.

47.

Full disclosure of all important facts aids in overcoming the limitations of accounting information.

Ans: T, LO: 3, Section: Financial Reporting Concepts, Subsection: Full Disclosure, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

48.

The economic entity assumption is that a company will remain in operations for the foreseeable future.

Ans: F, LO: 3, Section: Financial Reporting Concepts, Subsection: Assumptions in Financial Reporting, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

A Further Look at Financial Statements

2-7

49. Materiality is a company-specific aspect of faithful representation. Ans: F, LO: 3, Section: Financial Reporting Concepts, Subsection: Qualities of Useful Information, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

50.

Relevance and cost are two constraints in accounting.

Ans: F, LO: 3, Section: Financial Reporting Concepts, Subsection: Cost Constraint, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Risk Management, Analysis and Management, AICPA PC: None, IMA: Reporting

51.

Materiality relates to whether an item is large enough to likely influence the decision of an investor or creditor.

52.

The cost constraint weighs the cost that companies incur to provide a type of information against its benefit to financial statement users.

Ans: T, LO: 3, Section: Financial Reporting Concepts, Subsection: Cost Constraint, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

53.

In general, the FASB indicates that most assets must follow the fair value principle.

54.

A material item is one that is likely to influence an investor's decision.

55.

The periodicity assumption states that every economic entity can be separately identified and accounted for.

Ans: F, LO: 3, Section: Financial Reporting Concepts, Subsection: Assumptions in Financial Reporting Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

MULTIPLE CHOICE QUESTIONS 56.

In a classified balance sheet, assets are usually classified as a. current assets; long-term assets; property, plant, and equipment; and intangible assets. b. current assets; long-term investments; property, plant, and equipment; and common stocks. c. current assets; long-term investments; tangible assets; and intangible assets. d. current assets; long-term investments; property, plant, and equipment; and intangible assets.

Ans: D, Section: The Classified Balance Sheet, Subsection: Current Assets, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

57.

On a classified balance sheet, short-term investments are classified as a. intangible assets. b. property, plant, and equipment. c. current assets. d. long-term investments.

Ans: C, LO: 1, Section: The Classified Balance Sheet, Subsection: Current Assets, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

58.

A current asset is a. the last asset purchased by a business. b. an asset which is currently being used to produce a product or service. c. usually found as a separate classification in the income statement. d. expected to be converted to cash or used in the business within one year or one operating cycle, whichever is longer.

Ans: D, LO: 1, Section: The Classified Balance Sheet, Subsection: Current Assets, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

59.

Which of the following is not usually classified properly as a current asset? a. Supplies b. Short-term debt investments c. A fund to be used to purchase a building within the next year d. A receivable from the sale of an asset to be collected in two years

Ans: D, LO: 1, Section: The Classified Balance Sheet, Subsection: Current Assets, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

60.

An intangible asset a. derives its value from the rights and privileges it provides the owner. b. is worthless because it has no physical substance. c. is converted into a tangible asset during the operating cycle. d. cannot be classified on the balance sheet because it lacks physical substance.

Ans: A, LO: 1, Section: The Classified Balance Sheet, Subsection: Intangible Assets, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

A Further Look at Financial Statements

61.

2-9

Which of the following is not considered an asset? a. Equipment b. Dividends c. Accounts receivable d. Inventory

Ans: B, LO: 1, Section: The Classified Balance Sheet, Subsection: Current Assets, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

62.

In which balance sheet section would trademarks be reported? a. Intangible assets b. Investments c. Property, plant, and equipment d. Current assets

Ans: A, LO: 1, Section: The Classified Balance Sheet, Subsection: Intangible Assets, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

63.

Liabilities are generally classified on a balance sheet as a. small liabilities and large liabilities. b. present liabilities and future liabilities. c. tangible liabilities and intangible liabilities. d. current liabilities and long-term liabilities.

Ans: D, LO: 1, Section: The Classified Balance Sheet, Subsection: Current Liabilities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

64.

Which of the following would not be classified as a long-term liability? a. Current maturities of long-term debt b. Bonds payable c. Mortgage payable d. Lease liabilities

Ans: A, LO: 1, Section: The Classified Balance Sheet, Subsection: Long-term Liabilities, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

65.

Which of the following is generally not classified as a current liability? a. Salaries and Wages Payable b. Accounts Payable c. Taxes Payable d. Bonds Payable

Ans: D, LO: 1, Section: The Classified Balance Sheet, Subsection: Current Liabilities, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

66.

Buildings are classified on the balance sheet as a. a current asset. b. property, plant, and equipment. c. an intangible asset. d. a long-term investment.

Ans: B, LO: 1, Section: The Classified Balance Sheet, Subsection: Property, Plant, and Equipment, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

67.

It is not true that current assets are resources that are expected to be a. realized in cash within one year. b. sold within one year. c. consumed within one year. d. acquired within one year.

Ans: D, LO: 1, Section: The Classified Balance Sheet, Subsection: Current Assets, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process

2-10

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

A Further Look at Financial Statements

68.

2-11

The operating cycle of a company is the average time that is required to go from cash to a. sales in producing revenues. b. cash in producing revenues. c. inventory in producing revenues. d. accounts receivable in producing revenues.

Ans: B, LO: 1, Section: The Classified Balance Sheet, Subsection: Current Liabilities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

69.

On a classified balance sheet, companies usually list current assets a. in alphabetical order. b. with the largest dollar amounts first. c. in the order in which they are expected to be converted into cash. d. in the order of acquisition.

70.

On a classified balance sheet, intangible assets are a. listed directly under current assets on the balance sheet. b. not listed on the balance sheet because they do not have physical substance. c. listed after property, plant, and equipment. d. listed as a long-term investment on the balance sheet.

Ans: C, LO: 1, Section: The Classified Balance Sheet, Subsection: Intangible Assets, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

71.

Which statement about long-term investments is not true? a. They will be held for more than one year. b. They are not currently used in the operation of the business. c. They include investments in stock of other companies and land held for future use. d. They do not include long-term notes receivable.

Ans: D, LO: 1, Section: The Classified Balance Sheet, Subsection: Long-term Investments, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

72.

These are selected account balances on December 31, 2025. Land $150,000 Land (held for future use) 225,000 Buildings 1,200,000 Inventory 300,000 Equipment 675,000 Furniture 150,000 Accumulated Depreciation 450,000 What is the total amount of property, plant, and equipment that will appear on the balance sheet? a. $2,250,000 b. $1,950,000 c. $2,700,000 d. $1,725,000

Ans: D, LO: 1, Section: The Classified Balance Sheet, Subsection: Property, Plant, and Equipment, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $150,000 + $1,200,000 + $675,000 + $150,000  $450,000  $1,725,000 (Land + Build. + Equip + Furn. – Acc. dep.)

2-12

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

73.

What is the order in which assets are generally listed on a classified balance sheet? a. Current and long-term b. Current; property, plant and equipment; long-term investments; intangibles c. Current; property, plant and equipment; intangibles; long-term investments d. Current; long-term investments; property, plant and equipment, intangibles

74.

What is the first classification of assets generally listed on a classified balance sheet? a. Current assets b. Property, plant and equipment c. Long-term investments d. Intangibles

Ans: A, LO: 1, Section: The Classified Balance Sheet, Subsection: Current Assets, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

75.

Use the following data to determine the total dollar amount of assets to be classified as current assets. Acme Office Supplies Balance Sheet December 31, 2025

Cash $ 195,000 Accounts receivable 150,000 Inventory 165,000 Prepaid insurance 90,000 Stock investments (long-term) 255,000 Land 270,000 Buildings $315,000 Less: Accumulated depreciation (60,000) 255,000 Goodwill 210,000 Total assets $1,590,000 a. b. c. d.

Accounts payable Salaries and wages payable Mortgage payable Total liabilities

$ 210,000 30,000 240,000 480,000

Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

$360,000 750,000 1,110,000 $1,590,000

$855,000 $600,000 $510,000 $435,000

Ans: B, LO: 1, Section: The Classified Balance Sheet, Subsection: Current Assets, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $195,000 + $150,000 + $165,000 + $90,000  $600,000 (Cash + Acc. rec. + Inven. + Prep. ins.)

A Further Look at Financial Statements

76.

2-13

Use the following data to determine the total dollar amount of assets to be classified as property, plant, and equipment. Acme Office Supplies Balance Sheet December 31, 2025

Cash $ 195,000 Accounts receivable 150,000 Inventory 165,000 Prepaid insurance 90,000 Stock investments (noncurrent) 255,000 Land 270,000 Buildings $315,000 Less: Accumulated depreciation (60,000) 255,000 Goodwill 210,000 Total assets $1,590,000 a. b. c. d.

Accounts payable Salaries and wages payable Mortgage payable Total liabilities

$ 210,000 30,000 240,000 480,000

Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

360,000 750,000 1,110,000 $1 590,000

$990,000 $525,000 $735,000 $585,000

Ans: B, LO: 1, Section: The Classified Balance Sheet, Subsection: Property, Plant, and Equipment, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $270,000 + $255,000  $525,000 [Land + (Build. - Acc. dep.)]

77.

Use the following data to determine the total dollar amount of assets to be classified as long-term investments. Acme Office Supplies Balance Sheet December 31, 2025

Cash $ 195,000 Accounts receivable 150,000 Inventory 165,000 Prepaid insurance 90,000 Stock investments 255,000 Land 270,000 Buildings $315,000 Less: Accumulated depreciation (60,000) 255,000 Goodwill 210,000 Total assets $1,590,000 a. b. c. d.

Accounts payable Salaries and wages payable Mortgage payable Total liabilities

$ 210,000 30,000 240,000 480,000

Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

360,000 750,000 1,110,000 $1,590,000

$0 $525,000 $255,000 $465,000

Ans: C, LO: 1, Section: The Classified Balance Sheet, Subsection: Long-term Investments, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: Stock investments  $255,000

2-14

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

A Further Look at Financial Statements

78.

2-15

Use the following data to determine the total amount of working capital. Acme Office Supplies Balance Sheet December 31, 2025

Accounts payable Salaries and wages payable Mortgage payable Total liabilities

$ 210,000 30,000 240,000 480,000

Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

360,000 750,000 _1,110,000 $1,590,000

$360,000 $390,000 $130,000 $180,000

Ans: A, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Working Capital, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($195,000 + $150,000 + $165,000 + $90,000)  ($210,000 + $30,000)  $360,000 (Cash + Acc. rec. + Inv. + Prep. ins.) – (Acct. pay + Sal./wag. pay.)

79.

Use the following data to calculate the current ratio. Acme Office Supplies Balance Sheet December 31, 2025

Accounts payable Salaries and wages payable Mortgage payable Total liabilities

$ 210,000 30,000 240,000 480,000

Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

360,000 750,000 1,110,000 $1,590,000

2.13: 1 1.44: 1 2.86: 1 2.50: 1

Ans: D, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Current Ratio, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($195,000 + $150,000 + $165,000 + $90,000)  ($210,000 + $30,000)  2.50:1 (Cash + Acc. rec. + Inv. + Prep. ins.) ÷ (Acc. pay. + Sal./wag. pay.)

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

80.

Use the following data to determine the total dollar amount of assets to be classified as current assets. A1 Auto Supplies Balance Sheet December 31, 2025

Cash and cash equivalents $ 70,000 Accounts receivable 100,000 Inventory 140,000 Prepaid insurance 80,000 Stock investments (long-term) 180,000 Land 190,000 Buildings $230,000 Less: Accumulated depreciation (60,000) 170,000 Trademarks 140,000 Total assets $1,070,000 a. b. c. d.

Accounts payable Salaries and wages payable Bonds payable Total liabilities

$ 130,000 20,000 180,000 330,000

Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

240,000 500,000 740,000 $1,070,000

$390,000 $250,000 $570,000 $330,000

Ans: A, LO: 1, Section: The Classified Balance Sheet, Subsection: Current Assets, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $70,000 + $100,000 + $140,000 + $80,000  $390,000 (Cash + Acc. rec. + Inv. + Prep. ins.)

81.

Use the following data to determine the total dollar amount of assets to be classified as property, plant, and equipment. A1 Auto Supplies Balance Sheet December 31, 2025

Cash and cash equivalents $ 70,000 Accounts receivable 100,000 Inventory 140,000 Prepaid insurance 80,000 Stock investments 180,000 Land 190,000 Buildings $230,000 Less: Accumulated depreciation _(60,000) 170,000 Trademarks 140,000 Total assets $1,070,000 a. b. c. d.

Accounts payable Salaries and wages payable Bonds payable Total liabilities

$ 130,000 20,000 180,000 330,000

Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

240,000 500,000 740,000 $1,070,000

$540,000 $500,000 $360,000 $420,000

Ans: C, LO: 1, Section: The Classified Balance Sheet, Subsection: Property, Plant, and Equipment, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $190,000 + $170,000  $360,000

A Further Look at Financial Statements [Land + (Build. – Acc. dep.)]

2-17

2-18

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

82.

Use the following data to determine the total dollar amount of assets to be classified as long-term investments. A1 Auto Supplies Balance Sheet December 31, 2025

Cash and cash equivalents $ 70,000 Accounts receivable 100,000 Inventory 140,000 Prepaid insurance 80,000 Stock investments (noncurrent) 180,000 Land 190,000 Buildings $230,000 Less: Accumulated depreciation _(60,000) 170,000 Trademarks 140,000 Total assets $1,070,000 a. b. c. d.

Accounts payable Salaries and wages payable Bonds payable Total liabilities

$ 130,000 20,000 180,000 330,000

Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

240,000 500,000 740,000 $1,070,000

$0 $320,000 $180,000 $280,000

83.

Use the following data to determine the total amount of working capital. A1Auto Supplies Balance Sheet December 31, 2025

Accounts payable Salaries and wages payable Bonds payable Total liabilities

$ 130,000 20,000 180,000 330,000

Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

240,000 500,000 740,000 $1,070,000

$260,000 $240,000 $160,000 $420,000

Ans: B, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Working Capital, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($70,000 + $100,000 + $140,000 + $80,000)  ($130,000 + $20,000)  $240,000 (Cash + Acc. rec. + Inv. + Prep. ins.) - (Acc. pay. + Sal./wag. pay.)

A Further Look at Financial Statements

84.

2-19

Use the following data to calculate the current ratio. A1Auto Supplies Balance Sheet December 31, 2025

Cash and cash equivalents $ 70,000 Accounts receivable 100,000 Inventory 140,000 Prepaid insurance 80,000 Stock investments (noncurrent) 180,000 Land 190,000 Buildings $230,000 Less: Accumulated depreciation _ (60,000) 170,000 Trademarks 140,000 Total assets $1,070,000 a. b. c. d.

Accounts payable Salaries and wages payable Bonds payable Total liabilities

$ 130,000 20,000 180,000 330,000

Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

240,000 500,000 740,000 $1,070,000

2.07: 1 1.67: 1 3.00: 1 2.60: 1

Ans: D, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Current Ratio, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($70,000 + $100,000 + $140,000 + $80,000)  ($130,000 + $20,000)  2.60:1 (Cash + Acc. rec. + Inv. + Prep. ins.) ÷ (Acc. pay. + Sal./wag. pay.)

85.

Suppose that Old Navy has assets of $4,200,000, common stock of $1,092,000, and retained earnings of $665,000. What are the creditors’ claims on their assets? a. $3,773,000 b. $1,757,000 c. $2,443,000 d. $4,627,000

Ans: C, LO: 1, Section: The Classified Balance Sheet, Subsection: Liabilities, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $4,200,000  $1,092,000  $665,000  $2,443,000 (Assets - Com.st. - Ret.earn.)

86.

Suppose that Forever 21 Corporation has total assets of $3,600,000, common stock of $936,000, and retained earnings of $570,000 at December 31, 2025. What are the creditors’ claims on their assets at that date? a. $3,234,000 b. $1,506,000 c. $2,094,000 d. $3,966,000

Ans: C, LO: 1, Section: The Classified Balance Sheet, Subsection: Liabilities, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $3,600,000  $936,000  $570,000  $2,094,000 (Assets - Com.st. - Ret.earn.)

2-20

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

87.

Suppose that Forever 21 Corporation has total assets of $3,600,000, common stock of $936,000, and retained earnings of $570,000 at December 31, 2025. What are the stockholders’ claims on their assets at that date? a. $3,234,000 b. $1,506,000 c. $2,094,000 d. $3,966,000

Ans: B, LO: 1, Section: The Classified Balance Sheet, Subsection: Stockholders’ Equity, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $936,000 + $570,000  $1,506,000 (Com.st. + Ret.earn.)

88.

If a company has total assets of $1,600,000, liabilities of $200,000, common stock of $900,000, and retained earnings of $500,000 at December 31, 2025. What are the stockholders’ claims on their assets at that date? a. $1,600,000 b. $1,400,000 c. $700,000 d. $1,800,000

Ans: B, LO: 1, Section: The Classified Balance Sheet, Subsection: Stockholders’ Equity, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $900,000 + $500,000  $1,400,000 (Com.st. + Ret.earn.)

89.

Suppose that a corporation has total assets of $500,000, common stock of $50,000, and retained earnings of $200,000 at December 31, 2025. What are the stockholders’ claims on their assets at that date? a. $500,000 b. $450,000 c. $250,000 d. $300,000

Ans: C, LO: 1, Section: The Classified Balance Sheet, Subsection: Stockholders’ Equity, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $50,000 + $200,000 = $250,000 (Com.st. + Ret.earn.)

A Further Look at Financial Statements

90.

2-21

Use the following data to determine the total dollar amount of assets to be classified as current assets. Ace Supply Company Balance Sheet December 31, 2025

Cash $ 126,000 Accounts receivable 120,000 Inventory 210,000 Short-term investments 90,000 Land (held for future use) 255,000 Land 285,000 Buildings $339,000 Less: Accumulated depreciation _(60,000) 279,000 Franchise 210,000 Total assets $1,575,000 a. b. c. d.

Accounts payable Salaries and wages payable Note payable (due 2028) Total liabilities

$ 165,000 30,000 270,000 465,000

Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

360,000 750,000 _1,110,000 $1,575,000

$801,000 $336,000 $546,000 $456,000

Ans: C, LO: 1, Section: The Classified Balance Sheet, Subsection: Current Assets, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $126,000 + $120,000 + $210,000 + $90,000  $546,000 (Cash + Acc. rec. + Inv. + Sht.-term inv.)

91.

Use the following data to determine the total dollar amount of assets to be classified as property, plant, and equipment. Ace Supply Company Balance Sheet December 31, 2025

Cash $ 126,000 Accounts receivable 120,000 Inventory 210,000 Short-term investments 90,000 Land (held for future use) 255,000 Land 285,000 Buildings $339,000 Less: Accumulated depreciation (60,000) 279,000 Franchise 210,000 Total assets $1,575,000 a. b. c. d.

Accounts payable Salaries and wages payable Note payable (due 2028) Total liabilities

$ 165,000 30,000 270,000 465,000

Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

360,000 750,000 _1,110,000 $1,575,000

$1,029,000 $774,000 $834,000 $564,000

2-22

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

[Land + (Build. – Acc. dep.)]

A Further Look at Financial Statements

92.

2-23

Use the following data to determine the total dollar amount of assets to be classified as long-term investments. Ace Supply Company Balance Sheet December 31, 2025

Cash $ 126,000 Accounts receivable 120,000 Inventory 210,000 Short-term investments 90,000 Land (held for future use) 255,000 Land 285,000 Buildings $339,000 Less: Accumulated depreciation (60,000) 279,000 Franchise 210,000 Total assets $1,575,000 a. b. c. d.

Accounts payable Salaries and wages payable Note payable (due 2028) Total liabilities

$ 165,000 30,000 270,000 465,000

Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

360,000 750,000 _1,110,000 $1,575,000

$0 $465,000 $255,000 $585,000

93.

Use the following data to determine the total amount of working capital. Ace Supply Company Balance Sheet December 31, 2025

Cash $ 126,000 Accounts receivable 120,000 Inventory 210,000 Short-term investments 90,000 Land (held for future use) 255,000 Land 285,000 Buildings $339,000 Less: Accumulated depreciation (60,000) 279,000 Franchise 210,000 Total assets $1,575,000 a. b. c. d.

Accounts payable Salaries and wages payable Note payable (due 2028) Total liabilities

$ 165,000 30,000 270,000 465,000

Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

360,000 750,000 _1,110,000 $1,575,000

$606,000 $351,000 $381,000 $261,000

Ans: B, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Working Capital, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($126,000 + $120,000 + $210,000 + $90,000)  ($165,000 + $30,000)  $351,000 (Cash + Acc. rec. + Inv. + Sht-term inv.) – (Acc. pay. + Sal./wag. pay.)

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

2-24 94.

Use the following data to calculate the current ratio. Ace Supply Company Balance Sheet December 31, 2025

Cash $ 126,000 Accounts receivable 120,000 Inventory 210,000 Short-term investments 90,000 Land (held for future use) 255,000 Land 285,000 Buildings $339,000 Less: Accumulated depreciation (60,000) 279,000 Franchise 210,000 Total assets $1,575,000 a. b. c. d.

Accounts payable Salaries and wages payable Note payable (due 2028) Total liabilities

$ 165,000 30,000 270,000 465,000

Common stock Retained earnings Total stockholders’ equity Total Liabilities and stockholders’ equity

360,000 750,000 _1,110,000 $1,575,000

2.34: 1 2.80: 1 3.31: 1 1.26: 1

Ans: B, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Current Ratio, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($126,000 + $120,000 + $210,000 + $90,000)  ($165,000 + $30,000)  2.80:1 (Cash + Acc. rec. + Inv. + Sht.-term inv.) ÷ (Acc. pay. + Sal./wag. pay.)

95.

A measure of profitability is a. the current ratio. b. the debt to assets ratio. c. earnings per share. d. working capital.

Ans: C, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Earnings Per Share, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

96.

For 2025, Acme Co. reported net income of $36,000, net sales $400,000, and weightedaverage shares of common stock outstanding of 16,000. No preferred dividends were paid. Earnings per share is a. $2.25 b. $0.44 c. $25.00 d. $0.09

Ans: A, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Earnings Per Share, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($36,000  0)  16,000  $2.25 [(Net inc. – Pref.div) ÷ Ave.sh.out.

A Further Look at Financial Statements

97.

2-25

For 2025, Ace Inc. reported net income of $42,000, had weighted-average shares of common stock outstanding of 16,000, paid preferred dividends of $10,000 and common dividends of $5,000. What was 2025 earnings per share? a. $0.08 b. $0.50 c. $25.00 d. $2.00

Ans: D, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Earnings Per Share, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($42,000  $10,000)  16,000  $2.00 [(Net inc. – Pref.div) ÷ Ave.sh.out.

98.

Earnings per share is calculated by dividing a. gross profit by weighted-average common shares outstanding. b. (net income less preferred dividends) by weighted-average common shares outstanding. c. net income by weighted-average common shares outstanding. d. net sales by weighted-average common shares outstanding.

Ans: B, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Earnings Per Share, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

99.

Earnings per share is a a. profitability ratio. b. liquidity ratio. c. solvency ratio. d. trending ratio.

Ans: A, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Earnings Per Share, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

100.

Which of the following statements is true? a. Earnings per share is an internal measure and is not used by stockholders. b. The denominator used in computing earnings per share represents the shares of common stock outstanding on the last day of the accounting period. c. Net income is not adjusted when computing earnings per share. d. By comparing earnings per share of a single corporation over time, a stockholder can evaluate the corporation’s relative earnings performance.

Ans: D, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Earnings Per Share, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

101.

Earnings available to common stockholders is equal to a. total revenues b. net income + preferred dividends. c. preferred dividends – net income. d. net income – preferred dividends.

Ans: D, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Earnings Per Share, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

2-26

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

102.

Suppose that the following information is available for Home Depot Corporation and Lowes Corporation:

(in millions) Preferred dividends Net income Shares outstanding at the end of the year Shares outstanding at the beginning of the year

Home Depot Corporation 2025 2024 $25 $10 $500 $480 200 180 180

150

Lowes Corporation 2025 $0 $490 150

2024 $30 $520 200

200

220

Based on this information, the earnings per share calculations (rounded to two decimals) suggest a. lower performance in 2024 than in 2025 for Home Depot Corporation. b. lower performance in 2025 than in 2024 for Home Depot Corporation. c. less earnings available to Home Depot's common stockholders in 2025 than in 2024. d. a decrease in the average number of common shares outstanding between 2024 and 2025 for Home Depot Corporation. Ans: B, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Earnings Per Share, Bloom: AN, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting 2024 Home Depot EPS = ($480 - $10)/((180 + 150)/2) = $470/ 165 = $2.85 2025 Home Depot EPS = ($500 - $25)/((200 + 180)/2) = $475/ 190 = $2.50

103.

Suppose that the following information is available for Home Depot Corporation and Lowes Corporation:

(in millions) Preferred dividends Net income Shares outstanding at the end of the year Shares outstanding at the beginning of the year

Home Depot Corporation 2025 2024 $25 $10 $500 $480

Lowes Corporation 2025 $0 $490

2024 $30 $520

200

180

150

200

180

150

200

220

Based on this information, which of the following is suggested by the earnings per share calculations (rounded to two decimals) and the information given? a. There is lower performance in 2024 than in 2025 for Lowes Corporation. b. There is higher performance in 2024 than in 2025 for Lowes Corporation. c. There is less earnings available to Lowes common stockholders in 2025 than in 2024. d. There is an increase in the average number of common shares outstanding between 2024 and 2025 for Lowes. Ans: A, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Earnings Per Share, Bloom: AN, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting 2024 Loews EPS = ($520 - $30)/((200 + 220)/2) = $2.33 2025 Loews EPS = ($490 - $0)/((200 + 150)/2) = $2.80

A Further Look at Financial Statements

104.

2-27

Suppose that the following information is available for Home Depot Corporation and Lowes Corporation:

(in millions) Preferred dividends Net income Shares outstanding at the end of the year Shares outstanding at the beginning of the year

Home Depot Corporation 2025 2024 $25 $10 $500 $480 200 180 180

150

Lowes Corporation 2025 $0 $490 150

2024 $30 $520 200

200

220

Based on this information, what is the amount of Home Depot's earnings per share (rounded to two decimals) for 2025? a. $2.76 b. $2.50 c. $1.25 d. $1.32 Ans: B, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Earnings Per Share, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($500  $25)  [(200 + 180)  2]  $2.50 (Net inc. – Pref. div) ÷ [End. sh. out. + Beg. .sh. out.) ÷ 2]

105.

Suppose that the following information is available for Home Depot Corporation and Lowes Corporation:

(in millions) Preferred dividends Net income Shares outstanding at the end of the year Shares outstanding at the beginning of the year

Home Depot Corporation 2025 2024 $25 $10 $500 $480 200 180 180

150

Lowes Corporation 2025 $0 $490 150

2024 $30 $520 200

200

220

Based on the information for both Home Depot and Lowes over the two-year period, the earnings per share calculations (rounded to two decimals) indicate that a. Home Depot is seeing a greater performance improvement than Lowes. b. The earnings available to common stockholders is decreasing for Lowes and increasing for Home Depot. c. The earnings per share calculations for both companies must assume that changes in shares between 2024 and 2025 occur in the middle of the year. d. Lowes is more financially stable than Home Depot. Ans: C, LO: 2, Bloom: AN, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting 2024 Lowes EPS = ($520 - $30)/((200+220)/2) = $2.33 2025 Lowes EPS = ($490 - $0)/((200+150)/2) = $2.80

2-28

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

2024 Home Depot EPS = ($480 - $10)/((180+150)/2) = 470/165 = $2.85 2025 Home Depot EPS = ($500 - $25)/((200+180)/2) = 475/190= $2.50

106.

The relationship between current assets and current liabilities is important in evaluating a company's a. profitability. b. liquidity. c. market value. d. solvency.

Ans: B, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Liquidity, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

107.

Ratios that measure the income or operating success of a company for a given period of time are a. liquidity ratios. b. profitability ratios. c. solvency ratios. d. trending ratios.

Ans: B, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Using the Income Statement, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

108.

Which of the following is a measure of liquidity? a. Working capital b. Profit margin c. Earnings per share d. Debt to assets ratio

Ans: A, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Liquidity, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

109.

Current assets divided by current liabilities is known as the a. working capital. b. current ratio. c. profit margin. d. capital structure.

Ans: B, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Current Ratio, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

110.

The information needed to determine if companies can pay their current obligations is the a. net income for this year. b. projected net income for next year. c. relationship between current assets and current liabilities. d. relationship between short-term and long-term liabilities.

Ans: C, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Liquidity, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

A Further Look at Financial Statements

111.

A short-term creditor is primarily interested in the a. liquidity b. profitability c. consistency d. solvency

2-29

of the borrower.

112.

The current ratio is a. current assets plus current liabilities. b. current assets minus current liabilities. c. current assets divided by current liabilities. d. current assets times current liabilities.

Ans: C, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Current Ratio, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

113.

Working capital is calculated by taking a. current assets plus current liabilities. b. current assets minus current liabilities. c. current assets divided by current liabilities. d. current assets times current liabilities.

Ans: B, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Working Capital, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

114.

Working capital is a measure of a. consistency. b. liquidity. c. profitability. d. solvency.

115.

Long-term creditors are usually most interested in evaluating a. liquidity. b. profitability. c. solvency. d. consistency.

Ans: C, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Solvency, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

116.

Which of the following is a meaningful comparison to assess a company’s profitability? a. An intracompany comparison of net income for a two-year period b. Industry-average comparison of total assets c. Year-to-year comparisons of liabilities with a competitor in the same industry d. Intercompany comparisons of earnings per share for a two-year period

Ans: A, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Solvency, Bloom: K, Difficulty: Hard, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

2-30 117.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Which one of the following is true? a. Intangible assets are current assets that do not have physical substance. b. Obligations expected to be paid after one year are classified as expenses. c. Current assets are assets that a company expects to convert to cash or use up within the longer of one year or its operating cycle. d. Property, plant, and equipment are assets with relatively short useful lives that are used in the operations of the business.

Ans: C, LO: 1, Section: The Four Financial Statements Using Ratios, Subsection: The Classified Balance Sheet, Bloom: K, Difficulty: Hard, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

118.

A liquidity ratio measures the a. income or operating success of a company over a period of time. b. ability of a company to survive over a long period of time. c. short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash. d. percentage of total financing provided by creditors.

Ans: C, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Liquidity, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

119.

Working capital is a. calculated by dividing current assets by current liabilities. b. used to evaluate a company’s liquidity and short-term debt paying ability. c. used to evaluate a company’s solvency and long-term debt paying ability. d. calculated by subtracting current assets from current liabilities.

120.

The ability of a business to pay obligations that are expected to become due within the next year or operating cycle is a. leverage. b. liquidity. c. profitability. d. wealth.

A Further Look at Financial Statements

121.

2-31

Based on the following data, what is the amount of current assets? Accounts payable……………………………………………………….. $ 62,000 Accounts receivable…………………………………………………….. 100,000 Cash………………………………………………………………………. 70,000 Intangible assets………………………………………………………… 100,000 Inventory…………………………………………………………………. 138,000 Long-term investments…………………………………………………. 160,000 Long-term liabilities……………………………………………………… 200,000 Short-term investments…………………………………………………. 80,000 Notes payable……………………………………………………………. 56,000 Property, plant, and equipment .......................................................................1,340,000 Prepaid insurance……………………………………………………….. 2,000 a. b. c. d.

$232,000 $390,000 $252,000 $250,000

Ans: B, LO: 1, Section: The Four Financial Statements Using Ratios, Subsection: Current Assets, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $100,000 + $70,000 + $138,000 + $80,000 + $2,000  $390,000 (Acc. rec. + Cash + Inven. + Sh.-term inv. + Prep. ins.)

122.

Based on the following data, what is the amount of working capital? Accounts payable……………………………………………………….. $ 64,000 Accounts receivable…………………………………………………….. 114,000 Cash………………………………………………………………………. 70,000 Intangible assets………………………………………………………… 100,000 Inventory…………………………………………………………………. 138,000 Long-term investments…………………………………………………. 160,000 Long-term liabilities……………………………… ……………………. 200,000 Short-term investments…………………………………………………. 80,000 Notes payable (short-term)……………………………………………… 56,000 Property, plant, and equipment ...................................................................... 1,340,000 Prepaid insurance……………………………………………………….. 2,000 a. b. c. d.

$284,000 $332,000 $370,000 $326,000

Ans: A, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Working Capital, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($114,000 + $70,000 + $138,000 + $80,000 + $2,000)  ($64,000 + $56,000)  $284,000 (Acc. rec. + Cash + Inven. + Sh.-term inv. + Prep. ins.) – (Acc. pay. + Note + pay.)

2-32

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

123.

Using the following balance sheet and income statement data, what is the total amount of working capital? Current assets $ 32,000 Net income $42,000 Current liabilities 16,000 Stockholders’ equity 78,000 Average assets 160,000 Total liabilities 42,000 Total assets 120,000 Average common shares outstanding was 15,000. a. b. c. d.

$8,000 $32,000 $10,000 $16,000

Ans: D, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Working Capital, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $32,000  $16,000  $16,000 (Cur. assets – Cur. liab.)

124.

Using the following balance sheet and income statement data, what is the current ratio? Current assets $ 32,000 Net income $42,000 Current liabilities 16,000 Stockholders’ equity 78,000 Average assets 160,000 Total liabilities 42,000 Total assets 120,000 Average common shares outstanding was 15,000. a. b. c. d.

2.0: 1 2.6: 1 0.5: 1 2.9: 1

Ans: A, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Current Ratio, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $32,000  $16,000  2.0:1 (Cur. assets – Cur. liab.)

125.

Using the following balance sheet and income statement data, what is the earnings per share? Current assets $ 32,000 Net income $42,000 Current liabilities 16,000 Stockholders’ equity 78,000 Average assets 160,000 Total liabilities 42,000 Total assets 120,000 Average common shares outstanding was 15,000. a. b. c. d.

$5.20 $8.00 $2.80 $0.36

Ans: C, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Earnings Per Share, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $42,000  $15,000  $2.80 (Net inc. ÷ Ave. sh. out.)

A Further Look at Financial Statements

126.

2-33

Using the following balance sheet and income statement data, what is the debt to assets ratio? Current assets $ 32,000 Net income $42,000 Current liabilities 16,000 Stockholders’ equity 78,000 Average assets 160,000 Total liabilities 42,000 Total assets 120,000 Average common shares outstanding was 15,000. a. b. c. d.

26 percent 13 percent 65 percent 35 percent

Ans: D, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Debt to Assets Ratio, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $42,000  $120,000  35% (Tot. liab. ÷ Tot. assets)

127.

Using the following balance sheet and income statement data, what is the total amount of working capital? Current assets $ 21,000 Net income $45,000 Current liabilities 12,000 Stockholders’ equity 63,000 Average assets 132,000 Total liabilities 27,000 Total assets 90,000 Average common shares outstanding was 15,000. a. b. c. d.

$7,000 $5,000 $9,000 $2,000

Ans: C, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Working Capital, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $21,000  $12,000  $9,000 (Cur. assets – Cur. liab.)

128.

Using the following balance sheet and income statement data, what is the current ratio? Current assets $ 21,000 Net income $45,000 Current liabilities 12,000 Stockholders’ equity 63,000 Average assets 132,000 Total liabilities 27,000 Total assets 90,000 Average common shares outstanding was 15,000. a. b. c. d.

0.78: 1 3.33: 1 0.57: 1 1.75: 1

Ans: D, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Current Ratio, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $21,000  $12,000  1.75:1 (Cur. assets ÷ Cur. liab.)

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

2-34 129.

Using the following balance sheet and income statement data, what is the earnings per share? Current assets $ 21,000 Net income $45,000 Current liabilities 12,000 Stockholders’ equity 63,000 Average assets 132,000 Total liabilities 27,000 Total assets 90,000 Average common shares outstanding was 15,000. a. b. c. d.

$3.00 $4.20 $0.33 $0.50

Ans: A, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Earnings Per Share, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $45,000  $15,000  $3.00 (Net inc. ÷ Ave. sh. out).

130.

Using the following balance sheet and income statement data, what is the debt to assets ratio? Current assets $ 21,000 Net income $45,000 Current liabilities 12,000 Stockholders’ equity 63,000 Average assets 132,000 Total liabilities 27,000 Total assets 90,000 Average common shares outstanding was 15,000. a. b. c. d.

20.5 percent 30 percent 33.3 percent 40.9 percent

Ans: B, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Debt to Assets Ratio, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $27,000  $90,000  30% (Tot. liab. ÷ Tot. assets)

131.

The debt to assets ratio is computed by dividing a. long-term liabilities by total assets. b. long-term liabilities by average assets. c. total liabilities by total assets. d. total liabilities by average assets.

Ans: C, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Debt to Assets Ratio, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

132.

A useful measure of solvency is the a. current ratio. b. earnings per share. c. return on assets ratio. d. debt to assets ratio.

Ans: D, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Solvency, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

133.

Which of the following is not considered a measure of liquidity? a. Current ratio b. Working capital c. Debt to assets ratio d. Each of these answer choices are liquidity measures. .

A Further Look at Financial Statements

2-35

134.

Which measure would a long-term creditor be most interested in reviewing? a. Earnings per share b. Debt to assets ratio c. Current ratio d. Working capital measure

Ans: B, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Solvency, Bloom: C, Difficulty: Hard, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

135.

A1 Motors Corporation has a debt to assets ratio of 73%. This tells the user of the company’s financial statements that a. A1 is getting a 27% return on its assets. b. there is a risk that A1 cannot pay its debts as they come due. c. 73% of the assets are financed by the stockholders. d. based on this measure, the user should not invest in A1.

Ans: B, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Debt to Assets Ratio, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

136.

Ace Company is a retail store. Due to competition, it is having trouble selling its products. Thus, inventory has been building up. Ace’s current ratio has not changed for the past three years, in spite of the inventory buildup. Which of the following statements is true? a. As long as the current ratio remains constant, there is no need for concern. b. The composition of current assets and current liabilities does not matter. c. The management of Ace should consider the effect of slow-moving inventory on its liquidity. d. Since inventory is a current asset, any increases should automatically cause the current ratio to rise.

Ans: C, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Current Ratio, Bloom: C, Difficulty: Hard, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

137.

How can a company improve its current ratio? a. Work with a creditor to reclassify some current debt into long-term debt b. Collect accounts receivable c. Nothing can ethically be done to improve the current ratio d. Use excess cash to buy new equipment

Ans: A, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Current Ratio, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

138.

Suppose that Verizon Corporation has current assets of $1,800,000 and current liabilities of $750,000. If they pay $350,000 of their accounts payable, what will their new current ratio be? a. 3.6:1 b. 2.4:1 c. 4.5:1 d. 2.0:1

Ans: A, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Current Ratio, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($1,800,000  $350,000)  ($750,000  $350,000)  3.6:1 [(Cur. assets – A/P paid) ÷ (Cur. liab. – A/P paid)

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

139.

Suppose that Verizon Corporation has current assets of $1,800,000 and current liabilities of $750,000. If they issue $150,000 of new stock, what will their new current ratio be? (rounded) a. 2.6:1 b. 2.1:1 c. 2.2:1 d. 2.4:1

Ans: A, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Current Ratio, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($1,800,000 + $150,000)  $750,000  2.6:1 (Cur. assets + New stock) ÷ Cur. liab.

140.

Suppose that Patagonia Corporation has current assets of $1,600,000 and current liabilities of $750,000. If they pay $350,000 of their accounts payable, what will their new current ratio be? a. 3.1:1 b. 4.0:1 c. 1.5:1 d. 2.1:1

Ans: A, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Current Ratio, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($1,600,000  $350,000)  ($750,000  $350,000)  3.1:1 [(Cur. assets – A/P paid) ÷ (Cur. liab. - A/P paid)

141.

Suppose that Patagonia Corporation has current assets of $1,600,000 and current liabilities of $750,000. If they issue $200,000 of new stock what will their new current ratio be? (rounded) a. 2.4:1 b. 1.9:1 c. 1.7:1 d. 2.13:1

Ans: A, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Current Ratio, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($1,600,000 + $200,000)  $750,000  2.4:1 (Cur. assets + New stock) ÷ Cur. liab.

142.

The debt to assets ratio is a a. liquidity ratio. b. profitability ratio. c. solvency ratio. d. None of the answer choices is correct.

143.

Analysts determined that Amazon has the ability to pay its obligations expected to come due within the next year. What did the analysts measure? a. Liquidity b. Profitability c. Solvency d. Cash on hand

Ans: A, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Liquidity, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA

A Further Look at Financial Statements

2-37

BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

144.

To be relevant, what characteristic must accounting information exhibit? a. It must be capable of making a difference in a decision. b. It must be compared with other companies. c. It must be verifiable. d. It must be based on the U.S. monetary unit.

Ans: A, LO: 3, Section: Financial Reporting Concepts, Subsection: Qualities of Useful Information, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

145.

What is the role of the FASB? a. To regulate U.S. financial markets and accounting standard-setting bodies b. To determine auditing standards in the U.S. c. To establish accounting standards in the U.S. d. To regulate foreign companies that do business in the U.S.

Ans: C, LO: 3, Section: Financial Reporting Concepts, Subsection: The Standard-Setting Environment, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

146.

Which statement describes the periodicity assumption? a. The life of a business can be divided into artificial times periods for which useful reports can be prepared. b. The business will remain in operation for the foreseeable future. c. Every economic unit can be separately identified and accounted for. d. Financial reports are issued on a timely basis for decision-making.

Ans: A, LO: 3, Section: Financial Reporting Concepts, Subsection: Assumptions of Financial Reporting, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

147.

Which of the following organizations issues accounting standards for countries outside the United States? a. SEC b. GAAP c. IASB d. FASB

Ans: C, LO: 3, Section: Financial Reporting Concepts, Subsection: The Standard Setting Environment, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

148.

Which entity(ies) is/are responsible for establishing accounting standards in the United States? a. Securities and Exchange Commission b. International Accounting Standards Board c. Financial Accounting Standards Board d. Financial Accounting Standards Board and the International Accounting Standards Board

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

149.

Which statement is false concerning accounting principles in the United States? a. The Securities and Exchange Commission oversees U.S. financial markets and accounting standard-setting bodies. b. The International Accounting Standards Board issues accounting standards that must be followed by all companies that engage in international business. c. The primary auditing standard-setting body in the U.S. is the Financial Accounting Standards Board. d. The Public Company Accounting Oversight Board determines auditing standards.

150.

Generally accepted accounting principles a. are accounting rules formulated by the Internal Revenue Service. b. are sound in theory but rarely used in real life. c. are accounting rules that are recognized as a general guide for financial reporting. d. have eliminated all errors in accounting.

151.

The agency of the United States Government that oversees the U.S. financial markets is the a. Internal Revenue Service. b. Security Exchange Commission. c. Financial Accounting Standards Board. d. International Auditing Standards Committee.

Ans: B, LO: 3, Section: Financial Reporting Concepts, Subsection: The Standard Setting Environment, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

152.

What organization issues U.S. accounting standards? a. Securities and Exchange Commission b. International Accounting Standards Committee c. International Auditing Standards Committee d. Financial Accounting Standards Board

Ans: D, LO: 3, Section: Financial Reporting Concepts, Subsection: The Standard Setting Environment, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

153.

Which one of the following is not an enhancing quality of useful information? a. Timeliness b. Understandability c. Materiality d. Comparability

Ans: C, LO: 3, Section: Financial Reporting Concepts, Subsection: Enhancing Qualities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

154.

All of the following are qualities of useful information except a. faithful representation. b. materiality. c. relevance. d. flexibility.

Ans: D, LO: 3, Section: Financial Reporting Concepts, Subsection: Enhancing Qualities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

A Further Look at Financial Statements

155.

2-39

The two fundamental qualities of useful information are a. relevance and faithful representation. b. verifiability and timeliness. c. comparability and flexibility. d. understandability and consistency.

156.

The convention of consistency refers to consistent use of accounting principles a. among firms. b. from period to period. c. throughout the current accounting period. d. within industries.

Ans: B, LO: 3, Section: Financial Reporting Concepts, Subsection: Assumptions in Financial Reporting, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

157.

The quality of consistency is a type of a. relevance. b. materiality. c. comparability. d. faithful representation.

Ans: C, LO: 3, Section: Financial Reporting Concepts, Subsection: Assumptions in Financial Reporting, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

158.

Information that is presented in a clear fashion, so that users of that information can interpret it, is an example of a. relevance. b. faithful representation. c. understandability. d. comparability.

159.

In order for accounting information to be relevant, it must a. have very little cost. b. help predict future events or confirm prior expectations. c. not be reported to the public. d. be used by many different firms.

Ans: B, LO: 3, Section: Financial Reporting Concepts, Subsection: Qualities of Useful Information, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

160.

Accounting information should be verifiable in order to enhance a. comparability. b. faithful representation. c. consistency. d. relevance.

2-40 161.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Accounting information is relevant to business decisions because it a. has been verified by external audit. b. is prepared on an annual basis. c. confirms prior expectations. d. is neutral in its representations.

Ans: C, LO: 3, Section: Financial Reporting Concepts, Subsection: Qualities of Useful Information, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

162.

If accounting information has relevance, it is useful in making predictions about a. future IRS audits. b. new accounting principles. c. foreign currency exchange rates. d. the future events of a company.

Ans: D, LO: 3, Section: Financial Reporting Concepts, Subsection: Qualities of Useful Information, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

163.

Relevant accounting information a. is information that has been audited. b. must be reported within the operating cycle or one year, whichever is longer. c. has been objectively determined. d. is information that is capable of making a difference in a business decision.

164.

Which of the following is not a quality associated with faithful representation? a. Complete b. Consistency c. Neutral d. All of these answer choices are correct.

165.

Accounting information should be neutral in order to enhance a. faithful representation. b. consistency. c. comparability. d. relevance.

166.

Characteristics associated with relevant accounting information are a. comparability and timeliness. b. predictive value and confirmatory value. c. neutral and verifiable. d. consistency and understandability.

167.

Characteristics associated with faithfully representative accounting information are a. verifiable and timely. b. verifiable and neutral. c. complete and neutral. d. relevance and verifiable.

Ans: C, LO: 3, Section: Financial Reporting Concepts, Subsection: Qualities of Useful Information, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA

A Further Look at Financial Statements

2-41

BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

168.

Which of the following statements is not true? a. Comparability means using the same accounting principles from year to year within a company. b. Faithful representation is the quality of information that gives assurance that it is free of material error. c. Relevant accounting information must be capable of making a difference in the decision. d. The primary objective of financial reporting is to provide financial information that is useful to investors and creditors for making decisions.

Ans: A, LO: 3, Section: Financial Reporting Concepts, Subsection: Qualities of Useful Information, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

169.

Financial information is comparable if a. companies use the same accounting principles to prepare it. b. a company uses the same accounting practices from one period to the next. c. the benefits of preparing it outweigh the cost. d. it is capable of making a difference in an investing decision.

Ans: A, LO: 3, Section: Financial Reporting Concepts, Subsection: Enhancing Qualities, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

170.

An item is considered material if a. it does not cost a lot of money. b. it is of a tangible good. c. its size is likely to influence the decision of an investor or creditor. d. the cost of reporting the item is greater than its benefits.

Ans: C, LO: 3, Section: Financial Reporting Concepts, Subsection: Enhancing Qualities, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

171.

Information presented in a clear and concise fashion so that users can comprehend its meaning is an application of a. consistency. b. timeliness. c. verifiability. d. understandability.

172.

A company using the same accounting principles from year to year is an application of a. timeliness. b. consistency. c. full disclosure. d. materiality.

Ans: B, LO: 3, Section: Financial Reporting Concepts, Subsection: Enhancing Qualities, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

173.

Information is results. a. Verifiable b. Consistent c. Understandable d. Relevant

if independent measures, using the same methods, obtain similar

2-42

174.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Different companies using the same accounting principles is an application of a. consistency. b. materiality. c. full disclosure. d. comparability.

Ans: D, LO: 3, Section: Financial Reporting Concepts, Subsection: Enhancing Qualities, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

175.

The assumption that requires that only those things that can be expressed in money are included in the accounting records is the a. economic entity assumption. b. monetary unit assumption. c. going concern assumption. d. periodicity assumption.

Ans: B, LO: 3, Section: Financial Reporting Concepts, Subsection: Enhancing Qualities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

176.

Which of the following is a constraint in accounting? a. Comparability b. Cost c. Consistency d. Relevance

177.

The accounting concept that indicates assets should be reported at the price that would be received to sell an asset is the a. economic entity assumption. b. monetary unit assumption. c. fair value principle. d. historical cost principle.

Ans: C, LO: 3, Section: Financial Reporting Concepts, Subsection: Measurement Principles, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

178.

For accounting information to have relevance, it must be a. consistent. b. timely. c. verifiable. d. understandable.

Ans: B, LO: .3, Section: Financial Reporting Concepts, Subsection: Qualities of Useful Information, Bloom: C, Difficulty: Medium Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

179.

The periodicity assumption states that the economic life of a business can be divided into a. equal time periods. b. cyclical time periods. c. artificial time periods. d. perpetual time periods.

A Further Look at Financial Statements

180.

2-43

Which accounting assumption requires that only those things that can be expressed in dollar values are included in the accounting records? a. monetary unit assumption. b. historical cost principle. c. periodicity assumption. d. full disclosure principle.

Ans: A, LO: 3, Section: Financial Reporting Concepts, Subsection: Assumptions in Financial Reporting, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

181.

The indicates that assets should be reported at the price that would be received to sell the asset at the balance sheet date. a. historical cost principle b. fair value principle c. full disclosure principle d. consistency principle

Ans: B, LO: 3, Section: Financial Reporting Concepts, Subsection: Measurement Principles, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Risk Management, Analysis and Management, AICPA PC: None, IMA: Reporting

182.

Which accounting assumption assumes that an enterprise will continue in operation long enough to carry out its existing objectives and commitments? a. Monetary unit assumption b. Economic entity assumption c. Periodicity assumption d. Going concern assumption

Ans: D, LO: 3, Section: Financial Reporting Concepts, Subsection: Assumptions in Financial Reporting, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

183.

What does the full disclosure principle require? a. Companies must allow investors and creditors to examine their accounting records. b. Companies must disclose all circumstances and events that may affect decisions made by investors and other users. c. Companies must disclose the true value of all resources owned by the company and all amounts owed to creditors. d. Companies must disclose all transactions as part of their complete set of financial statements.

Ans: B, LO: 3, Section: Financial Reporting Concepts, Subsection: Full Disclosure, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Source: w34286490-05c8-4926-816f-e365eabbbf59

184.

It is assumed that the activities of Ford Motor company can be distinguished from those of General Motors because of the a. going concern assumption. b. economic entity assumption. c. monetary unit assumption. d. periodicity assumption.

Ans: B, LO: 3, Section: Financial Reporting Concepts, Subsection: Assumptions in Financial Reporting, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

2-44 185.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

The going concern assumption assumes that the business a. will be liquidated in the near future. b. will be purchased by another business. c. is in a growth industry. d. will remain in operation for the foreseeable future.

186.

The economic entity assumption states that economic events a. of different entities can be combined if all the entities are corporations. b. must be reported to the Securities and Exchange Commission. c. of a sole proprietorship cannot be distinguished from the personal economic events of its owners. d. of every entity can be separately identified and accounted for.

Ans: D, LO: 3, Section: Financial Reporting Concepts, Subsection: Assumptions in Financial Reporting, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

187.

The concept that a business has a reasonable expectation of remaining in business for the foreseeable future is called the a. economic entity assumption. b. monetary unit assumption. c. periodicity assumption. d. going concern assumption.

188.

Which of the following is not an accounting assumption? a. Integrity b. Going concern c. Periodicity d. Economic entity

189.

The periodicity assumption states a. the business will remain in operation for the foreseeable future. b. the life of a business can be divided into artificial time periods and that useful reports covering those periods can be prepared. c. every economic entity can be separately identified and accounted for. d. only those things that can be expressed in money are included in the accounting records.

190.

Acme Company has five plants nationwide that cost $300 million. The current fair value of the plants is $500 million. The plants will be reported as assets at a. $200 million. b. $800 million. c. $300 million. d. $500 million.

Ans: C, LO: 3, Section: Financial Reporting Concepts, Subsection: Historical Cost Principle, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

A Further Look at Financial Statements

191.

2-45

A1 Manufacturing Company has four plants nationwide that cost $450 million. Accumulated depreciation on the plants is $100 million at December 31, 2025. The current fair value of the plants at that date is $300 million. The plants will be reported on the December 31, 2025 balance sheet at a. $350 million. b. $700 million. c. $300 million. d. $600 million.

Ans: A, LO: 3, Section: Financial Reporting Concepts, Subsection: Historical Cost Principle, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $450 - $100 = $350 (Cost – Accumulated depreciation = Book value of plant)

192.

Suppose that Trek Company has four plants nationwide that cost $950 million. Accumulated depreciation on the plants is $300 million at December 31, 2025. The current fair value of the plants at that date is $800 million. The plants will be reported on the December 31, 2025 balance sheet at a. $950 million. b. $800 million. c. $500 million. d. $650 million.

Ans: D, LO: 3, Section: Financial Reporting Concepts, Subsection: Historical Cost Principle, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $950 - $300 = $650 (Cost – Accumulated depreciation = Book value of plant)

193.

Suppose that Patagonia Company has five manufacturing facilities nationwide that cost $500 million. The current fair value of the plants is $600 million. The plants will be reported as assets at a. $100 million. b. $500 million. c. $600 million. d. $900 million.

Ans: B, LO: 3, Section: Financial Reporting Concepts, Subsection: Historical Cost Principle, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

194.

Suppose that Target Corporation has actively-traded investment securities with a cost of $15 million. The current fair value of the investments is $20 million. The investment securities will be reported on the balance sheet at a. $5 million. b. $15 million. c. $20 million. d. $35 million.

Ans: C, LO: 3, Financial Reporting Concepts, Subsection: Fair Value Principle, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

2-46

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

195.

Suppose that Ralph Lauren Company has actively-traded investment securities that cost $30 million. The current fair value of the investment securities is $50 million. The securities will be reported on the balance sheet at a. $20 million. b. $30 million. c. $50 million. d. $80 million.

196.

The historical cost principle requires that when assets are acquired, they be recorded at a. fair market value. b. the amount paid for them. c. selling price. d. list price.

Ans: B, LO: 3, Section: Financial Reporting Concepts, Subsection: Historical Cost Principle, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

197.

Valuing assets at their fair value rather than at their cost is inconsistent with the a. economic entity assumption. b. historical cost principle. c. periodicity assumption. d. full disclosure principle.

Ans: B, LO: 3, Section: Financial Reporting Concepts, Subsection: Fair Value Principle, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

198.

Acme Cement Corporation reported $35 million for sales when it only had $20 million of actual sales. Which of the following qualities of useful information has Acme most likely violated? a. Comparability b. Relevance c. Faithful representation d. Consistency

Ans: C, LO: 3, Section: Financial Reporting Concepts, Subsection: Qualities of Useful Information, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

199.

Acme Corporation hired a new accountant. Over the next four years, the accountant used four different accounting methods to record depreciation for Acme's equipment. Which of the following qualities of useful information has Acme most likely violated? a. Comparability b. Relevance c. Faithful representation d. Consistency

200.

Tesla Company prepares quarterly reports, which it distributes to all stockholders and other entities that rely on its accounting information. Which of the following is the best term for the key assumption in financial reporting that Tesla is following? a. Monetary unit assumption b. Going concern assumption .

A Further Look at Financial Statements

2-47

c. Economic entity assumption d. Periodicity assumption. Ans: D, LO: 3, Section: Financial Reporting Concepts, Subsection: Assumptions in Financial Reporting, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

201.

Walmart Company prepares quarterly reports, which it files with the SEC and distributes to all stockholders. Which key assumption in financial reporting is Walmart following? a. Monetary unit assumption b. Periodicity assumption. c. Economic entity assumption d. Going concern assumption

202.

Tesla Company weighs the cost of providing information to stockholders with the benefits of doing so. Tesla is considering the a. monetary unit assumption. b. cost constraint. c. economic entity assumption. d. periodicity assumption.

Ans: B, LO: 3, Section: Financial Reporting Concepts, Subsection: Cost Constraint, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

203.

Walmart Company prepares quarterly reports, which it files with the SEC and distributes to all stockholders. In providing this information, Walmart weighs the cost of providing information to stockholders with the benefits of doing so. Walmart is applying the a. cost constraint. b. periodicity assumption. c. quality of consistency. d. historical cost principle.

Ans: A, LO: 3, Section: Financial Reporting Concepts, Subsection: Cost Constraint, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

2-48

BRIEF EXERCISES BE. 204 A list of financial statement items for Acme Manufacturing Company at June 30, 2025 includes the following: Accounts receivable $19,500 Prepaid insurance $5,400 Cash 22,400 Supplies 1,800 Short-term investments 6,200 Prepare the current assets section of the June 30, 2025 balance sheet listing the items in the proper sequence. Ans: N/A, LO: 1, Section: The Classified Balance Sheet, Subsection: Current Assets, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 204 ACME MANUFACTURING COMPANY Balance Sheet (PARTIAL) June 30, 2025 Assets Current assets Cash. ...................................................................... Debt investments .................................................... Accounts receivable ................................................ Supplies................................................................... Prepaid insurance.................................................... ` Total current assets .................................................

$22,400 6,200 19,500 1,800 5,400 $55,300

BE. 205 Suppose that the following information (in millions of dollars) is available for Columbia Sportswear for 2025: Sales revenue $6,300 Net income $588.7 Stock price per share $18.45 Preferred stock dividend $0 Average shares outstanding

336.4 million

Compute 2025 earnings per share for Columbia Sportswear. Ans: N/A, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Earnings Per Share, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 205 Earnings per share = [(Net inc. – Pref. stock div.) ÷ Aver. sh. out.]

$588.7 – $0 336.4

= $1.75

A Further Look at Financial Statements

2-49

BE. 206 Suppose that these selected condensed data are taken from a recent balance sheet of Samsung Corporation (in millions of dollars). Cash $ 7.2 Accounts receivable 14.4 Inventory 18.0 Other current assets 11.1 Total current liabilities 24.8 Additional information: Current liabilities at the beginning of the year were $35.6 million. What are (a) the working capital and (b) the current ratio? Ans: N/A, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Liquidity, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 206 a. $25.9 b. 2.04: 1

($50.7 – $24.8) (Cash + Acc. rec. + Inv. + oth. C.A.) – Tot. cur. liab. ($50.7  $24.8) (Cash + Acc. rec. + Inv. + oth. C.A.) ÷ Tot. cur. liab.

BE. 207 Insert the qualitative characteristics listed below that are associated with relevance and faithful representation. Confirmatory value Free from error Neutral

Materiality Complete Predictive value

RELEVANCE

FAITHFUL REPRESENTATION

Ans: N/A, LO: 3, Section: Financial Reporting Concepts, Subsection: Qualities of Useful Information, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 207 RELEVANCE 1. Confirmatory value 2. Predictive value 3. Materiality

FAITHFUL REPRESENTATION 1. Free from material error 2. Complete 3. Neutral

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

2-50 BE. 208

The following terms relate to the fundamental qualities of useful information. Match the key letter of the correct term with the descriptive statement below. a. b. c. d.

Confirmatory value Neutral Predictive value Relevant

e. f. g.

Faithful representation Timely Verifiable

1. Providing information that is not biased toward one position or another. 2. Providing information before it loses its capacity to influence decisions. 3. Providing information that is proven to be free from material error. 4. Providing information that would make a difference in a business decision. 5. Providing information that accurately depicts what really happened. 6. Providing information that confirms or corrects prior decisions. Ans: N/A, LO: 3, Section: Financial Reporting Concepts, Subsection: Qualities of Useful Information, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 208 1. b

3. g

5. e

2. f

4. d

6. a

BE. 209 For each of the independent situations described below, list the enhancing quality of useful information that has been violated, if any. List only one term for each case. 1. Carrier Company is in its third year of operations and has yet to issue financial statements. 2. Larsen Corporation has selected the FIFO inventory costing method during the current year. Last year it used the LIFO method and next year it plans to change to the average cost method. 3. Reiser Company expenses some office equipment that is inexpensive even though it has a useful life that exceeds 1 year. Ans: N/A, LO: 3, Section: Financial Reporting Concepts, Subsection: Assumptions in Financial Reporting, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 209 1. Timeliness 2. Consistency

3. No violation (materiality)

A Further Look at Financial Statements

2-51

BE. 210 Each of the following statements is justified by an accounting concept. Write the letter in the blank next to each statement corresponding to the concept involved. a. b. c. d.

Consistency Materiality Full disclosure Periodicity 1. The life of a business is divided into artificial time periods.

2. This characteristic best enhances comparability of financial statements between years. 3. A merger agreed on just after the balance sheet date nevertheless is reported in the notes to the financial statement. 4. A large company rounds its financial statement figures to the nearest thousand. Ans: N/A, LO: 3, Section: Financial Reporting Concepts, Subsection: Assumptions in Financial Reporting, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 210 1. d

2. a

3. c

4. b

BE. 211 Each of the following statements is justified by a fundamental quality or an enhancing quality of accounting information. Write the letter in the blank next to each statement corresponding to the quality involved. a. b. c.

Comparability Understandability Verifiable

d. e. f.

Consistency Relevance Faithful representation

A company uses the same accounting principles from year to year.

Information that is free from material error.

Information presented in a clear and concise fashion.

Information that makes a difference in a decision.

Information accurately depicts what really happened.

Ans: N/A, LO: 3, Section: Financial Reporting Concepts, Subsections: Qualities of Useful Information, Assumptions in Financial Information, Bloom: C, Difficulty: Easy, Min: 5, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 211 1. d

2. c

3. b .

4. e

5. f

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

2-52 BE. 212

Presented below are the basic assumptions and principles underlying financial statements. a. Historical cost principle b. Economic entity assumption c. Full disclosure principle

d. Going concern assumption e. Monetary unit assumption f. Periodicity assumption

Identify the basic assumption or principle that is described below. 1. The economic life of a business can be divided into artificial time periods. 2. The business will continue in operation long enough to carry out its existing objectives. 3. Assets should be recorded at their cost. 4. Economic events can be identified with a particular unit of accountability. 5. Circumstances and events that make a difference to financial statement users should be disclosed. 6. Only transaction data that can be expressed in terms of money should be included in the accounting records. Ans: N/A, LO: 3, Section: Financial Reporting Concepts, Subsections: Assumptions in Financial Information, Principle of Financial Reporting, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 212 1. f 2. d 3. a

4. b 5. c 6. e

A Further Look at Financial Statements

2-53

BE. 213 Suppose that the balance sheet for Super Cuts Salon is as follows: Super Cuts Salon Balance Sheet December 31, 2025 Cash $ 26,000 Accounts receivable 20,000 Inventory 10,000 Supplies 1,000 Prepaid insurance 2,000 Land 25,000 Buildings $239,000 Less: Accumulated depreciation (100,000) 139,000 Trademark 2,000 Total assets $225,000

Accounts payable Salaries and wages payable Note payable (due 2025) Total liabilities

$ 3,000 2,000 170,000 175,000

Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

35,000 15,000 50,000 $225,000

Instructions: Compute the company’s (a) total current assets and (b) total property, plant and equipment. Ans: NA, LO: 1, Section: The Classified Balance Sheet, Subsections: Current Assets, Property, Plant, and Equipment, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 213 (a)

$26,000 + $20,000 + $10,000 + $1,000 + $2,000 = $59,000

(b)

$25,000 + $139,000 = $164,000

BE. 214 Ace Corporation reports the following account balances at December 31, 2025: Accounts payable……………………………………………………….. Accounts receivable…………………………………………………….. Cash………………………………………………………………………. Intangible assets………………………………………………………… Inventory…………………………………………………………………. Long-term investments…………………………………………………. Long-term liabilities……………………………… ……………………. Short-term investments…………………………………………………. Notes payable (short-term)……………………………………………… Property, plant, and equipment………………………………………… Prepaid insurance……………………………………………………….. Salaries and wages payable…………………………………………… Land held for future use…………………………………………………… Instructions: .

$ 5,000 6,000 7,000 21,000 38,000 20,000 109,000 4,000 16,000 240,000 1,000 3,000 63,000

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

2-54

Compute the company’s (a) working capital and (b) current ratio. Ans: NA, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Liquidity, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 214 (a)

Current assets = $6,000 + $7,000 + $38,000 + $4,000 + $1,000 = $56,000 Current liabilities = $5,000 + $16,000 + $3,000 = $24,000 Working capital = $56,000 - $24,000 = $32,000

(b)

Current ratio = $56,000/ $24,000 = 2.33:1

BE. 215 A1 Associates Inc. reports the following account balances for the year ending June 30, 2025: Accounts payable……………………………………………………….. $ 25,000 Accounts receivable…………………………………………………….. 36,000 Cash and cash equivalents………………………………………………. 17,000 Goodwill……………………………………………………………….…… 121,000 Inventory…………………………………………………………………. 88,000 Notes payable (due 2028)……………………………… ………………. 100,000 Interest payable……………………………………………………………. 4,000 Notes payable (due Jan. 2026)……………………………………………… 15,000 Property, plant, and equipment…………………………………………… 550,000 Accumulated depreciation…... 110,000 Prepaid insurance………………………………………………………….. 7,000 Salaries and wages payable…………………………………………… 13,000 Bonds payable…………………………………………………….……….. 300,000 Instructions: Compute the company’s (a) current ratio and (b) debt to assets ratio. Ans: NA, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsections: Current Ratio, Debt to Assets Ratio, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 215 (a)

Current assets = $36,000 + $17,000 + $88,000 + $7,000 = $148,000 Current liabilities = $25,000 + $4,000 + $15,000 + $13,000 = $57,000 Current ratio = $148,000 / $57,000 = 2.6:1

(b)

Total assets = $148,000 + $121,000 + $550,000 - $110,000 = $709,000 Total liabilities = $57,000 + $100,000 + $300,000 = $457,000 Debt to assets ratio = $457,000 / $709,000 = 64%

A Further Look at Financial Statements

2-55

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

2-56 BE. 216

Ace Construction Company reported the following balance sheet and income statement data for the year ending December 31, 2025. Current assets Current liabilities Preferred dividends Total assets

$ 52,000 26,000 22,000 123,000

Net income Stockholders’ equity Total liabilities Common dividends

$142,000 78,000 52,000 30,000

The company had average common shares outstanding during the period of 300,000. Instructions: Compute the company’s (a) working capital and (b) earnings per share. Ans: D, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsections: Working Capital, Earnings per Share, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 216 (a) Working capital = $52,000 - $26,000 = $26,000 (b) Earnings per share = ($142,000 - $22,000) / 300,000 = $.40

A Further Look at Financial Statements

2-57

EXERCISES Ex. 217 The following information is available for A1 Supply Company for the year ended December 31, 2025: Accounts payable Stock investments (long-term) Accumulated depreciation, equipment Retained earnings Common stock Intangible assets Notes payable (due in 5 years) Accounts receivable Cash Debt investments (short-term) Land Equipment

$ 4,700 8,400 4,000 16,000 4,800 2,500 6,000 1,500 2,600 3,000 10,000 7,500

Instructions Use the above information to prepare a classified balance sheet for the year ended December 31, 2025. Ans: N/A, LO: 1, Section: The Classified Balance Sheet, Subsection: NA, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 217 A1 SUPPLY COMPANY Balance Sheet December 31, 2025 Assets Current assets Cash........................................................................ Debt investments .................................................... Accounts receivable ............................................... Total current assets ............................................................ Investments Stock investments ................................................... Property, plant, and equipment Land .................................................................... Equipment ............................................................... Less Accumulated depreciation-equipment ............. Intangible assets ............................................................... Total assets … ...............................................................

$2,600 3,000 1,500 $ 7,100 8,400 10,000 $7,500 4,000

3,500

13,500 2,500 $31,500

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

2-58 Solution 217

(Cont.) Liabilities and Stockholders’ Equity

Current liabilities Accounts payable ................................................... Long-term liabilities Notes payable.......................................................... Total liabilities ..................................................................... Stockholders’ equity Common stock......................................................... Retained earnings.................................................... Total stockholders’ equity .................................................... Total liabilities and stockholders’ equity ...............................

$ 4,700 6,000 10,700 $ 4,800 16,000 20,800 $31,500

Ex. 218 The following lettered items represent a classification scheme for a balance sheet, and the numbered items represent data found on balance sheets. In the blank next to each account, write the letter indicating to which category it belongs. A. B. C. D. E. F. G. H.

Current assets Investments Property, plant, and equipment Intangible assets Current liabilities Long-term liabilities Stockholders’ equity Not on the balance sheet

Ans: N/A, LO: 1, Section: The Classified Balance Sheet, Subsection: NA, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 218 1. 2. 3. 4. 5. 1. C

2. G

Accumulated depreciation-equip. Common stock Interest expense Salaries and wages payable Retained earnings 3. H

4. E

5. G

6. A

6. 7. 8. 9. 10. 7. D

8. A

Inventory Patents Prepaid insurance Mortgage payable Land (held for investment) 9. F

10. B

A Further Look at Financial Statements

Ex. 219 These items are taken from the financial statements of Acme Manufacturing December 31, 2025. Buildings Accounts receivable Prepaid insurance Cash Equipment Land Insurance expense Depreciation expense Interest expense Common stock Retained earnings (January 1, 2025) Accumulated depreciation—buildings Accounts payable Mortgage payable Accumulated depreciation—equipment Interest payable Service revenue

2-59

Company at

$95,800 15,600 4,680 18,840 79,400 61,200 780 7,300 2,600 57,000 40,000 45,600 15,500 88,600 18,720 3,600 17,180

Instructions Prepare a classified balance sheet. Assume that $13,600 of the mortgage payable will be paid in 2026. Ans: N/A, LO: 1, Section: The Classified Balance Sheet, Subsection: NA, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 219 ACME MANUFACTURING COMPANY Balance Sheet December 31, 2025 Assets Current assets Cash ...................................................... Accounts receivable ................................. Prepaid Insurance .................................... Total current assets .............................. Property, plant, and equipment Land ....................................................... Buildings..................................................... Less: Accumulated depreciation— buildings .............................................. Equipment .................................................. Less: Accumulated depreciation— equipment ....................................... Total assets ........................................

$18,840 15,600 4,680 $ 39,120 61,200 $95,800 45,600 79,400

50,200

18,720

60,680

172,080 $211,200

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

2-60 Solution 219

(Cont.) Liabilities and Stockholders' Equity

Current liabilities Accounts payable................................................................. Current portion of mortgage payable.................................. Interest payable ................................................................. Total current liabilities .................................................. Long-term liabilities Mortgage payable ............................................................... Total liabilities ............................................................ Stockholders' equity Common stock .................................................................... Retained earnings ($40,000 + $6,500*)........................................................ Total stockholders' equity.......................................... Total liabilities and Stockholders' equity .............................................

$15,500 13,600 3,600 32,700 75,000 107,700 57,000 46,500 103,500 $211,200

*Net income = $17,180 – $780 – $7,300 – $2,600 = $6,500 Ex. 220 The following items are taken from the financial statements of Kardashian Company for 2025: Accounts payable Accounts receivable Accumulated depreciation—equipment Advertising expense Cash Common stock Depreciation expense Dividends on common stock Equipment Insurance expense Notes payable (due in 2028) Prepaid insurance Rent expense Retained earnings (beginning) Salaries and wages expense Salaries and wages payable Service revenue Supplies Supplies expense

$ 10,000 11,000 38,000 21,000 14,000 90,000 12,000 15,000 210,000 3,000 70,000 6,000 17,000 12,000 34,000 3,000 130,000 4,000 6,000

A Further Look at Financial Statements

Ex. 220

2-61

(Cont.)

Instructions (a)

Calculate the net income.

(b)

Calculate the retained earnings balance that would appear on a balance sheet at December 31, 2025.

(c)

Prepare a classified balance sheet for Kardashian Company at December 31, 2025 assuming the note payable is a long-term liability.

(d)

Compute the current ratio, debt to assets ratio, and earnings per share value. The average number of shares outstanding for 2025 was 10,000.

Ans: N/A, LO: 1, 2, Sections: The Classified Balance Sheet, Analyzing the Financial Statements Using Ratios, Subsection: NA, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 220

(20 min.)

(a)

Net income = $37,000: ($130,000 – $21,000 – $12,000 – $3,000 – $17,000 – $34,000 – $6,000)

(b)

Retained earnings, January 1 Add: Net income Less: Dividends Retained earnings, December 31

(c)

$12,000 37,000 49,000 15,000 $34,000

KARDASHIAN COMPANY Balance Sheet December 31, 2025 Assets Current assets Cash......................................................................................... $ 14,000 Accounts receivable ............................................................ 11,000 Supplies .............................................................................. 4,000 Prepaid insurance...................................................................... 6,000 Total current assets ..................................................... Property, plant, and equipment Equipment ................................................................................. 210,000 Less: Accumulated depreciation—equipment ...................... 38,000 Total assets .................................................................

$ 35,000

172,000 $207,000

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

2-62 Solution 220

(Cont.)

Liabilities and Stockholders’ Equity Current liabilities Accounts payable ..................................................................... $10,000 Salaries and wages payable .................................................... 3,000 Total current liabilities ................................................... Long-term liabilities Notes payable ..................................................................... Total liabilities ............................................................... Stockholders’ equity Common stock ..................................................................... 90,000 Retained earnings ............................................................... 34,000 Total liabilities and stockholders’ equity ........................ (d)

$ 13,000 70,000 83,000

124,000 $207,000

Current ratio: $35,000 ÷ $13,000 = 2.7:1 (Cur. assets ÷ Cur. liab.) Debt to assets ratio: $83,000 ÷ $207,000 = 40.1% (Tot. liab. ÷ Tot. assets) Earnings per share: $37,000 ÷ 10,000 = $3.70 (Net inc. ÷ Ave. sh. out.)

Ex. 221 The following items are taken from the financial statements of Ryan Seacrest Company for the year ending December 31, 2025: Accounts payable Accounts receivable Accumulated depreciation-equipment Bonds payable Cash Common stock Cost of goods sold Depreciation expense Dividends on common stock Equipment Interest expense Patents Retained earnings, January 1, 2025 Salaries and wages expense Sales revenue Supplies

$18,500 8,000 4,800 18,000 24,000 25,000 27,000 4,800 5,300 44,000 2,500 7,500 16,000 5,200 50,500 4,500

Instructions (a) Prepare an income statement and a classified balance sheet for Ryan Seacrest Company. (b) Compute the following ratios and values: 1. Current ratio 2. Debt to assets ratio 3. Working capital 4. Earnings per share (the company’s average number of shares outstanding during the year was 5,000.) Ans: N/A, LO: 1, 2 Sections: The Classified Balance Sheet, Analyzing the Financial Statements Using Ratios, Subsection: NA, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

A Further Look at Financial Statements

Solution 221

2-63

(25 min.)

(a)

RYAN SEACREST COMPANY Income Statement For the Year Ended December 31, 2025 Revenues Sales revenue Expenses Cost of goods sold Depreciation expense Salaries and wages expense Interest expense Total Expenses Net income

$50,500 27,000 4,800 5,200 2,500 39,500 $11,000

RYAN SEACREST COMPANY Balance Sheet December 31, 2025 Assets Current assets Cash ................................................................................................. $24,000 Accounts receivable ................................................................... 8,000 Supplies............................................................................................. 4,500 Total current assets ............................................................ Property, plant, and equipment Equipment .................................................................................. 44,000 Less: Accumulated depreciation—equipment ............................. 4,800 Intangible assets Patents ....................................................................................... Total assets ....................................................................... Liabilities and Stockholders’ Equity Current liabilities Accounts payable ....................................................................... Long-term liabilities Bonds payable ........................................................................... Total liabilities .................................................................... Stockholders’ equity Common stock.................................................................................. $25,000 Retained earnings ...................................................................... 21,700* Total liabilities and stockholders’ equity ............................. *Retained earnings = $21,700 ($16,000 + $11,000 – $5,300). (b) 1. 2. 3. 4.

Current ratio: $36,500 ÷ $18,500 = 1.97:1 (Cur. assets ÷ Cur. liab.) Debt to assets ratio: $36,500 ÷ $83,200 = 43.9% (Tot. liab. ÷ Tot assets) Working capital $36,500 – $18,500 = $18,000 (Cur. assets  Cur. liab.) Earnings per share ($11,000 ÷ 5,000) = $2.20 (Net inc. ÷ Ave. sh. out.)

$36,500

39,200 7,500 $83,200

$18,500 18,000 36,500

46,700 $83,200

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

2-64 Ex. 222

These financial statement items are for A1 Auto Supply Corporation at year-end, July 31, 2025. Salaries and wages payable Salaries and wages expense Utilities expense Equipment Accounts payable Service revenue Rent revenue Notes payable (due 2027) Common stock Cash Accounts receivable Accumulated depreciation—equipment Dividends Depreciation expense Retained earnings (beginning of the year)

$ 2,580 50,700 22,600 21,000 4,100 62,100 8,500 1,800 16,000 20,200 12,780 6,000 5,000 4,000 35,200

Instructions (a) Prepare an income statement and a retained earnings statement for the year ended July 31, 2025. A1 Corporation did not issue any new stock during the year. (b) Prepare a classified balance sheet at July 31, 2025. Ans: N/A, LO: 1, Section: The Classified Balance Sheet, Subsection: NA, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 222 (a)

A1 AUTO SUPPLY CORPORATION Income Statement For the Year Ended July 31, 2025

Revenues Service revenue ........................................... Rent revenue................................................ Total revenues ..................................... Expenses Salaries and wages expense......................... Utilities expense ............................................ Depreciation expense.................................... Total expense ....................................... Net loss ...................................................................

$62,100 8,500 $70,600 50,700 22,600 4,000 77,300 $( 6,700)

A1 AUTO SUPPLY CORPORATION Retained Earnings Statement For the Year Ended July 31, 2025 Retained earnings, August 1, 2024 ..................... Less: Net loss............................................................ Dividends .......................................................... Retained earnings, July 31, 2025 ......................... .

$35,200 $6,700 5,000

11,700 $23,500

A Further Look at Financial Statements

Solution 222

(Cont.)

(b)

A1 AUTO SUPPLY CORPORATION Balance Sheet July 31, 2025

Assets Current assets Cash Accounts receivable Total current assets Property, plant, and equipment Equipment Less: Accumulated depreciation—equipment Total assets

$20,200 12,780 $32,980 21,000 6,000

Liabilities and Stockholders' Equity Current liabilities Accounts payable $ 4,100 Salaries and wages payable 2,580 Total current liabilities Notes payable (due 2027) Total liabilities Stockholders' equity Common stock 16,000 Retained earnings 23,500 Total stockholders' equity Total liabilities and stockholders' equity

15,000 $47,980

$6,680 1,800 8,480

39,500 $47,980

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

2-66 Ex. 223

These items are taken from the financial statements of Katy Perry Corporation at December 31, 2025. Retained earnings (beginning of year) Utilities expense Equipment Accounts payable Cash Salaries and wages payable Common stock Dividends Service revenue Prepaid insurance Maintenance and repairs expense Depreciation expense Accounts receivable Insurance expense Salaries and wages expense Accumulated depreciation—equipment

$33,000 2,000 56,000 15,300 15,900 3,000 13,000 14,000 78,000 3,500 1,800 3,300 14,200 2,200 47,000 17,600

Instructions Prepare an income statement and a retained earnings statement for the year ended December 31, 2025 and a classified balance sheet as of December 31, 2025. Ans: N/A, LO: 1, Section: The Classified Balance Sheet, Subsection: NA, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 223 KATY PERRY CORPORATION Income Statement For the Year Ended December 31, 2025 Revenues Service revenue ...................................... Expense Salaries and wages expense.................. Depreciation expense............................. Insurance expense ................................. Utilities expense ..................................... Maintenance and repairs expense.......... Total expenses ................................. Net income .......................................................

$78,000 $47,000 3,300 2,200 2,000 1,800 56,300 $21,700

KATY PERRY CORPORATION Retained Earnings Statement For the Year Ended December 31, 2025 Retained earnings, January 1, 2025 .................... Add: Net income................................................. Less: Dividends .................................................. .

$33,000 21,700 54,700 14,000

A Further Look at Financial Statements

Retained earnings, December 31, 2025 .............. Solution 223 (Cont.)

$40,700

KATY PERRY CORPORATION Balance Sheet December 31, 2025 Assets Current assets Cash .......................................................................... Accounts receivable ................................................... Prepaid insurance ...................................................... Total current assets............................................... Property, plant, and equipment Equipment.................................................................. Less: Accumulated depreciation—equipment ........... Total assets........................................................... Liabilities and Stockholders' Equity Current liabilities Accounts payable....................................................... Salaries and wages payable ...................................... Total current liabilities............................................ Stockholders' equity Common stock ........................................................... Retained earnings...................................................... Total stockholders' equity ...................................... Total liabilities and stockholders' equity .................

$15,900 14,200 3,500 33,600 $56,000 17,600

38,400 $72,000

$15,300 3,000 $18,300 13,000 40,700 53,700 $72,000

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

2-68 Ex. 224

The following data are taken from the financial statements of Acme Services, Inc. as of the end of the year 2025. The data are in alphabetical order. Accounts payable $ 28,000 Accounts receivable 66,000 Cash 24,000 Gross profit 160,000 Income before income taxes 54,000

Net income Other current liabilities Salaries and wages payable Total assets Total liabilities

$ 48,000 17,000 5,000 250,000 175,000

Additional information: The average common shares outstanding during the year was 40,000.

Instructions Compute the following: (a) Current ratio. (b) Working capital.

Ans: N/A, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Ratio Analysis, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 224 (a)

Current ratio = Current assets* ÷ Current liabilities** = $90,000 ÷ $50,000 = 1.8: 1

(b)

Working capital = Current assets* – Current liabilities** = $90,000 – $50,000 = $40,000

(c)

Earnings per share = (Net income – Preferred dividends) ÷ Average common shares outstanding = $48,000 ÷ 40,000 = $1.20

(d) Debt to assets ratio = Total debt ÷ Total assets = $175,000 ÷ $250,000 = 70% *(Acc. rec. + Cash) **(Acc. pay. + Oth. cur. liab. + Sal./wag. pay.) Ex. 225 Use the following data to calculate the liquidity and profitability ratios listed below. Current liabilities Capital expenditures Cash provided by operating activities Dividends paid on common stock Current assets

$100,000 20,000 32,000 5,000 190,000

Net income Net sales Total liabilities Total assets

$ 21,000 150,000 126,000 210,000

The average common shares outstanding during the period was 10,000. Instructions Compute the following: (a) Current ratio. (b) Working capital.

Ans: N/A, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Ratio Analysis, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

A Further Look at Financial Statements

2-69

Solution 225 (a)

Current ratio = Current assets ÷ Current liabilities = $190,000 ÷ $100,000 = 1.9: 1

(b)

Working capital = Current assets – Current liabilities = $190,000 – $100,000 = $90,000

(c)

Earnings per share ratio = (Net income – Preferred stock dividends) ÷ Average common share outstanding = $21,000 ÷ 10,000 = $2.10

(d)

Debt to assets ratio = Total debt ÷ Total assets = $126,000 ÷ $210,000 = 60%

Ex. 226 The following data are taken from the financial statements of Taylor Swift Company. The data are in alphabetical order. Accounts payable $ 28,000 Net sales $500,000 Accounts receivable 65,000 Other current liabilities 20,000 Average common shares out. 20,000 Salaries and wages payable 7,000 Cash 56,000 Stockholders’ equity 135,000 Gross profit 190,000 Total assets 300,000 Net income 50,000 Instructions Compute the following: (a) Current ratio. (b) Working capital.

Ans: N/A, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Ratio Analysis, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 226 (a)

Current ratio = Current assets* ÷ Current liabilities** = $121,000 ÷ $55,000 = 2.2: 1

(b)

Working capital = Current assets* – Current liabilities** = $121,000 – $55,000 = $66,000

(c)

Earnings per share = Net income ÷ Average common shares outstanding = $50,000 ÷ 20,000 = $2.50

(d)

Debt to assets ratio

= Total debt ÷ Total assets = $165,000 ÷ $300,000 = 55% (Total debt = Total assets – Stockholders’ equity = $300,000 – $135,000) *(Acc. rec. + Cash) **(Acc. pay. + Oth. cur. liab. + Sal./wag. pay.)

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

A Further Look at Financial Statements

2-71

Ex. 227 Comparative financial statement data for Rodrigo Corporation and Carpenter Corporation, two competitors, appear below. All balance sheet data are as of December 31, 2025.

Net sales Cost of goods sold Operating expenses Interest expense Income tax expense

Rodrigo Corporation 2025 $1,850,000 1,225,000 303,000 9,000 85,000

Current assets Plant assets (net) Current liabilities Long-term liabilities

427,200 532,000 66,325 148,500

130,336 139,728 35,348 29,620

Additional Information: Cash from operating activities Capital expenditures Dividends paid on common stock

153,000 90,000 36,000

44,000 20,000 15,000

Average number of common shares outstanding100,000

Carpenter Corporation 2025 $620,000 365,000 98,000 3,800 36,800

50,000

Instructions (a) Comment on the relative profitability of the companies by computing the net income and earnings per share for each company for 2025. (b) Comment on the relative solvency of the companies by computing the debt to assets ratio for each company for 2025. Ans: N/A, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Ratio Analysis, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

2-72 Solution 227 (a)

Rodrigo Company appears to be more profitable. Its net income for 2025 is $228,000 ($1,850,000 – $1,225,000 – $303,000 – $9,000 – $85,000). Its earnings per share is $2.28 ($228,000  100,000 shares outstanding). Carpenter's net income for 2025 is $116,400 ($620,000 – $365,000 – $98,000 – $3,800 – $36,800). Its earnings per share is $2.33 ($116,400  50,000 shares outstanding). Earnings per share should not be compared across companies.

(b)

Rodrigo appears to be slightly more solvent. Rodrigo's 2025 debt to assets ratio of 22.4% ($214,825  $959,200)a is lower than Carpenter's ratio of 24.1% ($64,968  $270,064)b. The lower the percentage of debt to assets, the lower the risk that a company may be unable to pay its debts as they become due. a

$214,825 ($66,325 + $148,500) is Rodrigo's 2025 total liabilities $959,200 ($427,200 + $532,000) is Rodrigo's 2025 total assets. b

$64,968 ($35,348 + $29,620) is Carpenter's 2025 total liabilities $270,064 ($130,336 + $139,728) is Carpenter's 2025 total assets. Ex. 228 For each of the ratios listed below, indicate by the appropriate code letter, whether it is a liquidity ratio, a profitability ratio, or a solvency ratio. Code: L = P = S =

Liquidity ratio Profitability ratio Solvency ratio

1. Debt to assets ratio 2. Earnings per share 3. Current ratio Ans: N/A, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Ratio Analysis, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 228 S P L

1. Debt to assets ratio 2. Earnings per share 3. Current ratio

A Further Look at Financial Statements

2-73

Ex. 229 The following information is available from the annual reports of Carey Company and Lopez Company. (amounts in millions) Carey Lopez Sales $26,510 $34,512 Gross profit 6,610 8,887 Net income 565 1,221 Current assets 13,712 28,447 Beginning total assets 17,102 33,130 Ending total assets 22,088 36,167 Current liabilities 7,966 13,950 Total liabilities 16,136 29,222 Average common shares outstanding 250 480 Preferred stock dividends paid -0-0Instructions (a) For each company, compute the following ratios: 1. Current ratio 2. Debt to assets ratio 3. Earnings per share (b) Based on your calculations, discuss the relative liquidity, solvency, and profitability of the two companies. Ans: N/A, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Ratio Analysis, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 229 (a) 1. Current ratio (Cur. assets/Cur. liab.) 2. Debt to assets ratio (Tot. liab. ÷ Tot. assets) 3. Earnings per share (Net. inc. ÷ Ave. sh. out.)

Carey 1.72:1 ($13,712 ÷ $7,966)

Lopez 2.04:1 ($28,447 ÷ $13,950)

73% ($16,136 ÷ 22,088)

81% ($29,222 ÷ $36,167)

$2.26 ($565 ÷ 250)

$2.54 ($1,221 ÷ 480)

(b) Based on the current ratio, Lopez is more liquid than Carey is since its current ratio (2.04:1) is 19% higher than Carey’s ratio (1.72:1). However, Carey would be considered more solvent than Lopez since its debt to assets ratio (73%) is 10% lower than Lopez’s debt ratio (81%). A lower debt to assets ratio indicates a company is more solvent and better able to survive over a long period of time. Lopez is more profitable than Carey is since its net income is higher. Earnings per share should not be compared across companies.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

2-74 Ex. 230

The chief financial officer (CFO) of Ace Cleaning Inc. requested that the accounting department prepare a preliminary balance sheet on December 30, 2025, so that the CFO could get an idea of how the company stood. He knows that certain debt agreements with its creditors require the company to maintain a current ratio of at least 2:1. The preliminary balance sheet is as follows. ACE CLEANING INC. Balance Sheet December 30, 2025 Current assets Cash Accounts receivable

$25,000 20,000

Prepaid insurance

15,000

Current liabilities Accounts payable Sal. and wages payable $ 60,000

$ 20,000 20,000

Long-term liabilities Notes payable Total liabilities

Property, plant, and equipment (net) Total assets

210,000 $270,000

$ 40,000

Stockholders' equity Common stock Retained earnings Total liabilities and stockholders’ equity

90,000 130,000 100,000 40,000

140,000 $270,000

Instructions (a) Calculate the current ratio and working capital based on the preliminary balance sheet. (b) Based in the results in (a), the CFO requested that $20,000 of cash be used to pay off the balance of the accounts payable account on December 31, 2025. Calculate the new current ratio and working capital after the company takes these actions. Ans: N/A, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Liquidity, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 230 (a)

(b)

$60,000 (Cash + Acc. rec. + Prep. ins. ÷ Cur. = 1.50:1 liab.) $40,000 Working capital = $60,000 – $40,000 = $20,000 (Cash + Acc. rec. + Prep. ins. – Cur. liab.) Current ratio =

Current ratio =

$40,000*

= 2.0:1

$20,000** Working capital = $40,000 – $20,000 = $20,000 *$60,000 – $20,000 **$40,000 – $20,000

A Further Look at Financial Statements

2-75

COMPLETION STATEMENTS 231. The rules and practices that are recognized as general guides for financial reporting are called . Ans: N/A, LO: 3, Section: Financial Reporting Concepts, Subsection: The Financial Reporting Environment, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

232. In accounting, principles.

results when different companies use the same accounting

Ans: N/A, LO: 3, Section: Financial Reporting Concepts, Subsection: Assumptions in Financial Reporting, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

233.

is a company-specific aspect of relevance where size is likely to influence the decision of an investor or creditor.

234. The

constraint relates to the fact that providing information is costly.

Ans: N/A, LO: 3, Section: Financial Reporting Concepts, Subsection: Cost Constraint, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

235. The earnings per share value is calculated by dividing net income – preferred stock dividends by . Ans: N/A, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Using the Income Statement, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

236. Assets that are expected to be converted to cash or used in the business within a relatively short period of time are called . Ans: N/A, LO: 1, Section: The Classified Balance Sheet, Subsection: Current Assets, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

237. The

is current assets divided by current liabilities.

Ans: N/A, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Liquidity, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

238. The principle states that an asset should be reported on the balance sheet at the amount that would be received if the asset was sold on that date. Ans: N/A, LO: 2, Section: Financial Reporting Concepts, Subsection: Principles of Financial Reporting, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Answers to Completion Statements 231. generally accepted accounting principles 232. comparability 233. materiality 234. cost 235. weighted-average common shares outstanding 236. current assets 237. current ratio 238. fair value

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

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MATCHING 239. Match the items below by entering the appropriate code letter in the space provided. A. Relevance B. Liquidity ratios C. Comparability D. Consistency E. Intangible assets F. Faithful representation

G. H. I. J. K. L.

Working capital Current ratio Earnings per share Solvency ratios Economic entity assumption Materiality

1. Measures of the ability of the company to survive over a long period of time. 2. Current assets divided by current liabilities. 3. Information that has a bearing on a decision. 4. Economic events can be identified with a particular unit of accountability. 5. An item important enough to influence the decision of an investor or creditor. 6. Same accounting principles and methods used from year to year within a company. 7. Information that accurately depicts what really happened. 8. Noncurrent resources that do not have physical substance. 9. (Net income – preferred stock dividends) divided by weighted-average common shares outstanding. 10. Different companies using the same accounting principles. 11. Measures of the short-term ability of the enterprise to pay its maturing obligations. 12. The excess of current assets over current liabilities. Ans: N/A, LO: 1-3, Section: NA, Subsection: NA, Bloom: K, Difficulty: Easy, Min: 6, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Answers to Matching 1. 5. 9.

J L I

2. 6. 10.

H D C

3. 7. 11.

A F B

4. 8. 12.

K E G

A Further Look at Financial Statements

2-77

SHORT-ANSWER ESSAY QUESTIONS S-A E 240 Identify the two parts of stockholders' equity in a corporation and indicate the purpose of each. Ans: N/A, LO: 1, Section: The Classified Balance Sheet, Subsection: Stockholders’ Equity, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communication, IMA: Reporting

Solution 240 The two parts of stockholders' equity and the purpose of each are: (1) Common stock is used to record investments of assets in the business by the owners (stockholders). (2) Retained earnings is used to record net income retained in the business. S-A E 241 What do these classes of ratios measure? (a) Liquidity ratios. (b) Profitability ratios. (c) Solvency ratios. Ans: N/A, LO: 2, Section: Analyzing the Financial Statements Using Ratios, Subsection: Ratio Analysis, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communication, IMA: Reporting

Solution 241 (a) Liquidity ratios measure the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash. (b) Profitability ratios measure the income or operating success of a company for a given period of time. (c) Solvency ratios measure the company's ability to survive over a long period of time. S-A E 242 Give the definition of current assets, current liabilities and the current ratio. Ans: N/A, LO: 1, 2, Section: The Classified Balance Sheet, Analyzing the Financial Statements Using Ratios, Subsections: Current Assets, Current Liabilities, Ratio Analysis, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communication, IMA: Reporting

Solution 242 Current assets are cash or other resources that are reasonably expected to be realized in cash, sold, or consumed in the business within one year or the operating cycle, whichever is longer. Current liabilities are obligations reasonably expected to be paid from the existing current assets or through the creation of other current liabilities within the next year or operating cycle, whichever is longer. The current ratio is a measure used to evaluate a company’s liquidity and short-term debt paying ability, computed by dividing current assets by current liabilities.

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

S-A E 243 Are short-term creditors, long-term creditors, and stockholders primarily interested in the same characteristics of a company? Explain. Ans: N/A, Section: Analyzing the Financial Statements Using Ratios, Subsection: Ratio Analysis, LO: 2, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communication, IMA: Reporting

Solution 243 The three parties are not primarily interested in the same characteristics of a company. Short-term creditors are primarily interested in the liquidity of the enterprise. In contrast, long-term creditors and stockholders are primarily interested in the profitability and solvency of the company. S-A E 244 Relevance and faithful representation are the fundamental qualities of useful information. (a) Briefly define each term. (b) Why are these characteristics important to users of financial statements? Ans: N/A, LO: 3, Section: Financial Reporting Concepts, Subsection: Qualities of Useful Information, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communication, IMA: Reporting

Solution 244 (a) Relevance is the quality of information that makes a difference in a business decision. Information is considered relevant if it provides information that provides accurate expectations about the future, and confirms or corrects prior expectations. Faithful representation means that information accurately depicts what really happened. Information must be complete, neutral and free from material error to provide a faithful representation. (b) Relevance and faithful representation are important to the users of financial statements because these users do not have first-hand knowledge of the operations of the business. In order for these users to make decisions, they must have assurances that the information provided by the company is relevant – (makes a difference) and faithfully representative – (means what the company says). Without these assurances, the users cannot have confidence in the information provided to them.

A Further Look at Financial Statements

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S-A E 245 You and the CEO of your company are waiting on an elevator. You are going to the 5 th floor and the CEO is going to the 35th floor. The CEO says, “What is the difference between consistency and comparability?” You have two minutes to respond. What will you say? Ans: N/A, LO: 3, Section: Financial Reporting Concepts, Subsection: Assumptions in Financial Reporting, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Communication, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communication, IMA: Reporting

Solution 245 You have asked an excellent question and I am glad to respond. Consistency means that a company uses the same accounting principles and methods each year. Decision-makers can work with accounting information, knowing that the company is consistently applying the principles and methods it has chosen. This is why it is so important that we carefully make these choices. There are procedures for making changes and communicating those changes to financial statement users. Comparability results when different companies use the same accounting principles and methods. Comparability allows users to compare accounting information of different companies. The financial statement footnotes identify many of the principles and procedures that companies use. Comparisons can be made for companies within certain industries or other groupings. S-A E 246 Comparability and consistency are enhancing qualities that make accounting information useful for decision-making purposes. Briefly explain the difference between these two qualities and explain how they are related to each other. Ans: N/A, LO: 3, Section: Financial Reporting Concepts, Subsection: Assumptions in Financial Reporting, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communication, IMA: Reporting

Solution 246 Comparability results when different companies use the same accounting principles and methods, while consistency results when one company uses the same principles and methods from year to year. The two qualities are related because information must possess relevance, faithful representation, comparability, and consistency to achieve the highest level of decision usefulness. In addition, accounting information for two entities cannot be comparable unless both companies practice consistency in their choice of principles and methods. S-A E 247 Identify and briefly explain the two fundamental qualities of useful information. Ans: N/A, LO: 3, Section: Financial Reporting Concepts, Subsection: Qualities of Useful Information, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communication, IMA: Reporting

Solution 247 Relevance and faithful representation are the two fundamental qualities of useful information. Relevance is the quality of information that indicates the information makes a difference in a decision. Faithful representation is information that is complete, neutral, and free from material .

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error.

A Further Look at Financial Statements

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S-A E 248 What are three of the five enhancing qualities of useful information? Ans: N/A, LO: 3, Section: Financial Reporting Concepts, Subsection: Enhancing Qualities, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communication, IMA: Reporting

Solution 248 The FASB and IASB describe the following enhancing qualities of useful information: comparability, consistency, verifiability, timeliness, and understandability. S-A E 249

(Ethics)

Many bonus plans are based upon the attainment of some specified short-term goal. For example, sales personnel at Metal Crafters are given a bonus of 5% of the amount by which their sales exceed $100,000. Sometimes the attainment of these goals is achieved by methods detrimental to the long-term needs of the company. Sales representative Sara Crown, for example, finds herself tempted to court certain customers that place large orders, even though she knows they may not be able to pay. She complains that the bonus system itself is unethical. Required: Is a bonus system like the one at Metal Crafters unethical? Explain. Ans: N/A, LO: 2, Section: NA, Subsection: NA, Bloom: E, Difficulty: Medium, Min: 5, AACSB: Ethics, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Decision Modeling, AICPA PC: Communication, IMA: Sstrategy, Planning & Performance

Solution 249 The bonus system described is not necessarily unethical, but it may be shortsighted. When employees are able to identify and address larger concerns (such as Sara's identification of the problem regarding the ability of a customer to pay) then such issues should probably become part of the system of bonuses. However, it is very difficult to set a bonus plan that allows for all contingencies. Since sales representatives are hired to generate sales, they most often are rewarded based on generating sales. Some of the future events, such as customers defaulting on payments, may not be the fault of the sales representative. For Sara Crown to create sales by soliciting customers with a poor payment record would be unethical on her part. She is required to use integrity, even when the possibility exists of her not using it, and even when she might gain by not using it.

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S-A E 250

(Communication)

Sunshine Sugar grows sugar cane in Florida, California, and Hawaii. Its investment in land to grow sugar exceeds $5 million. Currently, land whose original cost was more than $3 million in Florida is threatened by plans to flood the Everglades to reclaim the wetlands. Sunshine plans to fight vigorously to keep its land in production, particularly because most of the rest of its land is in California, which is threatened by water shortages. The land in Florida is also significantly more productive than that in California, and the wages paid to workers to process the sugar cane are substantially less. Current plans include litigation to prevent government seizure of the land, an extensive public education campaign, and intense lobbying efforts. Required: Sunshine has determined that a footnote disclosure should be made in the financial statements to alert the investors of the threat to the land. Carefully consider how much of the above information is appropriate for inclusion in the footnote. Write the footnote. Ans: N/A, LO: 3, Section: Financial Reporting Concepts, Subsection: Full Disclosure Principle, Bloom: E, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communication, IMA: Reporting

Solution 250 NOTE: A portion of the most valuable land owned by the company is the subject of plans by the Environmental Protection Agency to flood the Florida Everglades to "reclaim" the so-called wetlands. The company is working with the United States Department of Agriculture and other agencies to prevent this result. The company will be spending money to educate the public about this issue. Currently, land costing around $3 million is at risk. Usually the details of exactly why the land is so valuable to the company are not appropriate for inclusion. Footnotes need not be emotional or dramatic, either. There should be a systematic listing of at least the minimum amount the public has a right to know—how much land is at risk, and the nature of the risk.

IFRS QUESTIONS 1.

The classified balance sheet is a. required under GAAP but not under IFRS. b. required under IFRS in the same format as under GAAP. c. required under IFRS but not under GAAP. d. required under IFRS with certain variations in format as compared to GAAP.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

IFRS requires the use of a. the term balance sheet. b. the term statement of financial position. c. neither the term balance sheet nor the term statement of financial position, but recommends use of the term balance sheet. d. neither the term balance sheet nor the term statement of financial position, but recommends use of the term statement of financial position.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None,

A Further Look at Financial Statements

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IMA: Reporting

IFRS a. requires a specific format for the balance sheet (statement of financial position) that is identical to U.S. GAAP. b. requires a specific format for the balance sheet (statement of financial position) that is different from U.S. GAAP. c. requires no specific format for the balance sheet (statement of financial position) but most companies that follow IFRS prepare the statement identical to U.S. GAAP . d. requires no specific format for the balance sheet (statement of financial position) but most companies that follow IFRS prepare the statement in a different format from U.S. GAAP.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Most companies that follow IFRS present balance sheet (statement of financial position) information in this order. a. current assets; investments; property; plant and equipment; intangible assets; current liabilities; long-term liabilities; owners' equity. b. intangible assets; property; plant and equipment; investments; current assets; current liabilities; owners' equity; long-term liabilities. c. current assets; noncurrent assets; current liabilities; noncurrent liabilities; equity. d. noncurrent assets; current assets; equity; noncurrent liabilities; current liabilities.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Under IFRS and under GAAP, current assets are listed in IFRS GAAP a. order of liquidity order of liquidity b. reverse order of liquidity order of liquidity c. order of liquidity reverse order of liquidity d. reverse order of liquidity reverse order of liquidity

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

The subtotal net assets is used in a. both GAAP and IFRS. b. GAAP but not IFRS. c. IFRS but not GAAP. d. neither IFRS nor GAAP.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Both IFRS and GAAP require disclosure about a. accounting policies followed. b. judgements that management has made in the process of applying the entity's accounting policies. c. the key assumptions and estimation uncertainty. d. all of the above.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

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Under IFRS a. comparative prior-period information must be presented, but financial statements need not be provided annually. b. comparative prior-period information must be presented, and financial statements must be provided annually. c. comparative prior-period information is not required, but financial statements need not be provided annually. d. comparative prior-period information is not required, but financial statements must be provided annually.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

The use of fair value to report assets a. is not allowed under GAAP or IFRS. b. is required by GAAP and IFRS. c. is increasing under GAAP and IFRS, but GAAP has adopted it more broadly. d. is increasing under GAAP and IFRS, but IFRS has adopted it more broadly.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

10.

Under IFRS a. companies can apply fair value to property, plant, and equipment and natural resources. b. companies can apply fair value to property, plant, and equipment but not to natural resources. c. companies can apply fair value to neither property, plant, and equipment nor natural resources. d. companies can apply fair value to natural resources but not to property, plant, and equipment.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

CHAPTER 3 THE ACCOUNTING INFORMATION SYSTEM CHAPTER LEARNING OBJECTIVES 1. Analyze the effect of business transactions on the basic accounting equation. Each business transaction must have a dual effect on the accounting equation. For example, if an individual asset is increased, there must be a corresponding (a) decrease in another asset, or (b) increase in a specific liability, or (c) increase in stockholders’ equity. 2. Explain how accounts, debits, and credits are used to record business transactions. An account is an individual accounting record of increases and decreases in specific asset, liability, and stockholders’ equity items. The terms debit and credit are synonymous with left and right. Assets, dividends, and expenses are increased by debits and decreased by credits. Liabilities, common stock, retained earnings, and revenues are increased by credits and decreased by debits. 3. Indicate how a journal is used in the recording process. The basic steps in the recording process are (a) analyze each transaction in terms of its effect on the accounts, (b) enter the transaction information in a journal, and (c) transfer the journal information to the appropriate accounts in the ledger. The initial accounting record of a transaction is entered in a journal before the data are entered in the accounts. A journal (a) discloses in one place the complete effect of a transaction, (b) provides a chronological record of transactions, and (c) prevents or locates errors because the debit and credit amounts for each entry can be readily compared. 4. Explain how a ledger and posting help in the recording process. The entire group of accounts maintained by a company is referred to collectively as a ledger. The ledger provides the balance in each of the accounts as well as keeps track of changes in these balances. Posting is the procedure of transferring journal entries to the ledger accounts. This phase of the recording process accumulates the effects of journalized transactions in the individual accounts. 5. Prepare a trial balance. A trial balance is a list of accounts and their balances at a given time. The primary purpose of the trial balance is to prove the mathematical equality of debits and credits after posting. A trial balance also uncovers errors in journalizing and posting and is useful in preparing financial statements.

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Difficulties: Hard: 8 Medium: 120 Easy: 166

Question List by Section Using the Accounting Equation to Analyze Transactions Accounting Transactions: 1, 80, 82, 87 Analyzing Transactions: 2, 3, 4, 5, 55, 56, 57, 58, 59, 60, 61, 62, 63, 64, 65, 66, 67, 68, 69, 70, 71, 72, 73, 74, 75, 76, 77, 78, 79, 80, 81, 83, 84, 85, 86, 231, 240 Summary of Transactions: 230, 233, 244, 246, 247, 248, 249, 250, 251 Accounts, Debits, and Credits Debits and Credits: 8, 10, 11, 13, 14, 15, 18, 23, 90, 91, 92, 93, 94, 95, 96, 97, 100 Debit and Credit Procedures: 6, 7, 9, 107, 128, 130 Dr./Cr. for Assets and Liabilities: 16, 17, 19, 20, 22, 24, 98, 99, 105, 115, 116, 117, 125, 127, 129, 131, 137, 138, 139, 140, 141, 145, 148, 149, 154, 155, 156 Dr./Cr. for Stockholders’ Equity: 12, 21, 25, 26, 27, 88, 89, 277 Stockholders’ Equity Relationships: 142, 143, 144, 146, 147, 153, 157, 289 Summary of Debit/ Credit Rules: 110, 120, 121, 126, 232, 235, 245, 253, 254, 256, 257, 258, 259, 260 Using a Journal The Recording Process: 28, 29, 30, 31, 32, 158, 159, 160, 161, 162, 163, 164, 165, 278, 279, 285, 287 The Journal: 33, 34, 35, 36, 37, 166, 167, 168, 169, 170, 171, 172, 173, 174, 175, 176, 177, 178, 179, 180, 181, 182, 183, 184, 185, 186, 236, 237, 239, 242, 255, 261, 262, 263, 280 The Ledger and Posting The Ledger: 39, 188, 192, 194, 195, 196, 197 Chart of Accounts: 38, 40, 41, 42, 43, 44, 187, 189, 190, 191, 193, 198, 200 Posting: 45, 46, 199, 201, 202, 203, 204, 205, 241, 281 The Recording Process Illustrated: 47, 48, 206, 207, 208, 209, 210, 211 Summary Illustration of Journalizing and Posting: 252, 266, 267 The Trial Balance: 51, 52, 53, 216, 217, 218, 220, 222, 224, 225, 227, 232, 233, 242, 247, 272, 276, 277, 296, 298 Limitations of a Trial Balance: 52, 215, 216, 219, 222, 224, 225, 226, 227, 269, 270, 271

The Accounting Information System

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TRUE-FALSE STATEMENTS 1.

Economic events that require recording in the financial statements are called accounting transactions.

Ans: T, LO: 1, Section: Using the Accounting Equation to Analyze Transactions; Subsection: Accounting Transactions, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Global and Industry Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Revenue increases stockholders’ equity and should be recorded whenever cash is received from customers.

Ans: F, LO: 1, Section: Using the Accounting Equation to Analyze Transactions; Subsection: Analyzing Transactions, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Collection of an account receivable will increase both cash and accounts receivable.

The payment of a liability decreases both cash and accounts payable.

Ans: T, LO: 1, Section: Using the Accounting Equation to Analyze Transactions; Subsection: Analyzing Transactions, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

If total assets are increased, there must be a corresponding increase in liabilities or a decrease in stockholders’ equity.

A new account is opened for each transaction entered into by a business firm.

Ans: F, LO: 2, Section: Accounts Debits and Credits, Subsection: Debit and Credit Procedures, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

The recording process becomes more efficient and informative if all transactions are recorded in one account.

Ans: F, LO: 2, Section: Accounts Debits and Credits, Subsection: Debit and Credit Procedures, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

An account consists of two parts: (1) a left or debit side and (2) a right or credit side.

Ans: F, LO: 2, Section: Accounts Debits and Credits, Subsection: Debits and Credits, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

The account balance is the difference in total dollars between total debit amounts and total credit amounts.

Ans: T, LO: 2, Section: Accounts Debits and Credits, Subsection: Debit and Credit Procedures, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Reporting and Control

10.

An account is often referred to as a T-account because of the way it is constructed.

Ans: T, LO: 2, Section: Accounts Debits and Credits, Subsection: Debits and Credits, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

11.

A debit to an account always indicates an increase in that account.

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

If a revenue account is credited, the revenue account is increased.

Ans: T, LO: 2, Section: Accounts Debits and Credits, Subsection: Dr./Cr. for Stockholders’ Equity, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

13.

The normal balance of all accounts is a debit.

14.

Debit and credit can be interpreted to mean “bad” and “good”, respectively.

15.

A credit means that an account has been increased.

16.

A decrease in a liability account is recorded by a debit.

Ans: T, LO: 2, Section: Accounts Debits and Credits, Subsection: Dr./Cr. for Assets and Liabilities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

17.

An increase in an asset is recorded by a debit.

18.

The double-entry system of accounting refers to the placement of a double line at the end of a column of figures.

19.

A credit balance in a liability account indicates that an error in recording has occurred.

Ans: F, LO: 2, Section: Accounts Debits and Credits, Subsection: Dr./Cr. for Assets and Liabilities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

20.

The normal balance of an asset is a credit.

21.

The normal balance of the dividend account is a credit.

Ans: F, LO: 2, Section: Accounts Debits and Credits, Subsection: Dr./Cr. for Stockholders’ Equity, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

22.

Assets are decreased with a credit.

23.

A debit means that an account has been decreased.

24.

Liabilities are increased with debits and decreased with credits. .

The Accounting Information System

3-5

25.

The dividends account is a subdivision of the retained earnings account and appears as an expense on the income statement.

26.

Revenues are a subdivision of stockholders’ equity.

27.

Under the double-entry system, revenues must always equal expenses.

28.

Transactions are entered in the ledger first and then they are analyzed in terms of their effect on the accounts.

Ans: F, LO: 3, Section: Using a Journal. Subsection: The Recording Process, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

29.

Source documents can provide evidence that a transaction has occurred.

Ans: T, LO: 3, Section: Using a Journal. Subsection: The Recording Process, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

30.

Each transaction must be analyzed in terms of its effect on the accounts before it can be recorded in a journal.

31.

Transactions are entered in the ledger accounts and then transferred to journals.

32.

All business transactions must be entered first in the general ledger.

33.

Transactions are recorded in alphabetical order in a journal.

Ans: F, LO: 3, Section: Using a Journal. Subsection: The Journal, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

34.

The journal is a chronological record of all transactions.

Ans: T, LO: 3, Section: Using a Journal. Subsection: The Journal, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

35.

A journal is an accounting record in which transactions are initially recorded.

36.

The complete effect of a transaction on the accounts is disclosed in the journal.

37.

The account titles used in journalizing transactions need not be identical to the account titles in the ledger. .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

38.

The chart of accounts is a special ledger used in accounting systems.

Ans: F, LO: 4, Section: The Ledger and Posting. Subsection: Chart of Accounts, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

39.

A general ledger should be arranged in financial statement order beginning with the balance sheet accounts.

Ans: T, LO: 4, Section: The Ledger and Posting. Subsection: The Ledger, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

40.

The entire group of accounts maintained by a company is referred to collectively as the journal.

41.

Prepaid expenses are assets.

Ans: T, LO: 4, Section: The Ledger and Posting. Subsection: Chart of Accounts, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

42.

Salaries and wages payable is a type of expense.

Ans: F, LO: 4, Section: The Ledger and Posting. Subsection: Chart of Accounts, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

43.

Dividends are classified as an expense.

44.

Unearned Service Revenue is classified as a liability on the balance sheet.

45.

Posting is the process of proving the equality of debits and credits in the trial balance.

Ans: F, LO: 4, Section: The Ledger and Posting. Subsection: Posting, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

46.

Entering transactions into the journal is called posting.

47.

The journal entry to record the purchase of supplies on account includes a debit to the Supplies account and a credit to Accounts Payable.

Ans: T, LO: 4, Section: The Ledger and Posting. Subsection: The Recording Process Illustrated, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

48.

The journal entry to record a payment for supplies previously purchased on account includes a debit to the Cash account and a credit to Accounts Payable.

Ans: F, LO: 4, Section: The Ledger and Posting. Subsection: The Recording Process Illustrated, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

49.

A trial balance is prepared at the beginning of an accounting period.

Ans: F, LO: 5, Section: The Trial Balance, Subsection: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

The Accounting Information System

50.

3-7

A trial balance does not prove that all transactions have been recorded or that the ledger is correct.

Ans: T, LO: 5, Section: The Trial Balance, Subsection: NA, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

51.

In a trial balance, all debits are listed before all credits.

52.

When the columns of the trial balance equal each other, it means that no errors have occurred in recording and posting the transactions.

Ans: F, LO: 5, Section: The Trial Balance, Subsection: Limitations of a Trial Balance, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

MULTIPLE CHOICE QUESTIONS 53.

If total liabilities decreased by $4,000, then a. stockholders’ equity must have decreased by $4,000. b. assets must have decreased by $4,000, or stockholders’ equity must have increased by $4,000. c. assets and stockholders’ equity each increased by $2,000. d. assets must have increased by $4,000.

Ans: B, LO: 1, Section: Using the Accounting Equation to Analyze Transactions, Subsection: Analyzing Transactions, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

54.

Collection of a $600 Accounts Receivable a. increases an asset $600; decreases an asset $600. b. increases an asset $600; decreases a liability $600. c. decreases a liability $600; increases stockholders’ equity $600. d. decreases an asset $600; decreases a liability $600.

Ans: A, LO: 1, Section: Using the Accounting Equation to Analyze Transactions, Subsection: Analyzing Transactions, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

55.

If an individual asset is increased, then a. there could be an equal decrease in a specific liability. b. there could be an equal decrease in stockholders’ equity. c. there could be an equal decrease in another asset. d. None of these answer choices are correct.

Ans: C, LO: 1, Section: Using the Accounting Equation to Analyze Transactions, Subsection: Analyzing Transactions, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

56.

If services are rendered on account, then a. assets will decrease. b. liabilities will increase. c. stockholders’ equity will increase. d. liabilities will decrease.

Ans: C, LO: 1, Section: Using the Accounting Equation to Analyze Transactions, Subsection: Analyzing Transactions, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

57.

If services are rendered for cash, then a. assets will increase. b. liabilities will increase. c. stockholders’ equity will decrease. .

3-8

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

d. liabilities will decrease. Ans: A, LO: 1, Section: Using the Accounting Equation to Analyze Transactions, Subsection: Analyzing Transactions, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

58.

If expenses are paid in cash, then a. assets will increase. b. liabilities will decrease. c. stockholders’ equity will increase. d. assets will decrease.

Ans: D, LO: 1, Section: Using the Accounting Equation to Analyze Transactions, Subsection: Analyzing Transactions, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

59.

An investment by the stockholders in a business increases a. assets and stockholders’ equity. b. assets and liabilities. c. liabilities and stockholders’ equity. d. assets only.

Ans: A, LO: 1, Section: Using the Accounting Equation to Analyze Transactions, Subsection: Analyzing Transactions, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

60.

The purchase of an asset for cash a. increases assets and stockholders’ equity. b. increases assets and liabilities. c. decreases assets and increases liabilities. d. leaves total assets unchanged.

Ans: D, LO: 1, Section: Using the Accounting Equation to Analyze Transactions, Subsection: Analyzing Transactions, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

61.

The purchase of an asset on credit a. increases assets and stockholders’ equity. b. increases assets and liabilities. c. decreases assets and increases liabilities. d. leaves total assets unchanged.

Ans: B, LO: 1, Section: Using the Accounting Equation to Analyze Transactions, Subsection: Analyzing Transactions, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

62.

The payment of a liability a. decreases assets and stockholders’ equity. b. increases assets and decreases liabilities. c. decreases assets and increases liabilities. d. decreases assets and liabilities.

63.

The sale of an asset on account for what it costs a. increases assets and liabilities. b. decreases assets and liabilities. c. leaves total assets unchanged. d. decreases assets and increases liabilities.

The Accounting Information System

64.

3-9

When collection is made on Accounts Receivable, a. total assets will remain the same. b. stockholders’ equity will increase. c. total assets will increase. d. total assets will decrease.

Ans: A, LO: 1, Section: Using the Accounting Equation to Analyze Transactions, Subsection: Analyzing Transactions, Bloom: C, Difficulty: Medium Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

65.

A revenue generally a. increases assets and liabilities. b. increases assets and stockholders’ equity. c. increases assets and decreases stockholders’ equity. d. leaves total assets unchanged.

Ans: B, LO: 1, Section: Using the Accounting Equation to Analyze Transactions, Subsection: Analyzing Transactions, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

66.

A paid dividend a. decreases assets and stockholders’ equity. b. increases assets and stockholders’ equity. c. increases assets and decreases stockholders’ equity. d. decreases assets and increases stockholders’ equity.

Ans: A, LO: 1, Section: Using the Accounting Equation to Analyze Transactions, Subsection: Analyzing Transactions, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

67.

Receiving payment of a portion of an accounts receivable will a. not affect total assets. b. increase liabilities. c. increase stockholders’ equity. d. decrease net income.

68.

Incurring an expense a. decreases assets and liabilities. b. decreases stockholders’ equity. c. leaves stockholders’ equity unchanged. d. is basically the same as a liability.

69.

Which of the following transactions has no effect on retained earnings? a. Incurred expense b. Paid dividends c. Purchased land d. Earned revenue

70.

If a company buys a $1,700 machine on account, this transaction will affect the a. income statement and retained earnings statement only. b. income statement only. c. income statement, retained earnings statement, and balance sheet. .

3-10

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

d. balance sheet only. Ans: D, LO: 1, Section: Using the Accounting Equation to Analyze Transactions, Subsection: Analyzing Transactions, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

71.

A payment of a portion of an accounts payable will a. not affect total assets. b. increase liabilities. c. not affect stockholders’ equity. d. decrease net income.

72.

Acme Corporation received a cash advance of $500 from a customer. As a result of this event, a. assets increased by $500. b. stockholders’ equity increased by $500. c. liabilities decreased by $500. d. Both assets and stockholders’ equity increased by $500.

73.

Suppose that Target Corporation purchased equipment for $180,000 cash. As a result of this event, a. stockholders’ equity decreased by $180,000. b. assets increased by $180,000. c. total assets remained unchanged. d. Both assets and stockholders’ equity decreased by $180,000.

Ans: C, LO: 1, Section: Using the Accounting Equation to Analyze Transactions, Subsection: Analyzing Transactions, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

74.

Suppose that EY Company provided consulting services and billed the client $29,500. As a result of this event, a. total assets remained unchanged. b. assets increased by $29,500. c. stockholders’ equity increased by $29,500 d. Both assets and stockholders’ equity increased by $29,500.

75. Suppose that Microsoft Corporation paid a quarterly dividend of $422 million. As a result of this event, the a. Dividends account was increased by $422 million. b. Dividends account was decreased by $422 million. c. Cash account was increased by $422 million. d. Cash account was increased and the Dividends account was decreased by $422 million. Ans: A, LO: 1, Section: Using the Accounting Equation to Analyze Transactions, Subsection: Analyzing Transactions, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

76.

If a company pays dividends of $10,000, a. total stockholders' equity will be reduced by $10,000. b. net income will be reduced by $10,000. c. retained earnings will be reduced by $10,000. d. Both retained earnings and total stockholders' equity will be reduced by $10,000.

Ans: D, LO: 1, Section: Using the Accounting Equation to Analyze Transactions, Subsection: Analyzing Transactions, Bloom: C, Difficulty: Medium, Min:

The Accounting Information System

3-11

1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

77.

If a company issues common stock for $40,000 and uses $30,000 of the cash to purchase a truck, the net effect is that a. assets will be increased by $10,000. b. stockholders’ equity will be reduced by $40,000. c. assets will be increased by $40,000. d. assets will be unchanged.

Ans: C, LO: 1, Section: Using the Accounting Equation to Analyze Transactions, Subsection: Analyzing Transactions, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

78.

Are advanced receipts from customers treated as revenue at the time of receipt? Why or why not? a. Yes, they are treated as revenue at the time of receipt because the company has access to the cash. b. No, the amount of revenue cannot be adequately determined until the company completes the work. c. Yes, the intent of the company is to perform the work and the customer is confident that the services will be completed. d. No, revenue cannot be recognized until the performance obligation is satisfied.

79.

The receipt of cash in advance from a customer a. increases assets and stockholders' equity. b. increases assets and decreases stockholders' equity. c. increases assets and liabilities. d. None of these answer choices are correct.

80.

Which one of the following contains the selected steps of the accounting cycle in the correct order? 1. Journalize the transactions. 2. Post transactions to ledger accounts. 3. Analyze transactions. 4. Prepare financial statements. 5. Prepare a trial balance. a. 1, 2, 3, 5, 4 b. 3, 2, 1, 4, 5 c. 3, 1, 2, 5, 4 d. 3, 1, 2, 4, 5

Ans: C, LO: 1, Section: Using the Accounting Equation to Analyze Transactions, Subsection: Accounting Transactions, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

81. At the beginning of June, assets totaled $45,600 and liabilities totaled $16,500. During the month, the company earned net income of $15,000 and its assets increased by $7,000. Stockholders’ equity increased by $3,200. What are total liabilities at the end of June? a. $20,300 b. $29,100 c. $5,300 d. None of the answer choices are correct. Ans: A, LO: 1, Section: Using the Accounting Equation to Analyze Transactions, Subsection: Analyzing Transactions, Bloom: C, Difficulty: Hard, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

3-12

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution: $45,600 - $16,500 = $29,100; ($45,600 + $7,000) – ($29,100 + $3,200) =$20,300 Assets – Liabilities= Beg. Equity; (Assets + Inc. in Assets) – (Equity + Inc. in Equity) = Liabilities

82.

Suppose that on March 1, 2025, Amazon Company hires a new employee who will start to work on March 6. The employee will be paid on the last day of each month. Should a journal entry be made on March 6? Why or why not? a. Yes, the company is now obligated to pay the employee, thus that event must be recorded. b. No, hiring an employee is an important event; however it is not an economic event that should be recorded. c. Yes, failure to record the event would cause the financial statements to be misleading. d. No, the company's financial position has been changed; however, the dollar amount of the transaction is not yet known.

Ans: B, LO: 1, Section: Using the Accounting Equation to Analyze Transactions, Subsection: Accounting Transactions, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

83.

Suppose that Samsung Company had a transaction that caused a $5,000 increase in both assets and liabilities. This transaction could have been a(n) a. purchase of office equipment for $12,000, paying $7,000 cash and issuing a note payable for the balance. b. investment of $5,000 cash in the business by the stockholders. c. purchase of office equipment for $5,000 cash. d. repayment of a $5,000 bank loan.

Ans: A, LO: 1, Section: Using the Accounting Equation to Analyze Transactions, Subsection: Analyzing Transactions, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

84.

Acme Service Company rendered services and collected half of the invoice in cash. The remaining balance is due at the end of the month. This transaction a. increases assets, liabilities and stockholder’s equity. b. increases assets and liabilities; decreases stockholders’ equity. c. increases assets and stockholders’ equity. d. has no effect on the basic accounting equation.

85.

A1 Supply Company purchased equipment for $45,000, paying cash of $5,000 and signing a note payable for the balance due. This transaction a. increases assets, liabilities and stockholder’s equity. b. increases assets and liabilities; decreases stockholders’ equity. c. increases assets and liabilities. d. has no effect on the basic accounting equation.

86.

Ace Enterprises received a bill from Acme Service Company for $14,500 in electrical services. They paid $5,000 on receipt of the bill and agreed to pay the remainder by the end of the month. This transaction a. decreases assets, liabilities and stockholder’s equity. b. increases liabilities; decreases assets and stockholders’ equity. c. increases assets and liabilities. d. has no effect on the basic accounting equation.

Ans: B, LO: 1, Section: Using the Accounting Equation to Analyze Transactions, Subsection: Analyzing Transactions, Bloom: C, Difficulty: Hard, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

The Accounting Information System

87.

3-13

All of the following are characteristics of every accounting information system except it is a system a. that collects transaction data. b. that processes transaction data. c. that communicates financial information to decision makers. d. of data storage hardware for the chart of accounts.

Ans: D, LO: 1, Section: Using the Accounting Equation to Analyze Transactions, Subsection: Accounting Transactions, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Leverage Technology, AICPA AC: Systems and Process Management, AICPA PC: None, IMA:: None

88.

A1 Service Company began the year 2025 with $126,000 in its Common Stock account and a debit balance in Retained Earnings of $54,000. During the year, the company earned net income of $27,000, and declared and paid $9,000 of dividends. In addition, the company sold additional common stock amounting to $33,000. Based on this information, what should the transaction analysis show for total stockholders' equity at the end of 2025? a. $231,000 b. $249,000 c. $123,000 d. $165,000

Ans: C, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Dr./Cr. for Stockholders’ Equity, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $126,000 - $54,000 + $27,000  $9,000 + $33,000  $123,000 (Beg. Com. St.  Beg. Ret. Earn. + Net inc.  Div. + com. st. sold)

89.

Ace Construction Company started the year with $60,000 in its Common Stock account and a credit balance in Retained Earnings of $44,000. During the year, the company earned net income of $48,000, and declared and paid $20,000 of dividends. In addition, the company sold additional common stock amounting to $28,000. The amount reported for ending retained earnings on the retained earnings statement would be a. $160,000. b. $72,000. c. $132,000. d. $100,000.

Ans: B, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Dr./Cr. for Stockholders’ Equity, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $44,000 + $48,000  $20,000  $72,000 (Beg. Ret. Earn. + Net inc.  Div.)

90.

The left side of an account is a. blank. b. a description of the account. c. the debit side. d. the balance of the account.

Ans: C, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Debits and Credits, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

91.

Which one of the following is not a part of an account? a. Credit side b. Trial balance c. Debit side d. Title

Ans: B, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Debits and Credits, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC:

3-14

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

92.

An account is a part of the financial information system and is described by each one of the following except a. an account has a debit and credit side. b. an account is a source document. c. an account consists of three parts. d. an account has a title.

Ans: B, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Debits and Credits, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

93.

The right side of an account a. is the correct side. b. reflects all transactions for the accounting period. c. shows the balances of all accounts in the system. d. is the credit side.

Ans: D, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Debits and Credits, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

94.

An account consists of a. a title, a debit balance, and a credit balance. b. a title, a left side, and a debit balance. c. a title, a debit side, and a credit side. d. a title, a right side, and a debit balance.

95.

A T-account is a. a way of depicting the basic form of an account. b. a special account used instead of a journal. c. a special account used instead of a trial balance. d. used for accounts that have both a debit and credit balance.

Ans: A, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Debits and Credits, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

96.

Which statement about an account is true? a. In its simplest form, an account consists of two parts. b. An account is an individual accounting record of increases and decreases in specific asset, liability, and stockholders’ equity items. c. There are separate accounts for specific assets and liabilities but only one account for stockholders’ equity items. d. The left side of an account is the credit or decrease side.

Ans: B, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Debits and Credits, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

97.

In its simplest form, an account consists of all of the following except a. right (credit) side. b. account title. c. left side. d. explanation column.

The Accounting Information System

98.

3-15

A debit to an asset account indicates a(n) a. error. b. credit was made to a liability account. c. decrease in the asset. d. increase in the asset.

Ans: D, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Dr./Cr. for Assets and Liabilities, LO Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

99.

Debits a. increase both assets and liabilities. b. decrease both assets and liabilities. c. increase assets and decrease liabilities. d. decrease assets and increase liabilities.

Ans: C, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Dr./Cr. for Assets and Liabilities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

100.

The normal balance of any account is the a. left side. b. right side. c. side which increases that account. d. side which decreases that account.

101.

The double-entry system requires that each transaction must be recorded a. in at least two different accounts. b. in two sets of books. c. in a journal and in a ledger. d. first as a revenue and then as an expense.

102.

A credit is not the normal balance for which account listed below? a. Common Stock b. Revenue c. Accounts Payable d. Dividends

Ans: D, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Debits and Credits, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

103.

The classification and normal balance of the Dividends account is a. revenue with a credit balance. b. an expense with a debit balance. c. a liability with a credit balance. d. stockholders’ equity with a debit balance.

Ans: D, LO: 2, Section: Accounts, Debits, and Credits, Subsection: De./Cr. for Stockholders’ Equity, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

3-16 104.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Which of the following describes the classification and normal balance of the Retained Earnings account? a. Asset, debit b. Stockholders’ equity, credit c. Revenues, credit d. Expense, debit

Ans: B, LO: 2, Section: Accounts, Debits, and Credits, Subsection: De./Cr. for Stockholders’ Equity, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

105.

Which of the following describes the classification and normal balance of the Unearned Rent Revenue account? a. Asset, debit b. Liability, credit c. Revenues, credit d. Expense, debit

Ans: B, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Dr./Cr. for Assets and Liabilities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

106.

A revenue account a. is increased by debits. b. is decreased by credits. c. has a normal balance of a debit. d. is increased by credits.

107.

Which one of the following represents the expanded basic accounting equation? a. Assets = Liabilities + Common Stock + Dividends – Revenue – Expenses b. Assets + Dividends + Expenses = Liabilities + Common Stock + Revenues c. Assets – Liabilities – Dividends = Common Stock + Revenues – Expenses d. Assets = Revenues + Expenses – Liabilities

Ans: B, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Debit and Credit Procedures, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

108.

Which accounts normally have debit balances? a. Assets, expenses, and revenues b. Assets, expense, and retained earnings c. Assets, liabilities, and dividends d. Assets, expenses, and dividends

109.

Which accounts normally have credit balances? a. Revenues, liabilities, and dividends b. Revenues, liabilities, and assets c. Revenues, liabilities, and retained earnings d. Revenues, liabilities, and expenses

The Accounting Information System

110.

3-17

Which of the following correctly identifies normal balances of accounts? a. Assets Debit Liabilities Credit Common Stock Credit Revenues Debit Expenses Credit b. Assets Liabilities Common Stock Revenues Expenses

Debit Credit Credit Credit Credit

c. Assets Liabilities Common Stock Revenues Expenses

Credit Debit Debit Credit Debit

d. Assets Liabilities Common Stock Revenues Expenses

Debit Credit Credit Credit Debit

Ans: D, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Summary of Debit/ Credit Rules, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

111.

A credit will increase , but decrease a. accounts receivable; accounts payable b. accounts receivable; expenses c. accounts payable; common stock d. common stock; prepaid insurance

Ans: D, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Debits and Credits, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

112.

The best interpretation of the word “credit” is the a. offset side of an account. b. increase side of an account. c. right side of an account. d. decrease side of an account.

113.

In recording an accounting transaction in a double-entry system, a. the number of debit accounts must equal the number of credit accounts. b. there must always be entries made on both sides of the accounting equation. c. the amount of the debits must equal the amount of the credits. d. there must only be two accounts affected by any transaction.

Ans: C, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Debits and Credits Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

114.

A debit is not the normal balance for which account listed below? .

3-18

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

a. b. c. d.

Dividends Cash Accounts Receivable Service Revenue

115.

Suppose that an accountant for Tesla Inc. has debited an asset account for $1,000 and credited a liability account for $500. What can be done to complete the recording of the transaction? a. Nothing further must be done. b. Debit a stockholders’ equity account for $500. c. Debit another asset account for $500. d. Credit a different asset account for $500.

Ans: D, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Dr./Cr. for Assets and Liabilities, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

116.

Suppose that an accountant for Ralph Lauren Inc. has debited an asset account for $800 and credited a liability account for $700. Which of the following would be an incorrect way to complete the recording of the transaction? a. Credit an asset account for $100. b. Credit another liability account for $100. c. Credit a stockholders’ equity account for $100. d. Debit a stockholders’ equity account for $100.

117.

An accountant has debited an asset account for $900 and credited a liability account for $600. What can be done to complete the recording of the transaction? a Debit a stockholders’ equity account for $300. b. Debit another asset account for $300. c. Credit a different asset account for $300. d. Nothing further must be done.

Ans: C, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Dr./Cr. for Assets and Liabilities, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

118.

Which of the following accounts is increased with a debit? a. Dividends b. Service Revenue c. Interest Payable d. Common Stock

Ans: A, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Debits and Credits, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

The Accounting Information System

119.

3-19

Which of the following accounts is increased with a credit? a. Supplies Expense b. Supplies c. Sales Revenue d. Dividends

Ans: C, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Debits and Credits, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

120.

Which pair of accounts follows the rules of debit and credit in relation to increases and decreases in the same manner? a. Dividends Payable and Rent Expense b. Utilities Expense and Notes Payable c. Prepaid Insurance and Advertising Expense d. Service Revenue and Equipment

Ans: C, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Summary of Debit/ Credit Rules, Bloom: C, Difficulty: Hard, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

121.

Which of the following accounts follows the rules of debit and credit in relation to increases and decreases in the opposite manner? a. Prepaid Insurance and Dividends b. Dividends and Interest Revenue c. Interest Payable and Common Stock d. Advertising Expense and Land

Ans: B, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Summary of Debit/ Credit Rules, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

122.

Which of the following is not true of the terms debit and credit? a. They can be abbreviated as Dr. and Cr. b. They can be interpreted to mean increase and decrease. c. They can be used to describe the balance of an account. d. They can be interpreted to mean left and right.

123.

An account will have a credit balance if the a. credits exceed the debits. b. first transaction entered was a credit. c. debits exceed the credits. d. last transaction entered was a credit.

124.

For the basic accounting equation to stay in balance, each transaction recorded must a. affect two or less accounts. b. affect two or more accounts. c. always affect exactly two accounts. d. affect the same number of asset and liability accounts.

125.

Which of the following statements is true? .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

a. b. c. d.

Debits increase assets and increase liabilities. Credits decrease assets and decrease liabilities. Credits decrease assets and increase liabilities. Debits increase liabilities and decrease assets.

126.

Which pair of the listed accounts follows the rules of debits and credits in relation to increases and decreases in the opposite manner? a. Salaries and Wages Expense and Notes Payable b. Common Stock and Unearned Rent Revenue c. Prepaid Rent and Advertising Expense d. Service Revenue and Notes Payable

Ans: A, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Summary of Debit/ Credit Rules, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

127.

When Samsung receives money in advance of performing a service, it a. debits Cash and credits Unearned Service Revenue. b. debits Unearned Service Revenue and credits Accounts Payable c. debits Cash and credits Prepaid Insurance. d. debits Cash and credits Accounts Receivable.

Ans: A, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Dr./Cr. for Assets and Liabilities, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

128.

When Samsung performs a service but has not yet received payment, it a. debits Service Revenue and credits Accounts Receivable. b. debits Accounts Receivable and credits Service Revenue. c. debits Service Revenue and credits Accounts Payable. d. makes no entry until cash is received.

129.

Assets normally show a. credit balances. b. debit balances. c. debit and credit balances. d. debit or credit balances.

130.

An awareness of the normal balances of accounts would help you spot which of the following as an error in recording? a. A debit balance in the Dividends account b. A credit balance in an expense account c. A credit balance in a liabilities account d. A credit balance in a revenue account

The Accounting Information System

131.

3-21

If a company has overdrawn its bank balance, then a. its Cash account will show a debit balance. b. its Cash account will show a credit balance. c. the Cash account debits will exceed the cash account credits. d. it cannot be detected by observing the balance of the Cash account.

Ans: B, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Dr./Cr. for Assets and Liabilities, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

132.

Which account below is not a subdivision of stockholders’ equity? a. Dividends b. Revenues c. Expenses d. Liabilities

Ans: D, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Dr./Cr. for Stockholders’ Equity, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

133.

When a corporation distributes a dividend, the a. most common form of distribution is a cash dividend. b. Dividends account will be increased with a credit. c. Retained Earnings account will be directly increased with a debit. d. Dividends account will be decreased with a debit.

Ans: A, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Dr./Cr. for Stockholders’ Equity, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Business Economics

134.

The Dividends account a. appears on the income statement along with the expenses of the business. b. must show transactions every accounting period. c. is increased with debits and decreased with credits. d. is not a proper subdivision of stockholders’ equity.

Ans: C, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Dr./Cr. for Stockholders’ Equity, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

135.

Amazon’s revenue account a. is increased with a debit. b. is decreased with a credit. c. is increased with a credit. d. has a normal balance of a debit.

136.

Which of the following statements is not true? a. Expenses increase stockholders’ equity. b. Expenses have normal debit balances. c. Expenses decrease stockholders’ equity. d. Expenses are a negative factor in the computation of net income.

Ans: A, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Dr./Cr. for Stockholders’ Equity, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

137.

A credit to a liability account .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

a. b. c. d.

indicates an increase in the amount owed to creditors. indicates a decrease in the amount owed to creditors. is an error. must be accompanied by a debit to an asset account.

Ans: A, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Dr./Cr. for Assets and Liabilities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

138.

In the first month of operations, the total of the debit entries to the Cash account amounted to $7,000 and the total of the credit entries to the Cash account amounted to $4,000. At the end of the month, the Cash account has a a. $4,000 credit balance. b. $7,000 debit balance. c. $3,000 debit balance. d. $3,000 credit balance.

Ans: C, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Dr./Cr. for Assets and Liabilities, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $7,000 dr.  $4,000 cr.  $3,000 dr. (Cash debits  Cash credits)

139.

The Cash account balance of Acme Enterprises at July 1 is $500 (normal). The total of the debit entries to the Cash account amounted to $1,500 and the total of the credit entries to the Cash account amounted to $1,500 during July. At the end of the month, the Cash account has a a. $1,500 credit balance. b. $500 debit balance. c. $2,000 debit balance. d. $500 credit balance.

Ans: B, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Dr./Cr. for Assets and Liabilities, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $500 dr. + $1,500 dr.  $1,500 cr.  $500 dr. (Cash debits  Cash credits)

140.

At May 1, A1 Manufacturing Supply Inc. reported a Cash account balance of $1,000 (normal). During the month, the total of the debit entries to the Cash account amounted to $2,000 and the total of the credit entries to the Cash account amounted to $1,800. At the end of May, A1’s Cash account has a a. $1,800 credit balance. b. $3,000 debit balance. c. $1,200 debit balance. d. $1,800 credit balance.

Ans: C, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Dr./Cr. for Assets and Liabilities, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $1,000 dr. + $2,000 dr.  $1,800 cr.  $1,200 dr. (Cash debits  Cash credits)

The Accounting Information System

141.

3-23

If the Cash account has a credit balance, which of the following statements is true? a. This is the normal balance for cash. b. An error has occurred and must be corrected before financial statements can be prepared. c. The account needs to be analyzed to determine the reason for the credit balance. d. Debit postings exceed the credit postings for the accounting period.

Ans: C, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Dr./Cr. for Assets and Liabilities, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

142.

Which statement is incorrect? a. Dividends represent a distribution by a corporation to its stockholders. b. Dividends are shown on the income statement. c. Dividends reduce stockholders’ equity thus the Dividends account increases on the left side. d. The Dividends account has a normal debit balance.

Ans: B, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Stockholders’ Equity Relationships, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

143.

Why are expenses increased with a debit? a. They are always paid by cash, which is credited. Thus expenses are debited. b. They decrease stockholders’ equity thus they are increased with a debit. c. They have the same rules of debits and credits as the retained earnings account. d. None of the statements are correct.

Ans: B, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Stockholders’ Equity Relationships, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Business Economics

144.

During January 2025, its first month of operation, A1 Enterprises earned net income of $6,800 and paid dividends to the owners of $2,000. At January 31, the amount reported for ending retained earnings on the retained earnings statement would be a. $0. b. $6,800. c. $4,800. d. $2,000.

Ans: C, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Stockholders’ Equity Relationships, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $6,800  $2,000  $4,800 (Net Inc.  div.)

145.

On June 1, 2025, Ace Supply Inc. reported a debit cash balance of $42,000. During June, Ace made deposits of $16,000 and made disbursements totaling $48,000. What is the cash balance at the end of June? a. $10,000 credit balance b. $58,000 debit balance c. $10,000 debit balance d. $6,000 credit balance

Ans: C, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Dr./Cr. for Assets and Liabilities, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $42,000 + $16,000  $48,000  $10,000 debit (Beg. cash + dep.  disb.)

3-24 146.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

At January 1, 2025, Acme Industries reported Retained Earnings of $350,000. During 2025, Acme had a net loss of $75,000 and paid dividends to the stockholders of $50,000. At December 31, 2025, the amount reported for ending retained earnings on the retained earnings statement would be a. $350,000. b. $300,000. c. $275,000. d. $225,000.

Ans: D, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Stockholders’ Equity Relationships, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $350,000  $75,000  $50,000  $225,000 (Beg. Ret. Earn.  Net loss  div.)

147.

Suppose that during January 2025, Old Navy paid a cash dividend of $2,000,000. This transaction a. reduces stockholders' equity by $2,000,000. b. increases stockholders' equity by $2,000,000. c. reduces net income by $2,000,000. d. increases expenses by $2,000,000.

Ans: A, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Stockholders’ Equity Relationships, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

148.

During February 2025, its first month of operations, the owner of A1 Enterprises invested cash of $100,000. A1 had cash sales of $20,000 and paid expenses of $35,000. Assuming no other transactions impacted the cash account, what is the balance in Cash at February 28, 2025? a. $15,000 credit b. $85,000 debit c. $120,000 debit d. $65,000 credit

Ans: B, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Dr./Cr. for Assets and Liabilities, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $100,000 + $20,000  $35,000  $85,000 (Beg. cash + sales  exp.)

149. Suppose that at September 1, 2025, a Home Depot store reported a cash balance of $140,000. During the month, the store collected cash of $60,000 and made disbursements of $100,000. At September 30, 2025, the cash balance is a. $40,000 credit. b. $100,000 credit. c. $200,000 debit. d. $100,000 debit. Ans: D, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Dr./Cr. for Assets and Liabilities, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $140,000 + $60,000  $100,000  $100,000 debit (Beg. cash + collect.  disb.)

The Accounting Information System

150.

3-25

All of the following statements regarding the double-entry system are true except a. a two-sided effect of each transaction is recorded in appropriate accounts when using the double-entry system. b. the double-entry system provides a logical method for recording transactions. c. both sides of the accounting equation must be affected when recording a transaction using the double-entry system. d. when using the double-entry system, the sum of all debits to the accounts must equal the sum of all credits.

Ans: C, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Debits and Credits, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA:: None

151.

Which of the following accounts has a normal debit balance? a. Accounts Payable b. Prepaid Rent c. Retained Earnings d. Common Stock

Ans: B, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Debits and Credits, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

152.

Which of the following accounts has a normal credit balance? a. Prepaid Rent b. Notes Receivable c. Rent Revenue d. Rent Expense

153.

During 2025, its first year of operations, Acme Supply Co. had revenues of $130,000 and expenses of $66,000. The business paid cash dividends of $36,000. What is the amount reported for ending retained earnings on the December 31, 2025, retained earnings statement? a. $0 b. $36,000 c. $28,000 d. $64,000

154.

At February 1, 2025, the balance in a company’s supplies account was $3,500. During February, the company purchased supplies of $3,000 and used supplies of $4,000. At the end of February, the balance in the Supplies account should be a. $3,500 debit. b. $4,500 credit. c. $10,500 debit. d. $2,500 debit.

Ans: D, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Dr./Cr. for Assets and Liabilities, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $3,500 + $3,000  $4,000  $2,500 (Beg. sup. + purch.  sup. used)

3-26 155.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

At December 1, 2025, a company's Accounts Receivable balance was $16,800. During December, the company had credit sales of $45,000 and collected accounts receivable of $36,000. At December 31, 2025, the Accounts Receivable balance is a. $16,800 debit b. $25,800 debit c. $61,800 debit d. $25,800 credit

Ans: B, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Dr./Cr. for Assets and Liabilities, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $16,800 + $45,000  $36,000  $25,800 debit (Beg. Acc. Rec. + sales  collect.)

156.

At October 1, 2025, a company had an Accounts Payable balance of $140,000. During the month, the company made purchases on account of $100,000 and made payments on account of $160,000. At October 31, 2025, the Accounts Payable balance is a. $140,000 debit b. $20,000 credit c. $80,000 credit d. $160,000 credit

Ans: C, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Dr./Cr. for Assets and Liabilities, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $140,000 + $100,000  $160,000  $80,000 (Beg. Acc. Pay. + purch.  pay.)

157.

At September 1, 2025, a company reported Retained Earnings of $423,000. During the month, the company generated revenues of $60,000, incurred expenses of $36,000, purchased equipment for $15,000 and paid dividends of $6,000. What is the amount reported for ending retained earnings on the September 30, 2025, retained earnings statement? a. $423,000 b. $24,000 c. $426,000 d. $441,000

Ans: D, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Stockholders’ Equity Relationships Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $423,000 + ($60,000  $36,000)  $6,000  $441,000 [Beg. Ret. Earn. + (rev.  exp.)  div.]

158.

The first step in the recording process is to a. prepare financial statements. b. analyze the transaction in terms of its effect on the accounts. c. post to a journal. d. prepare a trial balance.

Ans: B, LO: 3, Section: Using a Journal, Subsection: The Recording Process, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA:: None

159.

Which of the following is not part of the recording process? a. Analyzing transactions b. Preparing a trial balance c. Entering transactions in a journal d. Posting journal entries

Ans: B, LO: 3, Section: Using a Journal, Subsection: The Recording Process, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA:: None

The Accounting Information System

160.

3-27

Evidence that would not help with determining the effects of a transaction on the accounts would be a(n) a. cash register sales tape. b. bill. c. advertising brochure. d. check.

Ans: C, LO: 3, Section: Using a Journal, Subsection: The Recording Process, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA:: None

161.

After transaction information has been recorded in the journal, it is transferred to the a. trial balance. b. income statement. c. general journal. d. ledger.

Ans: D, LO: 3, Section: Using a Journal, Subsection: The Recording Process, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA:: None

162.

The usual sequence of steps in the recording process is to a. analyze each transaction, enter the transaction in the journal, and transfer the information to the ledger accounts. b. analyze each transaction, enter the transaction in the ledger, and transfer the information to the journal. c. analyze each transaction, enter the transaction in the book of accounts, and transfer the information to the journal. d. analyze each transaction, enter the transaction in the book of original entry, and transfer the information to the journal.

Ans: A, LO: 3, Section: Using a Journal, Subsection: The Recording Process, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

163.

The final step in the recording process is to transfer the journal information to the a. trial balance. b. financial statements. c. ledger. d. file cabinets.

164.

The recording process occurs a. once a year. b. once a month. c. repeatedly during the accounting period. d. infrequently in a manual accounting system.

165.

Which of the following is not an example of a source document that provides evidence of a transaction? a. A cancelled check b. A sales slip c. A trial balance d. A cash register tape

Ans: C, LO: 3, Section: Using a Journal, Subsection: The Recording Process, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

3-28 166.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

All of the following are significant contributions that the journal makes to the recording process except the journal a. discloses the complete effect of a transaction in one place. b. helps prevent or locate errors because debits and credits can be readily compared. c. keeps complete information about changes in a specific account balance in one place. d. provides a chronological record of transactions.

Ans: C, LO: 3, Section: Using a Journal, Subsection: The Journal, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

167.

A journal provides a. the balances for each account. b. information about a transaction in several different places. c. a list of all accounts used in the business. d. a chronological record of transactions.

Ans: D, LO: 3, Section: Using a Journal, Subsection: The Journal, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

168.

The basic format of a journal would not include a(n) a. brief explanation. b. account title column. c. T-account. d. date column.

Ans: C, LO: 3, Section: Using a Journal, Subsection: The Journal, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

169.

Transactions in a journal are initially recorded in a. account number order. b. dollar amount order. c. alphabetical order. d. chronological order.

170.

A journal is not useful for a. disclosing in one place the complete effect of a transaction. b. preparing financial statements. c. providing a record of transactions. d. locating and preventing errors.

Ans: B, LO: 3, Section: Using a Journal, Subsection: The Journal, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

171.

A complete journal entry does not show a. the date of the transaction. b. the new balance in the accounts affected by the transaction. c. a brief explanation of the transaction. d. the accounts and amounts to be debited and credited.

The Accounting Information System

172.

3-29

The term referring to entering transaction data in the journal is a. chronicling. b. listing. c. posting. d. journalizing.

173.

The basic form of a journal entry has the a. debit account entered first and indented. b. credit account entered first and indented. c. debit account entered first at the extreme left margin. d. credit account entered first at the extreme left margin.

174.

Which of the following journal entries is recorded correctly and in the basic format? 550 a. Salaries and Wages Expense 1,500 Cash 950 Advertising Expense b. Salaries and Wages Expense Advertising Expense Cash c. Cash

550 950 1,600 1,500

Salaries and Wages Expense Advertising Expense d. Salaries and Wages Expense Advertising Expense Cash

550 950 550 950 1,500

Ans: D, LO: 3, Section: Using a Journal, Subsection: The Journal, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

175.

If a company has performed a service but has not yet received payment, the journal entry to record the transaction a. debits accounts receivable and credits service revenue. b. debits service revenue and credits accounts receivable. c. debits service revenue and credits accounts payable. d. makes no entry until the cash is received.

Ans: A, LO: 3, Section: Using a Journal, Subsection: The Journal, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

176.

If a company receives money in advance of performing a service, the journal entry to record the transaction a. debits cash and credits prepaid services. b. debits unearned fees and credits accounts payable. c. debits cash and credits unearned service revenue. d. debits cash and credits accounts receivable.

Ans: C, LO: 3, Section: Using a Journal, Subsection: The Journal, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

3-30 177.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

When a company receives a utility bill but will not pay it right away, it should make a journal entry that a. debits Utilities Expense and credits Accounts Receivable. b. debits Utilities Expense and credits Accounts Payable. c. debits Accounts Payable and credits Utilities Expense. d. make no entry until the bill is paid.

Ans: B, LO: 3, Section: Using a Journal, Subsection: The Journal, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

178.

When a service has been performed but no cash has been received, which of the following statements is true? a. No journal entry is made. b. The entry includes a debit to accounts payable. c. The entry includes a credit to unearned revenue. d. The entry includes a debit to accounts receivable.

Ans: D, LO: 3, Section: Using a Journal, Subsection: The Journal, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

179.

Equipment costing $20,000 is purchased by paying $5,000 cash and signing a note payable for the remainder. The journal entry to record this transaction should include a a. credit to Notes Payable. b. debit to Cash. c. credit to Notes Receivable. d. credit to Equipment.

180.

Equipment costing $20,000 is purchased by paying $5,000 cash and signing a note payable for the remainder. The journal entry to record this transaction should include a a. debit to Notes Payable. b. credit to Cash. c. credit to Notes Receivable. d. credit to Equipment.

181.

Equipment with a cost of $200,000 is purchased by paying $50,000 cash and signing a note for the remainder. The journal entry to record this transaction should include a a. credit to Notes Payable for $200,000. b. debit to Cash for $50,000. c. credit to Notes Receivable for $150,000. d. debit to Equipment for $200,000.

Ans: D, LO: 3, Section: Using a Journal, Subsection: The Journal, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

182.

Equipment costing $300,000 is purchased by paying $80,000 cash and signing a note for the remainder. The journal entry to record this transaction should include a a. debit to Notes Payable for $120,000. b. credit to Cash for $80,000. c. debit to Notes Receivable for $120,000. d. credit to Equipment for $300,000.

Ans: B, LO: 3, Section: Using a Journal, Subsection: The Journal, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

The Accounting Information System

183.

3-31

Which of the following journal entries is recorded correctly and in the basic format? a. Equipment 1,550 Cash 550 Notes Payable 1,000 b. Equipment Notes Payable Cash

1,550 1,000

c. Cash

550 1,550

Equipment Notes Payable d. Equipment Notes Payable Cash

550

1,000 1,550 1,000 550

184.

Which of the following journal entries is recorded correctly and in the basic format? a. Supplies 700 Cash 200 Accounts Payable 500 b. Supplies Accounts Payable Cash

700

c. Cash

200 700

Supplies Accounts Payable d. Supplies Accounts Payable Cash

500 200

500 700 500 200

Ans: B, LO: 3, Section: Using a Journal, Subsection: The Journal, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

185.

Which one of the following is incorrect concerning the journal? a. It provides a chronological record of transactions. b. It helps prevent or locate errors. c. It contains a record of each account maintained by the company. d. It discloses in one place the complete effect of a transaction.

Ans: C, LO: 3, Section: Using a Journal, Subsection: The Journal, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

186.

A journal a. contains only asset and liability accounts. b. is a collection of the entire group of accounts maintained by a company. c. provides a chronological record of transactions. d. should show accounts in alphabetical order.

3-32 187.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Typically, the chart of accounts begins with a. asset accounts. b. liability accounts. c. revenue accounts. d. expense accounts.

Ans: A, LO: 4, Section: The Ledger and Posting, Subsection: Chart of Accounts, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

188.

The purpose of the ledger is to a. record chronologically the day’s transactions. b. keep a record of documentation to support each transaction. c. keep in one place all information about changes in specific account balances. d. make sure that all assets, liabilities, etc., have normal balances at all times.

Ans: C, LO: 4, Section: The Ledger and Posting, Subsection: The Ledger, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

189.

Which of the following accounts would likely be listed before the others in a chart of accounts? a. Accumulated Depreciation—Buildings b. Insurance Expense c. Dividends d. Notes Payable

Ans: A, LO: 4, Section: The Ledger and Posting, Subsection: Chart of Accounts, Bloom: C, Difficulty: Hard, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

190.

Which of the following accounts would likely be listed last in a chart of accounts? a. Buildings b. Insurance Expense c. Dividends d. Notes Payable

Ans: B, LO: 4, Section: The Ledger and Posting, Subsection: Chart of Accounts, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

191.

The Unearned Service Revenue account is classified as a(n) a. asset. b. revenue. c. expense. d. liability.

Ans: D, LO: 4, Section: The Ledger and Posting, Subsection: Chart of Accounts, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

192.

A ledger a. contains only asset and liability accounts. b. is a collection of the entire group of accounts and their respective transaction amounts. c. provides a chronological record of transactions. d. should show accounts in alphabetical order.

Ans: B, LO: 4, Section: The Ledger and Posting, Subsection: The Ledger, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

The Accounting Information System

193.

3-33

Which of the following accounts is an asset? a. Service Revenue b. Notes Payable c. Supplies Expense d. Prepaid Rent

Ans: D, LO: 4, Section: The Ledger and Posting, Subsection: Chart of Accounts, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

194.

A person needing to determine the balance of a particular account should refer to the a. ledger. b. source document. c. chart of accounts. d. journal.

Ans: A, LO: 4, Section: The Ledger and Posting, Subsection: The Ledger, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

195.

The usual ordering of accounts in the general ledger is a. assets, liabilities, stockholders’ equity, revenues, and expenses. b. assets, liabilities, stockholders’ equity, expenses, and revenues. c. liabilities, assets, stockholders’ equity, revenues, and expenses. d. stockholders’ equity, assets, liabilities, expenses, and revenues.

196.

Management could determine the amounts due from customers by examining which of the following ledger accounts? a. Service Revenue b. Accounts Payable c. Accounts Receivable d. Supplies

197.

The ledger accounts are typically arranged in a. chronological order. b. alphabetical order. c. accounting equation order. d. order of appearance in the journal.

198.

Which of the following statements is incorrect? a. A chart of accounts is a listing of the accounts used by a business. b. New accounts can be added to the chart of accounts. c. Stockholders’ Equity is an account that is included in the chart of accounts. d. Account titles for the chart of accounts are used in general journal entries.

Ans: C, LO: 4, Section: The Ledger and Posting, Subsection: Chart of Accounts, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

199.

The procedure of transferring journal entries to the ledger accounts is called .

3-34

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

a. b. c. d.

journalizing. analyzing. reporting. posting.

Ans: D, LO: 4, Section: The Ledger and Posting, Subsection: Posting, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

200.

A chart of accounts for a business firm a. is a graph. b. indicates the amount of profit or loss for the period. c. lists the accounts used in the ledger. d. shows the balance of each account in the general ledger.

Ans: C, LO: 4, Section: The Ledger and Posting, Subsection: Chart of Accounts, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

201.

Posting a. should be performed in account number order. b. accumulates the effects of journalized transactions in the individual accounts. c. involves transferring all debits and credits on a journal page to the trial balance. d. is accomplished by examining ledger accounts and seeing which ones need updating.

Ans: B, LO: 4, Section: The Ledger and Posting, Subsection: Posting, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

202.

The principal purpose of posting is to a. help identify errors made in the journal. b. accumulate the effects of journalized transactions in the individual accounts. c. enter transactions directly into the ledger. d. help determine if the financial statements are ready to be prepared.

203.

Posting is performed by transferring information from the a. source documents to the journal. b. ledger to the journal. c. source documents to the ledger. d. journal to the ledger.

204.

Posting a. transfers journal entries to ledger accounts. b. transfers ledger transaction data to the journal. c. involves transferring all debits and credits on a journal page to the trial balance. d. provides a chronological record of transactions.

Ans: A, LO: 4, Section: The Ledger and Posting, Subsection: Posting, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

205.

NYC Nail Bar is a nail salon that caters to college students. The accountant transferred .

The Accounting Information System

3-35

journal entries to the ledger accounts at the end of the month. What is the name of this process? a. Ledgering b. Closing c. Recording d. Posting Ans: D, LO: 4, Section: The Ledger and Posting, Subsection: Posting, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

206.

Suppose that on January 14, Ralph Lauren Company purchased supplies of $500 on account. The entry to record the purchase will include a. a debit to Supplies and a credit to Accounts Payable. b. a debit to Supplies Expense and a credit to Accounts Receivable. c. a debit to Supplies and a credit to Cash. d. a debit to Accounts Receivable and a credit to Supplies.

Ans: A, LO: 4, Section: The Ledger and Posting, Subsection: The Recording Process Illustrated, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

207.

On July 7, 2025, Acme Enterprises received cash of $1,400 for services rendered. The entry to record this transaction will include a. a debit to Service Revenue of $1,400. b. a credit to Accounts Receivable of $1,400. c. a debit to Cash of $1,400. d. a credit to Accounts Payable of $1,400.

Ans: C, LO: 4, Section: The Ledger and Posting, Subsection: The Recording Process Illustrated, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

208.

On January 4, Acme Enterprises paid its social media consultant $500 for the current month’s services. The entry to record the payment will include a. a debit to Advertising Expense and a credit to Cash. b. a debit to Prepaid Advertising and a credit to Accounts Payable. c. a debit to Accounts Payable and a credit to Cash. d. a debit to Accounts Receivable and a credit to Cash.

209.

On July 17, 2025, Acme Enterprises received cash of $1,400 for services to be performed in August. The entry to record this transaction will include a. a debit to Cash and a credit to Service Revenue. b. a credit to Accounts Payable and a credit to Cash. c. a debit to Cash and a credit to Unearned Service Revenue. d. a debit to Cash and a credit to Accounts Payable.

3-36 210.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Acme Enterprises purchased equipment by signing a note payable for $50,000. The entry to record the purchase will include a. a debit to Equipment and credits to Cash and Accounts Payable. b. a debit to Equipment Expense and a credit to Notes Payable. c. a debit to Equipment and a credit to Notes Payable. d. a debit to Notes Receivable and a credit to Cash.

211.

On May 7, 2025, Acme Enterprises paid the current month’s insurance premium. The entry to record this transaction will include a. a debit to Insurance Expense and a credit to Cash. b. a debit to Prepaid Insurance and a credit to Accounts Payable. c. a debit to Cash and a credit to Prepaid Insurance. d. a debit to Insurance Expense and a credit to Accounts Payable.

212.

An accounting record that includes a list of accounts and their balances at a given time is called a a. trial balance. b. general journal. c. general ledger. d. chart of accounts.

Ans: A, LO: 5, Section: The Trial Balance, Subsection: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

213.

A list of accounts and their respective debit and credit balances at a given time is called a(n) a. journal. b. posting. c. trial balance. d. income statement.

Ans: C, LO: 5, Section: The Trial Balance, Subsection: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

214.

The primary purpose of the trial balance is to a. disclose the complete effect of a transaction in one place. b. make sure a journal entry is not posted twice. c. transfer journal entries to the ledger accounts. d. prove the equality of the debit and credit amounts after posting.

Ans: D, LO: 5, Section: The Trial Balance, Subsection: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

The Accounting Information System

215.

3-37

The accountant for Ace Stores, Inc. should have recorded the following correct entry: Jan. 15 Notes Receivable 243 Equipment 243 Instead, he misunderstood the transaction and recorded an incorrect entry. Which of the following wrong entries pertaining to this transaction could have been detected as erroneous when using a trial balance? a. Jan 15 Notes Payable 243 Cash 243 b. Jan 15 Notes Receivable 234 Equipment 234 c. Jan 15 Equipment 243 Notes Receivable 243 d. Jan 15 Notes Receivable 243 Equipment 234

Ans: D, LO: 5, Section: The Trial Balance, Subsection: Limitations of a Trial Balance, Bloom: C, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

216.

If the sum of the debit column equals the sum of the credit column in a trial balance, it indicates a. no errors have been made. b. no errors can be discovered. c. that all accounts reflect correct balances. d. the mathematical equality of the accounting equation.

Ans: D, LO: 5, Section: The Trial Balance, Subsection: Limitations of a Trial Balance, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

217.

A trial balance is a listing of a. transactions in a journal. b. the chart of accounts. c. general ledger accounts and balances. d. the totals from the journal pages.

218.

Customarily, a trial balance is prepared a. at the end of each day. b. after each journal entry is posted. c. at the end of an accounting period. d. only at the inception of the business.

219.

A trial balance would only help in detecting which one of the following errors? a. A transaction that is not journalized b. A journal entry that is posted twice c. Offsetting errors made in recording the transaction d. A transposition error when transferring the debit side of a journal entry to the ledger

Ans: D, LO: 5, Section: The Trial Balance, Subsection: Limitations of a Trial Balance, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

3-38 220.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ace Company’s trial balance at the end of its first month of operations reported the following accounts and amounts with normal balances: Cash $16,000 Prepaid insurance 500 Accounts receivable 2,500 Accounts payable 2,000 Notes payable 3,000 Common stock 5,000 Dividends 500 Revenues 22,000 Expenses 12,500 Total credits on Ace Company’s trial balance are a. $32,500. b. $32,000. c. $31,500. d. $33,000.

Ans: B, LO: 5, Section: The Trial Balance, Subsection: NA, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control Solution: $2,000 + $3,000 + $5,000 + $22,000  $32,000 (Acc. pay. + Not. pay. + Com. st. + Rev.)

221.

A trial balance proves a. the mathematical equality of debits and credits after the posting process. b. the ledger is posted correctly. c. that all transactions have been recorded correctly. d. that all transactions have been posted.

222.

A trial balance a. is a list of accounts with their balances at a given point in time. b. will not balance if a correct journal entry is posted twice. c. will tell you if a transaction is not posted at all. d. proves the factual accuracy of journalized transactions.

Ans: A, LO: 5, Section: The Trial Balance, Subsection: Limitations of a Trial Balance, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

The Accounting Information System

223.

3-39

Acme Company’s trial balance reported the following normal balances at the end of its first year: Cash $19,000 Prepaid insurance 700 Accounts receivable 3,500 Accounts payable 2,800 Notes payable 4,200 Common stock 5,400 Dividends 700 Revenues 29,000 Expenses 17,500 What amount did Acme Company’s trial balance show as total credits? a. $42,100 b. $41,400 c. $40,700 d. $42,800

Ans: B, LO: 5, Section: The Trial Balance, Subsection: NA, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control Solution: $2,800 + $4,200 + $5,400 + $29,000  $41,400 (Acc. pay. + Not. pay. + Com. st. + Rev.)

224.

A trial balance will not balance if a. a correcting journal entry is posted twice. b. a $50 cash dividend is debited to dividends for $500 and credited to cash for $50. c. a $300 payment on accounts payable is debited to accounts payable for $30 and credited to cash for $30. d. a transaction is not posted at all.

Ans: B, LO: 5, Section: The Trial Balance, Subsection: Limitations of a Trial Balance, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

225.

Which of the following errors, each considered individually, would cause the trial balance to be out of balance? a. A payment of $148 to a creditor was posted as a debit to Accounts Payable and a debit of $148 to Cash. b. Cash of $530 received from a customer on account was posted as a debit of $350 to Cash and as a credit of $350 to Accounts Payable. c. A payment of $59 for supplies was posted as a debit of $95 to Supplies and a credit of $95 to Cash. d. A transaction was not posted.

Ans: A, LO: 5, Section: The Trial Balance, Subsection: Limitations of a Trial Balance, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

226.

A trial balance will balance even if a. a journal entry to record the purchase of equipment for cash of $45,000 is not posted. b. a $10,000 cash dividend is debited to dividends for $10,000 and credited to cash for $1,000. c. a $300 collection on accounts receivable is credited to accounts receivable for $300 without a corresponding debit. d. a purchase of supplies for $575 on account is debited to supplies for $575 and credited to accounts payable for $557.

Ans: A, LO: 5, Section: The Trial Balance, Subsection: Limitations of a Trial Balance, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

3-40 227.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Which one of these errors would still allow a trial balance to balance? a. a $500 payment of advertising expense is debited to advertising for $500 and credited to cash for $50. b. a journal entry to record the purchase of supplies for cash of $700 is not posted. c. a $225 collection on accounts receivable is credited to accounts receivable for $225 without a corresponding debit. d. a purchase of equipment for $575 on account is debited to supplies for $575 and credited to accounts payable for $557.

228.

The ledger account balances for A1 Construction Corporation at December 31, 2025 are as follows: Cash $ 300 Accounts Receivable 522 Prepaid Insurance 82 Supplies 180 Equipment 4,000 Accumulated Depreciation – Equipment 600 Accounts Payable 384 Common Stock 1,200 Retained Earnings 1,400 Service Revenue 3,000 Salaries and Wages Expense 1,000 Rent Expense 500 If all accounts have normal balances, what would be total debits on the trial balance at December 31, 2025? a. $6,584. b. $6,556. c. $6,940. d. $7,200.

Ans: A, LO 5, Section: The Trial Balance, Subsection: NA, Bloom: AP, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: $300 + $522 + $82 + $180 + $4,000 + $1,000 + $500 = $6,584 (Cash + Accounts Receivable + Prepaid Insurance + Supplies + Equipment + Salaries and Wages Exp. + Rent Exp.)

The Accounting Information System

229.

3-41

A1 Service Corporation reports the following ledger account balances at June 30, 2025: Cash $1,662 Accounts receivable 2,098 Inventory 3,124 Prepaid rent 86 Equipment 300 Accumulated depreciation – equipment 52 Accounts payable 82 Unearned rent revenue 122 Common stock 206 Retained earnings 6,610 Service revenue 368 Interest revenue 56 Salaries and wages expense 160 Insurance expense 66 Assuming that all of the accounts have normal balances, what are total credits on the company’s trial balance at June 30, 2025? a. $7,440. b. $7,496. c. $7,444. d. $7,526.

Ans: B, LO 5, Section: The Trial Balance, Subsection: NA, Bloom: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $52  $82 + $122 + $206 + $6,610 + $368 + $56  $7,496 (Accum. Depr. + Acc. Pay. + Unearn. Rent Rev. + Com. Stk. + Ret. Earn.+ Serv. Rev. + Int. Rev.)

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

3-42

BRIEF EXERCISES Be. 230 Presented here are five economic events. For each item, indicate whether the event increased (+), decreased (–), or had no effect (NE) on assets, liabilities, and stockholders’ equity. Stockholders’ Assets = Liabilities + Equity 1. Received cash for services rendered. 2. Purchased supplies on account. 3. Paid employees' salaries. 4. Dividends paid in cash. 5. Expenses paid in cash. Ans: N/A, LO: 1, Section: Using the Accounting Equation to Analyze Transactions, Subsection: Summary of Transactions, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 230 1. Received cash for services rendered. 2. Purchased supplies on account. 3. Paid employees' salaries. 4. Dividends paid in cash. 5. Expenses paid in cash.

Assets + + – – –

Liabilities NE + NE NE NE

Stockholders’ Equity + NE – – –

Be. 231 At June 1, 2025, Acme Industries had an Accounts Receivable balance of $18,000. During the month, the company had credit sales of $25,000 and collected Accounts Receivable of $27,000. What is the balance in Accounts Receivable at June 30, 2025? Ans: N/A, LO: 2, Section: Using the Accounting Equation to Analyze Transactions, Subsection: Analyzing Transactions, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 231 The balance at the end of the month is $16,000 is calculated as follows: Beginning Accounts Receivable Add: Credit Sales Less: Collections Ending Accounts Receivable

$18,000 25,000 27,000 $16,000

Be. 232 For each item below, indicate whether a debit or credit applies. 1. Increase in Accounts Payable 2. Increase in Accounts Receivable 3. Increase in Retained Earnings 4. Decrease in Unearned Service Revenue 5. Decrease in Interest Payable Ans: N/A, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Summary of Debit/ Credit Rules, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

The Accounting Information System

Solution 232 1. Increase in Accounts Payable 2. Increase in Accounts Receivable 3. Increase in Retained Earnings 4. Decrease in Unearned Service Revenue 5. Decrease in Interest Payable

3-43

Cr. Dr. Cr. Dr. Dr.

Be. 233 For each item below, give an example of a transaction that would have that impact on the account. 1. Increase in Accounts Payable 2. Increase in Accounts Receivable 3. Increase in Retained Earnings 4. Increase in Unearned Rent Revenue 5. Decrease in Interest Payable Ans: N/A, LO: 1, Section: Using the Accounting Equation to Analyze Transactions, Subsection: Summary of Transactions, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Solution 233 1. Increase in Accounts Payable 2. Increase in Accounts Receivable 3. Increase in Retained Earnings 4. Increase in Unearned Rent Revenue 5. Decrease in Interest Payable

Purchase of supplies on account Sale on account Service revenue earned Collection of cash in advance for rent revenue _ Payment of interest on a note payable_

Be. 234 For each of the following accounts indicate the effect of a debit or a credit on the account and the normal balance. Increase (+), Decrease (–). Debit

_Credit_

Normal Balance

1. Salaries and Wages Expense. 2. Accounts Receivable. 3. Service Revenue. 4. Dividends 5. Retained Earnings. Ans: N/A, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Summary of Debit/ Credit Rules, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 234 1. Salaries and Wages Expense.

Debit +_ _

2. Accounts Receivable 3. Service Revenue.

+ –

_ _

– +

Dr. Cr.

4. Dividends 5. Retained Earnings

+ –_

– +

Dr. Cr.

Be. 235 .

_Credit_ –

Normal Balance Dr.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

3-44

For each of the following accounts indicate the effect of a debit or a credit on the account and the normal balance. Increase (+), Decrease (–). Debit

_Credit_

Normal Balance

1. Salaries and Wages Payable 2. Unearned Service Revenue 3. Rent Revenue. 4. Prepaid Insurance 5. Advertising Expense Ans: N/A, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Summary of Debit/ Credit Rules, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 235 1. Salaries and Wages Payable 2. Unearned Service Revenue

Debit -_ _ -

_Credit_ + _ + _

3. Rent Revenue 4. Prepaid Insurance 5. Advertising Expense

+ + _

+ _ _-

Normal Balance Cr. Cr.

_ _ _

Cr. Dr. Dr.

Be. 236 Journalize the following business transactions in general journal form. Identify each transaction by number. You may omit explanations of the transaction. 1. 2. 3. 4. 5.

Owner invested $60,000 in exchange for common stock of the corporation. Hired an employee to be paid $400 per week, starting tomorrow. Paid two years’ rent in advance, $7,200. Paid the worker’s weekly wage. Recorded service revenue earned and received for the week, $1,500.

Ans: N/A, LO: 3, Section: Using a Journal, Subsection: The Journal, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Solution 236 1. Cash ......................................................................................... Common Stock ................................................................ 2.

60,000

No entry 3.

60,000

Prepaid Rent ............................................................................ Cash ................................................................................

7,200

Salaries and Wages Expense ................................................... Cash ................................................................................

400

Cash ......................................................................................... Service Revenue..............................................................

1,500

Be. 237 .

7,200 400 1,500

The Accounting Information System

3-45

Beckham Company had the following transactions during the first week of May. Record the following transactions in general journal form. Identify each transaction by number. You may omit explanations of the transaction. 1. 2. 3. 4. 5.

Purchased supplies on account for $500. Performed services and billed the customer $1,200 Received cash of $750 for services to be performed in June. Collected $600 on account. Paid $300 on account.

Solution 237 1. Supplies ................................................................................... Accounts Payable ............................................................ 2.

4. 5.

500 500

Accounts Receivable ............................................................... Service Revenue .............................................................

1,200

Cash ........................................................................................ Unearned Service Revenue .............................................

750

Cash ........................................................................................ Accounts Receivable .......................................................

600

Accounts Payable..................................................................... Cash ................................................................................

300

1,200

750

600 300

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

3-46 Be 238

Prepare a corrected trial balance for A1 Supply Company. All accounts should have a normal balance. A1 Supply Company Trial Balance For the Quarter Ended March 31, 2025 Cash Accounts Receivable Prepaid Insurance Equipment Accounts Payable Unearned Service Revenue Notes Payable Common Stock Retained Earnings Dividends Service Revenue Salaries and Wages Expense Utilities Expense Rent Expense

Debit $28,000

Credit $32,000

2,500 60,000 15,000 10,000 20,000 30,000 27,000 1,500 52,000 15,000 5,000 10,000 $157,500

$150,500

Ans: N/A, LO: 5, Section: The Trial Balance, Subsection: NA, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 238

A1 Supply Company Trial Balance For the Quarter Ended March 31, 2025 Debit Cash $28,000 Accounts Receivable 32,000 Prepaid Insurance 2,500 Equipment 60,000 Accounts Payable Unearned Service Revenue Notes Payable Common Stock Retained Earnings Dividends 1,500 Service Revenue Salaries and Wages Expense 15,000 Utilities Expense 5,000 Rent Expense 10,000

Be. 239 .

Credit

$15,000 10,000 20,000 30,000 27,000 52,000

The Accounting Information System

3-47

For each of the following transactions of Woods Inc., identify the account to be debited and the account to be credited. 1. 2. 3. 4.

Purchased an 18-month insurance policy for cash. Paid weekly payroll. Purchased supplies on account. Received a utility bill to be paid at later date.

Ans: N/A, LO: 3, Section: Using a Journal, Subsection: The Journal, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Solution 239 Transaction 1 2 3 4

Debit Prepaid Insurance Salaries and Wages Expense

Credit Cash Cash

Supplies Utilities Expense

Accounts Payable Accounts Payable

Be. 240 Identify the impact on the accounting equation of the following transactions. 1. 2. 3. 4.

Purchased a 24-month insurance policy for cash. Purchased supplies on account. Received a utility bill to be paid at later date. Paid utility bill previously accrued.

Ans: N/A, LO: 1, Section: Using the Accounting Equation to Analyze Transaction, Subsection: Analyzing Transactions, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Solution 240 1. Net effect is no change: Increases assets and decreases assets. 2. Increases assets and increases liabilities. 3. Increases liabilities and decreases stockholders' equity. 4. Decreases assets and decreases liabilities.

Be. 241 The transactions of the Stormont Store are recorded in the general journal below. You are to post .

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

3-48

the journal entries to T-accounts and compute the August 31, 2025 balances. General Journal Date 2025 Aug. 5 10 19 25

Account Titles and Explanation

Debit

Accounts Receivable Service Revenue Cash Service Revenue Rent Expense Cash Cash Accounts Receivable

2,500

Credit

2,500 3,000 3,000 1,000 1,000 1,400 1,400

General Ledger Cash

Accounts Receivable

Service Revenue

Rent Expense

Ans: N/A, LO: 4, Section: The Ledger and Posting, Subsection: Posting, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Solution 241 General Ledger .

The Accounting Information System

Cash 8/10 8/25

3,000 1,400

8/31 Bal.

3,400

3-49

Accounts Receivable 8/19

1,000

8/5

2,500

8/31 Bal.

1,100

Service Revenue

8/25

1,400

Rent Expense

8/5 8/10 8/31 Bal.

2,500 3,000 5,500

8/19

1,000

8/31 Bal.

1,000

Be. 242 Ace Manufacturing Inc. had the following transactions during the month of December, 2025. Identify the account to be debited and the account to be credited for each transaction. 1. 2. 3. 4.

Paid for online advertising for the month of December. Paid for advertising to be run in print media during January and February, 2026. Received cash for customer account. Collected cash for services to be performed in January, 2026.

Solution 242 Transaction 1 2 3

Debit Advertising Expense Prepaid Advertising Cash

Cash

Credit Cash Cash Accounts Receivable Unearned Service Revenue

Be. 243 Prepare a trial balance from the ledger accounts of A1 Construction Company as of January 31, 2025. All accounts have normal balances. Accounts Payable Accounts Receivable Cash Common Stock Dividends

1,500 2,500 1,600 2,200 1,400

Rent Expense Service Revenue Supplies Salaries and Wages Expense

$ 500 3,500 200 1,000

Solution 243 A1 Construction Company Trial Balance .

3-50

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

January 31, 2025 Debit Cash Accounts Receivable Supplies Accounts Payable Common Stock Dividends Service Revenue Rent Expense Salaries and Wages Expense

Credit

$1,600 2,500 200 $1,500 2,200 1,400 3,500 500 1,000 $7,200

$7,200

The Accounting Information System

3-51

EXERCISES Ex. 244 Suppose that Target Company had the following transactions during May. List the number of the transaction and then describe the effect of each transaction on assets, liabilities, and stockholders’ equity. Sample: Made initial cash investment in the business. The answer would be—Increase in assets and increase in stockholders’ equity. 1. 2. 3. 4. 5. 6. 7. 8. 9.

Paid monthly utility bill. Purchased new display case for cash. Paid cash for repair work on the company security system. Billed customers for services performed. Received cash from customers billed in the previous transaction (transaction 4). Dividends paid to owners. Incurred advertising expenses on account. Paid monthly rent. Received cash from customers when service was rendered.

Ans: N/A, LO: 1,Section: Using the Accounting Equation to Analyze Transactions, Subsection: Summary of Transactions, Bloom: C, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Solution 244 1. Decrease in assets and decrease in stockholders’ equity. 2. No net change in assets. 3. Decrease in assets and decrease in stockholders’ equity. 4. Increase in assets and increase in stockholders’ equity. 5. No net change in assets. 6. Decrease in assets and decrease in stockholders’ equity. 7. Increase in liabilities and decrease in stockholders’ equity. 8. Decrease in assets and decrease in stockholders’ equity. 9. Increase in assets and increase in stockholders’ equity.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

3-52 Ex. 245

Suppose that these are selected accounts from the ledger of Walmart Corporation appear below. For each account, indicate the following: (a) In the first column at the right, indicate the nature of each account, using the following abbreviations: Asset - A Expense - E

Liability - L Revenues - R

None of the above - N

(b) In the second column, indicate the normal balance by inserting Dr. or Cr. Type of Account

Normal Balance

1. Supplies ……………………………….. 2. Notes Payable …………………………. 3. Service Revenue………………………. 4. Dividends………………………………. 5. Accounts Payable…………………….. 6. Salaries and Wages Expense………… 7. Common Stock………………………… 8. Accounts Receivable………………….. 9. Equipment…………………………….. 10. Notes Receivable……………………… Ans: N/A, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Summary of Debit/ Credit Rules, Bloom: K, Difficulty: Medium, Min: 5, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 245 1. Supplies ………………………………. 2. Note Payable …………………………. 3. Service Revenue………………………. 4. Dividends………………………………. 5. Accounts Payable…………………….. 6. Salaries and Wages Expense………… 7. Common Stock………………………… 8. Accounts Receivable………………….. 9. Equipment…………………………….. 10. Notes Receivable………………………

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

Normal Balance Dr. Cr. Cr. Dr. Cr. Dr. Cr. Dr. Dr. Dr.

The Accounting Information System

3-53

Ex. 246 Analyze the transactions of a business organized as a corporation described below and indicate their effect on the basic accounting equation. Use a plus sign (+) to indicate an increase and a minus sign (–) to indicate a decrease. Stockholders’ Assets = Liabilities + Equity 1. Received cash for services rendered. 2. Purchased office equipment on account. 3. Paid employees' salaries. 4. Received cash from customer in payment on account. 5. Paid telephone bill for the month. 6. Paid for office equipment purchased in transaction 2. 7. Purchased office supplies on account. 8. Dividends were paid. 9. Obtained a loan from the bank. 10. Billed customers for services rendered. Ans: N/A, Section: Using the Accounting Equation to Analyze Transactions, Subsection: Summary of Transactions, LO: 1, Bloom: C, Difficulty: Medium, Min: 10, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 246

1. Received cash for services rendered. 2. Purchased office equipment on account. 3. Paid employees' salaries. 4. Received cash from customer in payment on account. 5. Paid telephone bill for the month. 6. Paid for office equipment purchased in transaction 2. 7. Purchased office supplies on account. 8. Dividends were paid. 9. Obtained a loan from the bank. 10. Billed customers for services rendered.

Assets + + –

Liabilities

Stockholders’ Equity +

+ –

+,– – – + – + +

– – + – + +

3-54

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ex. 247 Wing Xi decides to open a pizza parlor near the local college campus that will operate as a corporation. Analyze the following transactions for the month of June in terms of their effect on the basic accounting equation. Record each transaction by increasing (+) or decreasing (–) the dollar amount of each item affected. Indicate the new balance of each item after a transaction is recorded. It is not necessary to identify the cause of changes in stockholders’ equity. Transactions (1) Xi invests $25,000 cash in exchange for common stock on June 1. (2) Purchased equipment for $4,000 paying $2,000 in cash and the remainder due in 30 days. (3) Purchased supplies for $1,200 cash. (4) Received a bill from Campus News for $200 for advertising in the campus newspaper. (5) Cash receipts from customers for pizza sales amounted to $1,500. (6) Paid salaries of $200 to student workers. (7) Billed the Tiger Football Team $300 for pizzas ordered. (8) Paid $200 to Campus News for advertising that was previously billed in Transaction 4. (9) Xi paid dividends of $1,200. (10) Incurred utility expenses for the month on account, $100. Transaction (1)

Accounts Cash + Receivable + Supplies + Equipment =

Accounts Common Payable + Stock +

Retained Earnings

Balance (2) Balance (3) Balance (4) Balance (5) Balance (6) Balance (7) Balance (8) Balance (9) Balance (10) Totals Ans: N/A, LO: 1, Section: Using the Accounting Equation to Analyze Transactions, Subsection: Summary of Transactions, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

The Accounting Information System

3-55

Solution 247 Transaction

Cash +

Accounts Accounts Common Receivable + Supplies + Equipment = Payable + Stock +

(1)

+$25,000

Balance (2)

$25,000 – 2,000

Balance (3)

$23,000 – 1,200

+$1,200

Balance (4)

$21,800

$1,200

Balance (5)

$21,800 + 1,500

$1,200

Balance (6)

$23,300 – 200

Balance (7)

$23,100

Balance (8)

$23,100 – 200

Balance (9)

Retained Earnings

+$25,000

$25,000 +$4,000

+$2,000

$4,000

$2,000

$25,000

$4,000

$2,000 + 200

$25,000

$4,000

$2,200

$25,000

-$ 200 +1,500

$1,200

$4,000

$2,200

$25,000

$1,300 – 200

$1,200

$4,000

$2,200

$25,000

$1,100 + 300

$300

$1,200

$4,000

$2,200 – 200

$25,000

$1,400

$22,900 – 1,200

$300

$1,200

$4,000

$2,000

$25,000

$1,400 – 1,200

Balance (10)

$21,700

$300

$1,200

$4,000

$2,000 + 100

$25,000

$ 200 – 100

Totals

$21,700

$300

$1,200

$4,000

$2,100

$25,000

$ 100

-$ 200

+$300

[Cash total = (1) – (2) – (3) + (5) – (6) – (8) – (9)]

3-56

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ex. 248 Analyze the following transactions in terms of their effect on the basic accounting equation. Record each transaction by increasing (+) or decreasing (–) the dollar amount of each item affected. Indicate the new balance of each item after a transaction is recorded. (1) Issued stock to investors for $20,000 in cash. (2) Purchased supplies on credit for $700. (3) Billed customers $1,000 for services provided. (4) Paid for supplies purchased in transaction 2. (5) Paid dividends of $300 cash to stockholders. (6) Received half from customers billed in transaction 3. (7) Received and paid utility bill for $100. Transaction (1)

Accounts Accounts Cash + Receivable + Supplies = Payable

Common Retained Stock + Earnings

Balance (2) Balance (3) Balance (4) Balance (5) Balance (6) Balance (7) Totals Ans: N/A, LO: 1, Section: Using the Accounting Equation to Analyze Transactions, Subsection: Summary of Transactions, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

The Accounting Information System

3-57

Solution 248 Transaction (1)

Accounts Cash + Receivable + Supplies = +$20,000

Balance (2)

$20,000

Balance (3)

$20,000

Balance (4)

$20,000 $1,000 –700

$700

$700 –700

$20,000

$1,000

Balance (5)

$19,300 $1,000 –300

$700

$20,000

$1,000 –300

Balance (6)

$19,000 $1,000 +500 –500

$700

$20,000

$700

Balance (7)

$19,500 –100

$500

$700

$20,000

$700 –100

Totals

$19,400

$500

$700

$20,000

$ 600

Accounts Payable +

Common Stock + +$20,000

Retained Earnings

$20,000 +$700

+$700

$700

$20,000

+$1,000

Cash total = (1) – (4) – (5) + (6) – (7) Ex. 249 A tabular analysis of the transactions made during August 2025 by Acme Company during its first month of operations is shown below. Each increase and decrease in stockholders' equity is explained. Assets Cash 1. +$30,000 2. 3. 4. 5. 6. 7. 8. 9. 10.

–1,000 –750 +2,400 –1,500 –1,000 –800 +450 –4,000

+ A/R

+ Supp.

+ Equip

+$5,000

= Accts Pay

Liab.+ Com. Stock +$30,000

+ Rev.

Stockholders' Equity Retained Earnings - Exp. - Div. Com. Stock

+$4,000

+$750 +$5,900

+$8,300

Serv. Rev.

– 1,500 –450 +500

–1,000 –800

Div. Rent Exp.

–4,000 –500

Sal. Exp. Util. Exp.

Instructions (a) Determine how much stockholders' equity increased for the month. (b) Compute the net income for the month. Ans: N/A, LO: 1, Section: Using the Accounting Equation to Analyze Transactions, Subsection: Summary of Transactions, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

3-58

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 249 (a)

Issued common stock ................................................................. Service revenue.......................................................................... Dividends.................................................................................... Rent expense ............................................................................. Salaries expense ........................................................................ Utilities expense ......................................................................... Increase in stockholders' equity .................................................. (Increase = 1. + 4. – 6. – 7. – 9. – 10.)

$30,000 8,300 (1,000) (800) (4,000) (500) $32,000

(b)

Service revenue.......................................................................... Rent expense ............................................................................. Salaries expense ........................................................................ Utilities expense ......................................................................... Net income ................................................................................. (Net inc. = 4. – 7. – 9. – 10.)

8,300 (800) (4,000) (500) $ 3,000

Ex. 250 The tabular analysis of transactions for A1 Service Company for the month of August, 2025 is presented below. Assume that the beginning balance of Retained Earnings is $0. Assets Cash 1. +$30,000 2. –1,000 3. –950 4. +2,400 5. –1,500 6. –1,000 7. –800 8. +450 9. –4,000 10.

+ A/R

+ Supp.

Liab. +

+ Equip.

Accts = Payable

+$11,000

+$10,000

+ C/S +$30,000

Stockholders' Equity Retained Earnings + Rev.

- Exp.

- Div. Com. Stock

+$950 +$5,900

–1,500

+$8,300

Serv. Rev. –1,000

–450 +500

–800

Div. Rent Exp.

–4,000 –500

Sal. Exp. Util. Exp.

Instructions Prepare a retained earnings statement for August and a classified balance sheet at August 31, 2025. Ans: N/A, LO: 1, Section: Using the Accounting Equation to Analyze Transactions, Subsection: Summary of Transactions, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

The Accounting Information System

3-59

Solution 250 A1 SERVICE COMPANY Retained Earnings Statement For the Month Ended August 31, 2025 Retained earnings, August 1 ............................................................... Add: Net income .................................................................................

$ 0 3,000* 3,000 1,000 $2,000

Less: Dividends ................................................................................... Retained earnings, August 31 ............................................................. *$8,300 – $800 – $4,000 – $500 (Net. inc. = 4. – 7. – 9. – 10.) A1 SERVICE COMPANY Balance Sheet August 31, 2025 Assets Current Assets: Cash* ................................................................................................... Accounts receivable ............................................................................ Supplies .............................................................................................. Total current assets........................................................................ Equipment ........................................................................................... Total assets ...................................................................................

$23,600 5,450 950

Liabilities and Stockholders’ Equity Current Liabilities Accounts payable .......................................................................... Stockholders’ equity Common stock .................................................................................... $30,000 Retained earnings .......................................................................... 2,000 Total liabilities and stockholders’ equity ................................... *$30,000 - $1,000 - $950 + $2,400 - $1,500 - $1,000 - $800 + $450 - $4,000 = $23,600

$30,000 11,000 $41,000

$ 9,000

32,000 $41,000

3-60

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ex. 251 The accounts in the ledger of A1 Delivery Service contain the following balances on July 31, 2025. Accounts Receivable Accounts Payable Cash Equipment Utilities Expense Insurance Expense Notes Payable, due 2024

$11,400 7,400 15,940 59,360 950 600 31,450

Prepaid Insurance Maintenance and Repairs Expense Service Revenue Dividends Common Stock Salaries and Wages Expense Salaries and Wages Payable Retained Earnings (July 1, 2025)

$ 1,800 1,200 15,500 800 40,000 8,400 900 5,200

Instructions Prepare an income statement and a retained earnings statement for the month of July 2025, and a classified balance sheet for July 31, 2025. Ans: N/A, LO: 1, Section: Using the Accounting Equation to Analyze Transactions, Subsection: Summary of Transactions, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 251 A1 DELIVERY SERVICE Income Statement For the Month Ended July 31, 2025 Revenues Service revenue ............................................................................. Expenses Salaries and wages expense ......................................................... Maintenance and repairs expense ................................................. Utilities expense ............................................................................ Insurance expense ........................................................................ Total expenses ........................................................................ Net income ..........................................................................................

$15,500 $8,400 1,200 950 600 11,150 $ 4,350

A1 DELIVERY SERVICE Retained Earnings Statement For the Month Ended July 31, 2025 Retained earnings, July 1 .................................................................... Add: Net income .................................................................................. Less: Dividends ................................................................................... Retained earnings, July 31 ..................................................................

$5,200 4,350 9,550 800 $8,750

The Accounting Information System

Solution 251

3-61

(Cont.) A1 DELIVERY SERVICE Balance Sheet July 31, 2025

Assets Current Assets: Cash ............................................................................................. Accounts receivable ...................................................................... Prepaid insurance .......................................................................... Total current assets .................................................................. Equipment ........................................................................................... Total assets ...................................................................................

$15,940 11,400 1,800 $29,140 59,360 $88,500

Liabilities and Stockholders’ Equity Current Liabilities Accounts payable .......................................................................... Salaries and wages payable .......................................................... Total current liabilities .............................................................. Notes payable ..................................................................................... Total liabilities ..........................................................................

$ 7,400 900

Stockholders’ equity Common stock ............................................................................... Retained earnings .......................................................................... Total stockholders' equity ............................................................... Total liabilities and stockholders’ equity ...................................

40,000 8,750

$ 8,300 31,450 39,750

48,750 $88,500

Ex. 252 Selected transactions for Acme Corporation during its first month in business are presented below: Sept. 1 Issued common stock in exchange for $30,000 cash received from investors. 5 Purchased equipment for $20,000, paying $2,000 in cash and the balance on account. 25 Paid $6,000 cash on balance owed for equipment. 30 Paid $1,000 cash dividend. Acme's chart of accounts shows: Cash, Equipment, Accounts Payable, Common Stock, and Dividends. Instructions (a) Prepare a tabular analysis of the September transactions. The column headings should be: Cash + Equipment = Accounts Payable + Stockholders' Equity. For transactions affecting stockholders' equity, provide explanations in the right margin. (b) Journalize the transactions. Do not provide explanations. (c) Post the transactions to T-accounts. Ans: N/A, LO: 1, 3, 4, Sections: Using the Accounting Equation to Analyze Transactions, Using a Journal, The Ledger and Posting, Subsection: Summary Illustration of Journalizing and Posting, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 252 .

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

3-62 (a)

Assets Cash 1 +$30,000 5 –2,000 25 –6,000 30 –1,000 $21,000

Sept.

+ Equipment

= Liabilities Accounts = Payable

+$20,000

+$18,000 –6,000

$20,000

$ 12,000

Stockholders' Equity

+$30,000

Issued stock

–1,000 $29,000

Dividends

(b) Date Sept. 1 5

General Journal Account Titles Debit Cash ................................................................................... 30,000 Common Stock..............................................................

30,000

Equipment ........................................................................... 20,000 Cash.............................................................................. Accounts Payable..........................................................

2,000 18,000

Accounts Payable ............................................................... 6,000 Cash..............................................................................

6,000

Dividends ............................................................................ 1,000 Cash..............................................................................

1,000

Bal.

9/5 Bal.

9/25

Cash 30,000 9/5 9/25 9/30 21,000

9/30 Bal.

Equipment 20,000 20,000 Accounts Payable 6,000 9/5 Bal.

Common Stock 9/1 Bal.

2,000 6,000 1,000

18,000 12,000

Dividends 1,000 1,000

30,000 30,000

J1 Credit

The Accounting Information System

3-63

Ex. 253 For each item below, indicate whether a debit or credit applies. 1. Decrease in Notes Payable 2. Increase in Dividends 3. Increase in Common Stock 4. Increase in Unearned Rent Revenue 5. Decrease in Interest Payable 6. Increase in Prepaid Insurance 7. Decrease in Salaries and Wages Expense 8. Decrease in Supplies 9. Increase in Revenues 10. Decrease in Accounts Receivable Ans: N/A, LO: 2, Bloom: C, Section: Accounts, Debits, and Credits, Subsection: Summary of Debit/ Credit Rules, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Solution 253 1. Decrease in Notes Payable 2. Increase in Dividends 3. Increase in Common Stock 4. Increase in Unearned Rent Revenue 5. Decrease in Interest Payable 6. Increase in Prepaid Insurance 7. Decrease in Salaries and Wages Expense 8. Decrease in Supplies 9. Increase in Revenues 10. Decrease in Accounts Receivable

Dr. Dr. Cr. Cr. Dr. Dr. Cr. Cr. Cr. Cr.

Ex. 254 For each item below, indicate whether a debit or credit applies. 1. Decrease in Prepaid Rent 2. Increase in Service Revenue 3. Decrease in Unearned Rent Revenue 4. Decrease in Equipment 5. Decrease in Interest Receivable 6. Increase in Depreciation Expense 7. Decrease in Accounts Payable 8. Increase in Supplies 9. Increase in Salaries and Wages Expense 10. Increase in Accounts Receivable Ans: N/A, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Summary of Debit/ Credit Rules, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

3-64

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 254 1. Decrease in Prepaid Rent 2. Increase in Service Revenue 3. Decrease in Unearned Rent Revenue 4. Decrease in Equipment 5. Decrease in Interest Receivable 6. Increase in Depreciation Expense 7. Decrease in Accounts Payable 8. Increase in Supplies 9. Increase in Salaries and Wages Expense 10. Increase in Accounts Receivable

Cr. Cr. Dr. Cr. Cr. Dr. Dr. Dr. Dr. Dr.

The Accounting Information System

3-65

Ex. 255 The chart of accounts used by A1 Printing Company is listed below. You are to indicate the proper accounts to be debited and credited for the following transactions by writing the account number(s) in the appropriate boxes. CHART OF ACCOUNTS 1 2 3 4 5 6 7

Cash Accounts Receivable Supplies Equipment Accounts Payable Notes Payable Unearned Service Revenue

8 9 10 11 12 13

Common Stock Retained Earnings Dividends Service Revenue Advertising Expense Rent Expense

Number(s) of account(s) debited 1.

Stockholders invest $90,000 cash to start the business.

Purchased three digital copy machines for $400,000, paying $100,000 cash and signing a 5-year, 6% note for the remainder.

Purchased $5,000 paper supplies on credit.

Cash received for photocopy services amounted to $7,000.

Paid $500 cash for social media consulting .

Paid $800 on account for paper supplies purchased in transaction 3.

Dividends of $1,500 were paid to stockholders.

Paid $1,200 cash for rent for the current month.

Received $2,000 cash advance from a customer for future copying.

10.

Billed a customer for $450 for photocopy services completed.

Number(s) of account(s) credited

Ans: N/A, LO: 2, Section: Using a Journal, Subsection: The Journal, Bloom: C, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

3-66

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 255

Number(s) of account(s) debited

Number(s) of account(s) credited

Stockholders invest $90,000 cash to start the business.

Purchased three digital copy machines for $400,000, paying $100,000 cash and signing a 5-year, 10% note for the remainder.

1, 6

Purchased $5,000 paper supplies on credit.

Cash received for photocopy services amounted to $7,000.

Paid $500 cash for social media consulting.

Paid $800 on account for paper supplies purchased in transaction 3.

Dividends of $1,500 were paid to stockholders.

Paid $1,200 cash for rent for the current month.

Received $2,000 cash advance from a customer for future copying.

Billed a customer for $450 for photocopy services completed.

10.

The Accounting Information System

3-67

Ex. 256 Show how the entry in each statement is entered in the ledger by using debit or credit to indicate the increase or decrease in the affected account. Debit or Credit 1.

An increase in Salaries and Wages Expense.

An increase in Accounts Payable.

An increase in Prepaid Insurance.

An increase in Common Stock.

An increase in Supplies.

An increase in Dividends.

An increase in Service Revenue.

A decrease in Accounts Receivable.

An increase in Rent Expense.

10.

A decrease in Equipment.

Ans: N/A, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Summary of Debit/ Credit Rules, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Solution 256 1.

An increase in Salaries and Wages Expense.

Debit

An increase in Accounts Payable.

Credit

An increase in Prepaid Insurance.

Debit

An increase in Common Stock.

Credit

An increase in Supplies.

Debit

An increase in Dividends.

Debit

An increase in Service Revenue.

Credit

A decrease in Accounts Receivable.

Credit

An increase in Rent Expense.

Debit

10.

A decrease in Equipment.

Credit

3-68

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ex. 257 For the accounts listed below, indicate if the normal balance of the account is a debit or credit. Normal Balance Debit or Credit

Accounts 1.

Service Revenue

Rent Expense

Accounts Receivable

Accounts Payable

Common Stock

Supplies

Insurance Expense

Dividends

Buildings

10.

Notes Payable

Ans: N/A, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Summary of Debit/ Credit Rules, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Solution 257

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Normal Balance Debit or Credit Credit Debit Debit Credit Credit Debit Debit Debit Debit Credit

Accounts Service Revenue Rent Expense Accounts Receivable Accounts Payable Common Stock Supplies Insurance Expense Dividends Buildings Notes Payable

Ex. 258 During an accounting period, a business has numerous transactions affecting each of the following accounts. State for each account whether it is likely to have (a) debit entries only, (b) credit entries only, or (c) both debit and credit entries. (1) (2) (3) (4) (5)

Advertising Expense Service Revenue Accounts Payable Accounts Receivable Common Stock

(6) (7) (8) (9) (10)

Dividends Cash Salaries and Wages Expense Notes Payable Insurance Expense

The Accounting Information System

Solution 258 (1) (a) (2) (b) (3) (c) (4) (c) (5) (b)

(6) (7) (8) (9) (10)

3-69

(a) (c) (a) (c) (a)

Ex. 259 Eight transactions are recorded in the following T-accounts:

(1) (7)

Cash 35,000 (2) 22,500 (3) (4) (6) (8)

3,500 1,950 2,225 8,000 4,500

Supplies 1,950

(3)

Common Stock (1)

(5)

Accounts Receivable 27,500 (7)

(2)

Equipment 13,500

35,000

Service Revenue (5)

10,000

Dividends 4,500

(6)

Accounts Payable 8,000 (2)

(4)

Salaries and Wages Expense 2,225

(8)

22,500

27,500

Indicate for each debit and each credit: (a) whether an asset, liability, common stock, dividends, revenue, or expense account was affected and (b) whether the account was increased (+) or (–) decreased. Answers should be presented in the following chart form: Transaction No.

Account Debited Type Effect

(1)

Asset

(Example)

Account Credited Type Effect Common Stock

(2) (3) (4) (5) (6) (7) (8) Ans: N/A, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Summary of Debit/ Credit Rules, Bloom: C, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

3-70

Solution 259 Transaction No.

Account Debited Type Effect

(1)

Asset

Common Stock

(2)

Asset

Asset Liability

– +

(3)

Asset

–

(4)

Expense

Asset

–

(5)

Asset

Revenue

(6)

Liability

–

Asset

–

(7)

Asset

–

(8)

Dividends

Asset

–

(Example)

Account Credited Type Effect

Ex. 260 For each of the following accounts indicate (a) the type of account (Asset, Liability, Stockholders’ Equity, Revenue, and Expense), (b) the debit and credit effects, and (c) the normal account balance. Example 0. Cash

1. 2. 3. 4.

a. Asset account b. Debit increases, credit decreases c. Normal balance - debit Accounts Accounts Payable 5. Accounts Receivable 6. Common Stock 7. Dividends 8.

Service Revenue Insurance Expense Notes Payable Equipment

Ans: N/A, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Summary of Debit/ Credit Rules, Bloom: K, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

The Accounting Information System

Solution 260 1. a. Liability Account. b. Debit decreases, credit increases. c. Normal balance – credit. 2. a. Asset Account. b. Debit increases, credit decreases. c. Normal balance – debit. 3. a. Stockholders’ Equity Account. b. Debit decreases, credit increases. c. Normal balance – credit. 4. a. Stockholders’ Equity Account. b. Debit increases, credit decreases. c. Normal balance – debit.

5. a. b. c. 6. a. b. c. 7. a. b. c. 8. a. b. c.

3-71

Revenue Account. Debit decreases, credit increases. Normal balance – credit. Expense Account. Debit increases, credit decreases. Normal balance – debit. Liability Account. Debit decreases, credit increases. Normal balance – credit. Asset Account. Debit increases, credit decreases. Normal balance – debit.

Ex. 261 Journalize the following business transactions in general journal form. Identify each transaction by number. You may omit explanations of the transactions. 1. Stockholders invest $40,000 in cash in starting a real estate office operating as a corporation. 2. Purchased $500 of supplies on credit. 3. Purchased equipment for $25,000, paying $3,500 in cash and signed a 30-day, $21,500, note payable. 4. Real estate commissions billed to clients amount to $4,000. 5. Paid $700 in cash for the current month's rent. 6. Paid $250 cash on account for office supplies purchased in transaction 2. 7. Received a bill for $800 for advertising for the current month. 8. Paid $2,500 cash for office salaries. 9. Paid $1,200 cash dividends to stockholders. 10. Received a check for $2,000 from a client in payment on account for commissions billed in transaction 4. Ans: N/A, LO: 3, Section: Using a Journal, Subsection: The Journal, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

3-72

Solution 261 1. Cash ........................................................................................ Common Stock ............................................................... 2.

9. 10.

40,000 40,000

Supplies ................................................................................... Accounts Payable ...........................................................

500

Equipment ............................................................................... Cash ............................................................................... Notes Payable .................................................................

25,000

Accounts Receivable ............................................................... Service Revenue .............................................................

4,000

Rent Expense .......................................................................... Cash ...............................................................................

700

Accounts Payable .................................................................... Cash ...............................................................................

250

Advertising Expense ................................................................ Accounts Payable ...........................................................

800

Salaries and Wages Expense .................................................. Cash ...............................................................................

2,500

Dividends ................................................................................. Cash ...............................................................................

1,200

Cash ........................................................................................ Accounts Receivable .......................................................

500 3,500 21,500

4,000

700

250 800

2,500

1,200 2,000 2,000

Ex. 262 Journalize the following business transactions in general journal form. Identify each transaction by number. You may omit explanations of the transactions. 1. 2. 3. 4. 5. 6. 7.

Received $50,000 from stockholders in exchange for the issuance of stock. Purchased equipment for $75,000, paying $15,000 in cash and signing a note payable for the remainder. Paid $3,000 rent for the month. Recorded $12,500 of services provided on account. Paid wages of $9,500. Received $7,000 in cash for services provided. Collected $2,000 from customers as payment on account.

Ans: N/A, LO: 3, Section: Using a Journal, Subsection: The Journal, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

The Accounting Information System

Solution 262 1. Cash ........................................................................................ Common Stock ................................................................ 2.

6. 7.

50,000 50,000

Equipment ................................................................................ Cash ................................................................................ Notes Payable .................................................................

75,000

Rent Expense........................................................................... Cash ................................................................................

3,000

Accounts Receivable ................................................................ Service Revenue .............................................................

12,500

Salaries and Wages Expense................................................... Cash ................................................................................

9,500

Cash ........................................................................................ Service Revenue .............................................................

7,000

Cash ........................................................................................ Accounts Receivable .......................................................

2,000

15,000 60,000

3,000

12,500

9,500

7,000 2,000

3-73

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

3-74

Ex. 263 Transactions for the Ace Company for the month of November are presented below. Journalize each transaction and identify each transaction by number. You may omit journal explanations. 1. Stockholders invested an additional $40,000 cash in the business. 2. Purchased land costing $18,000 for cash. 3. Purchased equipment costing $45,000 for $4,500 cash, with the remainder due in 30 days.. 4. Purchased supplies on account for $800. 5. Paid $3,000 for a one-year insurance policy. 6. Received $2,000 cash for services performed. 7. Received $5,000 for services previously performed on account. 8. Paid wages to employees for $2,500. 9. Paid dividends to stockholders of $400. Ans: N/A, LO: 3, Section: Using a Journal, Subsection: The Journal, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Solution 263 1. Cash ........................................................................................ Common Stock ............................................................... 2. 3.

40,000 40,000

Land ........................................................................................ Cash ...............................................................................

18,000

Equipment ............................................................................... Cash ............................................................................... Accounts Payable ...........................................................

45,000

Supplies ................................................................................... Accounts Payable ...........................................................

800

Prepaid Insurance .................................................................... Cash ...............................................................................

3,000

Cash ........................................................................................ Service Revenue .............................................................

2,000

Cash ........................................................................................ Accounts Receivable .......................................................

5,000

Salaries and Wages Expense .................................................. Cash ...............................................................................

2,500

Dividends ................................................................................. Cash ...............................................................................

400

18,000 4,500 40,500

800

3,000

2,000

5,000

2,500 400

The Accounting Information System

3-75

Ex. 264 This information relates to Acme Real Estate Agency for the month of October, 2025. Oct.

1 Stockholders invested $35,000 in exchange for common stock of the corporation. 2 An administrative assistant is hired at an annual salary of $36,000. 3 Equipment is purchased for $3,500 on account. 6 A house and lot are sold for M. Springer; commissions due from Springer are $10,000 (not paid by Springer at this time). 10 Cash is received in the amount of $140 as commission for acting as rental agent renting an apartment. 27 Cash of $700 is paid on account for the equipment purchased on October 3. 30 The administrative assistant is paid a $3,000 in salary for October.

Instructions (a) Journalize the transactions. Do not provide explanations. (b) Post the transactions to T accounts. Ans: N/A, LO: 3, 4, Sections: Using a Journal, The Ledger and Posting, Subsections: Summary Illustration of Journalizing and Posting, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Solution 264 (a)

General Journal

Date

Account Titles

Oct. 1 2 3 6 10 27 30

Cash ...................................................................... Common Stock ..................................................

Debit

Credit

35,000 35,000

No entry. Equipment ............................................................. Accounts Payable ..............................................

3,500

Accounts Receivable ............................................. Service Revenue................................................

10,000

Cash ...................................................................... Service Revenue................................................

140

Accounts Payable .................................................. Cash ..................................................................

700

Salaries and Wages Expense ................................ Cash ..................................................................

3,000

3,500 10,000 140 700 3,000

3-76

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 264

(Cont.)

(b) Cash Oct.

Accounts Payable

35,000 Oct.

700

140

3,000

Bal.

Oct.

Bal.

3,500

Bal.

2,800

Common Stock

10,000

Oct.

10,000

Bal.

Equipment Oct.

Oct.

31,440 Accounts Receivable

Oct.

700

35,000 35,000

Service Revenue

3,500

Oct.

3,500

10,000

140

Bal.

10,140

Salaries and Wages Expense Oct. Bal.

3,000 3,000

Ex. 265 These T accounts summarize the ledger of Acme Garden Supply Company Inc. at the end of the first month of operations, April 2025. Cash Apr.

1 12 29

20,000 700 800

900

Apr.

Unearned Service Revenue 15 25

1,200 3,500

Accounts Receivable Apr.

3,400

Apr.

800

Apr.

900

20,000

Service Revenue

5,700

Account Payable 3,500 Apr. 4

Common Stock

Supplies Apr.

Apr.

5,700

3,400

700

Salaries and Wages Expense Apr. 15 1,200

The Accounting Information System

Ex. 265

3-77

(Cont.)

Instructions (a) Prepare in the order they occurred the journal entries (including explanations) that resulted in the amounts posted to the accounts. (b) Prepare a trial balance at April 30, 2025. Ans: N/A, LO: 3, 5, Sections: Using a Journal, The Trial Balance, Subsections: The Journal, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Solution 265 (a) General Journal Date

Account Titles and Explanation

Apr. 1

Debit

Cash ...................................................................... Common Stock .................................................. (Issued stock for cash)

20,000

Supplies ................................................................. Accounts Payable .............................................. (Purchased supplies on account)

5,700

Accounts Receivable ............................................. Service Revenue................................................ (Billed clients for services rendered)

3,400

Cash ...................................................................... Service Revenue................................................ (Received cash for revenue earned)

700

Salaries and Wages Expense ................................ Cash .................................................................. (Paid salaries)

1,200

Accounts Payable .................................................. Cash .................................................................. (Paid creditors on account)

3,500

Cash ...................................................................... Accounts Receivable ......................................... (Received cash in payment of account)

800

Cash ...................................................................... Unearned Service Revenue ............................... (Received cash for future services)

900

Credit

20,000

5,700

3,400

700

1,200

3,500

800

900

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

3-78

Solution 265 (b)

(Cont.) ACME GARDEN SUPPLY COMPANY INC. Trial Balance April 30, 2025 Debit

Cash................................................................................ Accounts Receivable ....................................................... Supplies .......................................................................... Accounts Payable............................................................ Unearned Service Revenue ............................................ Common Stock................................................................ Service Revenue ............................................................. Salaries and Wages Expense .........................................

Credit

$17,700 2,600 5,700 $ 2,200 900 20,000 4,100 1,200 $27,200

$27,200

Ex. 266 The transactions of the Ace Delivery Service for the month of May, 2025 are recorded in the general journal below. You are to post the journal entries to the accounts in the general ledger. After all entries have been posted, you are to prepare a trial balance on the form provided. General Journal Date 2025 May 1

Account Titles and Explanation

Debit

Cash

25,000 Common Stock (Stockholders invested cash in business)

25,000

Equipment Cash Notes Payable (Paid cash and issued 2-year, 6%, note for delivery trucks)

60,000

Rent Expense Cash (Paid May rent)

1,000

Prepaid Insurance Cash (Paid one-year liability insurance)

1,400

Cash

4,500 Service Revenue (Received cash for delivery services)

Credit

10,000 50,000

1,000

1,400

4,500

The Accounting Information System

Ex. 266 20

3-79

(Cont.) Salaries and Wages Expense Cash (Paid salaries for current period)

500

Utilities Expense Accounts Payable (Received a bill for May utilities)

100

Dividends Cash (Paid dividends)

750

500

100

750

Accounts Receivable Service Revenue (Billed customer for delivery service)

1,000 1,000

General Ledger Cash

Accounts Receivable

Prepaid Insurance

Equipment

Accounts Payable

Notes Payable

3-80 Ex. 266

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

(Cont.) Common Stock

Dividends

Service Revenue

Rent Expense

Salaries and Wages Expense

Utilities Expense

ACE DELIVERY SERVICE Trial Balance May 31, 2025 Accounts

Credit

Debit

Ans: N/A, LO: 4,5, Sections: The Ledger and Posting, The Trial Balance, Subsection: Summary Illustration of Journalizing and Posting, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

The Accounting Information System

3-81

Solution 266 Cash

Accounts Receivable

5/1

25,000

5/4

10,000

5/30

1,000

5/18

4,500

5/8

1,000

5/31

Bal. 1,000

5/15

1,400

5/20

500

5/30

750

5/31

Bal 15,850 Prepaid Insurance

Equipment

5/15

1,400

5/4

60,000

5/31

Bal. 1,400

5/31

Bal. 60,000

Accounts Payable

Notes Payable

5/25

100

5/4

50,000

5/31

Bal. 100

5/31

Bal. 50,000

Common Stock

Dividends

5/1

25,000

5/30

750

5/31

Bal. 25,000

5/31

Bal. 750

Service Revenue

Rent Expense

5/18

4,500

5/8

1,000

5/30

1,000

5/31

Bal. 1,000

5/31

Bal. 5,500

3-82

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 266 (cont.) Salaries and Wages Expense

Utilities Expense

5/20

500

5/25

100

5/31

Bal. 500

5/31

Bal. 100

ACE DELIVERY SERVICE Trial Balance May 31, 2025 Accounts Cash Accounts Receivable Prepaid Insurance Equipment Accounts Payable Notes Payable Common Stock Dividends Service Revenue Rent Expense Salaries and Wages Expense Utilities Expense Totals

Credit $ 15,850 1,000 1,400 60,000

Debit

100 50,000 25,000

750 5,500 1,000 500 100 $80,600

$80,600

Ex. 267 Selected transactions from the journal of Acme Inc. during its first month of operations, August 2025, are presented here. Date Account Titles Aug. 1 Cash Common Stock 10 Cash Service Revenue 12 Equipment Cash Notes Payable 25 Accounts Receivable Service Revenue 31 Cash Accounts Receivable

Debit 10,000

Credit 10,000

1,700 1,700 12,200 1,200 11,000 2,500 2,500 600 600

The Accounting Information System

Ex. 267

3-83

(Cont.)

Instructions (a) Post the transactions to T-accounts. (b) Prepare a trial balance at August 31, 2025. Ans: N/A, LO: 4, 5, Sections: The Ledger and Posting, The Trial Balance, Subsection: Summary Illustration of Journalizing and Posting, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Solution 267 (a) Aug. 1 10 31 Bal.

Aug. 25 Bal.

Aug. 12 Bal.

Cash 10,000 Aug. 12 1,700 600 11,100

Accounts Receivable 2,500 Aug. 31 1,900

1,200

Notes Payable Aug. 12 Bal.

11,000 11,000

Common Stock Aug. 1 Bal.

10,000 10,000

Service Revenue Aug. 10 25 Bal.

1,700 2,500 4,200

600

Equipment 12,200 12,200

(b) ACME INC. Trial Balance August 31, 2025 Debit Cash ......................................................................................................... $11,100 Accounts Receivable ........................................................................... 1,900 Equipment............................................................................................ 12,200 Notes Payable ..................................................................................... Common Stock .................................................................................... Service Revenue ................................................................................. $25,200

Credit

$ 11,000 10,000 4,200 $25,200

3-84

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ex. 268 The accounts in the ledger of A1 Limo Service contain the following balances on July 31, 2025. All accounts have normal balances. Accounts Receivable Accounts Payable Cash Equipment Gasoline Expense Insurance Expense Notes Payable, due 2027

$16,400 12,400 ? 59,360 950 600 28,450

Prepaid Insurance Maintenance and Repairs Expense Service Revenue Dividends Common Stock Salaries and Wages Expense Salaries and Wages Payable Retained Earnings (July 1, 2025)

$ 1,800 1,200 13,500 800 50,000 6,400 900 5,200

Instructions Prepare a trial balance with the accounts arranged as illustrated in the chapter, and fill in the missing amount for Cash. Ans: N/A, LO: 5, Section: The Trial Balance, Subsection: NA, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 268 A1 LIMO SERVICE Trial Balance July 31, 2025 Cash ($110,450 – Debit total without Cash $87,510) ........................... Accounts Receivable ........................................................................... Prepaid Insurance ................................................................................ Equipment ........................................................................................... Accounts Payable ................................................................................ Salaries and Wages Payable .............................................................. Notes Payable (due 2027) ................................................................... Common Stock..................................................................................... Retained Earnings (July 1, 2025) ......................................................... Dividends ............................................................................................ Service Revenue ................................................................................. Salaries and Wages Expense .............................................................. Gasoline Expense ................................................................................ Maintenance and Repairs Expense ...................................................... Insurance Expense...............................................................................

Debit $22,940 16,400 1,800 59,360

Credit

$ 12,400 900 28,450 50,000 5,200 800 13,500 6,400 950 1,200 600 $110,450

$110,450

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Ex. 269 The trial balance of the Ace Service Company shown below does not balance. ACE SERVICE COMPANY Trial Balance June 30, 2025 Cash ............................................................................................. Accounts Receivable ..................................................................... Supplies ........................................................................................ Equipment ..................................................................................... Accounts Payable ......................................................................... Common Stock ............................................................................. Dividends ...................................................................................... Service Revenue ........................................................................... Salaries and Wages Expense ....................................................... Maintenance and Repairs Expense ............................................... Totals ...................................................................................

Debit $ 5,600 7,600 600 8,300

Credit

$ 12,766 1,941 1,500 15,200 3,800 1,600 $29,000

$29,907

An examination of the ledger and journal reveals the following errors: 1. Each of the above listed accounts has a normal balance per the general ledger. 2. Cash of $350 received from a customer on account was debited to Cash $530 and credited to Accounts Receivable $530. 3. Dividends of $300 paid to stockholders were posted as a credit to Dividends, $300, and a credit to Cash $300. 4. Salaries and Wages Expense of $300 was omitted from the trial balance. 5. The purchase of equipment on account for $700 was recorded as a debit to Maintenance and Repairs Expense and a credit to Accounts Payable for $700. 6. Services were performed on account for a customer, $510, for which Accounts Receivable was debited $510 and Service Revenue was credited $51. 7. A payment on account for $215 was credited to Cash for $215 and credited to Accounts Payable for $251. Instructions Prepare a correct trial balance. Ans: N/A, LO: 5, Section: The Trial Balance, Subsection: Limitations of a Trial Balance, Bloom: AN, Difficulty: Hard, Min: 25, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

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Solution 269 ACE SERVICE COMPANY Trial Balance June 30, 2025 Cash [$5,600 – $180 (2)]................................................................ Accounts Receivable [$7,600 + $180 (2)] ....................................... Supplies ......................................................................................... Equipment [$8,300 + $700 (5)] ....................................................... Accounts Payable [$12,766 – $251– $215 (7)] ............................... Common Stock............................................................................... Dividends [$1,500 + $300 + $300 (3)]............................................. Service Revenue [$15,200 + $459 (6)] ........................................... Salaries and Wages Expense [$3,800 + $300 (4)].......................... Maintenance and Repairs Expense [$1,600 – $700 (5)] ................. Totals ......................................................................................

Debit $ 5,420 7,780 600 9,000

Credit

$12,300 1,941 2,100 15,659 4,100 900 $29,900

$29,900

Ex. 270 Some of the following errors would cause the debit and credit columns of the trial balance to have unequal totals. For each of the four cases, state whether the error would cause unequal totals in the trial balance. If the error causes unequal totals, indicate the amount of difference between the columns and state whether the debit or credit is larger. Each case is to be considered independently of the others. 1. A payment of $700 to a creditor was recorded by a debit to Accounts Payable of $70 and a credit to Cash of $700. 2. A $340 payment for a printer was recorded by a debit to Equipment of $34 and a credit to Cash for $34. 3. An account receivable in the amount of $2,000 was collected in full. The collection was recorded by a debit to Cash for $2,000 and a debit to Accounts Payable for $2,000. 4. An account payable was paid by issuing a check for $800. The payment was recorded by debiting Accounts Payable $800 and crediting Accounts Receivable $800. Ans: N/A, LO: 5, Section: The Trial Balance, Subsection: Limitations of a Trial Balance, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 270 1. The trial balance totals will be unequal. The credit column will be $630 ($700 - $70) larger than the debit column. 2. The trial balance totals will be misstated but not unequal. 3. The trial balance totals will be unequal. The debit column will be $4,000 ($2,000 + $2,000) larger than the credit column. 4. The trial balance totals will be misstated but not unequal.

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Ex. 271 Some of the following errors would cause the debit and credit columns of the trial balance to have unequal totals. For each of the four cases, state whether the error would cause unequal totals in the trial balance. If the error causes unequal totals, indicate the amount of difference between the columns and state whether the debit or credit is larger. Each case is to be considered independently of the others. 1. A collection on account of $400 was journalized and posted as a debit to Cash $400 and a credit to Service Revenue $400. 2. A $950 purchase of supplies on account was recorded as a debit of $950 to Equipment and a credit of $950 to Accounts Payable. 3. A purchase of equipment for $3,500 on account was not recorded. 4. A $270 receipt on account was recorded as a $720 debit to Cash and a $270 credit to Accounts Receivable. Ans: N/A, LO: 5, Section: The Trial Balance, Subsection: Limitations of a Trial Balance, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 271 1. The trial balance totals will be misstated but not unequal. 2. The trial balance totals will be misstated but not unequal. 3. The trial balance totals will be misstated but not unequal. 4. The trial balance totals will be unequal. The debit column will be $450 ($720 - $270) larger than the credit column. Ex. 272 The account balances for Ace Electrical Service Company at December 31, 2025 are shown by the following alphabetical list: Accounts Payable Accounts Receivable Buildings Cash Common Stock Equipment Land Notes Payable (due 2029) Notes Receivable Supplies

$34,000 16,000 120,000 24,500 167,700 79,300 47,000 95,000 9,100 800

Instructions Prepare a trial balance with the accounts arranged in financial statement order. All accounts have normal balances. Ans: N/A, LO: 5, Section: The Trial Balance, Subsection: NA, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

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Solution 272 ACE ELECTRICAL SERVICES COMPANY Trial Balance December 31, 2025 Cash .............................................................................................. Notes Receivable .......................................................................... Accounts Receivable ..................................................................... Supplies ........................................................................................ Equipment ..................................................................................... Buildings ....................................................................................... Land .............................................................................................. Accounts Payable .......................................................................... Notes Payable (due 2029) ............................................................. Common Stock .............................................................................. Totals ....................................................................................

Debit $ 24,500 9,100 16,000 800 79,300 120,000 47,000

$296,700

Credit

$ 34,000 95,000 167,700 $296,700

Ex. 273 The ledger accounts of Acme Gym at July 31, 2025, its first period of operations, are shown below: Accounts Payable Accounts Receivable Buildings Common Stock Cash Equipment Notes Payable (due 2027) Supplies Dividends

$ 12,100 1,050 55,400 65,100 9,000 45,900 45,000 350 10,500

Instructions Prepare a trial balance with the ledger accounts arranged in the proper financial statement order. Include the appropriate heading. All accounts have normal balances. Ans: N/A, LO: 5, Section: The Trial Balance, Subsection: NA, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

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Solution 273 ACME GYM Trial Balance July 31, 2025 Debit $ 9,000 1,050 350 45,900 55,400

Cash ............................................................................................. Accounts Receivable ..................................................................... Supplies ........................................................................................ Equipment ..................................................................................... Buildings ....................................................................................... Accounts Payable ......................................................................... Notes Payable (due 2027) ............................................................. Common Stock ............................................................................. Dividends ...................................................................................... Totals ...................................................................................

Credit

$ 12,100 45,000 65,100 10,500 $122,200

$122,200

COMPLETION STATEMENTS 274.

An is an individual accounting record of increases and decreases in specific assets, liabilities, and stockholders’ equity items.

Ans: N/A, Section: Accounts, Debits, and Credits, Subsection: Debits and Credits, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

275.

The act of entering an amount on the left side of an account is called the account, and making an entry on the right side is called account.

the

Ans: N/A, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Debits and Credits, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

276.

, balances, whereas

, and , have credit normal account balances.

have debit normal account , , and

Ans: N/A, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Summary of Debit/Credit Rules, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

277.

The five subdivisions of stockholders’ equity are , , and

, .

Ans: N/A, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Dr./Cr. for Stockholders’ Equity, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

278.

The basic steps in the recording process are: the transaction in a , and transfer the appropriate accounts in the .

each transaction, enter information to

Ans: N/A, LO: 3, Section: Using a Journal, Subsection: The Recording Process, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

279.

A sales slip, a check, and a cash register tape are examples of as evidence that a transaction has taken place.

used

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280.

An accounting record where transactions are initially recorded in chronological order is called a .

Ans: N/A, LO: 3, Section: Using a Journal, Subsection: The Journal, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

281.

Posting is the procedure of transferring journal entries to

Ans: N/A, LO: 4, Section: The Ledger and Posting, Subsection: Posting, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

282.

The entire group of accounts and their balances maintained by a company is called the .

Ans: N/A, LO: 4, Section: The Ledger and Posting, Chart of Accounts, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

283.

A two-column list of all accounts and their balances at a given time is a

Ans: N/A, LO: 5, Section: The Trial Balance, Subsection: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Answers to Completion Statements 274. account 275. debiting, crediting 276. assets, expenses, dividends, common stock, liabilities, revenues, retained earnings 277. common stock, retained earnings, dividends, revenues, expenses

278. 279. 280. 281. 282. 283.

analyze, journal, journal, ledger source documents journal ledger accounts general ledger trial balance

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MATCHING 284. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.

Account Normal account balance Debit Revenue account Ledger

F. G. H. I. J.

Journal Posting Chart of accounts Trial balance Source document

1. The entire group of accounts with transaction amounts. 2. Transferring journal entries to ledger accounts. 3. The side which increases an account. 4. A list of all the accounts used by a company. 5. An accounting record of increases and decreases in specific assets, liabilities, and stockholders’ equity items. 6. Left side of an account. 7. Evidence that a transaction has taken place. 8. Shows the debit and credit effects of specific transactions. 9. A list of accounts and their balances at a given time. 10. Has a credit normal balance. Ans: N/A, LO: 1-5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Answers to Matching 1. 2. 3. 4. 5.

E G B H A

6. 7. 8. 9. 10.

C J F I D

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SHORT-ANSWER ESSAY QUESTIONS S-A E 285 Describe the accounting information system and the steps in the recording process. Ans: N/A, LO: 1, 3, Section: Using a Journal, Subsection: The Recording Process, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Communications, IMA:: None

Solution 285 The system of collecting and processing transaction data and communicating financial information to decision makers is known as the accounting information system. The basic steps in the recording process are: (1) Analyze each transaction in terms of its effect on the accounts (2) Enter the transaction information in a journal (3) Transfer the information to the appropriate accounts in the ledger. S-A E 286 A student is considering dropping his accounting class because he cannot understand the rules of debits and credits. Can the student be successful in the course without an understanding of the rules of debits and credits? Explain the rules of debits and credits in a way that will help him understand them. Ans: N/A, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Debits and Credits, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Communications, IMA:: None

Solution 286 Accounting is based on the double-entry system. This system records the dual effect of each transaction in the appropriate accounts, thus keeping the accounting equation in balance. Each transaction is analyzed and recorded using this dual effect system. If you do not have this basic understanding, the remaining chapters will become increasingly more difficult. You will not have the ability to make journal entries for the many new topics in these upcoming chapters. You may be trying to memorize the rules of debits and credits, only to discover that this does not work. Here are some other ways to master this very important topic: Make sure that you understand the accounting equation. Assets equal the total of liabilities and stockholders’ equity. Stockholders’ equity is not an account but rather a group of accounts that includes common stock, retained earnings, revenues, expenses, and dividends. Common stock, retained earnings, and revenues cause stockholders’ equity to increase while expenses and dividends cause stockholders’ equity to decrease. Next, make sure that you understand the accounting meaning of the terms debits and credits. For accounting, debit means left and credit means right. Don’t try to add any more to these definitions.

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Solution 286

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(Cont.)

Then, work with the rules of debits and credits. These rules determine whether a debit or credit increases or decreases an account. Start with assets. Assets increase with a debit and thus decrease with a credit. Think about the cash account – when cash is received, the account is increased with a debit. When cash is paid, the account is decreased with a credit. The remaining accounts are on the right side of the equal sign in the accounting equation. All of the other rules of debits and credits keep the equation in balance. Liabilities, common stock, retained earnings, and revenues are all increased with credits. Expenses and dividends are the two accounts that cause stockholders’ equity to decrease, thus they must be increased with a debit. Finally, you must work examples, exercises and problems to apply these rules of debits and credits. The more you work with these rules, the quicker they will become as natural as the multiplication tables. S-A E 287 During a study session, a classmate states that it is not necessary to make journal entries and then post them to the ledger. She states that it is sufficient to analyze the transaction and simply record the information in T-accounts. What is your response to this statement? Be brief, yet concise. Ans: N/A, LO: 3, Section: Using a Journal, Subsection: The Recording Process, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Communications, IMA:: None

Solution 287 You have a very good point regarding the steps of the accounting cycle. If a company only has a few transactions, it might be possible to simply analyze them and then record each in T accounts. However, nearly all businesses have many transactions each day. There must be a systematic way to process these transactions. The steps of the accounting cycle represent this process. After analyzing each transaction, a journal entry needs to be prepared. The journal represents a chronological listing of every transaction for a business. This allows users to review past transactions. Your approach does not leave a trail that can be reviewed at a later date. Once the journal entries are made, posting allows each line of the journal to be transferred into the ledger. This process increases and decreases individual accounts in the ledger. At the end of the accounting period, the balance of each account is determined and the trial balance is prepared. Based on your approach, if someone saw a credit to cash for $10,000 and wondered what the debit was, that person would have to go through every ledger account to locate the corresponding debit. By having a general journal, the person can view the entire transaction, thus easily seeing the account that was debited. Your approach may work for a very simple business, but it would result in problems for the majority of businesses and accountants. S-A E 288 An account is an important accounting record where financial information is stored until needed. Briefly explain (1) the nature of an account, (2) the different types of accounts, and (3) the manner in which an account is increased and decreased and its normal balance. Ans: N/A, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Debits and Credits, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Communications, IMA: Reporting and Control

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Solution 288 An account is an individual accounting record of increases and decreases in specific asset, liability, and stockholders’ equity accounts. In its simplest form, an account consists of three parts: (1) the title of the account, (2) a left or debit side, and (3) a right or credit side (it resembles the letter T). Accounts are classified as asset, liability, stockholders’ equity, revenue, and expense. Accounts with a normal debit balance, such as assets and expenses, are increased when debited and decreased when credited. Accounts with a normal credit balance, such as liabilities and revenues, are increased when credited and decreased when debited. S-A E 289 Why is the Dividends account increased by a debit? Explain in terms of its relationship to stockholders’ equity. Ans: N/A, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Stockholders’ Equity Relationships, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Communications, IMA:: None

Solution 289 Dividends represent a decrease in stockholders’ equity. According to the rules of debit and credit, a decrease in stockholders’ equity is recorded as a debit. S-A E 290 Kim Kardashian, a fellow student, contends that the double-entry system means each transaction must be recorded twice. Is Kim correct? Explain. Ans: N/A, LO: 2, Section: Accounts, Debits, and Credits, Subsection: Debits and Credits, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Communications, IMA: Reporting and Control

Solution 290 Kim is incorrect, the double-entry system merely records the dual (two-sided) effect of a transaction on the accounting equation. A transaction is not recorded twice; it is recorded once, with a dual effect. In other words, for each transaction, debits must equal credits. S-A E 291 (a) Can accounting transaction debits and credits be recorded directly in the ledger accounts? (b) What are the advantages of first recording transactions in the journal and then posting to the ledger? Ans: N/A, LO: 3, 4, Section: Using a Journal, Subsections: The Recording Process, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Communications, IMA: Reporting and Control

Solution 291 (a) Yes, debits and credits could be recorded directly in the ledger. (b) The advantages of using the journal are: (1) It discloses in one place the complete effect of a transaction. (2) It provides a chronological record of all transactions. (3) It helps to prevent or locate errors because the debit and credit amounts for each entry can be readily compared. S-A E 292 Describe the process of preparing a trial balance. What is the purpose of preparing a trial balance? If a trial balance does not balance, identify what might be the reasons why it does not balance. If the trial balance does balance, does that insure that the ledger accounts are correct? Explain. Ans: N/A, LO: 5, Section: The Trial Balance, Subsection: NA, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting

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Solution 292 The process of preparing a trial balance consists of (1) listing the account titles and their debit or credit balances in the order in which they appear in the general ledger, (2) totaling the debit and credit columns, and (3) proving the equality of the total debits and total credits. The primary purpose of the trial balance is to prove the equality of the debits and credits after posting. A trial balance also uncovers errors in journalizing and posting because errors in journalizing and posting cause a trial balance not to balance. A trial balance does not prove that all transactions have been recorded or that the ledger is correct. The trial balance may balance even when (1) an entire transaction is not journalized, (2) a correct journal entry is not posted, (3) a journal entry is posted twice, (4) incorrect accounts are used in journalizing or posting, or (5) offsetting errors are made in recording the amount of a transaction or posting to the ledger. S-A E 293 (Ethics) Robert Harder, Jr. was appointed the manager of Westbrook Properties, a recently formed company that manages residential rental properties. Maria Valdez is the accountant. She prepared a chart of accounts based on an analysis of the expenditures of the company. One of the largest expense categories is Travel and Entertainment. Mr. Harder believes that it is important to maintain a presence in the social life of the city. In this, he sharply differs from his father, Robert Harder, Sr. the elder Mr. Harder has set up Westbrook Properties in order to test his son's management skills before allowing him to manage a more lucrative commercial property business. Mr. Harder, Sr. provided the capital for Westbrook, and maintains close contact with the company. He allowed his son, however, to hire his own employees. Mr. Harder has asked Ms. Valdez to name the Travel and Entertainment account Property Development. He hopes to deflect his father's attention away from the amount he has spent on travel and entertainment until he has proven that his methods work. When Ms. Valdez resisted, he reminded her that he, not his father, hired her. He also reminded her that she had been enthusiastic about his business plans when she was hired. Required: 1. Who are the stakeholders in this situation? 2. Should Ms. Valdez agree to the change in the Travel and Entertainment account to Property Development? Explain. Ans: N/A, LO: 2,Section: Accounts, Debits, and Credits, Subsection: Debits and Credits, Bloom: E, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Professional Behavior, IMA: Reporting and Control

Solution 293 1. The stakeholders in this situation include Mr. Harder, Jr. Maria Valdez Mr. Harder, Sr. Bankers and others who might rely on the financial statements. 2. Ms. Valdez definitely should not agree to the name change. The intention of the person making the change is to deceive someone who has a right to know the affairs of the business, fully and completely. Though Ms. Valdez was hired by Mr. Harder, Jr., and though she may agree with his business methods, she cannot be a party to such deceit.

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S-A E 294 (Communication) The following trial balance was obtained from A1 Beauty Supply Company's computer system. RPT DPT PRIORITY RUN BY SEQUENCE

TR BAL ACC MGR 2 R.HAMES 997411

ACCOUNT CASH SUPPLIES ACC PAY NOTE PAY COMMON STOCK DIVIDENDS SERVICE REVENUE SAL AND WAG EXP RENT EXP OTHER EXP BAL ***TRIAL BALANCE IS IN BALANCE***

BAL 18700 5600 7500120010000500 110003500 900 500 0

Required: 1. What features make this trial balance difficult to read? 2. Prepare an improved trial balance. Ans: N/A, LO: 5, Section: The Trial Balance, Subsection: NA, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Communication, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 294 1. The trial balance is difficult to read because  The title is not explanatory  Account abbreviations are used  The numbers are not shown in standard currency format  Debits and credits are not separately shown, but are indicated by a "-" for credits  Extraneous information is provided. 2.

A1 BEAUTY SUPPLY COMPANY Trial Balance Cash Supplies Accounts Payable Note Payable Common Stock Dividends Service Revenue Salaries and Wages Expense Rent Expense Other Expenses

Debit $18,700 5,600

Credit

$ 7,500 1,200 10,000 500 11,000 3,500 900 500 $29,700

$29,700

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IFRS QUESTIONS 1.

Which of the following are the same under both GAAP and IFRS? a. The account. b. Debit and credit rules. c. Steps in the recording process. d. All of these answer choices are correct.

Ans: D LO6 BT: K Difficulty: Easy TOT: 1min. AACSB: REFLECTIVE THINKING AICPA BB: GLOBAL AND INDUSTRY PERSPECTIVES AICPA FC: Reporting IMA: Reporting

Which of the following are the same under both GAAP and IFRS? a. The journal. b. The ledger. c. The chart of accounts. d. All of these answer choices are correct.

Ans: D LO6 BT: K Difficulty: Easy TOT: 1min. AACSB: REFLECTIVE THINKING AICPA BB: GLOBAL AND INDUSTRY PERSPECTIVES AICPA FC: Reporting IMA: Reporting

Which of the following is true? a. Transaction analysis is completely different under IFRS and GAAP. b. Most transaction are recorded differently under IFRS and GAAP. c. Transaction analysis is the same under IFRS and GAAP. d. Transactions are not recorded under IFRS.

Ans: C LO6 BT: K Difficulty: Easy TOT: 1min. AACSB: REFLECTIVE THINKING AICPA BB: GLOBAL AND INDUSTRY PERSPECTIVES AICPA FC: Reporting IMA: Reporting

European companies rely a. less on historical cost and more on fair values than U.S companies. b. less on fair values and more on historical cost than U.S companies. c. completely on fair values for financial reporting. d. completely on historical cost for financial reporting.

Ans: A LO6 BT: K Difficulty: Easy TOT: 1min. AACSB: REFLECTIVE THINKING AICPA BB: GLOBAL AND INDUSTRY PERSPECTIVES AICPA FC: Reporting IMA: Reporting

The double-entry accounting system is the basis of accounting systems a. worldwide. b. worldwide, except for the U.S. c. in the U.S. only d. neither internationally nor in the U.S.

Ans: A LO6 BT: K Difficulty: Easy TOT: 1min. AACSB: REFLECTIVE THINKING AICPA BB: GLOBAL AND INDUSTRY PERSPECTIVES AICPA FC: Reporting IMA: Reporting

Under IFRS, the trial balance a. follows the same format as under GAAP. b. shows credits on the left and debits on the right. c. include less accounts than under GAAP. d. include more accounts than under GAAP.

Ans: A LO6 BT: K Difficulty: Easy TOT: 1min. AACSB: REFLECTIVE THINKING AICPA BB: GLOBAL AND INDUSTRY PERSPECTIVES AICPA FC: Reporting IMA: Reporting

Which of the following statements is true regarding the recording process? a. Because IFRS (International Financial Reporting Standards) rely more on fair value .

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and less on historical cost than U.S. GAAP, the double-entry accounting system is not widely used by companies who use IFRS. b. Both IFRS (International Financial Reporting Standards) and U.S. GAAP use the same general rules of debits and credits and the steps in the recording process. c. A trial balance using IFRS (International Financial Reporting Standards) is organized by first showing the accounts from the statement of financial position followed by accounts from the income statement; a trial balance using U.S. GAAP is organized using the opposite order. d. All of these answer choices are correct. Ans: B, LO: 6, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Under U.S. GAAP a. currency signs are generally used in the journal, ledger, trial balance, and financial statements. b. debits are recorded on the right side and credits are recorded on the left side of an account. c. the statement of financial position is often called the statement of changes in financial position. d. the rules of debits and credits, and the steps in the recording process are the same as under IFRS (International Financial Reporting Standards).

Ans: D, LO: 6, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

CHAPTER 4 ACCRUAL ACCOUNTING CONCEPTS CHAPTER LEARNING OBJECTIVES 1. Explain the accrual basis of accounting and the reasons for adjusting entries. The revenue recognition principle dictates that companies recognize revenue when a performance obligation has been satisfied. The expense recognition principle dictates that companies recognize expenses in the period when the company makes efforts to generate those revenues. Under the cash basis, companies record events only in the periods in which the company receives or pays cash. Accrual-based accounting means that companies record, in the periods in which the events occur, events that change a company's financial statements even if cash has not been exchanged. Companies make adjusting entries at the end of an accounting period. These entries ensure that companies record revenues in the period in which the performance obligation is satisfied and that companies recognize expenses in the period in which they are incurred. The major types of adjusting entries are prepaid expenses, unearned revenues, accrued revenues, and accrued expenses. 2. Prepare adjusting entries for deferrals. Deferrals are either prepaid expenses or unearned revenues. Companies make adjusting entries for deferrals at the statement date to record the portion of the deferred item that represents the expense incurred or the revenue for services performed in the current accounting period. 3. Prepare adjusting entries for accruals. Accruals are either accrued revenues or accrued expenses. Adjusting entries for accruals record revenues earned and expenses incurred in the current accounting period that have not been recognized through daily entries. 4. Prepare an adjusted trial balance and closing entries. An adjusted trial balance is a trial balance that shows the balances of all accounts, including those that have been adjusted, at the end of an accounting period. The purpose of an adjusted trial balance is to show the effects of all financial events that have occurred during the accounting period. One purpose of closing entries is to transfer net income or net loss for the period to Retained Earnings. A second purpose is to “zero-out” all temporary accounts (revenue accounts, expense accounts, and Dividends) so that they start each new period with a zero balance. To accomplish this, companies “close” all temporary accounts at the end of an accounting period. They make separate entries to close revenues and expenses to Income Summary, Income Summary to Retained Earnings, and Dividends to Retained Earnings. Only temporary accounts are closed. The required steps in the accounting cycle are (1) analyze business transactions, (2) journalize the transactions, (3) post to ledger accounts, (4) prepare a trial balance, (5) journalize and post adjusting entries, (6) prepare an adjusted trial balance, (7) prepare financial statements, (8) journalize and post-closing entries, and (9) prepare a post-closing trial balance.

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

*5. Describe the purpose and the basic form of a worksheet. The worksheet is a tool used to make it easier to prepare adjusting entries and the financial statements. Companies often prepare a worksheet using a computer spreadsheet. The sets of columns of the worksheet are, from left to right, the unadjusted trial balance, adjustments, adjusted trial balance, income statement, and balance sheet.

Accrual Accounting Concepts

4-3

Difficulties: Easy: 114 Medium: 178 Hard: 48

Question List by Section Accrual-Basis Accounting and Adjusting Entries: 1, 2, 56, 57, 62, 63, 69, 318, 331 The Revenue Recognition Principle: 3, 5, 70, 71, 73, 79, 80, 82, 97, 98, 99, 319 Five-Step Revenue Recognition Process: 58, 59, 60, 61, 67, 320 The Expense Recognition Principle: 4, 6, 7, 8, 68, 72, 74, 75, 76, 77, 78, 81, 84, 321 Accrual Versus Cash Basis Accounting: 9, 10, 64, 85, 86, 87, 88, 89, 90, 91, 92, 93, 94, 95, 96, 290, 291, 292, 293, 294, 332 The Need for Adjusting Entries: 11, 12, 13, 14, 65, 66, 104, 105, 106, 108, 109, 110, 112, 113, 114, 330, 334 Types of Adjusting Entries: 15, 16, 17, 18, 19, 20, 21, 22, 23, 100, 101, 102, 103, 107, 111, 115, 116, 117, 118, 119, 120, 121, 122, 123, 124, 125, 272, 273, 274, 275, 281, 282, 322, 335, 336 Adjusting Entries for Deferrals Prepaid Expenses: 31, 135, 136, 139, 143, 145, 165, 184, 271, 283, 323 Supplies: 130, 131, 132, 133, 134, 146, 147, 148, 156, 169, 183, 185 Insurance: 153, 154, 157, 173, 174, 175, 181, 182, 186 Depreciation: 24, 25, 26, 28, 138, 140, 155, 158, 164, 166, 176, 177, 187 Need for Adjustment: 178, 324 Statement Presentation: 32, 129, 152, 163, 167, 170, 179 Unearned Revenues: 27, 29, 30, 126, 127, 128, 137, 141, 142, 144, 150, 151, 168, 171, 1 72, 188, 189, 277, 278, 279, 339 Adjusting Entries for Accruals Accrued Revenues: 33, 160, 195, 201, 202, 203, 205, 206, 209, 210 Accrued Expenses: 159, 193, 204 Accrued Interest: 35, 36, 192, 194, 196, 197, 198, 199, 207, 208, 211, 212, 213, 214, 219, 220, 280 Accrued Salaries: 34, 190, 191, 215, 216, 217, 218, 312, 313, 325 Summary of Basic Relationships: 200, 276, 289, 295, 296, 297, 298, 299, 300, 301, 302, 303, 304, 305, 306, 307, 308, 309, 310, 311, 314 The Adjusted Trial Balance and Closing Entries Preparing the Adjusted Trial Balance: 38, 221, 222, 225, 227, 228, 230, 234, 326 Preparing Financial Statements: 37, 223, 224, 226, 229, 231, 232, 233, 241, 285, 286, 316 Quality of Earnings: 53, 54, 337 Closing the Books Preparing Closing Entries: 39, 40, 41, 42, 43, 44, 45, 46, 47, 48, 50, 235, 236, 237, 246, 249, 250, 251, 257, 258, 259, 260, 261, 262, 288, 317, 327 Preparing a Post-Closing Trial Balance: 43, 238, 239, 240, 242, 243, 244, 245, 247, 248, 263, 264, 265, 287, 328 Summary of the Accounting Cycle: 49, 52, 252, 253, 254, 255, 256 Using a Worksheet: 55, 266, 267, 268, 269, 270

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

TRUE-FALSE STATEMENTS 1.

The periodicity assumption states that the economic life of a business entity can be divided into artificial time periods.

Ans: T, LO 1, Topic: Accrual-Basis Accounting and Adjusting Entries Subtopic: NA, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

The periodicity assumption is often referred to as the expense recognition principle.

Ans: F, LO 1, Topic: Accrual-Basis Accounting and Adjusting Entries Subtopic: NA, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

The revenue recognition principle dictates that revenue be recognized in the accounting period in which the performance obligation is satisfied.

Ans: T, LO 1, Topic: Accrual-Basis Accounting and Adjusting Entries Subtopic: The Revenue Recognition Principle, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Expense recognition is tied to revenue recognition.

Ans: T, LO 1, Topic: Accrual-Basis Accounting and Adjusting Entries Subtopic: The Expense Recognition Principle, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

The revenue recognition principle and the expense recognition principle are helpful guides used in determining net income or net loss for a period.

Ans: T, LO 1, Topic: Accrual-Basis Accounting and Adjusting Entries Subtopic: The Revenue Recognition Principle, Bloom: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

The expense recognition principle requires that efforts be related to accomplishments.

Recognizing when an expense contributes to the production of revenue is critical.

Ans: T, LO 1, Topic: Accrual-Basis Accounting and Adjusting Entries Subtopic: The Expense Recognition, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

The expense recognition principle is frequently referred to as the matching principle.

Income will always be greater under the cash basis of accounting than under the accrual basis of accounting.

Ans: F, LO 1, Topic: Accrual-Basis Accounting and Adjusting Entries Subtopic: Accrual Versus Cash Basis Accounting, Bloom: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

10.

The cash basis of accounting is not in accordance with generally accepted accounting principles.

Ans: T, LO 1, Topic: Accrual-Basis Accounting and Adjusting Entries Subtopic: Accrual Versus Cash Basis Accounting, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

11.

Adjusting entries are often made because some business events are not recorded as they occur.

Ans: T, LO 1, Topic: Accrual-Basis Accounting and Adjusting Entries Subtopic: The Need for Adjusting Entries, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

12.

Adjusting entries are recorded in the general journal but are not posted to the accounts in the .

Accrual Accounting Concepts

4-5

general ledger. Ans: F, LO 1, Topic: Accrual-Basis Accounting and Adjusting Entries Subtopic: The Need for Adjusting Entries, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

13.

Adjusting entries are not necessary if the trial balance debit and credit columns balances are equal.

Ans: F, LO 1, Topic: Accrual-Basis Accounting and Adjusting Entries Subtopic: The Need for Adjusting Entries, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

14.

An adjusting entry would be made to the revenue account only when cash is received.

15.

An adjusting entry to a prepaid expense is required to recognize expired costs.

Ans: T, LO 1, Topic: Accrual-Basis Accounting and Adjusting Entries Subtopic: Types of Adjusting Entries, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

16.

An adjusting entry always includes two balance sheet accounts.

Ans: F, LO 1, Topic: Accrual-Basis Accounting and Adjusting Entries Subtopic: Types of Adjusting Entries, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

17.

An adjusting entry always includes a balance sheet account and an income statement account.

18.

Revenue received before it is recognized and expenses paid before being used or consumed are both initially recorded as liabilities.

Ans: F, LO 1, Topic: Accrual-Basis Accounting and Adjusting Entries Subtopic: Types of Adjusting Entries, Bloom: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

19.

Revenue received before it is recognized and expenses used or consumed before being paid are both initially recorded as liabilities.

Ans: T, LO 1, Topic: Accrual-Basis Accounting and Adjusting Entries Subtopic: Types of Adjusting Entries, Bloom: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

20.

Accrued revenues are revenues that have been received but not yet recognized.

Ans: F, LO 1, Topic: Accrual-Basis Accounting and Adjusting Entries Subtopic: Types of Adjusting Entries, Bloom: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

21.

Accrued revenues are revenues that have been performed but not yet recorded.

Ans: T, LO 1, Topic: Accrual-Basis Accounting and Adjusting Entries Subtopic: Types of Adjusting Entries, Bloom: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

22.

The difference between unearned revenue and accrued revenue is that accrued revenue has been recorded and needs adjusting and unearned revenue has never been recorded.

23.

If prepaid costs are initially recorded as an asset, no adjusting entries will be required in the future.

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

The cost of a depreciable asset less accumulated depreciation reflects the book value of the asset.

Ans: T, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Depreciation, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision Making

25.

The book value of a depreciable asset is always equal to its market value because depreciation is a valuation technique.

Ans: F, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Depreciation, Bloom: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Risk Analysis, AICPA PC: None, IMA: Reporting

26.

Accumulated Depreciation is a liability account and has a credit normal account balance.

Ans: F, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Depreciation, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

27.

A liability-revenue account relationship exists with an unearned rent revenue adjusting entry.

Ans: T, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Unearned Revenues, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

28.

The balances of the Depreciation Expense and the Accumulated Depreciation accounts should always be the same.

29.

Unearned revenue is a prepayment that requires an adjusting entry when services are performed.

Ans: T, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Unearned Revenues, Bloom: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

30.

The adjusting entry for unearned revenue results in an increase (a debit) to an asset account and an increase (a credit) to a revenue account.

Ans: F, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Unearned Revenues, Bloom: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

31.

Asset prepayments become expenses when they expire.

Ans: T, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Prepaid Expenses, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

32.

A contra asset account is subtracted from a related account in the balance sheet.

Ans: T, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Statement Presentation, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

33.

Accrued revenues are revenues that have been recorded but cash has been received before financial statements have been prepared.

Ans: F, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Revenues, Bloom: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

34.

The adjusting entry for accrued salaries requires a debit to Salaries and Wages Payable.

Ans: F, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Salaries, Bloom: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Accrual Accounting Concepts

35.

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The accrued interest for a three month note payable of $10,000 dated December 1, 2025 at an interest rate of 6% is $150 on December 31, 2025.

Ans: F, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Interest, Bloom: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $10,000 x .06 x 3/12 = $150 / 3 = $50 (Face x Rate x Time)

36.

Without an adjusting entry for accrued interest expense, liabilities and interest expense are understated, and net income and stockholders’ equity are overstated.

Ans: T, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Interest, Bloom: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

37.

Financial statements can be prepared from the information provided by an adjusted trial balance.

Ans: T, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing Financial Statements, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

38.

An adjusted trial balance must be prepared before the adjusting entries can be recorded.

Ans: F, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing the Adjusted Trial Balance, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

39.

Closing entries deal primarily with the balances of permanent accounts.

Ans: F, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing Closing Entries, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

40.

The only accounts that are closed are temporary accounts.

Ans: T, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing Closing Entries, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

41.

When closing entries are prepared, each income statement account is closed directly to retained earnings.

42.

Cash is a temporary account.

Ans: F, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing Closing Entries, Bloom: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

43.

The post-closing trial balance will contain only permanent—balance sheet—accounts.

Ans: T, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing a Post-Closing Trial Balance, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

44.

Accounts receivable is a permanent account.

Ans: T, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing Closing Entries, Bloom: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

45.

The Dividends account is closed to the Income Summary account at the end of each year.

46.

A revenue account is closed with a credit to the revenue account and a debit to Income Summary.

Ans: F, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing Closing Entries, Bloom: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision Making

4-8 47.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

An expense account is closed with a credit to the expense account and a debit to the Income Summary account.

Ans: T, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing Closing Entries, Bloom: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

48.

Financial statements should be prepared before the closing entries are made.

49.

In the accounting cycle, closing entries are prepared before adjusting entries.

Ans: F, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Summary of the Accounting Cycle, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

50.

Closing entries result in the transfer of net income or net loss into the Retained Earnings account.

51.

The post-closing trial balance will have fewer accounts than the adjusted trial balance.

Ans: T, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing the Post-Closing Trial Balance, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

52.

The accounting cycle begins with the journalizing of the transactions.

53.

The quality of a company’s earnings is enhanced by transparency.

Ans: T, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Quality of Earnings, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

54.

Earnings management refers to the practice of attempting to meet analysts’ expectations regarding net income for a specific period of time.

Ans: T, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Quality of Earnings, Bloom: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

*55.

A multiple-column worksheet used in the adjustment process is a permanent accounting record.

Ans: F, LO 5, Topic: Using a Worksheet, Subtopic: NA, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Accrual Accounting Concepts

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MULTIPLE CHOICE QUESTIONS 56.

The periodicity assumption states that a. a transaction can only affect one period of time. b. estimates should not be made if a transaction affects more than one time period. c. adjustments to the enterprise's accounts can only be made in the time period when the business terminates its operations. d. the economic life of a business can be divided into artificial time periods.

Ans: D, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: NA, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

57.

An accounting period starting on April 1 that is one year long is called a (an) a. fiscal year. b. interim period. c. calendar year. d. multi-period.

Ans: A, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: NA, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

58.

Suppose that Best Buy places an order for computers with Microsoft on December 17. The computers are delivered on December 20. Best Buy receives the invoice on December 21 and pays it on December 29. On what date does Microsoft satisfy its performance obligation? a. December 17 b. December 20 c. December 21 d. December 29

Ans: B, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: Five Step Revenue Recognition Process, Bloom: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

59.

Suppose that Best Buy places an order for computers with Microsoft on December 17. The computers are delivered on December 20. Best Buy receives the invoice on December 21 and pays it on December 29. On what date does Best Buy satisfy its performance obligation? a. December 17 b. December 20 c. December 21 d. Best Buy does not have a performance obligation.

Ans: D, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: Five Step Revenue Recognition Process, Bloom: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

60.

Suppose that Old Navy schedules an appointment with A1 Electrical Services on May 2. A1 services Old Navy’s electrical system on May 9 and leaves an invoice at that time. Old Navy pays the invoice on May 19. On what date does A1 satisfy its performance obligation? a. May 2 b. May 9 c. May 19 d. A1does not have a performance obligation.

61.

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

a. b. c. d.

May 2 May 9 May 19 Old Navy does not have a performance obligation.

62.

One of the accounting concepts upon which adjustments for prepayments and accruals are based is a. expense recognition. b. cost. c. monetary unit. d. economic entity.

63.

An accounting time period that is one year in length is called a. a fiscal year. b. an interim period. c. the time period assumption. d. a reporting period.

64.

Which statement is not true concerning the accrual basis of accounting? a. Transactions are recorded when payment is made for the costs incurred. b. GAAP requires the accrual basis for financial reporting. c. Transactions are recorded when events occur. d. Revenue is recognized when services are performed.

Ans: A, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: Accrual Versus Cash Basis of Accounting, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

65.

Adjustments would not be necessary if financial statements were prepared to reflect net income from a. monthly operations. b. fiscal year operations. c. interim operations. d. lifetime operations.

Ans: D, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: The Need for Adjusting Entries, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

66.

Management usually wants nesses to file tax returns. a. annual, annual b. monthly, annual .

financial statements while the IRS requires all busi-

Accrual Accounting Concepts

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c. quarterly, monthly d. monthly, monthly Ans: B, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: The Need for Adjusting Entries, Bloom: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA: Reporting

67.

Which of the following describes the timing of when revenue is recognized? a. In the period in which the related expenses are paid b. In the period in which the performance obligation is satisfied c. In the period in which payment is received for goods sold or work performed d. In the period in which the costs associated with earning the revenue are incurred and payment is received for goods sold or work performed

Ans: B, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: Five Step Revenue Recognition Process, Bloom: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA: Reporting

68.

Expenses are recognized when a. they contribute to the production of revenue. b. they are paid. c. they are billed by the supplier. d. the invoice is received.

Ans: A, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: The Expense Recognition Principle, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

69.

Which of the following is not generally an accounting time period? a. A week b. A month c. A quarter d. A year

Ans: A, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: NA, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA: Reporting

70.

The revenue recognition principle dictates that revenue should be recognized in the accounting records a. when cash is received. b. when the performance obligation is satisfied. c. at the end of the month. d. in the period that income taxes are paid.

Ans: B, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: The Revenue Recognition Principle, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA: Reporting

71.

In a service-type business, revenue is recognized a. at the end of the month. b. at the end of the year. c. when the service is performed. d. when cash is received.

Ans: C, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: The Revenue Recognition Principle, Bloom: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

72.

The expense recognition principle matches a. customers with businesses. b. expenses with revenues. c. assets with liabilities. .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

d. creditors with businesses. Ans: B, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: The Expense Recognition Principle, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

73.

A1 Auto Shop follows the revenue recognition principle. A1 services a car on August 31. The customer picks up the vehicle on September 1 and mails the payment to A1 on September 5. A1 receives the check in the mail on September 6. When should A1 show that the revenue was recognized? a. August 31 b. August 1 c. September 5 d. September 6

Ans: A, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: The Revenue Recognition Principle, Bloom: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA: Reporting

74.

A company spends $20 million dollars for an office building. Over what period should the cost be allocated to depreciation expense? a. When the $20 million is expended in cash. b. All in the first year. c. After $20 million in revenue is earned. d. None of these answer choices are correct.

Ans: D, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: The Expense Recognition Principle, Bloom: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Decision Modeling, AICPA PC: Communication, IMA: Reporting

75.

The expense recognition principle states that expenses should be matched with revenues. Another way of stating the principle is to say that a. assets should be matched with liabilities. b. efforts should be matched with accomplishments. c. dividends should be matched with stockholder investments. d. cash payments should be matched with cash receipts.

Ans: B, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: The Expense Recognition Principle, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA: Reporting

76.

Which principle dictates that efforts (expenses) be recorded with accomplishments (revenues)? a. Historical cost principle. b. Periodicity principle. c. Revenue recognition principle. d. Expense recognition principle.

Ans: D, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: The Expense Recognition Principle, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

77.

A flower shop makes a large sale for $1,000 on November 30. The customer is sent a statement on December 5 and a check is received on December 10. The flower shop follows GAAP and applies the revenue recognition principle. When should the $1,000 be recognized as revenue? .

Accrual Accounting Concepts

a. b. c. d.

4-13

December 5 December 10 November 30 December 1

Ans: C, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: The Expense Recognition Principle, Bloom: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA: Reporting

78.

A furniture factory's employees work overtime to finish an order that is sold on January 31. The office sends a statement to the customer in early February and payment is received by mid-February. The overtime wages should be expensed in a. January. b. February. c. the period when the workers receive their checks. d. either January or February depending on when the pay period ends.

Ans: A, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: The Expense Recognition Principle, Bloom: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

79.

Which of the following transactions would not involve the recognition of revenue? a. Recording revenue as an adjusting entry on the last day of the accounting period. b. Receiving cash from an established customer for services to be performed over the next three months. c. Billing customers on June 30 for services completed during June. d. Receiving cash for services performed.

Ans: B, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: The Revenue Recognition Principle, Bloom: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

80.

Why do generally accepted accounting principles require the application of the revenue recognition principle? a. Failure to apply the revenue recognition principle could lead to a misstatement of revenue. b. It is easy to apply the revenue recognition principle because revenue issues are always easy to identify and resolve. c. Recording revenue when cash is received is an objective application of the revenue recognition principle. d. Accounting software has made the revenue recognition easy to apply.

81.

On April 1, 2025, Acme Corporation paid $48,000 cash for equipment that will be used in business operations. The equipment will be used for four years. Acme records depreciation expense of $48,000 for the calendar year ending December 31, 2025. Which accounting principle has been violated? a. Depreciation principle .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

b. No principle has been violated. c. Cash principle d. Expense recognition principle Ans: D, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: The Expense Recognition Principle, Bloom: C, Difficulty: Medium, TOT: 2 min., AACSB: Ethics, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

82.

Under the cash basis of accounting, a. revenue is recognized when services are performed. b. expenses are matched with the revenue that is produced. c. cash must be received before revenue is recognized. d. a promise to pay is sufficient to recognize revenue.

Ans: C, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: The Revenue Recognition Principle, Bloom: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

83.

Under the accrual basis of accounting, a. cash must be received before revenue is recognized. b. net income is calculated by matching cash outflows against cash inflows. c. events that change a company's financial statements are recognized in the period they occur rather than in the period in which cash is paid or received. d. the ledger accounts must be adjusted to reflect a cash basis of accounting before financial statements are prepared under generally accepted accounting principles.

Ans: C, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: Cash Versus Accrual Basis Accounting, Bloom: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA: Reporting

84.

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.

85.

A small company may be able to justify using a cash basis of accounting if they have a. sales under $1,000,000. b. no accountants on staff. c. few receivables and payables. d. all sales and purchases on account.

Ans: C, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: Accrual Versus Cash Basis of Accounting, Bloom: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

86.

Which of the following statements is correct? a. As long as a company consistently uses the cash basis of accounting, generally accepted accounting principles allow its use. b. The use of the cash basis of accounting violates both the revenue recognition and expense recognition principles. .

Accrual Accounting Concepts

4-15

c. The cash basis of accounting is objective because no one can be certain of the amount of revenue until the cash is received. d. As long as management is ethical, there are no problems with using the cash basis of accounting. Ans: B, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: Accrual Versus Cash Basis of Accounting, Bloom: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

87.

The following is selected information from Ace Corporation for the fiscal year ending October 31, 2025. Cash received from customers $300,000 Revenue recognized 440,000 Cash paid for expenses 170,000 Cash paid for computers on November 1, 2024 that will be used for 3 48,000 years Expenses incurred including any depreciation 216,000 Proceeds from a bank loan, part of which was used to pay for the 100,000 computers Using on the accrual basis of accounting, what is Ace Corporation’s net income for the year ending October 31, 2025? a. $254,000 b. $224,000 c. $208,000 d. $270,000

Ans: B, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: Accrual Versus Cash Basis of Accounting, Bloom: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $440,000  $216,000  $224,000 (Rev. recog.  exp. incur.)

88.

The following is selected information from Acme Corporation for the fiscal year ending October 31, 2025: Cash received from customers $150,000 Revenue recognized 225,000 Cash paid for expenses 85,000 .

4-16

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Cash paid for computers on November 1, 2024 that will be used for 3 years

24,000

Expenses incurred including any depreciation Proceeds from a bank loan, part of which was used to pay for the computers

119,000 50,000

Using on the accrual basis of accounting, what is Acme Corporation’s net income for the year ending October 31, 2025? a. $132,000 b. $116,000 c. $106,000 d. $140,000 Ans: C, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: Accrual Versus Cash Basis of Accounting, Bloom: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $225,000  $119,000  $106,000 (Rev. recog.  exp. incur.)

89.

A company had the following transactions during 2024:  Sales of $9,000 on account  Collected $4,000 for services to be performed in 2025  Paid $3,750 cash in salaries for 2024  Purchased airline tickets for $500 in December for a trip to take place in 2025 What is the company’s 2024 net income using accrual basis accounting? a. $5,750 b. $9,750 c. $9,250 d. $5,250

Ans: D, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: Accrual Versus Cash Basis of Accounting, Bloom: AP, Difficulty: Hard, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $9,000  $3,750  $5,250 (Sales  salaries)

90.

A company had the following transactions during 2024:  Sales of $9,000 on account  Collected $4,000 for services to be performed in 2025  Paid $2,650 cash in salaries  Purchased airline tickets for $500 cash in December for a trip to take place in 2025 .

Accrual Accounting Concepts

4-17

What is the company’s 2024 net income using cash basis accounting? a. $10,350 b. $1,350 c. $9,850 d. $850 Ans: D, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: Accrual Versus Cash Basis of Accounting, Bloom: AP, Difficulty: Hard, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $4,000  $2,650  $500  $850 (Collect.  salaries  air. tick.)

91.

A1 Manufacturing Company had the following transactions during 2024:  Sales of $10,800 on account  Collected $4,800 for services to be performed in 2025  Paid $2,600 cash in salaries for 2024  Purchased airline tickets for $600 cash in December for a trip to take place in 2025 What is A1’s 2024 net income using accrual accounting? a. $8,800 b. $13,600 c. $13,000 d. $8,200

92.

A1 Manufacturing Company had the following transactions during 2024:  Sales of $10,800 on account  Collected $4,800 for services to be performed in 2025  Paid $2,600 cash in salaries  Purchased airline tickets for $600 in December for a trip to take place in 2025 What is A1’s 2024 net income using cash basis accounting? a. $1,600 b. $2,800 c. $13,000 d. $2,200

Ans: A, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: Accrual Versus Cash Basis of Accounting, Bloom: AP, Difficulty: Hard, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $4,800  $2,600  $600  $1,600 (Collect.  salaries  air. tick.)

93.

Given the accrual basis data below for a firm in its first year of operation, determine net in come under the cash basis of accounting. Revenue recognized $19,000 Accounts receivable 3,000 Expenses incurred 7,250 .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

a. b. c. d.

Accounts payable (related to expenses) Supplies purchased with cash $9,500 $14,000 $7,700 $9,950

750 1,800

Ans: C, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: Accrual Versus Cash Basis of Accounting, Bloom: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($19,000  $3,000)  ($7,250  $750)  $1,800  $7,700 [(Rev. recog.  acc. rec.) - (exp. incur.  acc. pay.)  sup.]

94.

Given the data below for a firm in its first year of operation, determine net income under the accrual basis of accounting. Revenue recognized $19,000 Accounts receivable 3,000 Expenses incurred 7,250 Accounts payable (related to expenses) 750 Supplies purchased with cash 1,800 a. $11,750 b. $14,000 c. $9,500 d. $12,200

Ans: A, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: Accrual Versus Cash Basis of Accounting, Bloom: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $19,000  $7,250  $11,750 (Rev. recog.  exp. incur.)

95.

Given the data below for a firm in its first year of operation, determine net income under the cash basis of accounting. Cash received from customers $45,000 Accounts receivable 12,000 Cash paid for expenses 26,000 Accounts payable (related to expenses) 3,000 Prepaid rent for next period 7,000 a. $19,000 b. $28,000 c. $21,000 d. $12,000

Ans: D, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: Accrual Versus Cash Basis of Accounting, Bloom: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $45,000  $26,000  $7,000  $12,000 (Cash rec.  cash paid  prep. rent)

96.

Given the data below for a firm in its first year of operation, determine net income under the accrual basis of accounting. Cash received from customers $45,000 Accounts receivable 12,000 Cash paid for expenses 26,000 .

Accrual Accounting Concepts

a. b. c. d.

Accounts payable (related to expenses) Prepaid rent for next period $19,000 $28,000 $21,000 $12,000

4-19

3,000 7,000

Ans: B, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: Accrual Versus Cash Basis of Accounting, Bloom: AP, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $45,000  $12,000  $26,000  $3,000  $28,000 (Cash rec. + acc. rec.  cash paid  acc. pay.)

97.

Under the cash basis of accounting, an amount received from a customer in advance of providing the services would be reported as a(n): a. revenue. b. liability. c. expense. d. prepaid expense.

Ans: A, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: The Revenue Recognition Principle, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA: Reporting

98.

Which of the following would not be an application of the revenue recognition or expense recognition principle? a. Recording accrued salaries and wages expense. b. Recording accrued interest revenue. c. Recording the collection of an advance customer payment as revenue. d. Recording prepaid expense adjustments.

Ans: C, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: The Revenue Recognition Principle, Bloom: C, Difficulty: Medium, TOT: 1 min., AACSB: Ethics, AICPA BC: None, AICPA AC: Risk Analysis, AICPA PC: Professional Demeanor

99.

Why was Apple required to spread their iPhone sales revenues over a two-year period? a. Because of its newness, their returns might exceed the normal level of returns b. Because they were required to provide software updates over that two-year period c. Because that was the estimated life of the iPhone d. Because they needed to defer revenue recognition since they had a swap program available for future models

Ans: B, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: The Revenue Recognition Principle, Bloom: K, Difficulty: Hard, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

100.

Which of the following is an example of a deferral adjusting entry? a. Accrued expense b. Accrued revenue c. Prepaid expense d. All of these choices are correct.

Ans: C, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: Types of Adjusting Entries, Bloom: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

101.

A primary difference between prepaid and accrued expenses is that prepaid expenses have a. been incurred and accrued expenses have not. b. not been paid and accrued expenses have. c. been paid and accrued expenses have not. d. not been recorded and accrued expenses have. .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ans: C, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: Types of Adjusting Entries, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

102.

A primary difference between accrued revenues and unearned revenues is that accrued revenues have a. not been recognized as revenue and unearned revenues have been. b. been received in cash and unearned revenues have not. c. been recorded as a liability and unearned revenues have not. d. not been received in cash and unearned revenues have.

Ans: D, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: Types of Adjusting Entries, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

103.

The general term used to indicate an expense that has not been paid or a revenue that has not been received and which has not yet been recognized in the accounts is a. contra asset. b. prepayment. c. asset. d. accrued.

104.

Accounts often need to be adjusted because a. there are never enough accounts to record all the transactions. b. many transactions affect more than one time period. c. there are always errors made in recording transactions. d. management can't decide what they want to report.

Ans: B, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: The Need for Adjusting Entries, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

105.

Adjusting entries are made to ensure that a. expenses are recognized in the period in which they are incurred. b. revenues are recorded in the period in which the performance obligation is satisfied. c. balance sheet and income statement accounts have correct balances at the end of an accounting period. d. All of these answer choices are correct.

Ans: D, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: The Need for Adjusting Entries, Bloom: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

106.

Adjusting entries are a. not necessary if the accounting system is operating properly. b. usually required before financial statements are prepared. c. made whenever management desires to change an account balance. d. made to balance sheet accounts only.

107.

Each of the following is a major type (or category) of adjusting entry except a. earned expenses. b. prepaid expenses. c. accrued expenses. d. accrued revenues.

Ans: A, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: Types of Adjusting Entries, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB:

Accrual Accounting Concepts

4-21

Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision Making

108.

Adjusting entries are required a. because some costs expire with the passage of time and have not yet been journalized. b. when the company's profits are below the budget. c. when expenses are recorded in the period in which they are earned. d. None of these answer choices are correct.

Ans: A, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: The Need for Adjusting Entries, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

109.

Which one of the following is not a justification for adjusting entries? a. Adjusting entries are necessary to ensure that the revenue recognition principle is followed. b. Adjusting entries are necessary to ensure that the expense recognition principle is followed. c. Adjusting entries are necessary to enable financial statements to be in conformity with GAAP. d. Adjusting entries are necessary to bring the general ledger accounts in line with the budget.

Ans: D, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: The Need for Adjusting Entries, Bloom: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

110.

Why are adjusting entries necessary? a. To update amounts in retained earnings for activity that occurred during the period b. To correct errors due to erroneous recording of journal entries c. To update accounts due to resources used, amounts expired due to the passage of time, or amounts that may need to be recorded d. To remove the balances of temporary accounts so that financial statements can be prepared

Ans: C, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: The Need for Adjusting Entries, Bloom: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

111.

An adjusting entry a. affects two balance sheet accounts. b. affects two income statement accounts. c. affects a balance sheet account and an income statement account. d. is always a compound entry.

112.

Adjusting entries are a. the same as correcting entries. b. needed to ensure that the expense recognition principle is followed. c. optional. d. rarely needed.

4-22 113.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

The preparation of adjusting entries is a. straightforward because the accounts that need adjustment will be out of balance. b. needed to ensure that the expense recognition principle is followed. c. only required for accounts that do not have a normal balance. d. optional when financial statements are prepared.

114.

If a resource has been consumed but a bill has not been received at the end of the accounting period, then a. an expense should be recorded when the bill is received. b. an expense should be recorded when the cash is paid out. c. an adjusting entry should be made recognizing the expense. d. it is optional whether to record the expense before the bill is received.

115.

An asset–expense relationship exists with a. liability accounts. b. revenue accounts. c. prepaid expense adjusting entries. d. accrued expense adjusting entries.

116.

A liability–revenue relationship exists with a. asset accounts. b. revenue accounts. c. unearned revenue adjusting entries. d. accrued expense adjusting entries.

Ans: C, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: Types of Adjusting Entries, Bloom: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

117.

Adjusting entries can be classified as a. postponements and advances. b. accruals and deferrals. c. deferrals and postponements. d. accruals and advances.

Ans: B, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: Types of Adjusting Entries, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

118.

Which of the following items describe the two classifications of adjusting entries? a. Postponements and advances b. Accruals and advances c. Deferrals and postponements d. Accruals and deferrals

Accrual Accounting Concepts

119.

4-23

Which of the following describes an accrued expense? a. Expenses incurred but not yet paid or recorded b. Expenses paid and recorded in an asset account after they are used or consumed c. Expenses paid and recorded in an asset account before they are used or consumed d. Expenses incurred and already paid or recorded

Ans: A, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: Types of Adjusting Entries, Bloom: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

120.

Accrued revenues are a. received and recorded as liabilities before they are recognized as revenues. b. recognized as revenues and recorded as liabilities before they are received. c. performed but not yet received or recorded as revenues. d. recognized and already received and recorded as revenues.

121.

Prepaid expenses are expenses that are a. paid and recorded in an asset account before they are used or consumed. b. paid and recorded in an asset account after they are used or consumed. c. incurred but not yet paid or recorded. d. incurred and already paid or recorded.

Ans: A, LO 1, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: Types of Adjusting Entries, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

122.

Goods purchased for future use in the business, such as supplies, are called a. prepaid expenses. b. revenues. c. stockholders’ equity. d. liabilities.

123.

Accrued expenses are expenses that are a. paid and recorded in an asset account before they are used or consumed. b. paid and recorded in an asset account after they are used or consumed. c. incurred but not yet paid or recorded. d. incurred and already paid or recorded.

124.

Before adjusting entries, unearned revenues are a. received and recorded as liabilities before they are recognized as revenue. b. recognized as revenue and recorded as liabilities before they are received. c. recognized as revenue but not yet received or recorded. d. recognized as revenue and already received and recorded.

125.

Adjusting entries affect at least .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

a. b. c. d.

one revenue and one expense account. one asset and one liability account. one revenue and one balance sheet account. one income statement account and one balance sheet account.

126.

An architecture firm collected $2,000 for architecture services to be provided in the future and recorded it as a liability. No entry was made at the time the service was provided. If no adjusting entry is made, this would cause a. revenues to be overstated. b. net income to be overstated. c. liabilities to be understated. d. revenues to be understated.

Ans: D, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Unearned Revenues, Bloom: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

127.

An adjusting entry can include a a. debit to an asset and a credit to a liability. b. debit to a revenue and a credit to an asset. c. debit to a liability and a credit to a revenue. d. debit to an expense and a credit to a revenue.

Ans: C, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Unearned Revenues, Bloom: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

128.

A law firm received $2,000 cash for legal services to be rendered in the future. The full amount was credited to the liability account Unearned Service Revenue. If the legal services have been rendered at the end of the accounting period and no adjusting entry is made, this would cause: a. expenses to be overstated. b. net income to be overstated. c. liabilities to be understated. d. revenues to be understated.

Ans: D, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Unearned Revenues, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

129.

On January 1, 2025, Ace Supply Company purchased equipment for $54,000. The company is depreciating the equipment at the rate of $750 per month. The book value of the equipment at December 31, 2025 is: a. $0. b. $9,000. c. $45,000. d. $54,000.

Ans: C, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Statement Presentation, Bloom: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Accrual Accounting Concepts

4-25

Solution: $54,000  ($750  12)  $45,000 [Cost of equip.  (dep./mon  12)]

130.

Acme Laundry Company purchased $8,500 worth of laundry supplies on June 2 and recorded the purchase as an asset. On June 30, an inventory of the laundry supplies indicated only $1,500 on hand. The adjusting entry that should be made by the company on June 30 is a. debit Supplies Expense, $1,500; credit Supplies, $1,500. b. debit Supplies, $7,000; credit Supplies Expense, $7,000. c. debit Supplies, $1,500; credit Supplies Expense, $1,500. d. debit Supplies Expense, $7,000; credit Supplies, $7,000.

Ans: D, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Supplies, Bloom: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $8,500  $1,500  $7,000 (Sup. purch.  sup. on hand)

131.

A1 Service Company purchased office supplies costing $7,000 and debited Supplies for the full amount. At the end of the accounting period, a physical count of office supplies revealed $2,500 still on hand. The appropriate adjusting journal entry to be made at the end of the period would be a. debit Supplies Expense, $2,500; credit Supplies, $2,500. b. debit Supplies, $4,500; credit Supplies Expense, $4,500. c. debit Supplies Expense, $4,500; credit Supplies, $4,500. d. debit Supplies, $2,500; credit Supplies Expense, $2,500.

Ans: C, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Supplies, Bloom: AP, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $7,000  $2,500  $4,500 (Sup. purch.  sup. on hand)

132.

A company purchased office supplies costing $5,000 and debited Supplies for the full amount. At the end of the accounting period, a physical count of office supplies revealed $900 still on hand. The appropriate adjusting journal entry to be made at the end of the period would be: a. debit Supplies Expense, $5,900; credit Supplies, $5,900. b. debit Supplies, $900; credit Supplies Expense, $900. c. debit Supplies Expense, $4,100; credit Supplies, $4,100. d. debit Supplies, $4,100; credit Supplies Expense, $4,100.

Ans: C, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Supplies, Bloom: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $5,000  $900  $4,100 (Sup. purch.  sup. on hand)

133.

Unearned revenue is classified as a(n) a. asset. b. revenue. c. contra revenue. d. liability.

Ans: D, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Supplies, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

134.

A1 Service Company purchased office supplies costing $7,000 and debited Supplies for the .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

full amount. At the end of the accounting period, a physical count of office supplies revealed $1,800 still on hand. The appropriate adjusting journal entry to be made at the end of the period would be: a. debit Supplies Expense, $5,200; credit Supplies, $5,200. b. debit Supplies, $1,800; credit Supplies Expense, $1,800. c. debit Supplies Expense, $1,800; credit Supplies, $1,800. d. debit Supplies, $5,200; credit Supplies Expense, $5,200. Ans: A, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Supplies, Bloom: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $7,000  $1,800  $5,200 (Sup. purch.  sup. on hand)

135.

On July 1 the A1 Shoe Store paid $24,000 to Acme Realty for 6 months’ rent beginning July 1. Prepaid Rent was debited for the full amount. If financial statements are prepared on July 31, the adjusting entry to be made by the A1 Shoe Store is a. debit Rent Expense, $24,000; credit Prepaid Rent, $4,000. b. debit Prepaid Rent, $4,000; credit Rent Expense, $4,000. c. debit Rent Expense, $4,000; credit Prepaid Rent, $4,000. d. debit Rent Expense, $24,000; credit Prepaid Rent, $20,000.

Ans: C, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Prepaid Expenses, Bloom: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $24,000  1/6  $4,000 (Rent paid  1/6)

136.

The balance in the prepaid rent account before adjustment at the end of the year is $12,000 and represents three months’ rent paid on December 1. The adjusting entry required on December 31 is a. debit Prepaid Rent, $4,000; credit Rent Expense $4,000. b. debit Prepaid Rent, $8,000; credit Rent Expense, $8,000. c. debit Rent Expense, $12,000; credit Prepaid Rent, $12,000. d. debit Rent Expense, $4,000; credit Prepaid Rent, $4,000.

Ans: D, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Prepaid Expenses, Bloom: AP, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $12,000  1/3  $4,000 (Prep. rent bal.  1/3)

137.

If a business has received cash in advance of services being performed and credits a liability account, the adjusting entry needed after the services are performed will be a. debit Unearned Service Revenue and credit Cash. b. debit Unearned Service Revenue and credit Service Revenue. c. debit Unearned Service Revenue and credit Prepaid Expense. d. debit Unearned Service Revenue and credit Accounts Receivable.

Ans: B, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Unearned Revenue, Bloom: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Accrual Accounting Concepts

138.

4-27

Accumulated Depreciation is a(n) a. expense account. b. stockholders’ equity account. c. liability account. d. contra asset account.

Ans: D, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Depreciation, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

139.

The Acme Company purchased equipment for $15,000 on December 1. It is estimated that annual depreciation on the computer will be $3,000. If financial statements are to be prepared on December 31, the company should make the following adjusting entry a. debit Depreciation Expense, $3,000; credit Accumulated Depreciation, $3,000. b. debit Depreciation Expense, $250; credit Accumulated Depreciation, $250. c. debit Depreciation Expense, $12,000; credit Accumulated Depreciation, $12,000. d. debit Equipment, $15,000; credit Accumulated Depreciation, $15,000.

Ans: B, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Prepaid Expenses, loom: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $3,000  12  $250 (Ann. depr.  12)

140.

Which one of the following is true as it relates to the Accumulated Depreciation account? a. It is a contra account. b. It is offset against an asset account on the income statement. c. It represents the portion of the cost of a long-lived asset that has been allocated as a cost during the current accounting period. d. It is an operating expense.

Ans: A, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Depreciation, Bloom: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

141.

Adjustments for unearned revenue a. decrease liabilities and increase revenues. b. increase liabilities and increase revenues. c. increase assets and increase revenues. d. decrease revenues and decrease assets.

Ans: A, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Unearned Revenues, Bloom: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

142.

A1 Realty Company received a check for $18,000 on July 1, which represents a 6-month advance payment of rent on a building it rents to a client. Unearned Rent Revenue was credited for the full $18,000. Financial statements will be prepared on July 31. A1 Realty should make the following adjusting entry on July 31 a. debit Unearned Rent Revenue, $3,000; credit Rent Revenue, $3,000. b. debit Rent Revenue, $3,000; credit Unearned Rent Revenue, $3,000. c. debit Unearned Rent Revenue, $18,000; credit Rent Revenue, $18,000. d. debit Cash, $18,000; credit Rent Revenue, $18,000.

Ans: A, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Unearned Revenues, Bloom: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BC:

4-28

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution: $18,000  6  $3,000 (Un. rent  6)

143.

As prepaid expenses expire with the passage of time, the correct adjusting entry will be a a. debit to an asset account and a credit to an expense account. b. debit to an expense account and a credit to an asset account. c. debit to an asset account and a credit to an asset account. d. debit to an expense account and a credit to an expense account.

Ans: B, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Prepaid Expenses, Bloom: C, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

144.

The adjusting entry to an unearned revenue account will a. decrease liabilities and increase revenues. b. increase liabilities and increase revenues. c. increase assets and increase revenues. d. decrease revenues and decrease assets.

Ans: A, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Unearned Revenues, Bloom: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

145.

Payments of expenses that will benefit more than one accounting period are initially identified as a. expenses. b. revenues. c. assets. d. liabilities.

Ans: C, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Prepaid Expenses, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

146.

A company usually determines the amount of supplies used during a period by a. adding the supplies on hand to the balance of the Supplies account. b. summing the amount of supplies purchased during the period. c. taking the difference between the supplies purchased and the supplies paid for during the period. d. taking the difference between the balance of the Supplies account and the cost of supplies on hand.

Ans: D, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Supplies, Bloom: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

147.

If a company fails to make an adjusting entry to record supplies expense, then a. stockholders’ equity will be understated. b. expense will be understated. c. assets will be understated. d. net income will be understated.

Ans: B, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Supplies, Bloom: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

148.

Supplies are recorded as assets when purchased. Therefore, the credit to Supplies in the adjusting entry is for the amount of supplies .

Accrual Accounting Concepts

a. b. c. d.

4-29

remaining. purchased. used. either used or remaining.

Ans: C, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Supplies, Bloom: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

149.

If a company fails to adjust the Unearned Revenue account at the end of the period, a. liabilities will be understated and revenues will be understated. b. liabilities will be overstated and revenues will be understated. c. assets will be overstated and revenues will be understated. d. assets will be understated and revenues will be understated.

Ans: B, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Unearned Revenues, Bloom: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

150.

If a company fails to adjust a Prepaid Rent account for rent that has expired, what effect will this have on that month's financial statements? a. Failure to make an adjustment does not affect the financial statements. b. Expenses will be overstated and net income and stockholders’ equity will be understated. c. Assets will be overstated and net income and stockholders’ equity will be understated. d. Assets will be overstated and net income and stockholders’ equity will be overstated.

Ans: D, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Unearned Revenues, Bloom: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

151.

If Acme Playhouse fails to adjust the Unearned Ticket Revenue account for revenue that should be recognized, what effect will this have on that month’s financial statements? a. Assets will be understated and revenues will be understated. b. Liabilities will be understated and revenues will be understated. c. Liabilities will be overstated and revenues will be understated. d. Assets will be overstated and revenues will be understated.

Ans: C, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Unearned Revenues, Bloom: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

152.

On January 1, 2024, Acme Inc. purchased equipment for $25,000. The company is depreciating the equipment at the rate of $1,000 per month. At January 31, 2025, the balance in Accumulated Depreciation is a. $1,000 debit. b. $12,000 credit. c. $13,000 credit. d. $62,000 debit.

Ans: C, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Statement Presentation, Bloom: AP, Difficulty: Hard, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $1,000  13 mon.  $13,000 (Depr./mon.  13)

4-30 153.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

At December 31, 2025, before any year-end adjustments, A1 Supply Company's Prepaid Insurance account had a balance of $5,800. It was determined that $2,600 of the Prepaid Insurance had expired. The adjusted balance for Insurance Expense for the year would be a. $2,600. b. $3,200. c. $5,800. d. $2,800.

Ans: A, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Insurance, Bloom: AP, Difficulty: Hard, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

154.

At December 31, 2025, before any year-end adjustments, Ace Manufacturing Company's Prepaid Insurance account had a balance of $4,200. It was determined that $1,800 of the Prepaid Insurance had expired. The adjusted balance for Prepaid Insurance at year-end would be a. $1,800. b. $2,400. c. $5,700. d. $4,200.

Ans: B, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Insurance, Bloom: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $4,200  $1,800  $2,400 (Prep. ins. bal.  ins. expir.)

155.

At the end of the fiscal year, the usual adjusting entry for depreciation on equipment was omitted. Which of the following statements is true? a. Net income will be overstated for the current year. b. Total assets will be understated at the end of the current year. c. The balance sheet and income statement will be misstated but the retained earnings statement will be correct for the current year. d. Total expenses will be overstated at the end of the current year.

Ans: A, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Depreciation, Bloom: AN, Difficulty: Hard, TOT: 2 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

156.

$ 300 522 82 180 4,000 $ 600

Accrual Accounting Concepts

Accounts Payable Common Stock Retained Earnings Service Revenue Salaries and Wages Expense Rent Expense

4-31

384 1,200 1,400 3,000 1,000 500 $6,584

$6,584

If on December 31, 2025, supplies on hand were $40, the adjusting entry would include a a. debit to Supplies for $40. b. credit to Supplies for $40. c. debit to Supplies Expense for $140. d. credit to Supplies Expense for $140. Ans: C, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Supplies, Bloom: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $180  $40  $140 (Sup. bal.  Sup. on hand)

157.

$ 300 522 82 180 4,000 $ 600

4-32

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Accounts Payable Common Stock Retained Earnings Service Revenue Salaries and Wages Expense Rent Expense

384 1,200 1,400 3,000 1,000 500 $6,584

$6,584

If on December 31, 2025, the insurance still unexpired amounted to $20, the adjusting entry would include a a. debit to Prepaid Insurance for $62. b. credit to Prepaid Insurance for $20. c. debit to Insurance Expense for $62. d. debit to Prepaid Insurance for $20. Ans: C, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Insurance, Bloom: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $82  $20  $62 (Prep. ins. bal.  unexp. ins.)

Accrual Accounting Concepts

158.

4-33

The unadjusted trial balance for Acme Corporation appears as follows: Acme Corporation Trial Balance December 31, 2025 Cash Accounts Receivable Prepaid Insurance Supplies Equipment Accumulated Depreciation - Equipment Accounts Payable Common Stock Retained Earnings Service Revenue Salaries and Wages Expense Rent Expense

$ 300 522 82 180 4,000 $ 600 384 1,200 1,400 3,000 1,000 500 $6,584

$6,584

If the estimated depreciation for equipment was $600, the adjusting entry would include a a. credit to Accumulated Depreciation - Equipment for $600. b. credit to Depreciation Expense for $600. c. debit to Accumulated Depreciation - Equipment for $600. d. credit to Equipment for $600. Ans: A, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Depreciation, Bloom: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

4-34 159.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

$ 300 522 82 180 4,000 $ 600 384 1,200 1,400 3,000 1,000 500 $6,584

$6,584

As of December 31, 2025, December’s rent of $150 had not been recorded or paid. The adjusting entry would include a a. credit to Accumulated Rent for $150. b. credit to Cash for $150. c. debit to Rent Payable for $150 d. debit to Rent Expense for $150 Ans: D, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Expenses, Bloom: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Accrual Accounting Concepts

160.

4-35

$ 300 522 82 180 4,000 $ 600 384 1,200 1,400 3,000 1,000 500 $6,584

$6,584

If service for $175 had been performed but not billed, the adjusting entry at the end of the period would include a a. debit to Service Revenue for $175. b. credit to Unearned Service Revenue for $175. c. credit to Service Revenue for $175. d. debit to Unearned Revenue for $175. Ans: C, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Revenues, Bloom: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision Making

161.

Depreciation is the process of a. valuing an asset at its fair value. b. increasing the value of an asset over the periods in which it is used. c. allocating the cost of an asset to the periods in which it is used. d. writing down an asset to its real value each accounting period.

Ans: C, LO 2, Topic: Adjusting Entries for Deferrals: Depreciation, Bloom: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

162.

The difference between the balance of a plant asset account and the related accumulated depreciation account is termed a. market value. b. contra asset. c. book value. d. liability.

Ans: C, LO 2, Topic: Adjusting Entries for Deferrals: Statement Presentation, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

4-36 163.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

A new accountant working for Ace Company records $800 of depreciation expense on store equipment as follows: Dr. Cr. Depreciation Expense ..................................................... 822 Accumulated Depreciation - Equipment ............ 822 The effect of this entry is to a. adjust the accounts to their proper amounts on December 31. b. overstate total assets on the balance sheet as of December 31. c. overstate the book value of the depreciable assets at December 31. d. understate the book value of the depreciable assets as of December 31.

Ans: D, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Statement Presentation, Bloom: C, Difficulty: Hard, TOT: 2 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision Making

164.

From an accounting standpoint, the acquisition of long-lived assets is essentially a(n) a. accrual of expense. b. accrual of revenue. c. accrual of unearned revenue. d. prepaid expense.

165.

If a business pays rent in advance and debits a prepaid rent account, the company receiving the rent payment will credit a. cash. b. prepaid rent. c. unearned rent revenue. d. accrued rent revenue.

Ans: C, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Prepaid Expenses, Bloom: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

166.

An accumulated depreciation account a. is a contra liability account. b. increases on the debit side. c. is offset against total assets on the balance sheet. d. has a normal credit balance.

Ans: D, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Depreciation, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

167.

The difference between the cost of a depreciable asset and its related accumulated depreciation is referred to as the a. market value of the asset. b. blue book value of the asset. c. book value of the asset. d. depreciated difference of the asset.

Ans: C, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Statement Presentation, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

168.

Which of the following would not result in unearned revenue? .

Accrual Accounting Concepts

a. b. c. d.

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Rent collected in advance from tenants. Services performed on account. Sale of season tickets to football games. Sale of two-year magazine subscriptions.

Ans: B, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Unearned Revenues, Bloom: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

169.

The policy at Acme Corporation is to expense all office supplies at the time of purchase. On the last day of the accounting period, there are $1,100 of unused office supplies on hand and the balance of supplies expense is $3,500. What should the accountant do to prepare accrual-basis financial statements? a. Debit Supplies and credit Supplies Expense for $1,100. b. Nothing, company policy says to expense supplies when purchased. c. Convince management to change its policy to avoid problems in the future. d. Debit Supplies Expense for $2,400 and credit Supplies for $2,400.

Ans: A, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Supplies, Bloom: AP, Difficulty: Hard, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $1,100 = unused supplies

170.

Which statement is correct? a. Accumulated Depreciation should always have a debit balance in the adjusted trial balance. b. Accumulated Depreciation is added to the long-term liabilities on the balance sheet. c. Accumulated Depreciation - Equipment represents the total cost of equipment that has expired up to the date of the balance sheet. d. Accumulated Depreciation is used to reveal the fair value of the related asset on the date of the balance sheet.

Ans: C, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Statement Presentation, Bloom: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

171.

Acme Supply Company collected $14,400 in May of 2024 for 4 months of service which would take place from October of 2024 through January of 2025. The revenue reported from this transaction during 2024 would be a. $0. b. $10,800. c. $14,400. d. $3,600.

Ans: B, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Unearned Revenues, Bloom: AP, Difficulty: Hard, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $14,400  3/4  $10,800 (Collect.  3/4)

172.

Ace Company collected $11,200 in September of 2024 for 4 months of service which would take place from October of 2024 through January of 2025. The revenue reported from this .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

transaction during 2025 would be a. $0. b. $8,400. c. $11,200. d. $2,800. Ans: D, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Unearned Revenues, Bloom: AP, Difficulty: Hard, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $11,200  1/4  $2,800 (Collect.  1/4)

173.

Ace Manufacturing Corporation purchased a one-year insurance policy in January 2024 for $36,000. The insurance policy is in effect from March 2024 through February 2025. If the company neglects to make the proper December 31, 2024 year-end adjustment for the expired insurance a. net income and assets will be understated by $30,000. b. net income and assets will be overstated by $30,000. c. net income and assets will be understated by $6,000. d. net income and assets will be overstated by $6,000.

Ans: B, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Insurance, Bloom: AN, Difficulty: Hard, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $36,000  10/12  $30,000 (Insur. pol. cost  10/12)

174.

Acme Supply Corporation purchased a one-year insurance policy in February 2024 for $42,000. The insurance policy is in effect from March 2024 through February 2025. If the company neglects to make the proper December 31, 2025 year-end adjustment for the expired insurance a. net income and assets will be understated by $35,000. b. net income and assets will be overstated by $35,000. c. net income and assets will be understated by $7,000. d. net income and assets will be overstated by $7,000.

Ans: B, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Insurance, Bloom: AN, Difficulty: Hard, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $42,000  10/12  $35,000 (Insur. pol. cost  10/12)

175.

At March 1, 2025, Acme Inc. had supplies on hand of $2,000. During the month, Acme purchased supplies of $2,900 and used supplies of $2,800. The March 31 balance sheet should report what balance in the Supplies account? a. $2,000 b. $2,100 c. $2,800 d. $2,900

Ans: B, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Insurance, Bloom: AP, Difficulty: Hard, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $2,000  $2,900  $2,800  $2,100 (Beg. sup.  sup. purch.  sup. used)

176.

A1 Service Company purchased equipment for $9,000 on January 1, 2025. The company expects to use the equipment for 3 years. It has no salvage value. Monthly depreciation ex.

Accrual Accounting Concepts

4-39

pense on the asset is a. $0. b. $250. c. $3,000. d. $9,000. Ans: B, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Depreciation, Bloom: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($9,000  3)  12  $250 (Equip. cost  3)  12

177.

Which one of the following is a contra account with a credit balance? a. Depreciation Expense b. Accumulated Depreciation c. Sales Discounts d. Cost of Goods Sold

Ans: B, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Depreciation, Bloom: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

178.

What is the purpose of recording depreciation on plant assets? a. To adjust the asset amount on the balance sheet to fair value b. To allocate the cost of the asset to expense in the accounting periods in which the asset was used to generate revenue c. To properly apply the cost principle d. To provide funds for the replacement of the asset when it reaches the end of its useful life

Ans: B, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Need for Adjustment, Bloom: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

179.

Ace Services Company purchased equipment for $12,000 on January 1, 2025. The company expects to use the equipment for 5 years. It has no salvage value. What balance would be reported on the December 31, 2025 balance sheet for Accumulated Depreciation? a. $0 because Accumulated Depreciation is reported on the Income Statement. b. $2,400 c. $9,600 d. $12,000

Ans: B, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Statement Presentation, Bloom: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $12,000  5  $2,400 (Equip. cost  5)

180.

A1 Realty Company received a check for $24,000 on July 1 which represents a 6 month advance payment of rent on a building it rents to a client. Unearned Rent Revenue was credited for the full $24,000. Financial statements will be prepared on July 31. A1 Realty should make the following adjusting entry on July 31: .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

a. b. c. d.

debit Unearned Rent Revenue, $4,000; credit Rent Revenue, $4,000. debit Rent Revenue, $4,000; credit Unearned Rent Revenue, $4,000. debit Unearned Rent Revenue, $24,000; credit Rent Revenue, $24,000. debit Cash, $24,000; credit Rent Revenue, $24,000.

Ans: A, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Prepaid Rent, Bloom: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $24,000  6  $4,000 (Rent rec.  6)

181.

Acme Inc. purchased a 12-month insurance policy on March 1, 2025 for $2,400. At March 31, 2025, the adjusting journal entry to record expiration of this asset will include a. a debit to Prepaid Insurance and a credit to Cash for $2,400. b. a debit to Prepaid Insurance and a credit to Insurance Expense for $240. c. a debit to Insurance Expense and a credit to Prepaid Insurance for $200. d. a debit to Insurance Expense and a credit to Cash for $200.

Ans: C, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Insurance, Bloom: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $2,400  12  $200 (Insur. pol. cost.  12)

182.

Ace Enterprises purchased an 18-month insurance policy on May 31, 2025 for $10,800. The December 31, 2025 balance sheet would report Prepaid Insurance of a. $0 because Prepaid Insurance is reported on the Income Statement. b. $4,200. c. $6,600. d. $10,800.

Ans: C, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Insurance, Bloom: AP, Difficulty: Hard, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $10,800  11/18  $6,600 (Insur. pol. cost.  11/18)

183.

At March 1, A1 Realty Inc. reported a balance in Supplies of $200. During March, the company purchased supplies for $950 and consumed supplies of $800. If no adjusting entry is made for supplies, a. stockholders' equity will be overstated by $800. b. expenses will be understated by $950. c. assets will be understated by $350. d. net income will be understated by $800.

Ans: A, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Supplies, Bloom: AN, Difficulty: Hard, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

184.

Ace Service Inc. pays its rent of $60,000 annually on January 1 and makes monthly adjusting entries. If the February 28 monthly adjusting entry for prepaid rent is omitted, which of the following are true? a. Failure to make the adjustment does not affect the February financial statements. .

Accrual Accounting Concepts

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b. Expenses will be overstated by $5,000 and net income and stockholders' equity will be understated by $5,000. c. Assets will be overstated by $10,000 and net income and stockholders' equity will be understated by $10,000. d. Assets will be overstated by $5,000 and net income and stockholders' equity will be overstated by $5,000. Ans: D, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Prepaid Expenses, Bloom: AN, Difficulty: Hard, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $60,000  12  $5,000 (Rent pay  12)

185.

A1 Advertising has an opening balance in its supplies account of $2,400 and purchases $3,000 of supplies during the year. A year-end physical count shows $2,800 in supplies inventory. Which is the appropriate adjusting journal entry at year end? a. Supplies Expense 2,600 Supplies 2,600 b. Supplies Expense 2,800 Supplies 2,800 c. Supplies 2,600 Supplies Expense 2,600 d. Supplies 3,000 Cash 3,000

Ans: A, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Supplies, Bloom: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $2,400 + $3,000 – $2,800 = $2,600 (Beg. sup. + sup. purch. – end. sup.)

186.

The fiscal year opened for Ace Manufacturing with a $2,700 balance in its Prepaid Insurance account. They purchased $9,600 in insurance policies during the year. If $1,725 of insurance has expired during the year, what is the year-end balance in the Prepaid Insurance account? a. $10,575 b. $12,300 c. $7,875 d. $5,175

Ans: A, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Insurance, Bloom: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $2,700 + $9,600 – $1,725 = $10,575 (Beg. prep. ins. + ins. purch. – expir. ins.)

187.

Equipment was purchased by A1 Manufacturing on January 1, 2025, for $125,000. A1’s policy is to adjust its accounts at year-end. Which is the appropriate adjusting journal entry to record depreciation at year-end if the company expects to use the equipment for five years with no salvage value? a. Depreciation Expense 25,000 .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Accumulated Depreciation – Equipment b. Accumulated Depreciation – Equipment Depreciation Expense c. Depreciation Expense Equipment d. Accumulated Depreciation – Equipment Equipment

25,000 25,000 25,000 25,000 25,000 25,000 25,000

Ans: A, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Depreciation, Bloom: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $125,000 ÷ 5 = $25,000 (Equip. cost/5 years.)

188.

Ace Marketing received $60,000 from a customer on January 2, 2025 for services to be provided evenly over the next two years. The appropriate adjusting journal entry to recognize revenue at Ace's fiscal year-end on December 31, 2025 would be: a. Unearned Service Revenue 30,000 Service Revenue 30,000 b. Service Revenue 30,000 Unearned Service Revenue 30,000 c. Service Revenue 30,000 Cash 30,000 d. Unearned Service Revenue 30,000 Cash 30,000

Ans: A, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Unearned Revenue, Bloom: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $60,000 ÷ 2 yrs. = $30,000 (Cash rec. /2 yrs.)

189.

A customer paid $60,000 to Ace Marketing on December 30, 2023, to perform services from January 1, 2024 through December 31, 2027. If Ace fails to record the revenue that should be recognized, would be understated by each year. a. net income, $15,000 b. net income, $12,000 c. liabilities, $15,000 d. assets, $12,000

Ans: A, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Unearned Revenue, Bloom: AN, Difficulty: Hard, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $60,000 ÷ 4 yrs. = $15,000 (Cash paid/4 yrs.)

190.

Acme Industries employs a five-day workweek and a September 30 year-end. Normal weekly wages amount to $36,000. If September 30 falls on a Wednesday, what is the appropriate adjusting journal entry at fiscal year-end? a. Salaries and Wages Expense 21,600 Salaries and Wages Payable 21,600 b. Salaries and Wages Expense 36,000 .

Accrual Accounting Concepts

Salaries and Wages Payable c. Salaries and Wages Expense Salaries and Wages Payable d. Salaries and Wages Expense Cash

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36,000 7,200 7,200 21,600 21,600

Ans: A, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Salaries, Bloom: AP, Difficulty: Hard, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $36,000  3/5 = $21,600 (Week. wag. x 3/5)

191.

Acme Industries employs a five-day workweek and a September 30 year-end. Normal weekly wages amount to $35,000. If September 30 is a Wednesday, what is the appropriate journal entry on October 2, the next payday for Acme? a. Salaries and Wages Expense 14,000 Salaries and Wages Payable 21,000 Cash 35,000 b. Salaries and Wages Expense 21,000 Salaries and Wages Payable 14,000 Cash 35,000 c. Salaries and Wages Expense 21,000 Cash 21,000 d. Salaries and Wages Payable 14,000 Cash 14,000

192.

A1 Corporation signed a six-month, 12% note payable of $10,000 on October 1, 2025. By recording the interest expense related to the note only when it is paid on April 1, 2026, A1 will understate expenses by on its year-end financial statements on December 31, 2025. a. $300 b. $600 c. $0 d. $11,200

Ans: A, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Interest, Bloom: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $10,000  .12  3/12  $300 (Note amount x int. rate x 3/12)

193.

If a company fails to adjust for accrued expenses, what effect will this have on that month's financial statements? a. Failure to make an adjustment does not affect the financial statements. b. Expenses will be understated and net income and stockholders’ equity will be overstated. c. Assets will be overstated and net income and stockholders’ equity will be understated. d. Assets will be overstated and net income and stockholders’ equity will be overstated. .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ans: B, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Expenses, Bloom: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

194.

Acme Industries borrows $20,000 at 7% annual interest for six months on October 1, 2025. Which is the appropriate entry to accrue interest if Acme has a December 31, 2025 yearend? a. Interest Expense 350 Interest Payable 350 b. Interest Expense 1,400 Interest Payable 1,400 c. Interest Expense 350 Notes Payable 350 d. Notes Payable 1,400 Interest Payable 1,400

Ans: A, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Interest, Bloom: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $20,000  .07  3/12  $350 (Amount bor. x int. rate x 3/12)

195.

A1 Consulting uses the accrual basis of accounting and a fiscal year ending December 31. Beginning on September 1, 2024, A1 performs services for Acme International at a rate of $5,000 per month. On February 12, 2025, Acme pays A1 $25,000 in full for all services rendered from September 1, 2024 to January 31, 2025. By not recording any adjustment as of December 31, 2024 related to services provided to Acme, A1 understated revenues by on its 2024 income statement. a. $20,000 b. $5,000 c. $25,000 d. $15,000

Ans: A, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Revenues, Bloom: AP, Difficulty: Hard, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($25,000 ÷ 5)  4  $20,000 (Cash rec./5 mon.) x 4 mon.

196.

Acme Industries signs a $40,000, 9%, 6-month note payable on September 1, 2024. How much interest expense will Acme report in its December 31, 2025 financial statements? a. $600 b. $1,200 c. $1,800 d. $0

Ans: A, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Interest, Bloom: AP, Difficulty: Hard, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $40,000  .09  2/12  $600 (Note amount x int. rate x 2/12)

197.

On August 15, 2025, Ace Industries signs a $200,000, 8%, twelve-month note payable. Which of the following entries correctly records the accrued interest on December 31, 2025? a. Interest Expense 6,000 Interest Payable 6,000 b. Interest Expense 5,333.33 Interest Payable 5,333.33 c. Interest Expense 16,000 .

Accrual Accounting Concepts

Interest Payable d. Interest Expense Interest Payable

4-45

16,000 10,000 10,000

Ans: A, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Interest, Bloom: AN, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $200,000  .08  4.5/12  $6,000 (Note amount x int. rate x 4.5/12)

198.

A1 Automotive signed a $5,000,120-day note payable on October 1 that bears interest at an annual rate of 9%. How much will appear on A1’s income statement for interest expense related to this note at December 31? a. $450 b. $150 c. $112.50 d. $4,500

Ans: C, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Interest, Bloom: AN, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $5,000  .09  3/12  $112.50 (Note amount x int. rate x 3/12)

199.

On November 1, 2024, Acme Industries, which uses a calendar year as its fiscal year, signs a $30,000, 7%, six-month note payable. Which of the following entries correctly records the payment of the note and entire interest on May 1, 2025? a. Notes Payable 30,000 Interest Expense 700 Interest Payable 350 Cash 31,050 b. Notes Payable 32,100 Cash 32,100 c. Notes Payable 31,050 Cash 31,050 d. Notes Payable 30,000 Interest Expense 1,050 Cash 31,050

Ans: A, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Interest, Bloom: AN, Difficulty: Hard, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $30,000 × .07 × 4/12 = $700 (Note amount x int. rate x 4/12)

200.

An adjusting entry can include a a. debit to an asset and a credit to a revenue. b. debit to a revenue and a credit to an asset. c. credit to an expense and a debit to a revenue. d. debit to an expense and a credit to a revenue.

Ans: A, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Summary of Basic Relationships, Bloom: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

A revenue–asset relationship exists with a. prepaid expense adjusting entries. b. accrued expense adjusting entries. c. unearned revenue adjusting entries. d. accrued revenue adjusting entries.

Ans: D, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Revenues, Bloom: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

202.

The accounts of a business, before an adjusting entry is made to record accrued revenue, reflect an a. understated liability and an overstated revenue. b. overstated asset and an understated revenue. c. understated expense and an overstated revenue. d. understated asset and an understated revenue.

Ans: D, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Revenues, Bloom: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

203.

Adjustments for accrued revenues a. increase assets and increase revenues. b. increase assets and increase liabilities. c. decrease assets and increase revenues. d. decrease liabilities and increase revenues.

Ans: A, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Revenues, Bloom: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

204.

Failure to prepare an adjusting entry at the end of the period to record an accrued expense would cause a. net income to be understated. b. an overstatement of assets and an overstatement of liabilities. c. an understatement of expenses and an understatement of liabilities. d. an overstatement of expenses and an overstatement of liabilities.

Ans: C, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Expenses, Bloom: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

205.

Failure to prepare an adjusting entry at the end of a period to record an accrued revenue would cause a. net income to be overstated. b. an understatement of assets and an understatement of revenues. c. an understatement of revenues and an understatement of liabilities. d. an understatement of revenues and an overstatement of liabilities.

Ans: B, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Revenues, Bloom: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

206.

An adjusting entry made to record accrued interest on a note receivable due next year consists of a a. debit to Interest Expense and a credit to Interest Payable. b. debit to Interest Receivable and a credit to Interest Revenue. c. debit to Interest Expense and a credit to Notes Payable. d. debit to Interest Expense and a credit to Cash.

Ans: B, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Revenues, Bloom: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Accrual Accounting Concepts

207.

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Suppose that Target Inc. borrowed $50,000 from the bank signing a 6%, 3-month note on September 1. Principal and interest are payable to the bank on December 1. If the company prepares monthly financial statements, the adjusting entry that the company should make for interest on September 30, would be a. debit Interest Expense, $3,000; credit Interest Payable, $3,000. b. debit Interest Expense, $250; credit Interest Payable, $250. c. debit Note Payable, $3,000; credit Cash, $3,000. d. debit Cash, $750; credit Interest Payable, $750.

Ans: B, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Interest, Bloom: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $50,000  .06  1/12  $250 (Amount borrowed  .06  1/12)

208.

Suppose that Old Navy borrowed $15,000 from the bank signing a 6%, 3-month note on October 1, 2024. Principal and interest are payable to the bank on January 1, 2025. If the company prepares monthly financial statements, the adjusting entry that the company should make for interest on October 31, 2024, would be a. debit Interest Expense, $75; credit Interest Payable, $75. b. debit Interest Expense, $900; credit Interest Payable, $900. c. debit Note Payable, $900; credit Cash, $900. d. debit Cash, $75; credit Interest Payable, $75.

Ans: A, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Interest, Bloom: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $15,000  .06  1/12  $75 (Amount borrowed  .06  1/12)

209.

Katy Perry, CPA has performed $500 of services for a client but has not billed the client as of the end of the accounting period. What adjusting entry must Katy make? a. Debit Cash and credit Unearned Service Revenue b. Debit Accounts Receivable and credit Unearned Service Revenue c. Debit Accounts Receivable and credit Service Revenue d. Debit Unearned Service Revenue and credit Service Revenue

Ans: C, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Revenues, Bloom: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

210.

Katy Perry, CPA, has billed her clients for services performed. She subsequently receives payments from her clients. What entry will she make upon receipt of the payments? a. Debit Unearned Service Revenue and credit Service Revenue b. Debit Cash and credit Accounts Receivable c. Debit Accounts Receivable and credit Service Revenue d. Debit Cash and credit Service Revenue

Ans: B, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Revenues, Bloom: AN, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

211.

Acme Real Estate signed a four-month note payable in the amount of $20,000 on September .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

1. The note requires interest at an annual rate of 9%. The amount of interest to be accrued at the end of September is a. $600. b. $150. c. $1,800. d. $200. Ans: B, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Interest, Bloom: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $20,000  .09  1/12  $150 (Note pay.  .09  1/12)

212.

A1 Real Estate signed a four-month note payable in the amount of $40,000 on May 1. The note requires interest at an annual rate of 6%. The amount of interest to be accrued at the end of May is a. $2,400. b. $600. c. $200. d. $450.

Ans: C, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Interest, Bloom: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $40,000  .06  1/12  $200 (Note pay.  .06  1/12)

213.

A gift shop signs a three-month note payable to help finance increases in inventory for the Christmas shopping season. The note is signed on November 1 in the amount of $50,000 with annual interest of 6%. What is the adjusting entry to be made on December 31 for the interest expense accrued to that date, if no entries have been made previously for the interest? a. Interest Expense 500 Interest Payable 500 b. Interest Expense 750 Interest Payable 750 c. Interest Expense 500 Cash 500 d. Interest Expense 750 Note Payable 750

Ans: A, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Interest, Bloom: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $50,000  .06  2/12  $500 (Note pay.  .06  2/12)

214.

A1 Ski Shop signs a three-month note payable to help finance increases in inventory for the winter ski season. The note is signed on October 1, 2025 in the amount of $30,000 with annual interest of 6%. What is the adjusting entry to be made on December 31, 2025 for the interest expense accrued to that date, assuming that no entries have been made previously to accrue interest? a. Interest Expense 150 Interest Payable 150 b. Interest Expense 300 Interest Payable 300 .

Accrual Accounting Concepts

c. Interest Expense Interest Payable d. Interest Expense Note Payable

4-49

450 450 1,800 1,800

Ans: C, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Interest, Bloom: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $30,000  .06  3/12  $450 (Note pay.  .06  3/12)

215.

Suppose that Verizon paid employee wages on and through Friday, January 26, and the next payroll will be paid in February. There are three more working days in January (29–31). Employees work 5 days a week and the company pays $1,200 a day in wages. What will be the adjusting entry to accrue wages expense at the end of January? a. Salaries and Wages Expense 1,200 Salaries and Wages Payable 1,200 b. Salaries and Wages Expense 6,000 Salaries and Wages Payable 6,000 c. Salaries and Wages Expense 3,600 Salaries and Wages Payable 3,600 d. No adjusting entry is required.

Ans: C, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Salaries, Bloom: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $1,200  3  $3,600 (Wages/day  3)

216.

Kim Kardashian earned a salary of $500 for the last week of October. She will be paid on November 1. The adjusting entry for Kim’s employer on October 31 is a. No entry is required. b. Salaries and Wages Expense 500 Salaries and Wages Payable 500 c. Salaries and Wages Expense 500 Cash 500 d. Salaries and Wages Payable 500 Cash 500

Ans: B, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Salaries, Bloom: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

217.

At the end of the fiscal year, the usual adjusting entry for accrued salaries owed to employees was omitted. Which of the following statements is true? a. Salaries and Wages Expense for the year is overstated. b. Liabilities at the end of the year are understated. c. Assets at the end of the year are understated. d. Stockholders’ equity at the end of the year is understated.

Ans: B, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Salaries, Bloom: AN, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

218.

A company shows a balance in Salaries and Wages Payable of $50,000 at the end of the .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

month. The next payroll amounting to $75,000 is to be paid in the following month. What will be the journal entry to record the payment of salaries? a. Salaries and Wages Expense 75,000 Salaries and Wages Payable 75,000 b. Salaries and Wages Expense 75,000 Cash 75,000 c. Salaries and Wages Expense 25,000 Cash 25,000 d. Salaries and Wages Payable 50,000 Salaries and Wages Expense 25,000 Cash 75,000 Ans: D, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Salaries, Bloom: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

219.

Suppose that Ralph Lauren issued a one-year 6% $400,000 note on April 30, 2025. Interest expense for the year ended December 31, 2025 was a. $24,000. b. $18,000. c. $16,000. d. $14,000.

Ans: C, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Interest, Bloom: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $400,000  .06  8/12  $16,000 (Note pay.  .06  8/12)

220.

Suppose that Ulta Corporation issued a one-year 10% $400,000 note on April 30, 2025. Assuming that the company only accrues interest at year-end, the interest expense to be recorded at December 31, 2025 is (rounded to the nearest dollar): a. $36,000. b. $27,000. c. $26,667. d. $40,000.

Ans: C, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Interest, Bloom: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $400,000  .10  8/12  $26,667 (Note pay.  .10  8/12)

221.

Which of the statements below is not true? a. An adjusted trial balance should show ledger account balances. b. An adjusted trial balance can be used to prepare financial statements. c. An adjusted trial balance proves the mathematical equality of debits and credits in the ledger. d. An adjusted trial balance is prepared before all transactions have been journalized.

Ans: D, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing the Adjusted Trial Balance, Bloom: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

222.

Which statement is incorrect concerning the adjusted trial balance? .

Accrual Accounting Concepts

4-51

a. An adjusted trial balance proves the equality of the total debit balances and the total credit balances in the ledger after all adjustments are made. b. The adjusted trial balance provides the primary basis for the preparation of financial statements. c. The adjusted trial balance lists the account balances in order of their magnitude. d. The adjusted trial balance is prepared after the adjusting entries have been journalized and posted. Ans: C, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing the Adjusted Trial Balance, Bloom: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

223.

Can financial statements be prepared directly from the adjusted trial balance? a. They cannot. The general ledger must be used. b. Yes, the adjusted trial balance shows the adjusted balances from the general ledger. c. No, the adjusted trial balance merely proves the equality of the total debit and total credit balances in the ledger after adjustments are posted. It has no other purpose. d. They can because that is the only reason that an adjusted trial balance is prepared.

Ans: B, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing Financial Statements, Bloom: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

224.

The primary source used in the preparation of the financial statements is the a. trial balance. b. post-closing trial balance. c. general trial balance. d. adjusted trial balance.

Ans: D, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing Financial Statements, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

225.

Which of the following accounts will reflect the account’s beginning balance on the adjusted trial balance? a. Prepaid rent b. Retained earnings c. Prepaid insurance d. Unearned revenue

Ans: B, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing the Adjusted Trial Balance, Bloom: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

226.

The following accounts show balances on the adjusted trial balance. Which of these account balances will not appear the same on the balance sheet? a. Retained earnings b. Accounts receivable c. Common stock d. Notes payable

Ans: A, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing Financial Statements, Bloom: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

227.

Which trial balance will consist of the greatest number of accounts? .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

a. b. c. d.

Post-closing trial balance Unadjusted trial balance Adjusted trial balance All of the above will contain the same number of accounts.

Ans: C, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing the Adjusted Trial Balance, Bloom: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

228.

Based on the account balances below, what is the total of the debit and credit columns of the adjusted trial balance? Service revenue $5,300 Equipment $7,400 Cash 2,525 Prepaid insurance 1,225 Unearned service rev. 5,320 Depreciation expense 640 Salaries and wages expense 1,050 Accum. depreciation 1,280 Common stock 390 Retained earnings 550 a. $11,150 b. $12,840 c. $11,560 d. $12,430

Ans: B, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing the Adjusted Trial Balance, Bloom: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $5,300  $5,320  $390  $1,280  $550  $12,840 (Ser. rev.  Un. ser. rev.  com. st.  acc. dep.  ret. earn.)

Accrual Accounting Concepts

229.

4-53

Given the following adjusted trial balance: Cash Accounts receivable Inventory Prepaid rent Equipment Accumulated depreciation-equipment Accounts payable Unearned service revenue Common stock Retained earnings Service revenue Interest revenue Salaries and wages expense Travel expense Total Net income for the year is a. $198. b. $370. c. $424. d. $596.

Debit $1,662 2,098 3,124 86 300

Credit

52 82 122 206 6,610 368 56 160 66 $7,496

$7,496

Ans: A, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing Financial Statements, Bloom: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $368  $56  $160  $66  $198 (Ser. rev.  int. rev.  sal. exp.  trav. exp.)

230.

Which of the following errors will cause a trial balance to be out of balance? a. Posting the issuance of stock as a debit to Cash and a credit to Common stock b. Recording the payment of prepaid rent as rent expense c. Posting a debit amount as a credit in the ledger d. Posting a journal entry twice

4-54 231.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Debit $1,662 2,098 3,124 86 300

Credit

52 82 122 206 6,610 368 56 160 66 $7,496

$7,496

After closing entries have been posted, the balance in retained earnings will be: a. $6,440. b. $6,612. c. $6,980. d. $6,808. Ans: D, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing Financial Statements, Bloom:: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $6,610  $368  $56  $160  $66  $6,808 (Beg. ret. earn.  Ser. rev.  int. rev.  sal. exp.  trav. exp.)

232.

Given the following adjusted trial balance: .

Accrual Accounting Concepts

Cash Accounts receivable Inventory Prepaid rent Equipment Accumulated depreciation-equipment Accounts payable Unearned service revenue Common stock Retained earnings Service revenue Interest revenue Salaries and wages expense Travel expense Total

Debit $ 831 1,049 1,562 43 150

4-55

Credit

26 41 61 103 3,305 184 28 80 33 $3,748

$3,748

Net income for the year is a. $99. b. $184. c. $212. d. $298. Ans: A, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing Financial Statements, Bloom: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $184  $28  $80  $33  $99 (Ser. rev.  int. rev.  sal. exp.  trav. exp.)

233.

Given the following adjusted trial balance: Debit .

Credit

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

$ 831 1,049 1,562 43 150 26 41 61 103 3,305 184 28 80 33 $3,748

$3,748

After closing entries have been posted, the balance in retained earnings will be a. $3,306. b. $3,220. c. $3,490. d. $3,404. Ans: D, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing Financial Statements, Bloom: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $3,305  $184  $28  $80  $33  $3,404 (Beg. ret. earn.  Ser. rev.  int. rev.  sal. exp.  trav. exp.)

234.

Which statement is correct concerning the adjusted trial balance? a. An adjusted trial balance eliminates the need for the preparation of financial statements. b. The purpose of an adjusted trial balance is to prove the equality of the total debit balances and the total credit balances in the ledger. c. An adjusted trial balance will contain only permanent—balance sheet—accounts. d. The adjusted trial balance is prepared after the adjusting entries have been journalized but before they have been posted.

Ans: B, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing the Adjusted Trial Balance, Bloom: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

235.

Which of the following is a true statement about closing the books of a corporation? a. Expenses are closed to the Expense Summary account. b. Only revenues are closed to the Income Summary account. c. Revenues and expenses are closed to the Income Summary account. d. Revenues, expenses, and the Dividends account are closed to the Income Summary account.

Ans: C, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing Closing Entries, Bloom: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Accrual Accounting Concepts

236.

4-57

The closing entry process consists of closing a. all asset and liability accounts. b. out the Retained Earnings account. c. all permanent accounts. d. all temporary accounts.

Ans: D, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing Closing Entries, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

237.

Which account will have a zero balance after closing entries have been journalized and posted? a. Service Revenue b. Supplies c. Prepaid Insurance d. Accumulated Depreciation

Ans: A, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing Closing Entries, Bloom: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

238.

A post-closing trial balance will show: a. zero balances for all accounts. b. zero balances for balance sheet accounts. c. only balance sheet accounts. d. only income statement accounts.

Ans: C, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing a Post-Closing Trial Balance, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

239.

Which types of accounts will appear in the post-closing trial balance? a. Permanent accounts. b. Temporary accounts. c. Accounts shown in the income statement columns of a worksheet. d. None of these answer choices are correct.

Ans: A, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing a Post-Closing Trial Balance, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

240.

What type of accounts can be found on a post-closing trial balance? a. All accounts that have balances after the closing process is complete b. Permanent and temporary accounts c. Assets, expenses, revenues, and liabilities d. Accounts that have been closed during the period

Ans: A, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing a Post-Closing Trial Balance, Bloom: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

241.

Suppose that Target fails to record an adjusting entry for accrued expenses at the end of June. What effect does this have on the financial statements? a. Expenses are overstated and revenues are understated. b. Assets are overstated and expenses are understated. c. Expenses and liabilities are understated. d. Revenues and expenses are understated.

Ans: C, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing Financial Statements, Bloom: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

242.

The purpose of the post-closing trial balance is to .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

a. prove that no mistakes were made. b. prove the equality of the permanent account balances that are carried forward into the next accounting period. c. prove the equality of the temporary account balances that are carried forward into the next accounting period. d. list all the balance sheet accounts in alphabetical order for easy reference. Ans: B, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing a Post-Closing Trial Balance, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

243.

Closing entries a. are prepared before the financial statements. b. reduce the number of permanent accounts. c. cause the revenue and expense accounts to have zero balances. d. summarize the activity in every account.

244.

Which of the following account’s balance will change between the adjusted trial balance and the post-closing trial balance? a. Common Stock b. Prepaid Rent c. Unearned Service Revenue d. Retained Earnings

Ans: D, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing a Post-Closing Trial Balance, Bloom: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision Making

245.

Which type of accounts will not appear in the post-closing trial balance? a. Asset accounts b. Permanent accounts c. Liability accounts d. Temporary accounts

Ans: D, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing a Post-Closing Trial Balance, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

246.

There are usually how many closing journal entries? a. 5 b. 4 c. 3 d. 2

Ans: B, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing Closing Entries, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Accrual Accounting Concepts

247.

4-59

Given the following adjusted trial balance, what will be the totals for the debit and credit columns of the post-closing trial balance? Cash Accounts receivable Inventory Prepaid rent Equipment Accumulated depreciation-equipment Accounts payable Unearned service revenue Common stock Retained earnings Service revenue Interest revenue Salaries and wages expense Travel expense Totals a. b. c. d.

Debit $1,662 2,098 3,124 86 300

Credit

160 66 $7,496

52 82 172 206 6,610 318 56

$7,496

$7,496 $7,218 $7,444 $7,270

Ans: D, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing a Post-Closing Trial Balance, Bloom: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $1,662  $2,098  $3,124  $86  $300  $7,270 (Cash  acc. rec.  inven.  prep. rent  equip.)

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Debit $ 831 1,049 1,562 43 150

Credit

80 33 $3,748

26 41 86 103 3,305 159 28

$3,748

$3,635 $3,609 $3,748 $3,722

Ans: A, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing a Post-Closing Trial Balance, Bloom: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $831  $1,049  $1,562  $43  $150  $3,635 (Cash  acc. rec.  inven.  prep. rent  equip.)

249.

The following information is from the Income Statement of A1 Laundry Service: Revenues Service Revenue Expenses Salaries and wages expense $ 2,450 Advertising expense 500 Rent expense 300 Supplies expense 200 Insurance expense 100 Total expenses Net Income The entry to close the Service Revenue account includes a a. debit to Service Revenue for $6,500. b. credit to Service Revenue for $6,500. c. debit to Income Summary for $6,500. d. debit to Retained Earnings for $6,500.

$6,500

3,550 $2,950

Ans: A, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing Closing Entries, Bloom: AP, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Accrual Accounting Concepts

250.

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The following information is from the Income Statement of A1 Laundry Service: Revenues Service Revenue Expenses Salaries and Wages expense Advertising expense Rent expense Supplies expense Insurance expense Total expenses Net Income

$6,500 $ 2,450 500 300 200 100 3,550 $2,950

The entry to close the expense accounts includes a a. credit to Income Summary for $3,550. b. debit to Income Summary for $3,550. c. debit to Salaries and Wages Expense for $2,450. d. credit to Retained Earnings for $3,550. Ans: B, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing Closing Entries, Bloom: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

251.

$6,500 $ 2,450 500 300 200 100 3,550 $2,950

The entry to close Income Summary includes a: a. credit to Income Summary for $2,950. b. debit to Income Summary for $2,950. c. debit to Retained Earnings for $2,950. d. credit to Common Stock for $2,950. Ans: B, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing Closing Entries, Bloom: AP, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

252.

The final step in the accounting cycle is to prepare a. closing entries. b. financial statements. c. a post-closing trial balance. d. adjusting entries.

Ans: C, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Summary of the Accounting Cycle, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

4-62 253.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

The first required step in the accounting cycle is: a. adjusting entries. b. journalizing transactions. c. analyzing transactions. d. posting transactions.

254.

How many required steps are there in the accounting cycle? a. 11 b. 9 c. 7 d. 5

Ans: B, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Summary of the Accounting Cycle, Bloom: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

255.

Which of the following steps in the accounting cycle usually occurs only at the end of a company’s annual accounting period? a. Step 3: Post to the ledger accounts. b. Step 7: Prepare financial statements. c. Step 6: Prepare adjusting trial balance. d. Step 9: Prepare a post-closing trial balance.

Ans: D, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Summary of the Accounting Cycle, Bloom: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

256.

The Accounts Receivable account has a beginning balance of $52,000 and an ending balance of $74,000. If total sales on account were $42,000 for the year, what were the total collections on account? a. $20,000 b. $64,000 c. $74,000 d. $84,000

Ans: A, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Summary of the Accounting Cycle, Bloom: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: [($52,000  $42,000)  $74,000]  $20,000 (Beg. acc. rec.  sales  end. acc. rec.)

Accrual Accounting Concepts

257.

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The following information is from the Income Statement of A1 Lawn Service for the quarter ending September 2025: Service Revenue Expenses Salaries and Wages expense Supplies expense Insurance expense Total expenses Net Income

$4,500 $ 2,000 400 100 2,500 $2,000

The balance in Retained Earnings at July 1 was $3,200. A1 distributed dividends of $2,200 during the period. The company perform the closing process quarterly. After closing revenue and expenses, Income Summary will have a balance of a. $2,000 debit. b. $2,000 credit. c. $1,800 credit. d. $2,200 debit. Ans: B, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing Closing Entries, Bloom: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

258.

Which one of the following accounts is closed at the end of an accounting period? a. Retained Earnings b. Dividends c. Unearned Sales Revenue d. Accumulated Depreciation

259.

Which statement is true concerning the preparation of closing entries? a. They can be prepared before or after adjusting entries. b. They cause the balances of all accounts at the end of the period to be adjusted to zero. c. They are necessary before financial statements can be prepared. d. They result in updating the balance in Retained Earnings for the period.

Ans: D, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing Closing Entries, Bloom: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

4-64 260.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

The following information is from the Income Statement of A1 Lawn Service for the quarter ending September 2025: Service Revenue $4,500 Expenses Salaries and Wages expense $ 2,000 Supplies expense 400 Insurance expense 100 Total expenses 2,500 Net Income $2,000 The balance in Retained Earnings at July 1 was $3,200. A1 distributed dividends of $2,200 during the period. They perform the closing process quarterly. After closing entries have been posted, Retained Earnings will have a balance of a. $1,000 debit. b. $3,000 credit. c. $5,200 credit. d. $2,800 credit.

Ans: B, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing Closing Entries, Bloom: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $3,200 + $2,000 – $2,200 = $3,000 (Beg. retained earnings + net income – dividends = ending retained earnings)

261.

The following information is from the Income Statement of A1 Lawn Service for the quarter ending September 2025: Service Revenue $4,500 Expenses Salaries and Wages expense $ 2,000 Supplies expense 400 Insurance expense 100 Total expenses 2,500 Net Income $2,000 The balance in Retained Earnings at July 1 was $3,200. A1 distributed dividends of $2,200 during the period. They perform the closing process quarterly. Which of the following is not one of the closing entries that the company will make? a. Credit Income Summary for $4,500, Debit Retained Earnings for $4,500 b. Debit Retained Earnings for $2,200, Credit Dividends for $2,200 c. Debit Service Revenue $4,500, Credit Income Summary for $4,500 d. Debit Income Summary for $2,000, Credit Retained Earnings for $2,000

Ans: A, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing Closing Entries, Bloom: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

262.

Which of the following accounts is adjusted but is not closed? a. Supplies Expense b. Supplies c. Depreciation Expense d. Service Revenue

Ans: B, LO 3, 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing Closing Entries, Bloom: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

263.

Which of the following accounts would appear in an adjusted trial balance but not a post.

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closing trial balance? a. Depreciation Expense b. Accumulated Depreciation c. Unearned Revenue d. Supplies Ans: A, LO 2, 3, 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing a Post-Closing Balance, Bloom: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

264.

Which of the following accounts is neither adjusted nor closed? a. Supplies Expense b. Unearned Revenue c. Accumulated Depreciation d. Cash

Ans: D, LO 3, 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing a Post-Closing Balance, Bloom: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

265.

Which of the following accounts is both adjusted and closed? a. Supplies b. Unearned Revenue c. Depreciation Expense d. Accumulated Depreciation

Ans: C, LO 3, 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing a Post-Closing Balance, Bloom: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

*266. The worksheet is a. part of the journal. b. a financial statement. c. part of the ledger. d. none of these answer choices are correct. Ans: D, LO 5, Topic: Using a Worksheet, Subtopic: NA, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

*267. The worksheet starts with two columns for the a. adjustments. b. financial statements. c. trial balance. d. adjusted trial balance. Ans: C, LO 5, Topic: Using a Worksheet, Subtopic: NA, Bloom: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

*268. The worksheet does not contain columns for the a. income statement. b. statement of retained earnings. c. balance sheet. d. adjusted trial balance. Ans: B, LO 5, Topic: Using a Worksheet, Subtopic: NA, Bloom: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

*269. The worksheet contains columns for the a. statement of retained earnings. .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

b. statement of cash flows. c. post-closing trial balance. d. balance sheet. Ans: D, LO 5, Topic: Using a Worksheet, Subtopic: NA, Bloom: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

*270. Net income is shown on the worksheet under the a. debit column of the adjusted trial balance and the credit column of retained earnings. b. debit column of the income statement and the credit column of the balance sheet. c. credit column of the adjusted trial balance and the debit column of retained earnings. d. credit column of the income statement and the debit column of the balance sheet. Ans: B, LO 5, Topic: Using a Worksheet, Subtopic: NA, Bloom: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

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BRIEF EXERCISES Be. 271 Identify the effect, if any, that each of the following transactions would have upon cash and retained earnings. Determine the dollar amount and the effect (+, –, N). Retained _Cash Earnings 1. 2. 3. 4. 5.

Purchases equipment for $3,000 Purchased $200 of supplies for cash Recorded an adjusting entry to record use of $110 of the above supplies. Received $600 from customers in payment of their accounts Recorded depreciation of equipment for period used, $900.

Solution 271

1. 2. 3. 4. 5.

_Cash

Retained Earnings

$-3,000_ $ -_200

N N_

$ -110_

$ + 600

_N _

$ - 900_

Ans: N/A, LO 2, Topic: Adjusting Entries for Accruals, Subtopic: Prepaid Expenses, Bloom: AN, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Be. 272 Before month-end adjustments are made, the February 28 trial balance of a company contains revenue of $11,000 and expenses of $8,900. Adjustments are necessary for the following items:     

Depreciation for February is $1,200. Revenue earned but not yet billed is $2,800. Accrued interest expense is $900. Revenue collected in advance that is now recognized is $2,500. Portion of prepaid insurance expired during February is $500.

Instructions: Calculate the correct net income for the company for the month of February. Solution 272 Net Income before Adjustments ($11,000 – $8,900)

$ 2,100

Add: Unearned Revenues Accrued Revenues

$2,500 2,800

Subtract: Depreciation Expense Interest Expense Insurance Expense

1,200 900 500

Net Income after Adjustments

5,300 7,400

2,600 $ 4,800

Ans: N/A, LO 1, Topic: Accrual-Basis Accounting and Adjusting Entries, Subtopic: Types of Adjusting Entries, Bloom: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Be. 273 Before month-end adjustments are made, the September 30 trial balance of a company contains revenue of $9,200 and expenses of $6,500. Adjustments are necessary for the following items:     

Supplies used during September is $300. Revenue earned but not yet billed is $2,100. Accrued interest expense is $800. Revenue collected in August and earned during September is $3,400. Portion of prepaid rent expired during September is $300.

Instructions: Calculate the correct net income for the company for September.

Solution 273 .

Accrual Accounting Concepts

Net Income before Adjustments ($9,200 – $6,500) Add:

Unearned Revenues Accrued Revenues

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$ 2,700 $3,400 2,100

Subtract: Supplies Expense Interest Expense Rent Expense

300 800 300

Net Income after Adjustments

5,500 8,200

1,400 $ 6,800

Be. 274 For each of the following oversights, state whether total assets will be understated (U), overstated (O), or no effect (NE). 1.

Failure to record revenue recognized but not yet received.

Failure to record expired prepaid rent.

Failure to record accrued interest on a note receivable.

Failure to record depreciation.

Failure to record accrued wages.

Failure to record the recognized portion of unearned revenues.

Solution 274 1. U 2. O 3. U 4. O 5. NE 6. NE Ans: N/A, LO 1, 2 & 3, Topic: Accrual-Basis Accounting and Adjusting Entries, Subtopic: Types of Adjusting Entries, Bloom: AN, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Be. 275 State whether each situation is a prepaid expense (PE), unearned revenue (UR), accrued revenue (AR) or an accrued expense (AE). 1. 2. 3. 4. 5.

Unrecorded interest on savings bonds is $245. Property taxes that have been incurred but that have not yet been paid or recorded amount to $300. Legal fees of $1,000 were collected in advance. By year end 60 percent were still unearned. Prepaid insurance had a $500 balance prior to adjustment. By year-end, 40 percent was still unexpired. Unpaid salaries earned by year-end but not yet paid or recorded amounted to $1,200.

Solution 275 1. AR 2. AE 3. UR 4. PE 5. AE Ans: N/A, LO 1, Topic: Accrual-Basis Accounting and Adjusting Entries, Subtopic: Types of Adjusting Entries, Bloom: C, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Be. 276 Identify the impact on the balance sheet for that month if the following information is not used to adjust the accounts. 1. 2. 3. 4.

Supplies consumed during the month totalled $3,000. Interest accrues on notes payable at the rate of $200 per month. Insurance of $450 expired during the month. Plant and equipment are depreciated at the rate of $1,200 per month.

Solution 276 1. Assets overstated and Stockholders' Equity overstated by $3,000. 2. Liabilities understated and Stockholders' Equity overstated by $200. 3. Assets overstated and Stockholders' Equity overstated by $450. 4. Assets overstated and Stockholders' Equity overstated by $1,200. Ans: N/A, LO 2 & 3, Topic: Adjusting Entries for Accruals, Subtopic: Summary of Basic Relationships, Bloom: AN, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Be. 277 On January 1, the Perry & Seacrest, CPAs received a $7,500 cash retainer for accounting services to be provided evenly over the next 3 months. The full amount was credited to the liability account Unearned Service Revenue. Assuming that the revenue is recognized evenly over the 3-month period, what adjusting journal entry should be made at January 31?

Solution 277 .

Accrual Accounting Concepts

Unearned Service Revenue ($7,500/3) Service Revenue

4-71

2,500 2,500

Ans: N/A, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Unearned Revenues, Bloom: AP, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Reporting

Be. 278 On February 1, the A1 Tax Service received a $3,600 cash retainer for tax preparation services to be provided evenly over the next 4 months. The full amount was credited to the liability account Unearned Service Revenue. Assuming that the revenue is recognized evenly over the 4-month period, what balance would be reported on the February 28 balance sheet for Unearned Service Revenue? Solution 278 Revenue recognized monthly = $3,600 / 4 months = $900 per month (Cash rec. ÷ 4)

Feb 28 balance in Unearned Service Revenue = $3,600 – $900 revenue recognized in February = $2,700 [Cash rec. – (Cash rec. ÷ 4)] Ans: N/A, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Unearned Revenues, Bloom: AP, Difficulty: Easy, TOT: 4 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Be. 279 Ace Publications sold annual subscriptions to their magazine for $42,000 in December 2024. The magazine is published monthly. The new subscribers received their first magazine in January 2025. 1. 2.

What adjusting entry should be made in January if the subscriptions were originally recorded as a liability? What amount will be reported on the January 31, 2025 balance sheet for Unearned Subscription Revenue?

Solution 279 1.

Unearned Subscription Revenue ($42,000/12) Subscription Revenue

3,500 3,500

Unearned Subscription Revenue at January 31: $42,000 – $3,500 = $38,500 [Ann. sub. – (ann. sub. ÷ 12)]

Ans: N/A, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Unearned Revenues, Bloom: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Be. 280 Acme Music School borrowed $30,000 from the bank signing a 6%, 6-month note on November 1. Principal and interest are payable to the bank on May 1. If the company prepares monthly financial statements, what adjusting entry should the company make at November 30 with regard to the note (round answer to the nearest dollar)?

Solution 280 Interest Expense ($30,000  6%  1/12) .

150

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

4-72

Interest Payable

(Borrowing  6%  1/12)

150

Ans: N/A, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Interest, Bloom: AP, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Be. 281 Match the statements below with the appropriate terms by entering the appropriate letter code in the spaces provided. TERMS: A. Prepaid Expenses B. Unearned Revenues C. Accrued Revenues D. Accrued Expenses STATEMENTS: 1.

A revenue not yet recognized; collected in advance.

An expense incurred; not yet paid or recorded.

A revenue performed; not yet collected or recorded.

An expense not yet incurred; paid in advance.

Solution 281 1. B 2. D 3. C 4. A Ans: N/A, LO 1, 2 ,3, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: Types of Adjusting Entries, Bloom: K, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Be. 282 Match the statements below with the appropriate terms by entering the appropriate letter code in the spaces provided. .

Accrual Accounting Concepts

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TERMS: A. Prepaid Expenses B. Unearned Revenues C. Accrued Revenues D. Accrued Expenses STATEMENTS: 1. A law firm requires clients to place deposits for legal services to be rendered in the ture.

fu-

2. A company has a $10,000, 11.5%, one year note outstanding. 3. A maid service bills its customers at the end of each month. 4. An accounting firm pays the bill for its storage unit at the beginning of each year-long lease renewal. Solution 282 1. B 2. D 3. C 4. A Ans: N/A, LO 1, 2 ,3, Topic: Accrual Basis Accounting and Adjusting Entries, Subtopic: Types of Adjusting Entries, Bloom: C, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Be. 283 Prepare adjusting entries for the following transactions. Omit explanations. 1. 2. 3.

Depreciation on equipment is $800 for the accounting period. There was no beginning balance of supplies and $600 of supplies were purchased during the period. At the end of the period $120 of supplies were on hand. Prepaid rent had a $1,000 normal balance prior to adjustment. By year end $300 was unexpired.

Solution 283 1. Depreciation Expense ................................................................... Accumulated Depreciation—Equipment ................................ .

800 800

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

2. Supplies Expense ......................................................................... Supplies ............................................................................... ($600 – $120)

480 480

(Sup. pur. – sup. on hand)

3. Rent Expense ............................................................................... Prepaid Rent ........................................................................ ($1,000 – $300)

700 700

(Prep. rent bal. – Unexp. rent) Ans: N/A, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Prepaid Expenses, Bloom: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Be. 284 Prepare adjusting entries for the following transactions. Omit explanations. 1. 2. 3.

Unrecorded interest accrued on savings bonds is $200. Property taxes incurred but not paid or recorded amount to $900. Salaries incurred by year-end but not yet paid or recorded amounted to $600.

Solution 284 1. Interest Receivable ........................................................................ Interest Revenue ...................................................................

200

2. Property Tax Expense ................................................................... Property Taxes Payable .......................................................

900

3. Salaries and Wages Expense ....................................................... Salaries and Wages Payable ................................................

600

200 900 600

Ans: N/A, LO 3, Topic: Adjusting Entries for Accruals, Subtopics: Accrued Revenues, Accrued Expenses, Bloom: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Be. 285 The adjusted trial balance of Ace Corporation at December 31, 2025 includes the following accounts: Retained Earnings $12,600; Dividends $5,000; Service Revenue $30,000; Salaries and Wages Expense $15,000; Insurance Expense $2,000; Rent Expense $4,500; Supplies Expense $500; and Depreciation Expense $1,000. Prepare an income statement for the year ended December 31, 2025.

Accrual Accounting Concepts

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Solution 285 ACE CORPORATION Income Statement For the Year Ended December 31, 2025 Revenues Service Revenue Expenses Salaries and Wages Expense Rent Expense Insurance Expense Depreciation Expense Supplies Expense Total Expenses Net Income

$ 30,000 $15,000 4,500 2,000 1,000 500 23,000 $ 7,000

Ans: N/A, Topic: The Adjusting Trial Balance and Closing Entries, Subtopic: Preparing Financial Statements, LO 4, Bloom: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Be. 286 The adjusted trial balance of Ace Corporation at December 31, 2025 includes the following accounts: Retained Earnings $12,600; Dividends $5,000; Service Revenue $30,000; Salaries and Wages Expense $15,000; Insurance Expense $2,000; Rent Expense $4,500; Supplies Expense $500; and Depreciation Expense $1,000. Prepare a retained earnings statement for the year. Solution 286 ACE CORPORATION Retained Earnings Statement For the Year Ended December 31, 2025 Retained Earnings, January 1 Plus: Net Income* Less: Dividends Retained Earnings, December 31

$12,600 7,000 19,600 5,000 $14,600

(Beg. ret. earn. + net inc. – div.) * $30,000 – ($15,000 + $4,500 + $2,000 + $1,000 + $500) = $7,000 Ans: N/A, LO 4, Topic: The Adjusting Trial Balance and Closing Entries, Subtopic: Preparing Financial Statements, Bloom: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Be. 287 .

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Suppose that the following selected accounts appear in the adjusted trial balance for Verizon. Identify the accounts that would be included in the post-closing trial balance. 1. 2. 3. 4.

Accumulated Depreciation Depreciation Expense Retained Earnings Dividends

5. 6. 7.

Supplies Accounts Payable Service Revenue

Solution 287 The following are accounts that would be included in the post-closing trial balance. 1. 3. 5. 6.

Accumulated Depreciation Retained Earnings Supplies Accounts Payable

Ans: N/A, Topic: The Adjusting Trial Balance and Closing Entries, Subtopic: Preparing a Post-Closing Trial Balance, LO 4, Bloom: K, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Be. 288 The following information is from the Income Statement of the A1 Rental Shop for the year ending October 31, 2025: Service Revenue Expenses Salaries and Wages Expense Rent Expense Depreciation Expense Miscellaneous Expense Total Expenses Net Income

$9,500 $ 3,000 1,400 2,100 300 6,800 $2,700

This is A1’s first year in business. A1 distributed dividends of $2,500 during the period. Prepare closing entries at December 31, 2025.

Solution 288 1. Service Revenue............................................................................ .

9,500

Accrual Accounting Concepts

Income Summary ..................................................................

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9,500

2. Income Summary .......................................................................... Salaries and Wages Expense ................................................ Rent Expense ....................................................................... Depreciation Expense ........................................................... Miscellaneous Expense ........................................................

6,800

3. Income Summary .......................................................................... Retained Earnings ................................................................

2,700

4. Retained Earnings ......................................................................... Dividends ..............................................................................

2,500

3,000 1,400 2,100 300 2,700 2,500

Ans: N/A, LO 4, Topic: The Adjusting Trial Balance and Closing Entries, Subtopic: Preparing Closing Entries, Bloom: AP, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Be. 289 Prepare adjusting entries for the following transactions of the Acme Ice Cream Shoppe for the year ending December 31, 2025. 1. 2. 3.

The beginning balance in the supplies account was $500. Supplies totaling $3,900 were purchased during the year. At the end of the period, an inventory counted $250 of supplies on hand. The business rented a storage unit on July 1 and prepaid the $2,100 annual rental fee. On April 1, the company borrowed $12,000 on a 7.9%, 9-month note, which is due January 1, 2026.

Solution 289 1. Supplies Expense ......................................................................... Supplies ................................................................................ ($500 + $3,900 – $250)

4,150 4,150

(Beg, bal. + sup. pur. – sup. on hand)

2. Rent Expense ................................................................................ Prepaid Rent ........................................................................ $2,100 x 6/12

1,050 1,050

(Prep. rent. x expired months/rental term)

3. Interest Expense ........................................................................... Interest Payable .................................................................... ($12,000 x 7.9% x 9/12)

711 711

Ans: N/A, LO 2, 3, Topic: Adjusting Entries for Accruals, Adjusting Entries for Deferrals, Subtopic: Summary of Basic Relationships, Bloom: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

EXERCISES Ex. 290 The balance sheets of A1 Nail Bar include the following: Interest Receivable Supplies Salaries and Wages Payable Unearned Service Revenue The income statement for 2025 shows the following: Interest Revenue Service Revenue Supplies Expense Salaries and Wages Expense

12/31/25 $4,300 5,000 3,700 -0-

12/31/24 $ -03,900 3,800 4,000

$17,500 78,700 10,700 48,000

Instructions: Assume all purchases are made with cash and the beginning and ending balances in Accounts Payable are zero. Assume all services are paid upon performance and the beginning and ending balances in Accounts Receivable are zero. Calculate the following for 2025: 1. Cash received for interest. 2. Cash paid for supplies. 3. Cash paid for salaries and wages. 4. Cash received for service revenue.

Accrual Accounting Concepts

Solution 290 1. Cash received for interest Interest Revenue Less: Interest Receivable Cash Received 2. Cash paid for supplies Supplies Expense Less: Supplies (2024) Add: Supplies (2025) Cash Paid 3. Cash paid for salaries and wages Salaries and Wages Expense Add: Salaries and Wages Payable (2024)

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$13,200 $17,500 4,300 $13,200 $11,800 $10,700 3,900 6,800 5,000 $11,800 $48,100

Less: Salaries and Wages Payable (2025) Cash Paid

$48,000 3,800 51,800 3,700 $48,100

4. Cash received for service revenue Service Revenue Less: Unearned Service Revenue (2024) Cash Received

$78,700 4,000 $74,700

$74,700

Ans: N/A, LO 1, Topic: Accrual-Basis Accounting and Adjusting Entries, Subtopic: Accrual Versus Cash Basis Accounting, Bloom: AN, Difficulty: Hard, TOT: 15 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Ex. 291 The 2025 income statement for a company showed rent expense of $9,500 and salaries expense of $8,600. The related balance sheet account balances at year-end last year and this year were as follows: 2025 2024 Prepaid Rent $900 $300 Salaries and Wages Payable 500 400 Calculate the following for 2025: 1. Cash paid for rent. 2. Cash paid for salaries.

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 291 1. Cash paid for rent Rent Expense Less: Prepaid rent (2024) Add: Prepaid rent (2025) Cash Paid

$10,100 $9,500 300 9,200 900 $10,100

2. Cash paid for wages Salaries and Wages Expense Add: Salaries and Wages Payable (2024)

$8,500 $8,600 400 9,000 500 $8,500

Less: Salaries and Wages Payable (2025) Cash Paid

Ans: N/A, LO 1, Topic: Accrual-Basis Accounting and Adjusting Entries, Subtopic: Accrual Versus Cash Basis Accounting, Bloom: AN, Difficulty: Hard, TOT: 10 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Ex. 292 A company using the cash basis of accounting reports net income for 2025 of $45,460. If the company had used the accrual basis of accounting it would have reported the following year-end balances: 2025 Accounts receivable $3,850 Supplies 1,740 Salaries and wages payable 3,600 Other unpaid amounts 2,400

2024 $5,100 1,950 2,250 2,100

Instructions: Determine the company’s net income under the accrual basis of accounting. Show your calculations. Use the column headings shown below. Explanation

Amount

Accrual Accounting Concepts

Solution 292 Explanation Cash basis net income The decrease in accounts receivable would be included in cash basis net income, but not accrual basis net income The decrease in supplies would not be included in cash basis net income The increase in salaries payable would be deducted in accrual basis net income The increase in other unpaid amounts would be deducted in accrual basis net income Accrual basis net income

4-81

Amount $45,460

(1,250) ( 210) (1,350) ( 300) $42,350

Ans: N/A, LO 1, Topic: Accrual-Basis Accounting and Adjusting Entries, Subtopic: Accrual Versus Cash Basis Accounting, Bloom: AP, Difficulty: Hard, TOT: 10 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Ex. 293 A1 Accounting Services began operations on July 1. It allows its clients 90 days to pay for services received. On the other hand, the company’s suppliers require payment for their goods and services within 30 days. A1 prepaid its office rent for 12 months on July 1. At the end of the year, December 31, the company had yet to pay its last month’s utility bill. Instructions: Explain how cash and accrual basis accounting would handle each of the events described above. Use the column headings shown below. Event Cash Basis Accrual Basis

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Solution 293 Event Cash Basis 90 days for customers Revenue would be to pay recorded when the cash was received.

Accrual Basis Revenue would be recorded when the service was performed.

30 days to pay suppliers

Expenses would be recorded when the cash was paid.

Until the item purchased was used it would be recorded as an asset. When used, it would then be expensed.

Prepaid rent of 12 months

It would be expensed when paid.

It would be recorded as an asset when paid and then expensed as time passes.

Unpaid utilities

It would not be expensed until paid.

It would be expensed in the month incurred.

Ans: N/A, LO 1, Topic: Accrual-Basis Accounting and Adjusting Entries, Subtopic: Accrual Versus Cash Basis Accounting, Bloom: C, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Ex. 294 Acme Company prepared the following income statement using the cash basis of accounting for its first year of operations: ACME COMPANY Income Statement, Cash Basis For the Year Ended December 31, 2024 Service revenue (does not include $40,000 of services rendered on account because the collection will not be until 2025) ......................................................... $380,000 Expenses (does not include $20,000 of expenses on account because payment will not be made until 2025)..................................................................... 220,000 Net income .................................................................................................................. $160,000 Additional data: 1. Depreciation on a company automobile for the year amounted to $7,000. This amount is not included in the expenses above. 2. On January 1, 2024, paid for a two-year insurance policy on the automobile amounting to $1,600. This amount is included in the expenses above. Instructions: (a) Recast the above income statement on the accrual basis in conformity with generally accepted accounting principles. Show computations and explain each change. (b)

Explain which basis (cash or accrual) provides a better measure of income.

Accrual Accounting Concepts

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Solution 294 (a)

ACME COMPANY Income Statement For the Year Ended December 31, 2024 Service revenue ................................................................................................... $420,000 Expenses ............................................................................................................. 246,200 Net income........................................................................................................... $173,800

Service revenue should include the $40,000 for services performed on account. The accrual basis states that revenue is reflected in the period when the service is performed. ($380,000 + $40,000 = $420,000). Expenses should include the $20,000 for expenses incurred but not yet paid. The accrual basis states that expenses should be reflected in the period when incurred. Expenses also should only include half of the $1,600 insurance premium since $800 applies to 2024. The other $800 is an asset and should be reflected on the balance sheet as prepaid insurance. The $7,000 of depreciation for the automobile is included as an expense in 2024. ($220,000 + $20,000 – $800 + $7,000 = $246,200). (b) The accrual basis of accounting provides a better measure of income than the cash basis. The accrual basis is required under generally accepted accounting principles and recognizes revenues when the performance obligation is satisfied and expenses when incurred. Revenues and expenses recognized under the accrual basis are related to the economic environment in which they occur and thus allow trends to be more meaningfully interpreted. The cash basis often fails to recognize revenue in the period when the performance obligation is satisfied and expenses when incurred. Additionally, expenses are not matched with revenues when recognized; therefore, the expense recognition principle is violated. Ans: N/A, LO 1, Topic: Accrual-Basis Accounting and Adjusting Entries, Subtopic: Accrual Versus Cash Basis Accounting, Bloom: AP, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

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Ex. 295 On December 31, 2025, a company prepared an income statement and balance sheet and failed to include three adjusting entries. The incorrect income statement showed net income of $40,000. The balance sheet showed total assets, $130,000; total liabilities, $60,000; and stockholders’ equity, $70,000. The data for the three adjusting entries were: (1)

Depreciation of $9,000 was not recorded on equipment.

(2)

Salaries and Wages amounting to $10,000 for the last two days in December were not paid and not recorded. The next payroll will be in January.

(3)

Rent of $8,000 was paid for two months in advance on December 1. The entire amount was debited to Prepaid Rent when paid.

Instructions: Complete the following tabulation to correct the financial statement amounts shown (indicate deductions with parentheses): Item Incorrect balances Effects of: Depreciation

Net Income $ 40,000

Total Assets $130,000

Total Liabilities Stockholders’ Equity $ 60,000 $ 70,000

Total Assets $130,000

Total Liabilities Stockholders’ Equity $60,000 $70,000

Salaries and Wages Rent Correct Balances Solution 295 Item Net Income Incorrect balances $40,000 Effects of: Depreciation (9,000) Salaries and Wages (10,000) Rent (4,000)* Correct Balances $17,000 [Net inc. – depr. – sal./wag. – (rent pay. ÷ 2)] * $8,000/2 = $4,000

(9,000) 10,000 (4,000) $117,000

$70,000

(9,000) (10,000) (4,000) $47,000

[St. equity – depr. – sal./wag. – (rent pay. ÷ 2)]

Ans: N/A, LO 2, 3, Topic: Adjusting Entries for Accruals, Deferrals, Subtopic: Summary of Basic Relationships, Bloom: AN, Difficulty: Hard, TOT: 10 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Accrual Accounting Concepts

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Ex. 296 A company accumulates the following adjustment data at December 31. 1. Revenue of $1,100 collected in advance has been earned. 2. Salaries of $600 are unpaid. 3. Prepaid rent totaling $400 has expired. 4. Supplies of $550 have been used. 5. Revenue earned but unbilled totals $750. 6. Utility expenses of $300 are unpaid. 7. Interest of $250 should be accrued on a note payable. Instructions: (a) For each of the above items indicate: 1. The type of adjustment (prepaid expense, unearned revenue, accrued revenue, or accrued expense). 2. The account relationship (revenue/liability, expense/liability, revenue/asset, expense/asset). 3. The status of account balances before adjustment (understatement or overstatement). 4. The adjusting entry. (b) Assume net income before the adjustments listed above was $22,500. What is the adjusted net income? Prepare your answer in the tabular form presented below.

Type of Adjustment

Account Relationship

Account Balances Before Adjustment (Understatement or Overstatement)

Adjusting Entry

Income Effect Of Adjustment Increase (Decrease)

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 296 (a) Type of Account Adjustment Relationship 1. Unearned revenue L/R 2. Accrued expense

E/L

3. Prepaid expense

E/A

4. Prepaid expense

E/A

5. Accrued revenue

A/R

6. Accrued expense

E/L

7. Accrued expense Codes: A = L = E = (b)

Account Balances Before Adjustment (Understatement or Overstatement) Adjusting Entry Liab. O Unearned Ser Rev. Rev. U Service Revenue

E/L

Asset Liability Expense

R = O = U =

Income Effect Increase (Decrease) 1,100

Exp. U Liab. U

Salaries and Wages Expense Salaries and Wages Payable

(600)

Exp. U Asset O

Rent Expense Prepaid Rent

(400)

Exp. U Asset O

Supplies Expense Supplies

(550)

Asset U Rev. U

Accounts Receivable Service Revenue

750

Exp. U Liab. U

Utilities Expense Accounts Payable

(300)

Exp. U Liab. U

Interest Expense Interest Payable

(250)

Revenue Overstatement Understatement

Net income before adjustments .................................................. Add: Unearned service revenue (1) ......................................... Accrued revenue (5) ........................................................ Less: Accrued salaries (2) ........................................................ Prepaid rent expired (3) .................................................. Supplies used (4) ............................................................ Accrued utilities (6) ......................................................... Accrued interest (7) ........................................................ Adjusted net income ...................................................................

$22,500 $1,100 750 600 400 550 300 250

1,850 24,350

2,100 $22,250

Ans: N/A, LO 2,3, Topic: Adjusting Entries for Accruals, Deferrals, Subtopic: Summary of Basic Relationships, Bloom: AN, Difficulty: Hard, TOT: 20 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Accrual Accounting Concepts

4-87

Ex. 297 The adjusted trial balance of a company includes the following balance sheet accounts that frequently require adjustment. For each account, indicate (a) the type of adjusting entry (prepaid expenses, unearned revenues, accrued revenues, or accrued expenses) and (b) the related account in the adjusting entry. (a) (b) Balance Sheet Account Type of Adjusting Entry Related Account 1. Supplies 2. Accounts Receivable 3. Prepaid Insurance 4. Accumulated Depreciation— Equipment 5. Interest Payable 6. Salaries and Wages Payable 7. Unearned Service Revenue Solution 297 Balance Sheet Account

(a) Type of Adjusting Entry

(b) Related Account

1. Supplies

Prepaid Expense

Supplies Expense

2. Accounts Receivable

Accrued Revenue

Service Revenue

3. Prepaid Insurance

Prepaid Expense

Insurance Expense

4. Accumulated Depreciation— Equipment

Prepaid Expense

Depreciation Expense

5. Interest Payable

Accrued Expense

Interest Expense

6. Salaries and Wages Payable

Accrued Expense

Salaries and Wages Exp.

7. Unearned Service Revenue

Unearned Revenue

Service Revenue

Ans: N/A, LO 2, 3, Topic: Adjusting Entries for Accruals, Deferrals, Subtopic: Summary of Basic Relationships, Bloom: C, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ex. 298 Match the statements below with the appropriate terms by entering the appropriate letter code in the spaces provided. TERMS: A. Prepaid Expenses B. Unearned Revenues C. Accrued Revenues D. Accrued Expenses STATEMENTS: 1. A revenue not yet earned; collected in advance. 2. Office supplies on hand that will be used in the next period. 3. Subscription revenue collected; not yet earned. 4. Rent not yet collected; performance obligation already satisfied. 5. An expense incurred; not yet paid or recorded. 6. A revenue for which performance obligation is satisfied; not yet collected or recorded. 7. An expense not yet incurred; paid in advance. 8. Interest expense incurred; not yet paid or recorded. Solution 298 1. B 2. A 3. B 4. C 5. D 6. C 7. A 8. D Ans: N/A, LO 2,3, Topic: Adjusting Entries for Accruals, Deferrals, Subtopic: Summary of Basic Relationships, Bloom: K, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Accrual Accounting Concepts

4-89

Ex. 299 A review of the ledger of a company at December 31, 2025, produces the following data pertaining to the preparation of annual adjusting entries: (a) Salaries and Wages Payable, $0: Salaries are paid every Friday for the current week. Five employees receive a weekly salary of $800, and three employees earn a weekly salary of $700. December 31 is a Tuesday. Employees do not work weekends. All employees worked the last 2 days of December. (b) Unearned Rent Revenue, $60,000: The company had several lease contracts during the year as shown below: Total Rent Term per Number of (in months) lease leases Date Oct. 1 12 $ 8,000 3 Dec. 1 12 18,000 2 (c) Notes Receivable, $90,000: This is a 6-month note, dated November 1, 2025, with a 6% interest rate. Instructions: Prepare the adjusting entries at December 31, 2025. Show all computations. Solution 299 (a) Dec. 31 Salaries and Wages Expense Salaries and Wages Payable (5 X $800 X 2/5 = $1,600) (3 X $700 X 2/5 = $ 840) (b)

(c)

2,440 2,440

31 Unearned Rent Revenue Rent Revenue (3/12 X $8,000 X 3 = $6,000) (1/12 X $18,000 X 2 = $3,000)

9,000

31 Interest Receivable Interest Revenue ($90,000 X .06 X 2/12 = $900)

900

9,000

900

Ans: N/A, LO 2, 3, Topic: Adjusting Entries for Accruals, Deferrals, Subtopic: Summary of Basic Relationships, Bloom: AP, Difficulty: Hard, TOT: 15 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ex. 300 A review of the ledger of a company at December 31, 2025, produces the following data pertaining to the preparation of annual adjusting entries: (a) Notes Payable, $80,000: This is a 9-month note, dated September 1, 2025, with a 9% interest rate. (b) Prepaid Rent, $648,000. The company rents offices throughout the Midwest. During 2025 it signed 10 leases as shown below: Date Sept. 1 Nov. 1

Term (in months) 8 12

Monthly Rent $ 4,500 7,000

Number of Leases 4 6

(c) Unearned Service Revenue $175,800. During 2025 the company entered into 13 monthly service contracts with clients. The clients prepaid for the services to be provided over the contract period in an even manner. Date Aug. 1 Oct. 1

Service Period (in months) 9 6

Total Amount Per Contract $12,600 15,000

Number of Contracts 8 5

Instructions: Prepare the adjusting entries at December 31, 2025. Show all computations. Solution 300 (a) Dec. 31 Interest Expense Interest Payable ($80,000 X .09 X 4/12 = $2,400) (b)

(c)

2,400 2,400

31 Rent Expense Prepaid Rent (4 X $4,500 X 4 = $72,000) (2 X $7,000 X 6 = $84,000)

156,000

31 Unearned Service Revenue Service Revenue (5/9 X $12,600 X 8 = $56,000) (3/6 X $15,000 X 5 = $37,500)

93,500

156,000

93,500

Ans: N/A, LO 2, 3, Topic: Adjusting Entries for Accruals, Deferrals, Subtopic: Summary of Basic Relationships, Bloom: AP, Difficulty: Hard, TOT: 20 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Accrual Accounting Concepts

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Ex. 301 A semi-professional hockey team prepares financial statements on a monthly basis. Their season begins in October, but in September the team engaged in the following transactions: (a)

Paid $150,000 to Oklahoma City as advance rent for use of Oklahoma City Arena for the sixmonth period October 1 through March 31.

(b)

Collected $450,000 cash from sales of season tickets for the team's 30 home games. This amount was credited to Unearned Ticket Revenue.

(c)

During the month of October, the team played five home games.

Instructions: Prepare the adjusting entries required at October 31 for the transactions above. Solution 301 (a) Rent Expense .............................................................................. Prepaid Rent ...................................................................... ($150,000  6 = $25,000) (b) & (c) Unearned Ticket Revenue ........................................................... Ticket Revenue .................................................................. ($450,000  30 = $15,000; $15,000  5 = $75,000)

25,000 25,000

75,000 75,000

[(Cash coll. ÷ 30) × 5] Ans: N/A, LO 2, 3, Topic: Adjusting Entries for Accruals, Deferrals, Subtopic: Summary of Basic Relationships, Bloom: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision Making

Ex. 302 A semi-professional baseball team prepares financial statements on a monthly basis. Their season begins in April, but in March the team engaged in the following transactions: (a)

Paid $120,000 to Lawrence City as advance rent for use of Lawrence City Stadium for the sixmonth period April 1 through September 30.

(b)

Collected $600,000 cash from sales of season tickets for the team's 20 home games. This amount was credited to Unearned Ticket Revenue.

(c)

During the month of April, the team played four home games and five road games.

Instructions: Prepare the adjusting entries required at April 30 for the transactions above.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

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Solution 302 (a) Rent Expense .............................................................................. Prepaid Rent ..................................................................... ($120,000  6 = $20,000) (b) & (c) Unearned Ticket Revenue ........................................................... Ticket Revenue .................................................................. ($600,000  20 = $30,000; $30,000  4 = $120,000)

20,000 20,000

120,000 120,000

Ans: N/A, LO 2,3, Topic: Adjusting Entries for Accruals, Deferrals, Subtopic: Summary of Basic Relationships, Bloom: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Ex. 303 Prepare adjusting entries for the following transactions. Omit explanations. 1. 2. 3.

Depreciation on equipment is $1,340 for the accounting period. Interest owed on a loan but not paid or recorded is $275. There was no beginning balance of supplies and $550 of office supplies were purchased during the period. At the end of the period $100 of supplies were on hand. Prepaid rent had a $1,000 normal balance prior to adjustment. By year-end $700 had expired. Salaries incurred by year-end but not yet paid or recorded amounted to $900.

4. 5.

Solution 303 1. Depreciation Expense ................................................................... Accumulated Depreciation—Equipment ...............................

1,340 1,340

2. Interest Expense ........................................................................... Interest Payable ...................................................................

275

3. Supplies Expense ......................................................................... Supplies ............................................................................... ($550 – $100)

450

4. Rent Expense ............................................................................... Prepaid Rent ........................................................................

700

900

Salaries and Wages Expense .................................................... Salaries and Wages Payable .................................................

275 450

700 900

Ans: N/A, LO 2, 3, Topic: Adjusting Entries for Accruals, Deferrals, Subtopic: Summary of Basic Relationships, Bloom: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Ex. 304 .

Accrual Accounting Concepts

4-93

Prepare adjusting entries for the following transactions. Omit explanations. 1. 2. 3. 4. 5.

Unrecorded interest accrued on savings bonds is $410. Property taxes incurred but not paid or recorded amount to $800. Unearned service revenue of $4,000 was collected in advance. By year-end $700 was still unearned. Prepaid insurance had a $750 debit balance prior to adjustment. By year-end, 60 percent was still unexpired. Salaries incurred by year-end but not yet paid or recorded amounted to $650.

Solution 304 1. Interest Receivable ........................................................................ Interest Revenue ...................................................................

410 410

2. Property Tax Expense ................................................................... Property Taxes Payable .......................................................

800

3. Unearned Service Revenue ........................................................... Service Revenue .................................................................. ($4,000 – $700)

3,300

800 3,300

4. Insurance Expense ........................................................................ Prepaid Insurance ................................................................. ($750 x .40)

300

5. Salaries and Wages Expense ....................................................... Salaries and Wages Payable .................................................

650

300

650

Ex. 305 Prepare year-end adjustments for the following transactions. Omit explanations. 1. 2. 3. 4. 5. 6. 7.

Accrued interest on notes receivable is $30. $1,000 of unearned service revenue should be recognized as revenue. Three years’ rent, totaling $45,000, was paid in advance at the beginning of the year. Services totaling $2,900 had been performed but not yet billed at the end of the year. Depreciation on equipment totaled $6,500 for the year. Supplies purchased totaled $850. By year-end, only $250 of supplies remained. Salaries owed to employees at the end of the year total $960.

Solution 305 .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

1. Interest Receivable ........................................................................ Interest Revenue ...................................................................

2. Unearned Service Revenue ........................................................... Service Revenue ..................................................................

1,000

Rent Expense .............................................................................. Prepaid Rent ........................................................................ ($45,000  3 = $15,000)

15,000

Accounts Receivable................................................................... Service Revenue.....................................................................

2,900

Depreciation Expense ................................................................ Accumulated Depreciation—Equipment ...............................

6,500

6. Supplies Expense ......................................................................... Supplies ............................................................................... ($850 – $250) ..............................................................................................................

600

7. Salaries and Wages Expense ....................................................... Salaries and Wages Payable ..............................................

960

4. 5.

1,000

15,000

2,900 6,500 600

960

Ans: N/A, LO 2 ,3, Topic: Adjusting Entries for Accruals, Deferrals, Subtopic: Summary of Basic Relationships, Bloom: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Ex. 306 A company purchased a delivery truck on June 1 for $30,000, paying $10,000 cash and signing a 6%, 2-month note for the remaining balance. The truck is expected to depreciate $6,000 each year. The company prepares monthly financial statements. Instructions: (a)

Prepare the general journal entry to record the acquisition of the delivery truck on June 1.

(b)

Prepare any adjusting journal entries that should be made on June 30.

(c)

Show how the delivery truck will be reflected on the company's balance sheet on June 30.

Accrual Accounting Concepts

Solution 306 (a) June 1 Equipment .................................................................... Notes Payable ..................................................... Cash .................................................................... (To record acquisition of delivery truck and signing of a 2-month, 6% note)

30,000 20,000 10,000

(b) June 30 Depreciation Expense ................................................... Accumulated Depreciation—Equipment ............... (To record monthly depreciation) ($6,000  12 = $500/month)

500

30 Interest Expense .......................................................... Interest Payable .................................................. (To accrue interest on notes payable) ($20,000  6%  1/12 = $100)

100

4-95

500

100

$30,000 500

$29,500

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ex. 307 Acme Company prepares monthly financial statements. Below are listed some selected accounts and their balances on the September 30 trial balance before any adjustments have been made for the month of September. ACME COMPANY Trial Balance (Selected Accounts) September 30, 2025

Supplies .............................................................................................. Prepaid Insurance ............................................................................... Equipment ........................................................................................... Accumulated Depreciation—Equipment .............................................. Unearned Rent Revenue ....................................................................

Debit $ 2,700 4,800 16,200

Credit

$ 1,000 1,200

(Note: Debit column does not equal credit column because this is a partial listing of selected account balances.) An analysis of the account balances by the company's accountant provided the following additional information: 1. A physical count of office supplies revealed $1,000 on hand on September 30. 2. A two-year life insurance policy was purchased on September 1 for $4,800. 3. Office equipment depreciates $3,000 per year. 4. The amount of rent received in advance that remains unearned at September 30 is $300. Instructions: Using the information given, prepare the adjusting entries that should be made by Acme Company on September 30.

Accrual Accounting Concepts

Solution 307 1. Supplies Expense ......................................................................... 1,700 Supplies ................................................................................ (To record the amount of office supplies used $2,700 – $1,000) 2. Insurance Expense ........................................................................ Prepaid Insurance ................................................................ (To record insurance expired $4,800  24)

200

3. Depreciation Expense ................................................................... Accumulated Depreciation—Equipment ................................ (To record monthly depreciation $3,000  12)

250

4. Unearned Rent Revenue ............................................................... Rent Revenue ...................................................................... (To record rent revenue recognized $1,200 – $300)

900

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1,700

200

250

900

Ex. 308 Prepare the required end-of-period adjusting entries for each independent case listed below. Case 1 A company began the year with a $3,000 balance in the Supplies account. During the year, $8,500 of additional supplies were purchased. A physical count of supplies on hand at the end of the year revealed that $8,300 worth of supplies had been used during the year. No adjusting entry has been made until year-end. Case 2 A company has a calendar year-end accounting period. On July 1, the company purchased office equipment for $30,000. It is estimated that the office equipment will depreciate $200 each month. No adjusting entry has been made until year-end. Case 3 A company is in the business of renting several apartment buildings and prepares monthly financial statements. It has been determined that 2 tenants in $900 per month apartments and one tenant in the $1,000 per month apartment had not paid their December rent as of December 31.

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 308 Case 1—December 31 Supplies Expense ............................................................ Supplies ................................................................ (To record supplies used during the year) Case 2—December 31 Depreciation Expense ....................................................... Accumulated Depreciation—Equipment................. (To record depreciation expense for six months) $200  6 months = $1,200 Depreciation Case 3—December 31 Accounts Receivable ........................................................ Rent Revenue ....................................................... (To accrue rent recognized but not yet received) [(2 x $900) + $1,000)]

8,300 8,300

1,200 1,200

2,800 2,800

Ans: N/A, LO 2, 3, Topic: Adjusting Entries for Accruals, Deferrals, Subtopic: Summary of Basic Relationships, Bloom: AP, Difficulty: Hard, TOT: 10 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Accrual Accounting Concepts

4-99

Ex. 309 A1 Insurance Agency prepares monthly financial statements. Presented below is an income statement for the month of June that is correct on the basis of information considered. A1 INSURANCE AGENCY Income Statement For the Month Ended June 30 Revenues Service Revenue ........................................................................ Expenses Salaries and Wages Expense ..................................................... Advertising Expense ................................................................... Rent Expense ............................................................................. Depreciation Expense ................................................................ Total Expenses ........................................................................... Net Income .........................................................................................

$40,000 $12,000 800 4,200 2,800 19,800 $20,200

Additional data: When the income statement was prepared, the company accountant neglected to take into consideration the following information: 1. A utility bill for $1,200 was received on the last day of the month for electric and gas service for the month of June. 2. A company insurance salesman sold a life insurance policy to a client for a premium of $10,000. The agency billed the client for the policy and is entitled to a commission of 20%. 3. Supplies on hand at the beginning of the month were $2,500. The agency purchased additional supplies during the month for $1,500 in cash and $1,200 of supplies were on hand at June 30. 4. The agency purchased a new car at the beginning of the month for $24,000 cash. The car will depreciate $6,000 per year. 5. Salaries owed to employees at the end of the month total $5,300. The salaries will be paid on July 5. Instructions: Prepare a corrected income statement.

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 309 A1 INSURANCE AGENCY Income Statement For the Month Ended June 30 Revenues Service Revenue ($40,000 + $2,000*)......................................... Expenses Salaries and Wages Expense ($12,000 + $5,300) ...................... Rent Expense ............................................................................. Depreciation Expense ($2,800 + $500**) .................................... Supplies Expense ($2,500 + $1,500 - $1,200) ............................ Utilities Expense ($0 + $1,200) ................................................... Advertising Expense ................................................................... Total expenses .................................................................. Net Income .........................................................................................

$42,000 $17,300 4,200 3,300 2,800 1,200 800 29,600 $12,400

Ans: N/A, LO 2, 3, Topic: Adjusting Entries for Accruals, Deferrals, Subtopic: Summary of Basic Relationships, Bloom: AN, Difficulty: Hard, TOT: 15 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting *$10,000*20% = $2,000 ** $6,000/12 = $500

Ex. 310 One part of an adjusting entry is given below. Instructions: Indicate the account title for the other part of the entry. 1. Unearned Service Revenue is debited. 2. Prepaid Rent is credited. 3. Accounts Receivable is debited. 4. Depreciation Expense on equipment is debited. 5. Utilities Expense is debited. 6. Interest Payable is credited. 7. Service Revenue is credited (give two possible debit accounts). 8. Interest Receivable is debited. Solution 310 1. Service Revenue 2. Rent Expense 3. Service Revenue 4. Accumulated Depreciation —Equipment

5. Accounts Payable 6. Interest Expense 7. Accounts Receivable or Unearned Service Revenue 8. Interest Revenue

Ans: N/A, LO 2,3, Topic: Adjusting Entries for Accruals, Deferrals, Subtopic: Summary of Basic Relationships, Bloom: C, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Accrual Accounting Concepts

4-101

Ex. 311 The following ledger accounts are used by the Ace Race Track: Accounts Receivable Prepaid Advertising Prepaid Rent Unearned Sales Revenue Sales Revenue Advertising Expense Rent Expense Instructions: For each of the transactions below, prepare the journal entry (if one is required) to record the initial transaction and then prepare the adjusting entry, if any, required on November 30, the end of the fiscal year. (a)

On November 1, paid rent on the track facility for three months, $150,000.

(b)

On November 1, sold season tickets for admission to the racetrack. The racing season is yearround with 25 racing days each month. Season ticket sales totaled $960,000.

(c)

On November 1, borrowed $250,000 from First National Bank by issuing a 6% note payable due in three months.

(d)

On November 5, programs for 20 racing days in November, 25 racing days in December and 15 racing days in January were printed for $3,000. The accountant for the concessions company reported that gross receipts for November were $140,000. Ten percent is due to Ace and will be remitted by December 10.

(e)

Solution 311 (a) Journal Entry Prepaid Rent ............................................................................... 150,000 Cash ............................................................................ Adjusting Entry Rent Expense ....................................................................... Prepaid Rent ................................................................ ($150,000  3)

50,000 50,000

(b) Journal Entry Cash ........................................................................................... 960,000 Unearned Sales Revenue ............................................. Adjusting Entry Unearned Sales Revenue ..................................................... Sales Revenue ............................................................ ($960,000  12)

150,000

960,000

80,000 80,000

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 311 (Cont.) (c) Journal Entry Cash ........................................................................................... 250,000 Notes Payable ............................................................. Adjusting Entry Interest Expense ................................................................... Interest Payable ........................................................... ([$250,000  6%]  1/12 = $1,250) (d) Journal Entry Prepaid Advertising .............................................................. Cash ............................................................................ Adjusting Entry Advertising Expense ............................................................. Prepaid Advertising ...................................................... (($3,000  20)  60 = $1,000)

250,000

1,250 1,250

3,000 3,000

1,000 1,000

(e) Journal Entry None Adjusting Entry Accounts Receivable (140,000 x .10) .................................... Sales Revenue ............................................................

14,000 14,000

Ans: N/A, LO 2, 3, Topic: Adjusting Entries for Accruals, Deferrals, Subtopic: Summary of Basic Relationships, Bloom: AP, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Ex. 312 A company has an accounting fiscal year, which ends on June 30. The company also has a policy of paying the weekly payroll on Friday. Payroll records indicate the following salary costs were incurred. Date Amount Monday June 28 $3,200 Tuesday June 29 2,800 Wednesday June 30 2,900 Thursday July 1 3,000 Friday July 2 2,600 Instructions: (a)

Prepare any necessary adjusting journal entries that should be made at year-end on June 30.

(b)

Prepare the journal entry to record the payment of the weekly payroll on July 2.

Accrual Accounting Concepts

Solution 312 (a) June 30 Salaries and Wages Expense ...................................... Salaries and Wages Payable .............................. (To accrue salaries incurred but not yet paid)

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8,900 8,900

(June 28, 29 and 30 amounts: $3,200 + $2,800 + $2,900)

(b) July 2

Salaries and Wages Payable ....................................... Salaries and Wages Expense ...................................... Cash .................................................................... (To record payment of July 2 payroll)

8,900 5,600* 14,500

*(July 1 and 2 amounts: $3,000 + $2,600) Ans: N/A, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Salaries, Bloom: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Ex. 313 On Friday of each week, a company pays its personnel weekly wages amounting to $45,000 for a five-day work week. Instructions: (a)

Prepare the necessary adjusting entry at year-end, assuming December 31 falls on Wednesday.

(b)

Prepare the journal entry for payment of the week's wages on the payday, which is Friday, January 2 of the next year.

Solution 313 (a) Dec. 31 Salaries and Wages Expense ....................................... Salaries and Wages Payable ............................... ([$45,000  5  3 = $27,000)............................................ (b) Jan. 2

Salaries and Wages Payable ........................................ Salaries and Wages Expense ....................................... Cash ....................................................................

27,000 27,000

27,000 18,000* 45,000

*$45,000/5*2 = $18,000 Ans: N/A, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Salaries, Bloom: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

4-104

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ex. 314 Presented below is the Trial Balance and Adjusted Trial Balance for Stabler Company on December 31. STABLER COMPANY Trial Balance December 31

Cash Accounts Receivable Prepaid Rent Supplies Equipment Accumulated Depreciation— Equipment Accounts Payable Notes Payable Interest Payable Salaries and Wages Payable Unearned Service Revenue Common Stock Dividends Service Revenue Salaries and Wages Expense Utilities Expense Rent Expense Supplies Expense Depreciation Expense Interest Expense Totals

Before Adjustment Dr. Cr. $ 3,000 2,800 2,100 1,200 18,000

After Adjustment Dr. Cr. $ 3,000 3,700 1,500 700 18,000

$ 1,300 2,700 10,000

$ 1,500 3,000 10,000 120 800 4,060 8,200

4,460 8,200 3,200

3,200 8,000

2,060 1,800 500

$34,660

9,300 2,860 2,100 1,100 500 200 120 $36,980

$36,980

Instructions: Prepare in journal form, with explanations, the adjusting entries that explain the changes in the balances from the trial balance to the adjusted trial balance.

Accrual Accounting Concepts

Solution 314 Accounts Receivable ........................................................................... Service Revenue ........................................................................ (To record revenue earned but not yet recognized or collected)

4-105

900 900

Rent Expense ..................................................................................... Prepaid Rent .............................................................................. (To record expiration of prepaid rent)

600

Supplies Expense ............................................................................... Supplies ..................................................................................... (To record supplies used)

500

Depreciation Expense ......................................................................... Accumulated Depreciation—Equipment ..................................... (To record depreciation expense)

200

Salaries and Wages Expense ............................................................. Salaries and Wages Payable ............................................................. (To record salaries owed, not yet paid or recorded)

800

Interest Expense ................................................................................. Interest Payable ......................................................................... (To record accrued interest payable)

120

Unearned Service Revenue ................................................................ Service Revenue ........................................................................ (To record revenue for services performed)

400

Utilities Expense ................................................................................. Accounts Payable ....................................................................... (To record receipt of utility bill)

300

600

500

200

800

120

400

300

Ans: N/A, LO 2,3, Topic: Adjusting Entries for Accruals, Deferrals, Subtopic: Summary of Basic Relationships, Bloom: AP, Difficulty: Medium, TOT: 20 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ex. 315 The Katy’s Petting Zoo operates a drive-through tourist attraction in Maine. The company adjusts its accounts at the end of each month. The selected accounts appearing below reflect balances after adjusting entries were prepared on April 30. The adjusted trial balance shows the following: Prepaid Rent $ 18,000 Buildings 42,000 Accumulated Depreciation—Buildings 5,500 Unearned Ticket Revenue 600 Other data: 1. Three months’ rent had been prepaid on April 1. 2. The buildings are being depreciated at $6,000 per year. 3. The unearned ticket revenue represents tickets sold for future zoo visits. The tickets were sold at $4.00 each on April 1. During April, twenty of the tickets were used by customers. Instructions: (a)

(b)

Calculate the following: 1. Monthly rent expense. 2. The age of the buildings in months. 3. The number of tickets sold on April 1. Prepare the adjusting entries that were made by the Katy’s Petting Zoo on April 30.

Solution 315 (a) 1. $9,000. The $18,000 balance on the adjusted trial balance reflects two months remaining on the prepaid rent. This indicates that the monthly rent is $9,000. 2. The buildings are 11 months old. By dividing annual depreciation ($6,000) by 12, the monthly depreciation expense is $500. The accumulated depreciation account shows $5,500, which means that depreciation has been taken for 11 months. 3. 170 tickets were originally sold. Twenty tickets were used in April at $4.00 each. The adjusted trial balance shows a balance of $600 indicating that 150 tickets are still outstanding. By adding the 20 used in April to the 150 still remaining to be used, 170 tickets must have been sold on April 1. (b)

1. Rent Expense ....................................................................... Prepaid Rent ................................................................

9,000

2. Depreciation Expense .......................................................... Accumulated Depreciation—Buildings .........................

500

3. Unearned Ticket Revenue .................................................... Ticket Revenue ............................................................ (20  $4 = $80)

9,000 500 80

Ans: N/A, LO 2, Topic: Adjusting Entries for Deferrals, Subtopics: Prepaid Expenses, Unearned Revenues, Bloom: AP, Difficulty: Hard, TOT: 15 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Accrual Accounting Concepts

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Ex. 316 The adjusted trial balance of A1 Financial Planners appears below and using the information from the adjusted trial balance, you are to prepare for the month ending December 31: 1. an income statement; 2. a retained earnings statement; and 3. a balance sheet. A1 FINANCIAL PLANNERS Adjusted Trial Balance December 31, 2025 Cash ................................................................................................... Accounts Receivable ........................................................................... Supplies .............................................................................................. Equipment ........................................................................................... Accumulated Depreciation—Equipment .............................................. Accounts Payable ............................................................................... Unearned Service Revenue ................................................................ Common Stock .................................................................................... Retained Earnings .............................................................................. Dividends ............................................................................................ Service Revenue ................................................................................. Supplies Expense ............................................................................... Depreciation Expense ......................................................................... Rent Expense .....................................................................................

Solution 316 1.

Debit $ 15,400 2,200 1,800 15,500

Credit

$ 4,000 3,000 5,000 15,000 7,400 3,500 9,500 1,100 2,500 1,900 $43,900

$43,900

A1 FINANCIAL PLANNERS Income Statement For the Month Ended December 31, 2025

Revenues Service Revenue ........................................................................ Expenses Depreciation Expense ................................................................ Rent Expense ............................................................................. Supplies Expense ....................................................................... Total Expenses ..................................................................... Net Income ..........................................................................................

$ 9,500 $2,500 1,900 1,100 5,500 $ 4,000

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 316 (Continued) 2.

A1 FINANCIAL PLANNERS Retained Earnings Statement For the Month Ended December 31, 2025

Retained Earnings, December 1 ......................................................... Plus: Net Income ...............................................................................

$ 7,400 4,000 11,400 3,500 $ 7,900

Less: Dividends ................................................................................. Retained Earnings, December 31 .......................................................

A1 FINANCIAL PLANNERS Balance Sheet December 31, 2025

Assets Cash .................................................................................................... Accounts Receivable .......................................................................... Supplies .............................................................................................. Equipment ........................................................................................... Less: Accumulated Depreciation—Equipment .................................. Total Assets ...............................................................................

$15,400 2,200 1,800 $15,500 4,000

Liabilities and Stockholders’ Equity Liabilities Accounts Payable .............................................................................. $ 3,000 Unearned Service Revenue ....................................................... 5,000 Total Liabilities ...................................................................... Stockholders’ Equity Common Stock............................................................................ 15,000 Retained Earnings ...................................................................... 7,900 Total Liabilities and Stockholders’ Equity ..............................

11,500 $30,900

$ 8,000

22,900 $30,900

Ans: N/A, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing Financial Statements, Bloom: AP, Difficulty: Hard, TOT: 20 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Accrual Accounting Concepts

Ex. 317 The adjusted trial balance shown below is for Acme Company at the end of its fiscal year: ACME COMPANY Adjusted Trial Balance March 31, 2025 Cash ................................................................................................... Accounts Receivable ........................................................................... Supplies .............................................................................................. Prepaid Insurance ............................................................................... Equipment ........................................................................................... Accumulated Depreciation—Equipment .............................................. Accounts Payable ............................................................................... Salaries and Wages Payable .............................................................. Unearned Rent Revenue .................................................................... Common Stock .................................................................................... Retained Earnings .............................................................................. Dividends ............................................................................................ Service Revenue ................................................................................. Rent Revenue ..................................................................................... Salaries and Wages Expense ............................................................. Supplies Expense ............................................................................... Rent Expense ..................................................................................... Insurance Expense ............................................................................. Depreciation Expense .......................................................................... Instructions: Prepare the closing entries for the temporary accounts at March 31.

Debit $12,900 9,400 700 2,500 16,000

Credit

$ 4,800 5,800 1,100 600 15,000 5,600 5,800 34,600 14,400 18,100 1,800 12,000 1,500 1,200 $81,900

$81,900

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 317 March 31 Service Revenue ............................................................. Rent Revenue.................................................................. Income Summary....................................................... 31

34,600 14,400 49,000

Income Summary............................................................. 34,600 Salaries and Wages Expense..................................... Rent Expense............................................................. Supplies Expense....................................................... Insurance Expense..................................................... Depreciation Expense ................................................

31 31

Income Summary............................................................. Retained Earnings ....................................................

14,400

Retained Earnings ........................................................... Dividends .................................................................

5,800

18,100 12,000 1,800 1,500 1,200 14,400 5,800

Ans: N/A, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing Closing Entries, Bloom: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

COMPLETION STATEMENTS 318.

The

assumption states that the economic life of a business can be divided

into artificial time periods. Ans: periodicity, LO 1, Topic: Accrual-Basis Accounting and Adjusting Entries, Subtopic: NA, Bloom: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

319.

The

principle gives accountants guidance as to when revenue is to be rec-

orded. Ans: revenue recognition, LO 1, Topic: Accrual-Basis Accounting and Adjusting Entries, Subtopic: The Revenue Recognition Principle, Bloom: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

320.

In a service company, revenue is earned when the service is

Ans: performed, LO 1, Topic: Accrual-Basis Accounting and Adjusting Entries, Subtopic: Five-Step Revenue Recognition Process, Bloom: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

321.

The

expense

recognition

principle

attempts

match

with

. Ans: expenses, revenues, LO 1, Topic: Accrual-Basis Accounting and Adjusting Entries, Subtopic: The Expense Recognition Principle, Bloom: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Accrual Accounting Concepts

322.

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Expenses paid and recorded in an asset account before they are used or consumed are

called

. Revenue received and recorded as a liability before it is earned is

referred to as

Ans: prepaid expenses, unearned revenue or deferred revenue, LO 1, Topic: Accrual-Basis Accounting and Adjusting Entries, Subtopic: Types of Adjusting Entries, Bloom: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

323.

Failure to adjust a prepaid expense account for the amount expired will cause to be understated and

to be overstated.

Ans: expenses, assets, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Prepaid Expenses, Bloom: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

324.

Depreciation is an

concept, not a

concept.

Ans: allocation, valuation, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Need for Adjustment, Bloom: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

325.

An adjusting entry recording accrued salaries for a period indicates that Salaries and Wages Expense has been

but has not yet been

or record-

ed. Ans: incurred, paid, LO 3, Topic: Adjusting Entries for Accruals, Subtopic: Accrued Salaries, Bloom: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

326.

An adjusted trial balance proves the after all

of the total debit and credit balances

entries have been made.

Ans: equality, adjusting, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing the Adjusted Trial Balance, Bloom: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

327.

In addition to updating Retained Earnings, in each

entries produce a zero balance

account.

Ans: closing, temporary, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing Closing Entries, Bloom: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

328.

After all closing entries are journalized and posted, a

trial balance is

prepared from the ledger. Ans: post-closing, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Preparing a Post-Closing Trial Balance, Bloom: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Answers to Completion Statements 318. 319. 320. 321. 322. 323.

periodicity revenue recognition performed expenses, revenues prepaid expenses, unearned revenue or deferred revenue expenses, assets .

324. 325. 326. 327. 328.

allocation, valuation incurred, paid equality, adjusting closing, temporary post-closing

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

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MATCHING 329. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.

Periodicity assumption Cash basis Revenue recognition principle Prepaid expenses Expense recognition principle

F. G. H. I. J.

Accrued revenues Depreciation Post-closing trial balance Accrued expenses Book value

1. Events recorded only in periods the company receives or pays cash 2. Expenses paid before they are incurred 3. Cost less accumulated depreciation 4. The economic life of a business can be divided into artificial time periods 5. Efforts are related to accomplishments 6. Includes only permanent—balance sheet—accounts 7. Revenue is recognized when the performance obligation is satisfied. 8. Revenues earned but not yet received 9. Expenses incurred but not yet paid 10. A cost allocation process

Answers to Matching 1. 2. 3. 4. 5.

B D J A E

6. 7. 8. 9. 10.

H C F I G

Ans: N/A, LO 1, 2, 3, 4 Topic: NA, Subtopic: NA, BT: K, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Accrual Accounting Concepts

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SHORT-ANSWER ESSAY QUESTIONS S-A E 330 You are part of a group of individuals (incorporators) who want to form a new corporation. During discussions on forming the business, Mark Adams makes this statement: Our business will have accounts receivable and accounts payable. It will also acquire a substantial amount of computers. Will it be acceptable to use the cash basis of accounting? Prepare a response for Mark and the other incorporators. Solution 330 Considering the proper basis of accounting to use is an important decision that should be addressed before the business is started. Thus, this is an excellent time to look at the differences between the cash and accrual basis of accounting. When the cash basis is used, revenue is recorded when cash is received and expenses are recorded when cash is paid. This is not an objective approach in determining net income because the receipt and payment of cash does not reflect the efforts and accomplishments of the business. Also, accounts receivable, accounts payable and depreciation are not recognized in the accounting records. The use of the accrual basis of accounting overcomes these problems. Revenue is recorded when the performance obligation is satisfied and expenses are recorded when they are incurred. This represents an objective way of matching efforts and accomplishments of the accounting period. In addition, accounts receivable and accounts payable are recorded and their balances are shown on the balance sheet. The business has access to these balances during the accounting period and can make important decisions about them. Since the business has computers, it is important to record a portion of their costs as expense each accounting period. This process is called depreciation. Instead of showing the cost as an expense when the computers are purchased (cash basis), the cost is allocated to the accounting periods in which the computers are used (accrual basis). This makes net income more meaningful because it reflects a matching of the expense to the period in which revenues were recognized. The cost of the computers, less the accumulation of depreciation that has been taken, is shown as an asset on the balance sheet. Thus, the user can see that these assets are available for future use. Also, generally accepted accounting principles require the use of the accrual basis of accounting because it reports the effect of transactions which change the financial statements in the periods in which the events occur, not when the related cash changes hands. It will be better to use the accrual basis of accounting. Ans: N/A, LO 1, Topic: Accrual-Basis Accounting and Adjusting Entries, Subtopic: The Need for Adjusting Entries, Bloom: C, Difficulty: Medium, TOT: 20 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA: Reporting

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S-A E 331 The income statement is an important financial statement used by individuals who are interested in the operations of a business enterprise. Explain how the periodicity assumption and the revenue recognition and expense recognition principles provide guidance to accountants in preparing an income statement. Solution 331 The periodicity assumption assumes that the financial and operating life of an accounting entity, such as a business enterprise, can be broken up into arbitrary time periods. The revenue recognition and expense recognition principles are the basic rules for allocating revenues and expenses to these arbitrary time periods under the accrual basis of accounting. The revenue recognition principle dictates the time period to which revenue is to be allocated and recognized, that is, on which income statement the revenue is to be reported. The expense recognition principle dictates the time period to which costs are allocated and recognized as expenses, that is, on which income statement the expenses are to be reported and matched against revenues in the determination of net income. Ans: N/A, LO 1, Topic: Accrual-Basis Accounting and Adjusting Entries, Subtopic: NA, Bloom: C, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA: Reporting

S-A E 332 As a recent graduate in accounting, and the financial director of a political candidate in a current election, you have been asked to explain many questions concerning how governmental accounting differs from corporate accounting. Required: (a) Discuss the differences between cash basis and accrual basis accounting. (b) Prepare a memo to your candidate explaining why governmental entities favor the cash basis of accounting.

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Solution 332 (a) The cash basis of accounting recognizes revenues and expenses when cash is received and paid. This can lead to misleading financial statements by simply speeding up or delaying the cash from sales and expense transactions. The accrual basis of accounting recognizes revenues and expenses when those items occur. Information presented on an accrual basis reveals relationships that are useful in predicting future results. (b)

TO: Candidate FROM: Financial director SUBJECT: Governmental Accounting Practice Governments favor the cash basis of accounting because expenses are only recognized when paid. This results in a large number of unrecorded liabilities that if recorded, would make the government’s deficits even larger than currently reported. No elected official or governmental bureaucrat wants to be held accountable for increasing the deficit because of changing to the accrual basis of accounting.

S-A E 333 The long-term liability section of Alpha Corporation’s Balance Sheet includes the following accounts Notes Payable Mortgage Payable Salaries and Wages Payable Accumulated Depreciation Total Long-Term Liabilities

$100,000 250,000 75,000 125,000 $550,000

Alpha Corporation is an established company and does not experience any financial difficulties or have any cash flow problems. Discuss at least two items that are questionable as long-term liabilities. Solution 333 Salaries and Wages Payable should not be reported as a long-term liability. This represents the amounts owed to employees. If the corporation does not have any financial difficulties or cash flow problems, the salaries should be paid within one year. Accumulated Depreciation is a contra asset account. The balance is subtracted from the cost of the related asset in the Property, Plant, and Equipment section of the balance sheet. Are all of the notes payable, including the mortgage, actually long-term (due after one year)? If not, the portion due within one year should be reported as a current liability instead. Ans: N/A, LO 1, 2, & 3, Topic: NA, Subtopic: NA, Bloom: C, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA: Reporting

S-A E 334 .

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What is the purpose of the preparation of adjusting entries? Solution 334 Adjusting entries are needed to ensure that the revenue recognition and expense recognition principles are followed. The use of adjusting entries makes it possible to produce accurate financial statements at the end of the period. Their purpose is to bring all accounts up to date. Ans: N/A, LO 1, Topic: Accrual-Basis Accounting and Adjusting Entries, Subtopic: The Need for Adjusting Entries, Bloom: K, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Communication, IMA: Reporting

S-A E 335 Briefly distinguish between a deferral and an accrual. Solution 335 A deferral is the postponement of the recognition of an expense already paid or of a revenue already received. An accrual is the recognition of an expense or revenue that has been incurred but that has not yet been recorded, and cash has not been paid or received. Ans: N/A, LO 1, Topic: Accrual-Basis Accounting and Adjusting Entries, Subtopic: Types of Adjusting Entries, Bloom: C, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Communication, IMA: Reporting

S-A E 336 In developing an accounting information system, it is important to establish procedures whereby all transactions that affect the components of the accounting equation are recorded. Why then, is it often necessary to adjust the accounts before financial statements are prepared even in a properly designed accounting system? Identify the major types of adjustments that are frequently made and give a specific example of each. Solution 336 Account balances must be adjusted before financial statements are prepared, even in a properly designed accounting system, because (1) some events are not recorded daily because it is not efficient to do so, and (2) some costs are not recorded during the accounting period because these costs expire with the passage of time rather than as a result of recurring daily transactions, and (3) some items may be unrecorded. Deferrals are types of adjustments of recorded transactions that must be allocated to future periods as well as the current period. Examples of deferral-type adjustments are prepaid rent, prepaid insurance, and unearned revenue. Accruals are adjustments of unrecorded transactions that must be recognized in the current period. Examples of accrual-type adjustments are salaries and wages payable, interest payable, and interest receivable. Ans: N/A, LO 1, Topic: Accrual-Basis Accounting and Adjusting Entries, Subtopic: Types of Adjusting Entries, Bloom: K, Difficulty: Medium, TOT: 7 min., AACSB: Analytic, AICPA BC: None, AICPA AC: Medium, AICPA PC: None, IMA: Reporting

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S-A E 337 Companies are continually under pressure to “Make the Numbers” – to have earnings that are in line with expectations. Explain the terms earnings management and quality of earnings. Solution 337 Earnings management is the planned timing of revenues, expenses, gains, and losses to smooth out bumps in net income. Such action is undertaken to help a company meet target financial numbers. Quality of earnings indicates the level of full and transparent information that a company provides to users of financial statements. Ans: N/A, LO 4, Topic: The Adjusted Trial Balance and Closing Entries, Subtopic: Quality of Earnings, Bloom: C, Difficulty: Easy, TOT: 5 min., AACSB: Ethics, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA: Reporting

S-A E 338 (Ethics) Benson and Jencks is a manufacturing company that specializes in writing instruments. The past year was a difficult one for the company, as it sought to retain its share in a market in which the largest competitors were also rapid innovators. Benson and Jencks introduced a new product late in the year, even though testing was not complete. It was a pen designed with two cartridges: one supplying ink and the other correction fluid. A person could then switch easily between writing and correcting errors. It was priced fairly high and was never heavily advertised. Even so, the Correct-OPen, as the product was named, was an overwhelming success. The success of the product has Fern Donald, the manager of the New Products division, worried, however. She was concerned that quality problems would begin occurring, since the longevity of the pen and stability of the correction fluid formulation had not been tested. She did not want sales personnel to get the bonuses that appeared to be indicated, since they might aggressively promote a product that would fail in use. She preferred to complete testing of the pen first, so that more confidence could be placed in the results. Top management, however, declined the tests. Ms. Donald then instructed you, the accountant, not to prorate payroll taxes or rent expense for the rest of the year, but to show them as current expenses in total. In this way, the new product would appear to be only slightly profitable. Required: 1. Describe the alternatives that you as an accountant would have in this situation. 2. Indicate which alternative is best.

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Solution 338 1. The choices include: 1. Follow the manager's instructions. 2. Explain to the manager why you cannot follow her instructions. 3. Report the manager's actions to her superior. 4. Resign. There are probably other alternatives as well. Students should be able to come up with at least #1 and #2. 2. Of the choices, #1 is unethical because it will cause the financial statements to be misleading. #3 and #4 are rather drastic measures that do not seem to be indicated, at least not yet. #2, therefore, is the best choice. Ans: N/A, LO 1, Topic: NA, Subtopic: NA, BT: E, Difficulty: Medium, TOT: 10 min., AACSB: Ethics, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA: Reporting

S-A E 339 (Communication) A new sales representative, Ed Welty, has just received his copy of the month-end financial reports. He is puzzled by the term "unearned revenue." He left the following e-mail message for you on the company's internal back channel: What is this??? Creative Accounting, or what??? Line item 12 on year-to-date financials shows over $25Gs in Unearned Revenue!!! Come on, guys! Either we earned it, or we didn't. Right??! Is this how you guys lower our commissions? Reply to e.welty@sbd.com

Required: Write a response to send to Ed. (Since the answer is being prepared for a "back channel" type system, it can be in informal language and can respond in kind to the humor. However, proper grammar and spelling are essential, as is the message about what unearned revenue really is.)

IFRS QUESTIONS True-False Statements 1.

The cash basis of accounting is not in accordance with IFRS.

Ans: T, LO 6, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

The expense recognition principle requires that efforts be matched with accomplishments.

Ans: T, LO 6, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Adjusting entries are needed to enable financial statements to conform to International Financial Reporting Standards (IFRS).

Ans: T, LO 6, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

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Multiple Choice Questions 4.

Which of the following are in accordance with IFRS? a. Accrual basis accounting b. Cash basis accounting c. Both accrual basis and cash basis accounting d. Neither accrual basis nor cash basis accounting

Ans: A, LO 6, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: Communication, IMA: Reporting

Wong Ho Company had the following transactions during 2021:    

Sales of ¥11,000 on account Collected ¥4,000 for services to be performed in 2022 Paid ¥1,250 cash in salaries Purchased airline tickets for ¥500 in December for a trip to take place in 2022

What is Wong Ho’s 2021 net income using accrual accounting? a. ¥9,750. b. ¥13,750. c. ¥13,250. d. ¥9,250. Ans: A, LO 6, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: Global and Industry Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: ¥11,000 - ¥1,250 = ¥9,750.

Under International Financial Reporting Standards, a. the cash-basis method of accounting is accepted. b. events are recorded in the period in which the event occurs. c. interim period financial statements are either a calendar year or a fiscal year. d. a fiscal year is an accounting time period encompassing less than 12 months.

Ans: B, LO 6, BT: K, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: Global and Industry Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

What is the proper adjusting entry at June 30, the end of the fiscal year, based on a prepaid insurance account balance before adjustment, € 20,500, and unexpired amounts per analysis of policies of €4,000? a. Debit Insurance Expense, € 4,000; Credit Prepaid Insurance, € 4,000. b. Debit Insurance Expense, € 20,500; Credit Prepaid Insurance, € 20,500. c. Debit Prepaid Insurance, € 16,500; Credit Insurance Expense, € 16,500. d. Debit Insurance Expense, € 16,500; Credit Prepaid Insurance, € 16,500.

Ans: D, LO 6, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: (€20,500 − €4,000 = €16,500)

Karcan, Inc. purchased supplies costing ₤2,500 on January 1, 2022 and recorded the transaction by increasing assets. At the end of the year ₤1,100 of the supplies are still on hand. How will the adjusting entry impact Karcan, Inc.’s statement of financial position at December 31, 2022? a. Decreased assets ₤1,100. b. Increased equity ₤1,100. .

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c. Increased liabilities ₤1,400. d. Decreased assets ₤1,400. Ans: D, LO 6, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: (₤2,500 − ₤1,100 = ₤1,400)

Karcan, Inc. purchased supplies costing ₤2,500 on January 1, 2022 and recorded the transaction by increasing assets. At the end of the year ₤1,100 of the supplies are still on hand. If Karcan, Inc. does not make the appropriate adjusting entry, what is the impact on its statement of financial position at December 31, 2022? a. Assets overstated by ₤ 1,400. b. Equity understated by ₤ 1,400. c. Equity overstated by ₤ 1,100. d. Assets overstated by ₤ 1,100.

Ans: A, LO 6, BT: AP, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: (₤2,500 − ₤1,100 = ₤1,400)

10.

Similarities between International Financial Reporting Standards and U.S. GAAP include all of the following except a. Cash-basis accounting is not in accordance with either IFRS or U.S. GAAP. b. Both IFRS and U.S. GAAP allow revaluation of items such as land and buildings to fair value. c. Both IFRS and U.S. GAAP divide the economic life of companies into artificial time periods. d. The revenue recognition principle is very similar under IFRS and U.S. GAAP.

Ans: B, LO 6, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Brief Exercises 11.

The statements of financial position of Rocky Acre Spread Ltd. include the following: 12/31/22 12/31/21 Interest Receivable €4,300 € -0Supplies 5,000 3,000 Salaries and Wages Payable 3,600 3,800 Unearned Service Revenue -04,000 The income statement for 2022 shows the following: Interest Revenue €14,400 Service Revenue 75,700 Supplies Expense 8,700 Salaries and Wages Expense 36,000 Instructions Calculate the following for 2022: 1. Cash received for interest. 2. Cash paid for supplies. 3. Cash paid for salaries and wages. .

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Cash received for service revenue.

Solution 11 (15 min.) 1. Cash received for interest Interest Revenue Less: Interest Receivable Cash Received 2. Cash paid for supplies Supplies Expense Less: Supplies (2021) Add: Supplies (2022) Cash Paid 3. Cash paid for salaries and wages Salaries and Wages Expense Add: Salaries and Wages Payable (2021)

€14,400 4,300 €10,100 €8,700 3,000 5,700 5,000 €10,700

Less: Salaries and Wages Payable (2022) Cash Paid

€36,000 3,800 39,800 3,600 €36,200

4. Cash received for revenue Service Revenue Less: Unearned Service Revenue (2021) Cash Received

€75,700 4,000 €71,700

€10,100

€10,700

€36,200

€71,700

LO 6, BT: AP Difficulty: Hard, TOT: 15 min., AACSB: Analytic, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

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Solution 339 Since the answer is being prepared for an internal "back channel" type system, it can be in informal language and can respond in kind to the humor. However, proper grammar and spelling are essential, as is the message about what unearned revenue really is. A proposed message follows: Ed—What a pleasant surprise to hear from you! Maybe you can teach those other guys in your department something about living in the present! Do you know some of them still write me notes on paper??? Unbelievable, right??! Now to your question. Your unearned revenue is the sales you made that us smart guys in accounting didn't figure you had earned, so we just took it away from you! Might as well save the company some dough for our own bonuses, right?? Seriously, Ed—unearned revenue is the result of you getting customers of the kind we like— they pay in advance! When they pay before we can even get their products made or shipped, we can't count the money they pay us as revenue. What we actually have is a liability—an obligation to make and ship products. So that's how us (smart guys) in accounting count it—as a liability. You happened to have about 25% of your sales that fit in that category. When production can catch up with orders, you'll get credit for the sales. (Take heart—It'll seem like Christmas all over again) Thanks again for actually using the system. Talk to me again sometime . . . Reply to … Ans: N/A, LO 2, Topic: Adjusting Entries for Deferrals, Subtopic: Unearned Revenues, Bloom: C, Difficulty: Medium, TOT: 20 min., AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA: Reporting

CHAPTER 5 MERCHANDISING OPERATIONS AND THE MULTIPLE-STEP INCOME STATEMENT CHAPTER LEARNING OBJECTIVES 1. Describe merchandising operations and inventory systems. Because of the presence of inventory, a merchandising company has sales revenue, cost of goods sold, and gross profit. To account for inventory, a merchandising company must choose between a perpetual inventory system and a periodic inventory system. 2. Record purchases under a perpetual inventory system. The Inventory account is debited for all purchases of merchandise and for freight costs, and it is credited for purchase discounts and purchase returns and allowances. 3. Record sales under a perpetual inventory system. When inventory is sold, Accounts Receivable (or Cash) is debited and Sales Revenue is credited for the selling price of the merchandise. At the same time, Cost of Goods Sold is debited and Inventory is credited for the cost of inventory items sold. Separate contra revenue accounts are maintained for Sales Returns and Allowances and Sales Discounts. These accounts are debited as needed to record returns, allowances, or discounts related to the sale. 4. Prepare a multiple-step income statement. In a single-step income statement, companies classify all data under two categories, revenues or expenses, and net income is determined in one step. A multiple-step income statement shows numerous steps in determining net income, including results of nonoperating activities. 5. Determine the cost of goods sold under a periodic inventory system. The periodic system uses multiple accounts to keep track of transactions that affect inventory. To determine the cost of goods sold, first calculate the cost of goods purchased by adjusting purchases for returns, allowances, discounts, and freight-in. Then calculate the cost of goods sold by adding the cost of goods purchased to beginning inventory and subtracting ending inventory. 6. Compute and analyze gross profit rate and profit margin. Profitability is affected by gross profit, as measured by the gross profit rate, and by management’s ability to control costs, as measured by the profit margin. *7. Record purchases and sales of inventory under a periodic inventory system. To record purchases, entries are required for (a) cash and credit purchases, (b) purchase returns and allowances, (c) purchase discounts, and (d) freight costs. To record sales, entries are required for (a) cash and credit sales, (b) sales returns and allowances, and (c) sales discounts. *8. Prepare adjusting entries for credit sales with returns and allowances. Adjusting credit sales for returns and allowances requires two entries at the end of the period. The first entry requires a debit to Sales Returns and Allowances and a credit to Refund Liability for the selling price of the estimated returns. The second entry requires a debit to Estimated Inventory Returns and a credit to Cost of Goods Sold for the cost of the estimated returns. Refund Liability is a liability account and reflects the estimated future amount owed to .

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customers in response to future returned goods. Estimated Inventory Returns will generally be added to the Inventory account at the end of the period. Difficulty: Easy: 137 Medium: 145 Hard: 12

QUESTION LIST BY SECTION Merchandising Operations and Inventory Systems (1): 1, 3, 13, 14, 15, 57, 58, 61, 62,63, 64, 65, 66, 67, 68, 69, 72, 73, 74, 81, 85, 245, 275, 276 Operating Cycles: 59 Flow of Costs: 76, 79, 82, 83 Perpetual System: 4, 8, 11, 16, 60, 70, 77, 78 Periodic System: 5, 9, 10, 12, 75, 80, 84 Advantages of the Perpetual System: 277 Recording Purchases Under a Perpetual System (2): 86, 87, 103 104, 107, 108, 109, 246, 278 Freight Costs: 116, 117, 118, 279, 294 Freight Costs Incurred by the Buyer: 89, 91, 110, 114 Freight Costs Incurred by the Seller: 17, 92, 111, 113, 115 Purchase Returns and Allowances: 88, 90, 98, 99, 280 Purchases Discounts: 18, 19, 20, 21, 22, 93, 94, 95, 96, 97, 100, 101, 102, 105, 106, 255 Summary of Purchasing Transactions: 256, 257, 258, 259, 260 Recording Sales Under a Perpetual System (3): 23, 24, 25, 26, 27, 31, 120, 121, 122, 123, 124, 125, 126, 133, 151, 152, 155, 157, 246, 248, 281, 287 Sales Returns and Allowances: 29, 119, 127, 128, 129, 134, 135, 136, 137, 154 Sales Discounts: 28, 30, 32, 33, 130, 131, 132, 138, 139, 140, 141, 142, 143, 144, 145, 146, 147, 148, 149, 150, 153, 156, 261 Data Analytics and Credit Sales: 34, 35 Multiple-Step Income Statement (4): Single-Step Income Statement: 37, 159, 160, 161, 167, 178, 253, 254 Multiple-Step Income Statement: 36, 38, 42, 44, 45, 163, 166, 169, 170, 180, 263, 289, 291 Sales: 173, 177, 179, 249 Gross Profit: 39, 164, 172, 176, 211, 216, 283 Operating Expenses: 43, 165, 174, 175, 290 Nonoperating Activities and Income Tax Expense: 40 Cost of Goods Sold Under a Periodic System (5): 46, 47, 186, 187, 188, 189, 190, 191, 192, 193, 194, 195, 196, 197, 198, 268, 269 Gross Profit and Profit Margin (6): 52, 199, 221, 252, 270 Gross Profit Rate: 48, 49, 50, 51, 200, 201, 203, 204, 205, 206, 207, 208, 209, 210, 213, 214, 218, 219, 220, 222, 223, 225, 226, 292, 293 Profit Margin: 202, 212, 215, 217, 284 Periodic Inventory System (7): 232 Recording Merchandise Transactions: 250, 251, 271, 272, 273, 274 Recording Purchases of Merchandise: 54, 227, 233 Freight Costs: 239, 240 Purchase Returns and Allowances: 229 Recording Sales of Merchandise: 234 .

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Sales Returns and Allowances: 53, 228 Sales Discounts: 230, 231, 236, 238 Comparison of Entries – Perpetual vs. Periodic: Adjusting Entries for Credit Sales with Returns and Allowances (8): 55, 56, 243, 244, 288

TRUE-FALSE STATEMENTS 1.

Retailers and wholesalers are both considered merchandising enterprises.

Ans: T, Topic: Merchandising Operations and Inventory Systems, Subtopic: NA, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

The operating cycle of a merchandising company is ordinarily shorter than that of a service company.

Ans: F, LO: 1, Topic: Merchandising Operations, Subtopic: Operating Cycle, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

Sales revenue minus operating expenses equals gross profit.

Ans: F, LO: 1, Topic: Merchandising Operations, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

Under a perpetual inventory system, cost of goods sold is determined each time a sale occurs.

Ans: T, LO: 1, Topic: Merchandising Operations, Subtopic: Perpetual System, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

A periodic inventory system does not require a detailed record of inventory items.

Ans: T, LO: 1, Topic: Merchandising Operations, Subtopic: Periodic System, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

The operating cycle of a merchandiser involves the purchase and sale of inventory as well as the subsequent collection of cash from credit sales.

Ans: T, LO: 1, Topic: Merchandising Operations, Subtopic: Operating Cycle, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

The purchase of inventory and its eventual sale lengthen the operating cycle of a merchandising company.

Ans: T, LO: 1, Topic: Merchandising Operations, Subtopic: Operating Cycle, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

Under the periodic inventory system, the cost of goods sold account is updated each time a sale is made.

Ans: F, LO: 1, Topic: Merchandising Operations, Subtopic: Perpetual System, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

An advantage of using the periodic inventory system is that it requires fewer journal entries than the perpetual inventory system.

Ans: T, LO: 1, Topic: Merchandising Operations, Subtopic: Periodic System, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

10.

The periodic inventory system provides an up-to-date balance of inventory on hand.

Ans: F, LO: 1, Topic: Merchandising Operations, Subtopic: Periodic System, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

11.

A very small business most likely would use a perpetual inventory system.

Ans: F, LO: 1, Topic: Merchandising Operations, Subtopic: Perpetual System Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB:

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12.

Technology has greatly increased the use of periodic inventory systems.

Ans: F, LO: 1, Topic: Merchandising Operations, Subtopic: Periodic System, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Technology and Tools, AICPA PC: None, IMA: Reporting and Control

13.

Cost of Goods Sold is considered an expense of a merchandising firm.

Ans: T, LO: 1, Topic: Merchandising Operations, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

14.

Operating expenses are subtracted from revenue for a service enterprise and from gross profit for a merchandising enterprise.

15.

Net sales minus cost of goods sold is called gross profit.

16.

Under the perpetual inventory system, purchases of merchandise for sale are recorded in the Inventory account.

Ans: T, LO: 2, Bloom: K, Topic: Merchandising Operations, Subtopic: Perpetual System, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

17.

Freight costs incurred by the seller on outgoing merchandise are an operating expense to the seller.

Ans: T, LO: 2, Topic: Recording Purchases Under a Perpetual System, Subtopic: Freight Costs Incurred by the Seller, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

18.

The terms 2/10, n/30 mean that a 2 percent discount is allowed on payments made within the 10 day discount period.

Ans: T, LO: 2, Topic: Recording Purchases Under a Perpetual System, Subtopic: Purchase Discounts, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

19.

A buyer who acquires merchandise under credit terms of 1/10, n/30 has 20 days after the invoice date to take advantage of the cash discount.

Ans: F, LO: 2, Topic: Recording Purchases Under a Perpetual System, Subtopic: Purchase Discounts, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

20.

Discounts taken by the buyer for early payment of an invoice are called sales discounts by the buyer.

Ans: F, LO: 2, Topic: Recording Purchases Under a Perpetual System, Subtopic: Purchase Discounts, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

21.

If merchandise costing $5,000, with terms 2/10, n/30, is paid within 10 days, the amount of the purchase discount is $100.

Ans: T, LO: 2, Topic: Recording Purchases Under a Perpetual System, Subtopic: Purchase Discounts, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Quantitative Methods Solution: $5,000 x .02 = $100 (Cost x Purchase discount percentage = Purchase discount)

22.

When an invoice is paid within the discount period, the amount of the discount decreases the cost of the inventory. .

Merchandising Operations

5-5

23.

Sales revenue is only earned during the period in which the cash is collected from the buyer.

Ans: F, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

24.

Cash register documents provide evidence of credit sales.

25.

The Sales Returns and Allowances account and the Sales Discount account are both classified as expense accounts.

Ans: F, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

26.

The revenue recognition principle is applied to merchandising companies by recognizing sales revenues when the performance obligation is satisfied.

Ans: T, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

27.

Sales allowances and sales discounts are both designed to encourage customers to pay their accounts promptly.

Ans: F, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: NA, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

28.

Sales Discounts is a contra revenue account to Sales Revenue.

Ans: T, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: Sales Discounts, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

29.

The normal balance of the Sales Returns and Allowances account is a credit.

Ans: F, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: Sales Returns and Allowances, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

30.

When the terms of sale include a sales discount, it usually is advisable for the buyer to pay within the discount period.

Ans: T, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: Sales Discounts, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

31.

Sales Discounts and Sales Returns and Allowances both have normal debit balances.

32.

Merchandise is sold for $5,000 with terms 1/10, n/30. If $1,000 of the merchandise is returned prior to payment and the invoice is paid within the discount period, the amount of the sales discount is $40.

Ans: T, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: Sales Discounts, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Quantitative Methods Solution: ($5,000 - $4,000) x .01 = $40 (Sale rev. – Return) x discount

33.

The terms 2/10, n/30 mean that a 2 percent discount is allowed on payments made over .

5-6

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

10 but before 30 days after the invoice date. Ans: F, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: Sales Discounts Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Quantitative Methods

34.

Data analytics can be useful in refining sales discounts and sales returns and allowances policies.

Ans: T, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: Data Analytics and Credit Sales, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Quantitative Methods

35.

Data analytics can be useful in refining purchase discounts and purchase returns and allowances policies.

Ans: F LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: Data Analytics and Credit Sales, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Quantitative Methods

36.

The multiple-step income statement is considered by some to be more useful than the single-step income statement because it highlights the components of net income.

Ans: T, LO: 4, Topic: Multiple Step Income Statements, Subtopic: Multiple-Step Income Statements, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

37.

In a single-step income statement, only one step is required in determining net income.

Ans: T, LO: 4, Topic: Multiple Step Income Statements, Subtopic: Single-Step Income Statements, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

38.

Freight-out is reported as an operating expense in the income statement.

39.

Gross profit appears on both the single-step and multiple-step forms of an income statement.

Ans: F, LO: 4, Topic: Multiple Step Income Statements, Subtopic: Gross Profit, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

40.

Nonoperating activities include revenues and expenses that are related to the company’s main line of operations.

Ans: F, LO: 4, Topic: Multiple Step Income Statements, Subtopic: Nonoperating Activities and Income Tax Expense Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

41.

Operating expenses include interest expense and income tax expense.

Ans: F, LO: 4, Topic: Multiple Step Income Statements, Subtopic: Nonoperating Activities and Income Tax Expense, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

42.

Income from operations appears on both the single-step and multiple-step forms of an income statement.

Ans: F, LO: 4, Topic: Multiple Step Income Statements, Subtopic: Multiple-Step Income Statements, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

43.

A merchandising company’s net income is determined by subtracting operating expenses from gross profit.

Ans: T, LO: 4, Topic: Multiple Step Income Statements, Subtopic: Operating Expenses, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

44.

Sales revenues, cost of goods sold, and gross profit are amounts on a merchandising company's income statement not commonly found on the income statement of a service .

Merchandising Operations

5-7

company. Ans: T, LO: 4, Topic: Multiple Step Income Statements, Subtopic: Multiple-Step Income Statements, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

45.

The income statement for a merchandising company presents only two amounts not shown on a service company’s income statement.

Ans: F, LO: 4, Topic: Multiple Step Income Statements, Subtopic: Multiple-Step Income Statements, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

46.

Under the periodic system, the Purchases account is used to accumulate all purchases of merchandise for resale.

Ans: T, LO: 5, Topic: Cost of Goods Sold Under a Periodic System, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

47.

With the periodic inventory system, goods available for sale must be calculated before determining cost of goods sold.

48.

If net sales are $750,000 and cost of goods sold is $600,000, the gross profit rate is 20%.

Ans: T, LO: 6, Topic: Gross Profit and Profit Margin, Subtopic: Gross Profit Rate, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: ($750,000 - $600,000) / $750,000 = .20 or 20% (Sales rev. – COGS)/ Sales rev.

49.

The gross profit dollar amount is generally considered to be more informative than the gross profit rate.

Ans: F, LO: 6, Topic: Gross Profit and Profit Margin, Subtopic: Gross Profit Rate, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

50.

Gross profit rate is computed by dividing the cost of goods sold by net sales.

Ans: F, LO: 6, Topic: Gross Profit and Profit Margin, Subtopic: Gross Profit Rate, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

51.

The quality of earnings ratio is calculated as net income divided by net cash provided by operating activities.

52.

A quality of earnings ratio significantly less than 1 suggests that a company may be using more aggressive accounting techniques in order to accelerate income recognition.

Ans: T, LO: 6, Topic: Gross Profit and Profit Margin, Subtopic: NA, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

*53.

Under the periodic system, when a customer returns goods, Purchase Returns and Allowances is debited.

Ans: F, LO: 7, Topic: Periodic Inventory System, Subtopic: Sales Returns and Allowances, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

*54.

Under the periodic inventory system, acquisitions of merchandise are not recorded in the Inventory account.

Ans: T, LO: 7, Topic: Periodic Inventory Systems, Subtopic: Recording Purchases of Merchandise, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

*55. The balance in the Refund Liability account is the estimated future amount expected to be .

5-8

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

collected from suppliers when goods purchased in the future are returned. Ans: F, LO: 8, Topic: Adjusting Entries for Credit Sales with Returns and Allowances, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

*56. The balance in Estimated Inventory Returns is generally deducted from Inventory on the Balance sheet. Ans: F, LO: 8, Topic: Adjusting Entries for Credit Sales with Returns and Allowances, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

MULTIPLE CHOICE QUESTIONS 57.

Merchandising companies that sell to retailers are known as a. brokers. b. corporations. c. wholesalers. d. service firms.

Ans: C, LO: 1, Section: Merchandising Operations and Inventory Systems, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

58.

Which of the following would not be considered a merchandising operation? a. Retailer b. Wholesaler c. Service firm d. Merchandising company

59.

Which of the following activities is not a component of the operating cycle of a merchandiser? a. Sale of merchandise b. Issuing stock to owners c. Collection of cash from merchandise sales d. Purchase of merchandise

Ans: B, LO: 1, Section: Merchandising Operations and Inventory Systems, Subtopic: Operating Cycles, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

60.

Which statement below is true concerning a perpetual inventory system? a. It allows for the determination of cost of goods sold after each sale. b. It does not require a physical inventory count to verify the cost of goods on hand. c. Cost of goods sold is determined based on a physical count at the end of the period. d. It is used infrequently due to the high cost of determining the cost of goods acquired.

Ans: A, LO: 1, Section: Merchandising Operations and Inventory Systems, Subtopic: Perpetual Systems, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

61.

Gross profit equals the difference between .

Merchandising Operations

a. b. c. d.

5-9

net income and operating expenses. net sales and cost of goods sold. net sales and operating expenses. net sales and cost of goods sold plus operating expenses.

Ans: B, LO: 1, Section: Merchandising Operations and Inventory Systems, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

62.

Each of the following companies is a merchandising company except a a. wholesale parts company. b. candy store. c. moving company. d. furniture store.

Ans: C, LO: 1, Section: Merchandising Operations and Inventory Systems, Subtopic: NA, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

63.

Net income will result if gross profit exceeds a. cost of goods sold. b. operating expenses. c. purchases. d. cost of goods sold plus operating expenses.

Ans: B, LO: 1, Section: Merchandising Operations and Inventory Systems, Subtopic: NA, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

64.

A merchandiser will earn an operating income of exactly $0 when a. net sales equals cost of goods sold. b. cost of goods sold equals gross profit. c. operating expenses equal net sales. d. gross profit equals operating expenses.

Ans: D, LO: 1, Section: Merchandising Operations and Inventory Systems, Subtopic: NA, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

65.

With regard to accounting for a merchandising company versus a service company, which of the following is true? a. Additional accounts and entries are typically required for a service company. b. Retailers and wholesalers can be either service companies or merchandising companies. c. The operating cycle of a merchandising company is longer than that of a service company. d. Because inventory is an expense, it is recognized on the balance sheet by both service and merchandising companies.

Ans: C, LO: 1, Section: Merchandising Operations and Inventory Systems, Subtopic: NA, Bloom: C, Difficulty: Medium Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

66.

A merchandiser that sells directly to consumers is a a. retailer. b. wholesaler c. broker. d. service enterprise.

Ans: A, LO: 1, Section: Merchandising Operations and Inventory Systems, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

67.

Two categories of expenses in merchandising companies are .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

a. b. c. d.

cost of goods sold and financing expenses. operating expenses and financing expenses. cost of goods sold and operating expenses. purchases and cost of goods sold.

68.

The primary source of revenue for a wholesaler is a. investment income. b. service revenue. c. the sale of merchandise. d. the sale of plant assets the company owns.

69.

Generally, the revenue account for a merchandising enterprise is called a. Sales Revenue or Sales. b. Investment Income. c. Gross Profit. d. Net Sales.

70.

Under a perpetual inventory system, a. accounting records continuously disclose the amount of inventory. b. increases in inventory resulting from purchases are debited to Purchases. c. there is no need for a year-end physical count. d. the account Purchase Returns and Allowances is credited when goods are returned to vendors.

Ans: A, LO: 1, Section: Merchandising Operations and Inventory Systems, Subtopic: Perpetual System, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

71.

The operating cycle of a merchandising company is a. always one year in length. b. ordinarily longer than that of a service company. c. about the same as that of a service company. d. ordinarily shorter than that of a service company.

Ans: B, LO: 1, Section: Merchandising Operations and Inventory Systems, Subtopic: Operating Cycle, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

72.

Net sales less cost of goods sold is called a. gross profit. b. net profit. c. net income. d. marginal income.

73.

After gross profit is calculated, operating expenses are deducted to determine a. gross profit. .

Merchandising Operations

5-11

b. net income. c. gross profit on sales. d. net sales. Ans: B, LO: 1, Section: Merchandising Operations and Inventory Systems, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

74.

Which of the following expressions is incorrect? a. Gross profit - Operating expenses = Net income b. Net sales - Cost of goods sold - Operating expenses = Net income c. Net income + Operating expenses = Gross profit d. Operating expenses - Cost of goods sold = Gross profit

Ans: D, LO: 1, Section: Merchandising Operations and Inventory Systems, Subtopic: NA, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

75.

Detailed records of goods held for resale are not maintained under a a. perpetual inventory system. b. periodic inventory system. c. double-entry accounting system. d. single entry accounting system.

Ans: B, LO: 1, Section: Merchandising Operations and Inventory Systems, Subtopic: Periodic System, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

76.

Which of the following is a true statement about inventory systems? a. Periodic inventory systems require more detailed inventory records. b. Perpetual inventory systems require more detailed inventory records. c. A periodic system requires cost of goods sold to be determined after each sale. d. A perpetual system determines cost of goods sold only at the end of the accounting period.

Ans: B, LO: 1, Section: Merchandising Operations and Inventory Systems, Subtopic: Flow of Costs, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

77.

Which of the following items is determined at a different time under the perpetual inventory system than under the periodic system? a. Sales Revenue b. Cost of Goods Sold c. Purchases d. Accounts Receivable

Ans: B, LO: 1, Section: Merchandising Operations and Inventory Systems, Subtopic: Perpetual System, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

78.

In a perpetual inventory system, cost of goods sold is recorded a. daily. b. monthly. c. annually. d. each time a sale occurs.

Ans: D, LO: 1, Section: Merchandising Operations and Inventory Systems, Subtopic: Perpetual System, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

79.

The primary difference between a periodic and perpetual inventory system is that a periodic system .

5-12

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

a. b. c. d.

keeps a record showing the inventory on hand at all times. provides better control over inventories. records the cost of the sale on the date the sale is made. determines the inventory on hand only at the end of the accounting period.

Ans: D, LO: 1, Section: Merchandising Operations and Inventory Systems, Subtopic: Flow of Costs, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

80.

When using the periodic system the physical inventory count is used to determine a. only the sales value of goods in the ending inventory. b. both the cost of the goods in ending inventory and the sales value of goods sold during the period. c. both the cost of the goods sold and the cost of ending inventory. d. only the cost of merchandise sold during the period.

Ans: C, LO: 1, Section: Merchandising Operations and Inventory Systems, Subtopic: Periodic System, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

81.

Under a perpetual inventory system, inventory is recognized as cost of goods sold when a company a. pays for the inventory. b. purchases the inventory. c. sells the inventory. d. receives payment from the customer.

82.

Which statement is incorrect? a. Periodic inventory systems provide better control over inventories than perpetual inventory systems. b. Computers and electronic scanners allow more companies to use a perpetual inventory system. c. Freight-in is debited to Inventory when a perpetual inventory system is used. d. Regardless of the inventory system that is used, companies should take a physical inventory count.

Ans: A, LO: 1, Section: Merchandising Operations and Inventory Systems, Subtopic: Flow of Costs, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

83.

If a company determines cost of goods sold each time a sale occurs, it a. must have a computerized accounting system. b. uses a combination of the perpetual and periodic inventory systems. c. uses a periodic inventory system. d. uses a perpetual inventory system.

84.

Which of the following statements about periodic inventory systems is not true? a. Detailed inventory records of the goods on hand throughout the period are not .

Merchandising Operations

5-13

maintained in the Inventory account. b. A physical count is taken at the end of the period to determine the ending inventory balance. c. Cost of goods sold is determined and recorded each time a sale is made. d. The Inventory account is not updated for each purchase and sale. Ans: C, LO: 1, Section: Merchandising Operations and Inventory Systems, Subtopic: Periodic System, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

85.

What is a difference between merchandising companies and service enterprises? a. Service companies report inventories and gross profit while merchandising enterprises only report inventory. b. Merchandising companies generally have a longer operating cycle than service enterprises. c. Cost of goods sold is an expense for service enterprises but not for merchandising companies. d. All are these choices are differences.

Ans: B, LO: 1, Section: Merchandising Operations and Inventory Systems, Subtopic: NA, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

86.

Under the perpetual inventory system, which of the following accounts would not be used? a. Sales Revenue b. Purchases c. Cost of Goods Sold d. Inventory

Ans: B, LO: 2, Section: Recording Purchases Under a Perpetual System, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

87.

Under a perpetual inventory system, acquisition of merchandise for resale is debited to a. the Inventory account. b. the Purchases account. c. the Supplies account. d. the Cost of Goods Sold account.

Ans: A, LO: 2, Section: Recording Purchases Under a Perpetual System, Subtopic: NA, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

88.

The journal entry to record a return of merchandise purchased on account under a perpetual inventory system would credit a. Accounts Payable. b. Purchase Returns and Allowances. c. Sales Revenue. d. Inventory.

Ans: D, LO: 2, Section: Recording Purchases Under a Perpetual System, Subtopic: Purchase Returns and Allowances, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

89.

Which of the following items will not result in a journal entry being recorded in the Inventory account under a perpetual system? a. A purchase of merchandise .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

b. A return of merchandise inventory to the supplier c. Payment of freight costs for goods shipped to a customer d. Payment of freight costs for goods received from a supplier Ans: C, LO: 2, Section: Recording Purchases Under a Perpetual System, Subtopic: Freight Costs Incurred by the Buyer, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

90.

A company using a perpetual inventory system that returns goods previously purchased on credit would a. debit Accounts Payable and credit Inventory. b. debit Sales and credit Accounts Payable. c. debit Cash and credit Accounts Payable. d. debit Accounts Payable and credit Purchases.

Ans: A, LO: 2, Section: Recording Purchases Under a Perpetual System, Subtopic: Purchase Returns and Allowances, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

91.

If a purchaser using a perpetual inventory system pays the transportation costs for goods purchased, then the a. Inventory account is increased. b. Inventory account is not affected. c. Freight-Out account is increased. d. Delivery Expense account is increased.

Ans: A, LO: 2, Section: Recording Purchases Under a Perpetual System, Subtopic: Freight Costs Incurred by the Buyer, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economic

92.

Freight costs incurred by a seller on merchandise sold to customers will cause an increase a. in the selling expenses of the buyer. b. in operating expenses for the seller. c. to the cost of goods sold of the seller. d. to a contra-revenue account of the seller.

Ans: B, LO: 2, Section: Recording Purchases Under a Perpetual System, Subtopic: Freight Costs Incurred by the Seller, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

93.

Acme Company purchased merchandise inventory with an invoice price of $12,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Acme Company pays within the discount period? a. $12,000 b. $11,760 c. $10,800 d. $11,040

Ans: B, LO: 2, Section: Recording Purchases Under a Perpetual System, Subtopic: Purchase Discounts, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Quantitative Methods Solution: $12,000  .98  $11,760 (Purch. amount  (1 – discount rate))

94.

A buyer borrows money at 6% interest to pay a $9,000 invoice with terms 1/10, n/30 on the 10th day of the discount period. The loan is repaid on the 30th day of the invoice. What is the buyer’s net savings for these two transactions (assume a 360-day year)? a. $0 .

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b. $60.00 c. $61.20 d. $120.00 Ans: B, LO: 2, Section: Recording Purchases Under a Perpetual System, Subtopic: Purchase Discounts, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control Solution: ($9,000  .01)  ($9,000  .06  20/360)  $60 ((Invoice amount. x discount rate) – (amount bor.  annual interest rate  term/360))

95.

In the credit terms of 1/10, n/30, the “1” represents the a. number of days in the discount period. b. full amount of the invoice. c. number of days when the entire amount is due. d. percent of the cash discount.

Ans: D, LO: 2, Section: Recording Purchases Under a Perpetual System, Subtopic: Purchase Discounts, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

96.

A1 Supply Company purchased merchandise with an invoice price of $2,000 and credit terms of 2/10, n/30. Assuming a 360-day year, what is the implied annual interest rate inherent in the credit terms? a. 4% b. 24% c. 36% d. 72%

Ans: C, LO: 2, Section: Recording Purchases Under a Perpetual System, Subtopic: Purchase Discounts, Bloom: AN, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control Solution: [360  (30  10)]  2%  36% [Days In year  (30  10)]  Discount percentage]

97.

Company A purchased merchandise inventory with an invoice price of $15,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Company A pays within the discount period? a. $15,000 b. $14,760 c. $14,700 d $12,000

Ans: C, LO: 2, Section: Recording Purchases Under a Perpetual System, Subtopic: Purchase Discounts, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control Solution: $15,000  .98  $14,700 (Purch. price  (1 – Discount rate))

98.

A company returned goods for credit to the supplier. Which one of the following is part of the journal entry required if a perpetual inventory system is used? a. Credit Accounts Payable b. Credit Purchase Returns and Allowances .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

c. Debit Accounts Receivable d. Credit Inventory Ans: D, LO: 2, Section: Recording Purchases Under a Perpetual System, Subtopic: Purchase Returns and Allowances, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

99.

A credit sale of $3,800 is made on April 25, terms 2/10, n/30, on which a return of $200 is granted on April 28. What amount will be received as payment in full if collected on May 4? a. $3,528 b. $3,724 c. $3,800 d $3,600

Ans: A, LO: 2, Section: Recording Purchases Under a Perpetual System, Subtopic: Purchase Returns and Allowances, Purchase Discounts, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control Solution: ($3,800  $200)  .98  $3,528 (Sale amount – ret.)  (1 – Discount rate)

100.

Ace Supply Company purchased merchandise with an invoice price of $2,000 and credit terms of 3/10, n/30. Assuming a 360-day year, what is the implied annual interest rate inherent in the credit terms? a. 3% b. 8% c. 36% d 54%

Ans: D, LO: 2, Section: Recording Purchases Under a Perpetual System, Subtopic: Purchase Discounts, Bloom: AN, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control Solution: [360  (30  10)]  3%  54% [Days in year  (30  10)]  Discount rate

101.

A credit sale of $1,400 is made on July 15, terms 2/10, n/30, on which a return of $100 is granted on July 18. What amount is received as payment in full on July 24? a. $1,400 b. $1,274 c. $1,350 d $1,372

Ans: B, LO: 2, Section: Recording Purchases Under a Perpetual System, Subtopic: Purchase Discounts, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control Solution: ($1,400  $100)  .98  $1,274 ((Cr. sale – ret.)  (1 – Discount rate))

101.

If a company is given credit terms of 2/10, n/30, it should a. hold off paying the bill until the end of the credit period while investing the money at 10% annual interest during this time. b. pay within the discount period and recognize a savings. c. pay within the credit period but don't take the trouble to invest the cash while waiting to .

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pay the bill. d. recognize that the supplier is desperate for cash and withhold payment until the end of the credit period while negotiating a lower sales price. Ans: B, LO: 2, Section: Recording Purchases Under a Perpetual System, Subtopic: Purchase Discounts, Bloom: AN, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

103.

A purchase invoice is a document that a. provides support for goods purchased for cash. b. provides evidence of incurred operating expenses. c. provides evidence of credit purchases. d. serves only as a customer receipt.

Ans: C, LO: 2, Section: Recording Purchases Under a Perpetual System, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Internal Controls

104.

Company A is a retailer and uses a perpetual inventory system. Which statement is correct? a. Returns of merchandise by Company A to a manufacturer are credited to Inventory. b. Freight paid to get merchandise to Company A’s store is debited to Freight Expense. c. A return of merchandise by one of Company A’s customers is credited to Inventory. d. Discounts taken by Company A’s customers are credited to Inventory.

Ans: A, LO: 2, Section: Recording Purchases Under a Perpetual System, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

105.

As the president of Acme Company, you notice that no discounts have been taken when settling accounts payable. What would be an acceptable explanation? a. All invoices have credit terms of n/30. b. There is not sufficient cash to pay within the discount period. c. Discounts are missed because no one knows how to enter them in the new accounting software. d. The full amount of the invoice is being paid within the discount period and the treasurer is pocketing the discount amount.

Ans: A, LO: 2, Section: Recording Purchases Under a Perpetual System, Subtopic: Purchase Discounts, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

106.

When using a perpetual inventory system, why are purchase discounts credited to Inventory? a. The discounts are debited to discount expense and thus the credit has to be made to merchandise inventory. b. The discounts reduce the cost of the inventory. c. The discounts are a reduction of business expenses. d. None of these answers choices is correct.

Ans: B, LO: 2, Section: Recording Purchases Under a Perpetual System, Subtopic: Purchase Discounts, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

107.

Acme Market recorded the following events involving a recent purchase of inventory: Received goods for $80,000, terms 2/10, n/30. Returned $1,600 of the shipment for credit. Paid $400 freight on the shipment. Paid the invoice within the discount period. .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

As a result of these events, the company’s inventory a. increased by $76,832. b. increased by $78,800. c. increased by $77,224. d. increased by $77,232. Ans: D, LO: 2, Bloom: AP, Section: Recording Purchases Under a Perpetual System, Subtopic: NA, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: [($80,000  $1,600)  .98] + $400  $77,232 (Purch. amount –ret.)  (1 – Discount rate) + freight

108.

Company A recorded the following events involving a recent purchase of inventory: Received goods for $120,000, terms 2/10, n/30. Returned $2,400 of the shipment for credit. Paid $600 freight on the shipment. Paid the invoice within the discount period. As a result of these events, the company’s inventory a. increased by $115,248. b. increased by $118,200. c. increased by $115,836. d. increased by $115,848.

Ans: D, LO: 2, Section: Recording Purchases Under a Perpetual System, Subtopic: NA, Bloom: AP, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: [($120,000  $2,400)  .98] + $600  $115,848 (Purch. amount −ret.)  (1 – Discount rate + freight

109.

Under a perpetual inventory system, assets purchased for resale are recorded in which of the following accounts? a. Supplies b. Inventory c. Equipment d. Patents

Ans: B, LO: 2, Section: Recording Purchases Under a Perpetual System, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

110.

Under the perpetual system, cash freight costs incurred by the buyer for the transporting of goods is recorded in which account? a. Freight Expense b. Freight-In c. Inventory d. Freight-Out

Ans: C, LO: 2, Section: Recording Purchases Under a Perpetual System, Subtopic: Freight Costs Incurred by the Buyer, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

111.

Under the perpetual system, cash freight costs incurred by the seller for the transporting of goods is recorded in which account? a. Freight Expense b. Freight-In c. Inventory .

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d. Freight-Out Ans: D, LO: 2, Section: Recording Purchases Under a Perpetual System, Subtopic: Freight Costs Incurred by the Seller, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

112.

Company A and Company B both use perpetual systems. If Company A shipped goods to Company B with shipping terms FOB Shipping point, which of the following statements is true concerning the freight costs? a. Company B will debit Inventory for the freight costs. b. Company B will debit Freight-In for the freight costs. c. Company A will debit Inventory for the freight costs. d. Company A will debit Freight-Out for the freight costs

Ans: A, LO: 2, Section: Recording Purchases Under a Perpetual System, Subtopic: Freight Costs, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

113.

Acme Company and A1 Company both use perpetual systems. If Acme shipped goods to A1 Company with shipping terms FOB Destination, which of the following statements is true concerning the freight costs? a. A1 will debit Inventory for the freight costs. b. A1 will debit Freight-In for the freight costs. c. Acme will debit Inventory for the freight costs. d. Acme will debit Freight-Out for the freight costs

Ans: D, LO: 2, Section: Recording Purchases Under a Perpetual System, Subtopic: Freight Costs Incurred by the Seller, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

114.

Under the perpetual system, when goods are shipped FOB Shipping Point, the freight costs are charged to a. Freight Expense by the seller. b. Freight-In by the buyer. c. Inventory by the buyer. d. Freight-Out by the seller.

Ans: C, LO: 2, Section: Recording Purchases Under a Perpetual System, Subtopic: Freight Costs Incurred by the Buyer, Bloom: KC Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

115.

Under the perpetual system, when goods are shipped FOB Destination, the freight costs are charged to a. Freight Expense by the seller. b. Freight-In by the buyer. c. Inventory by the buyer. d. Freight-Out by the seller.

Ans: D, LO: 2, Section: Recording Purchases Under a Perpetual System, Subtopic: Freight Costs Incurred by the Seller, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

116.

When goods are shipped FOB Destination, title to the goods transfers from the seller to the buyer a. when the purchase order is received by the seller. b. when the goods are given to the freight carrier by the seller. c. when the freight bill is paid by the buyer. .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

d. when the goods are received by the buyer. Ans: D, LO: 2, Section: Recording Purchases Under a Perpetual System, Subtopic: Freight Costs, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

117.

When goods are shipped FOB Shipping Point, title to the goods transfers from the seller to the buyer a. when the purchase order is received by the seller. b. when the goods are given to the freight carrier by the seller. c. when the freight bill is paid by the buyer. d. when the goods are received by the buyer.

Ans: B, LO: 2, Section: Recording Purchases Under a Perpetual System, Subtopic: Freight Costs, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

118.

Which of the following statements is true regarding freight costs? a. Freight-out is reported by the seller as an operating expense. b. Freight-in is reported by the buyer as an operating expense. c. The buyer dictates which party will pay the freight costs. d. Freight costs incurred by the seller are considered part of the cost of the inventory.

119.

Which of the following accounts is classified as a contra revenue account? a. Sales Revenue b. Cost of Goods Sold c. Sales Returns and Allowances d. Purchase Discounts

Ans: C, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: Sales Returns and Allowances, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

120.

Sales revenues are usually considered earned when a. cash is received from credit sales. b. an order is received. c. goods have been transferred from the seller to the buyer. d. adjusting entries are made.

Ans: C, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

121.

Sales revenue a. may be recorded before cash is collected. b. will always equal cash collections in a month. c. only results from credit sales. d. is only recorded after cash is collected.

Ans: A, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: NA, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

122.

The journal entry to record a credit sale ignoring cost of goods sold is a. Cash Sales Revenue b. Cash Service Revenue .

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c. Accounts Receivable Sales Returns and Allowances d. Accounts Receivable Sales Revenue Ans: D, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: NA, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

123.

Under the perpetual inventory system, in addition to making the entry to record a sale, a company would a. debit Inventory and credit Cost of Goods Sold. b. debit Cost of Goods Sold and credit Purchases. c. debit Cost of Goods sold and credit Inventory. d. make no additional entry until the end of the period.

Ans: C, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: NA, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

124.

When sales of merchandise are made for cash, the transaction may be recorded by the following entry: a. Debit Sales Revenue, credit Cash b. Debit Cash, credit Sales Revenue c. Debit Sales Revenue, credit Cash Discounts d. Debit Sales Revenue, credit Sales Returns and Allowances

Ans: B, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: NA, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

125.

The entry to record a sale of $1,800 with terms of 2/10, n/30 will include a a. debit to Sales Discounts for $36. b. debit to Sales Revenue for $1,764. c. credit to Accounts Receivable for $1,800. d. credit to Sales Revenue for $1,800.

Ans: D, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

126.

A sales invoice is prepared when goods a. are sold for cash. b. are sold on credit. c. sold on credit are returned. d. are sold on credit or for cash.

Ans: B, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

127.

Which of the following relationships is true concerning the Sales Returns and Allowances account? a. It is a contra account that is reported on the balance sheet as a deduction from the .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

related sales. b. It can flag problems of inferior merchandise, inefficiencies in filling orders, and other mistakes. c. It represents the cost of merchandise returned by customers. d. It has a normal credit balance and is added to sales to determine net sales. Ans: B, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: Sales Returns and Allowances, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

128.

The Sales Returns and Allowances account is classified as a(n) a. asset account. b. contra asset account. c. expense account. d. contra revenue account.

Ans: D, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: Sales Returns and Allowances, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

129.

The entry to record the return of goods from a customer would include a a. debit to Sales Revenue. b. credit to Sales Revenue. c. debit to Sales Returns and Allowances. d. credit to Sales Returns and Allowances.

Ans: C, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: Sales Returns and Allowances, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

130.

The entry to record the receipt of payment within the discount period on a sale of $900 with terms of 2/10, n/30 will include a a. credit to Sales Discounts for $18. b. debit to Sales Revenue for $882. c. credit to Accounts Receivable for $900. d. credit to Sales Revenue for $900.

Ans: C, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: Sales Discounts, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

131.

The entry to record a sale of $900 with terms of 2/10, n/30 will include a a. credit to Sales Discounts for $18. b. debit to Cash for $882. c. credit to Accounts Receivable for $900. d. credit to Sales Revenue for $900.

Ans: D, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: Sales Discounts, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

132.

The collection of a $1,500 account within the 2 percent discount period will result in a a. debit to Sales Discounts for $30. b. debit to Accounts Receivable for $1,470. .

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c. credit to Cash for $1,470. d. credit to Accounts Receivable for $1,470. Ans: A, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: Sales Discounts, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control Solution: 1,500  .02  $30 (Acct. bal.  Discount rate)

133.

A sales invoice is used as documentation for a journal entry that requires a debit to a. Cash and a credit to Sales Revenue. b. Sales Returns and Allowances and a credit to Accounts Receivable. c. Accounts Receivable and a credit to Sales Revenue. d. Cash and a credit to Sales Returns and Allowances.

Ans: C, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: NA, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

134.

If a customer agrees to retain merchandise that is defective because the seller is willing to reduce the selling price, this transaction is known as a sales a. discount. b. return. c. contra asset. d. allowance.

135.

When goods are returned that relate to a prior cash sale, a. the Sales Returns and Allowances account should not be used. b. the Cash account will be credited. c. Sales Returns and Allowances will be credited. d. Accounts Receivable will be credited.

Ans: B, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: Sales Returns and Allowances, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

136.

The Sales Returns and Allowances account does not provide information to management about a. possible inferior merchandise. b. the percentage of credit sales versus cash sales. c. inefficiencies in filling orders. d. errors in billing customers.

Ans: B, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: Sales Returns and Allowances, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

137.

A Sales Returns and Allowances account is not debited if a customer a. returns defective merchandise. b. receives a credit for merchandise of inferior quality. c. utilizes a prompt payment incentive. d. returns goods that are not in accordance with specifications.

Ans: C, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: Sales Returns and Allowances, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

138.

As an incentive for customers to pay their accounts promptly, a business may offer its customers a. a sales discount. b. free delivery. .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

c. a sales allowance. d. a sales return. Ans: A, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: Sales Discounts, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

139.

The credit terms offered to a customer by a business were 2/10, n/30, which means a. the customer must pay the bill within 10 days. b. the customer can deduct a 2% discount if the bill is paid between the 10th and 30th day from the invoice date. c. the customer can deduct a 2% discount if the bill is paid within 10 days of the invoice date. d. two sales returns can be made within 10 days of the invoice date and no returns thereafter.

Ans: C, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: Sales Discounts, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

140.

A company sells an item on account with credit terms of 2/10, n/20. What is the meaning of these terms? a. An additional amount equal to 2 percent of the invoice price must be paid if payment is not received within 10 days; the account is overdue after 20 days. b. A 10 percent cash discount may be taken if payment is made immediately; a 2 percent discount may be taken if paid within 20 days. c. A 2 percent cash discount may be taken if payment is made within 10 days of the invoice date; otherwise, the full amount is due within 20 days. d. A 10 percent cash discount may be taken if payment is made within 2 days of the invoice date; otherwise, the full amount is due in 20 days.

141.

A sales discount does not a. provide the purchaser with a cash savings. b. reduce the amount of cash received from a credit sale. c. increase a contra revenue account. d. increase an operating expense account.

Ans: D, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: Sales Discounts, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

142.

Acme Inc. sells $1,200 of merchandise on account to A1 Company with credit terms of 2/10, n/30. If A1 Company remits a check taking advantage of the discount offered, what is the amount of A1 Company's check? a. $1,176 b. $1,200 c. $1,080 d. $1,120

Ans: A, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: Sales Discounts, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control Solution: $1,200  .98  $1,176 (Sal. amount  (1 – Discount rate)

143.

A1 Supply Company sells merchandise on account for $3,000 to Ace Company with credit terms of 2/10, n/30. Ace Company returns $500 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the .

Merchandising Operations

5-25

check? a. $2,440 b. $2,460 c. $2,450 d. $2,250 Ans: C, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: Sales Discounts, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control Solution: ($3,000  $500)  .98  $2,450 (Sal. amount – ret.)  (1 – Discount rate)

144.

Company A sells $900 of merchandise on account to Company B with credit terms of 2/10, n/30. If Company B remits a check taking advantage of the discount offered, what is the amount of Company B’s check? a. $630 b. $882 c. $810 d. $720

Ans: B, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: Sales Discounts, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control Solution: $900  .98  $882 (Sales price  (1 – Discount rate))

145.

Which of the following accounts normally have debit balances? a. Sales Discounts b. Sales Returns and Allowances. c. Both Sales Discounts and Sales Returns and Allowances have debit balances. d. Neither Sales Discounts nor Sales Returns and Allowances have debit balances.

Ans: C, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: Sales Discounts, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

146.

Acme Supply Company sells merchandise on account for $7,500 to A1 Exploration Company with credit terms of 2/10, n/30. A1 Exploration returns $1,500 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check? a. $7,350 b. $7,380 c. $6,000 d. $5,880

Ans: D, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: Sales Discounts, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control Solution: ($7,500  $1,500)  .98  $5,880 (Sales price – ret.)  (1 − .02))

147.

A1 Retail Inc. sold merchandise for $800 subject to credit terms of 3/10, n/30. Which one of the following is part of the journal entry made by A1 Retail to record the collection in full within the discount period in a perpetual inventory system? a. Debit to Sales Discounts for $24 .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

b. Debit to Cash for $824 c. Credit to Accounts Receivable for $824 d. Credit to Inventory for $24 Ans: A, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: Sales Discounts, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control Solution: $800  .03  $24 (Sales price  Discount rate)

148.

Acme Supply Company sells merchandise on account for $1,800 to Ace Retail Company with credit terms of 2/10, n/30. Ace Retail Company returns $600 of merchandise that was damaged, along with a check to settle the account within the discount period. What entry does Acme Supply Company make upon receipt of the check? a. Cash 1,200 Accounts Receivable 1,200 b. Cash Sales Returns and Allowances Accounts Receivable

1,176 624

c. Cash Sales Returns and Allowances Sales Discounts Accounts Receivable

1,176 600 24

1,800

d. Cash 1,764 Sales Discounts 36 Sales Returns and Allowances Accounts Receivable

1,800

600 1,200

Ans: C, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: Sales Discounts, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control Solution: ($1,800  $600)  .02  $24 Sales discount (Sales price – ret.)  .Discount rate

149.

The collection of a $500 account beyond the 2 percent discount period will result in a a. debit to Cash for $490. b. debit to Accounts Receivable for $500. c. debit to Cash for $500. d. debit to Sales Discounts for $10.

Ans: C, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: Sales Discounts, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

150.

The collection of an $800 account beyond the 2 percent discount period will result in a a. debit to Cash for $784. b. credit to Accounts Receivable for $800. c. credit to Cash for $800. .

Merchandising Operations

5-27

d. debit to Sales Discounts for $16. Ans: B, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: Sales Discounts, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

151.

Which of the following would not be classified as a contra account? a. Sales Revenue b. Sales Returns and Allowances c. Accumulated Depreciation d. Sales Discounts

Ans: A, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

152.

Which of the following accounts has a normal credit balance? a. Sales Returns and Allowances b. Sales Discounts c. Sales Revenue d. Cost of Goods Sold

153.

With respect to the income statement, a. contra revenue accounts do not appear on the income statement. b. sales discounts increase the amount of sales. c. contra revenue accounts increase the amount of operating expenses. d. sales discounts are included in the calculation of gross profit.

Ans: D, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: Sales Discounts, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

154.

When a seller records a return of goods sold on account, the account credited is a. Sales Revenue. b. Sales Returns and Allowances. c. Inventory. d. Accounts Receivable.

Ans: D, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: Sales Returns and Allowances, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

155.

The respective normal account balances of Sales, Sales Returns and Allowances, and Sales Discounts are a. credit, credit, credit. b. debit, credit, debit. c. credit, debit, debit. d. credit, debit, credit.

Ans: C, LO: 3, B Topic: Recording Sales Under a Perpetual System, Subtopic: NA, loom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

156.

On January 14, 2025, Acme Furniture Company purchased merchandise inventory for $60,000. Credit terms were 2/10, n/30. The inventory was sold on account for $100,000 on January 21, 2025. Credit terms were 1/10, n/30. The accounts payable was settled on January 23, 2025, and the accounts receivables were settled on January 30, 2025. Which statement is correct? .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

a. b. c. d.

Cash flows were affected on January 14 and January 21. The gross profit rate is 60%. On January 30, 2025, customers should remit cash of $99,000. There is not enough information available to answer this question.

Ans: C, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: Sales Discounts, Bloom: AN, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control Solution: $100,000  .99  $99,000 (Sal. amount  (1 – Discount rate))

157.

Which statement is incorrect? a. The Sales Revenue account is used to record the sales of goods held for resale to customers. b. Sales discounts are recorded as debits to the Sales Revenue account. c. The Sales Revenue account is a revenue account. d. The Sales Revenue account has a normal credit balance and is closed at the end of the accounting period.

Ans: B, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: NA, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

158.

Opportunities for businesses to use data analytics in making decisions include all of the following except a. what type of sales discount to offer. b. policies regarding sales returns. c. which customers should be granted credit. d. All of these are opportunities to use data analytics.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

159.

Indicate which one of the following would not appear on both a single-step income statement and a multiple-step income statement. a. Gross profit b. Salaries and wages expense c. Sales revenue d. Cost of goods sold

Ans: A, LO: 4, Topic: Multiple-Step Income Statement, Subtopic: Single-Step Income Statement, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

160.

The form of the income statement that derives its name from the fact that the total of all expenses is deducted from the total of all revenues is called a a. multiple-step statement. b. revenue statement. c. report-form statement. d. single-step statement.

Ans: D, LO: 4, Topic: Multiple-Step Income Statement, Subtopic: Single-Step Income Statement, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

161.

Gross profit does not appear a. on a multiple-step income statement. b. on a single-step income statement. c. to be relevant in analyzing the operation of a merchandising company. d. on either a multiple-step or single-step income statement.

Ans: B, LO: 4, Topic: Multiple-Step Income Statement, Subtopic: Single-Step Income Statement, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA

Merchandising Operations

5-29

BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

162.

Gross profit equals the difference between net sales and a. operating expenses. b. cost of goods sold. c. net income. d. cost of goods sold plus operating expenses.

Ans: B, Topic: Multiple-Step Income Statement, Subtopic: Gross Profit LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

163.

Positive operating income will result if gross profit exceeds a. costs of goods sold. b. salaries and wages expense. c. cost of goods sold plus operating expenses. d. operating expenses.

Ans: D, LO: 4, Topic: Multiple-Step Income Statement, Subtopic: Multiple-Step Income Statement, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

164.

What is the term applied to the excess of net sales over the cost of goods sold? a. Income before income taxes b. Income from operations c. Net income d. Gross profit

Ans: D, LO: 4, Topic: Multiple-Step Income Statement, Subtopic: Gross Profit, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

165.

Operating expenses would include a. interest expense. b. income tax expense. c. freight-out. d. freight-out and interest.

Ans: C, LO: 4, Topic: Multiple-Step Income Statement, Subtopic: Operating Expenses, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

166.

Which of the following is not a true statement about a multiple-step income statement? a. Operating expenses do not include income tax expense. b. There may be a section for non-operating activities. c. There may be a section for operating assets. d. There is a section for cost of goods sold.

Ans: C, LO: 4, Topic: Multiple-Step Income Statement, Subtopic: Multiple-Step Income Statement, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

167.

An advantage of the single-step income statement over the multiple-step form is a. the amount of information it provides. b. its comprehensiveness. c. its simplicity. d. its use in computing ratios.

Ans: C, LO: 4, Topic: Multiple-Step Income Statement, Subtopic: Single-Step Income Statement, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

5-30 168.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Income from operations appears on a. both a multiple-step and a single-step income statement. b. neither a multiple-step nor a single-step income statement. c. a single-step income statement. d. a multiple-step income statement.

169.

Income from operations is gross profit less 1. operating expenses and other expenses and losses. 2. operating expenses plus other revenues and gains. 3. operating expenses. a. 1 b. 2 c. 3 d. both 1 and 2

Ans: C, LO: 4, Topic: Multiple-Step Income Statement, Subtopic: Multiple-Step Income Statement, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

170.

Multiple-step income statements show a. gross profit but not income from operations. b. neither gross profit nor income from operations. c. both income from operations and gross profit. d. income from operations but not gross profit.

171.

Interest expense would be classified on a multiple-step income statement under the heading a. Other expenses and losses. b. Other revenues and gains. c. Operating expenses. d. Cost of goods sold.

Ans: A, LO: 4, Topic: Multiple-Step Income Statement, Subtopic: Non-operating Activities and Income Tax Expense, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

172.

Gross profit for a merchandising company is net sales minus a. operating expenses. b. cost of goods sold. c. sales discounts. d. cost of goods available for sale.

Ans: B, LO: 4, Topic: Multiple-Step Income Statement, Subtopic: Gross Profit, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

173.

The sales section of an income statement for a retailer would not include a. Sales discounts. b. Sales revenue. c. Net sales. d. Cost of goods sold.

Ans: D, LO: 4, Topic: Multiple-Step Income Statement, Subtopic: Sales, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

Merchandising Operations

174.

5-31

The operating expenses section of an income statement for a merchandising company would not include a. Freight-out. b. Utilities expense. c. Cost of goods sold. d. Insurance expense.

Ans: C, LO: 4, Topic: Multiple-Step Income Statement, Subtopic: Operating Expenses, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

175.

Indicate which one of the following would appear on the income statement of both a merchandising company and a service company. a. Gross profit b. Operating expenses c. Sales returns d. Cost of goods sold

Ans: B, LO: 4, Topic: Multiple-Step Income Statement, Subtopic: Operating Expenses, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

176.

Gross profit does not appear a. on a merchandising company income statement. b. on a service company income statement. c. to be relevant in analyzing the operation of a merchandising company. d. on the income statement if the periodic inventory system is used because it cannot be calculated.

Ans: B, LO: 4, Topic: Multiple-Step Income Statement, Subtopic: Gross Profit, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

177.

Financial information is presented below: Operating expenses $ 45,000 Sales returns and allowances 3,000 Sales discounts 7,000 Sales revenue 160,000 Cost of goods sold 96,000 Net sales reported on the income statement would be a. $153,000. b. $150,000. c. $160,000. d. $157,000.

Ans: B, LO: 4, Topic: Multiple-Step Income Statement, Subtopic: Sales, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: $160,000  $3,000  $7,000  $150,000 (Sal.rev.  sal. ret./all.  sal. dis.)

178.

Which of the following items are reported on a multiple-step income statement and on a single-step income statement? a. Cost of goods sold and sales b. Gross profit and operating expenses c. Operating expenses and total expenses d. Sales and income from operations

Ans: A, LO: 4, Topic: Multiple-Step Income Statement, Subtopic: Single-Step Income Statement, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

5-32 179.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Financial information is presented below: Operating expenses $ 42,000 Sales returns and allowances 12,000 Sales discounts 3,000 Sales revenue 165,000 Cost of goods sold 96,000 Net sales reported on the income statement would be a. $153,000. b. $150,000. c. $165,000. d. $162,000.

Ans: B, LO: 4, Topic: Multiple-Step Income Statement, Subtopic: Sales, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: $165,000  $12,000  $3,000  $150,000 (Sal. rev. – sal. ret./all. – sal. dis.)

180.

What is an advantage of using the multiple-step income statement? a. It highlights the components of net income. b. Gross profit is not a separate item. c. It is easier to prepare than the single-step income statement. d. Net income will be higher than net income computed using the single-step income statement.

Ans: A, LO: 4, Topic: Multiple-Step Income Statement, Subtopic: Multiple-Step Income Statement, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

181.

For a jewelry retailer, which of the following is an example of Other Revenues and Gains? a. Repair revenue b. Unearned revenue c. Gain on sale of display cases d. Discount received for paying for merchandise inventory within the discount period

Ans: C, LO: 4, Topic: Multiple-Step Income Statement, Subtopic: Non-Operating Activities and Income Tax Expense, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

182.

For Target Corporation, which of the following is an example of Other Revenues and Gains? a. Sales revenue b. Unearned revenue c. Gain on the sale of land d. Purchases discounts

183.

For Target Corporation, which of the following is an example of Other Expenses and Losses? a. Interest Revenue b. Interest Expense c. Cost of Goods Sold d. Utilities Expense

Ans: B, LO: 4, Topic: Multiple-Step Income Statement, Subtopic: Non-Operating Activities and Income Tax Expense, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

Merchandising Operations

184.

5-33

All of the following are examples of Other Expenses and Losses except a. Rent Expense b. Interest Expense c. Loss on the Sale of Land d. Casualty Losses

Ans: A, LO: 4, Topic: Multiple-Step Income Statement, Subtopic: Non-Operating Activities and Income Tax Expense, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

185.

Which of the following would be reported in Other Expenses and Losses? a. Interest Expense b. Rent Expense c. Dividends d. Income Tax Expense

186.

When using a periodic inventory system, which statement concerning the computation of cost of goods sold is correct? a. The amount of ending inventory is determined on the last day of the accounting period. b. Cost of goods available for sale includes net purchases plus the ending inventory. c. Purchases represent cash paid for purchases during the accounting period. d. Freight-in is ignored.

Ans: A, LO: 5, Topic: Cost of Goods Sold Under a Periodic System, Subtopic: NA, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

187.

When using the periodic inventory system, which of the following is not a step in determining the cost of goods purchased? a. Add freight-in b. Subtract purchase returns and allowances c. Subtract the cost of ending inventory d. All of these are necessary steps.

Ans: C, LO: 5, Topic: Cost of Goods Sold Under a Periodic System, Subtopic: NA, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

188.

At the beginning of the year, A1 Athletic Supply had an inventory of $600,000. During the year, the company purchased goods costing $2,250,000. If the company reported ending inventory of $750,000 and sales of $3,000,000, their cost of goods sold and gross profit rate would be a. $1,500,000 and 70%. b. $2,100,000 and 30%. c. $1,500,000 and 30%. d. $2,100,000 and 70%.

5-34

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution: $600,000 + $2,250,000  $750,000  $2,100,000; ($3,000,000  $2,100,000)  $3,000,000  30% ((Beg. inv. + purch. – end. inv. = COGS; (Sales – COGS)  Sales = G.P. rate)

189.

At the beginning of the year, Ace Athletic Supply had an inventory of $300,000. During the year, the company purchased goods costing $1,200,000. If the company reported ending inventory of $450,000 and sales of $1,500,000, their cost of goods sold and gross profit rate would be a. $750,000 and 70% b. $1,050,000 and 30%. c. $750,000 and 30%. d. $1,050,000 and 70%.

Ans: B, LO: 5,6, Topic: Cost of Goods Sold Under a Periodic System, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: $300,000 + $1,200,000  $450,000  $1,050,000; ($1,500,000  $1,050,000)  $1,500,000  30% (Beg. inv. + purch. – end. inv.); (Sales – COGS) ÷ Sales

190.

During the year, A1 Mini-Mart’s merchandise inventory decreased by $80,000. If the company’s cost of goods sold for the year was $1,200,000, purchases were a. $1,280,000. b. $1,120,000. c. $1,040,000. d. Unable to determine.

Ans: B, LO: 5, Topic: Cost of Goods Sold Under a Periodic System, Subtopic: NA Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: $1,200,000  $80,000  $1,120,000 (COGS – inv. dec.)

191.

During the year, Company A’s merchandise inventory decreased by $50,000. If the company’s cost of goods sold for the year was $750,000, purchases were a. $800,000. b. $700,000. c. $650,000. d. Unable to determine.

Ans: B, LO: 5, Topic: Cost of Goods Sold Under a Periodic System, Subtopic: NA Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: $750,000  $50,000  $700,000 (COGS – inv. dec.)

192.

The amount of cost of good available for sale during the year depends on the amounts of a. beginning merchandise inventory and cost of goods sold. b. beginning merchandise inventory, the net cost of purchases, and ending merchandise inventory. c. beginning merchandise inventory, cost of goods sold and ending merchandise inventory. d. beginning merchandise inventory and net cost of purchases.

Ans: D, LO: 5, Topic: Cost of Goods Sold Under a Periodic System, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

Merchandising Operations

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193. The following information is available for A1 Produce Market: Sales $225,000 Ending merchandise inventory 27,000 Sales discounts 3,000 Purchases 143,000

Freight-in Purchase returns and allowances Depreciation expense Beginning merchandise inventory

$11,000 4,000 8,000 23,000

How much is A1’s cost of goods sold? a. $173,000 b. $146,000 c. $143,000 d. None of these answer choices are correct. Ans: B, LO: 5, Topic: Cost of Goods Sold Under a Periodic System, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: 23,000 + 143,000 + 11,000 – 4,000 – 27,000 = 146,000 (Beg Inv + purch + freight-in – purch ret/allow – End Inv)

194.

Which of the following is not considered in computing net cost of purchases? a. Purchases returns and allowances b. Purchases c. Freight paid on purchased goods d. Freight paid on goods shipped to customers

Ans: D, LO: 5, Topic: Cost of Goods Sold Under a Periodic System, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

195.

Assume Company A uses the periodic inventory system and has a beginning inventory balance of $5,000, purchases of $75,000, and sales of $125,000. Company A closes its books once a year on December 31. The Inventory account would be expected to have a balance on December 31 prior to adjusting and closing entries that was a. equal to $5,000. b. more than $5,000. c. less than $5,000. d. indeterminate.

Ans: A, LO: 5, Topic: Cost of Goods Sold Under a Periodic System, Subtopic: NA, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

196.

All of the following statements are true regarding the periodic inventory system except a. Under the periodic inventory system, cost of goods sold is calculated at the end of the period. b. Under the periodic inventory system, the balance in ending inventory is determined at the end of the period. c. Under the periodic inventory system, the assets reported on the balance sheet differ from those reported under the perpetual system. d. Under the periodic system, a company uses separate accounts to record freight costs, purchase returns, and purchase discounts. .

5-36

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ans: C, LO: 5, Topic: Cost of Goods Sold Under a Periodic System, Subtopic: NA, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

197.

Acme Supply Company's accounting records show the following for the year ending December 31, 2025. Purchase Discounts $ 11,200 Freight-In 15,600 Purchases 700,020 Beginning Inventory 47,000 Ending Inventory 57,600 Purchase Returns and Allowances 12,800 Using the periodic system, the cost of goods purchased is a. $660,420. b. $708,420. c. $717,220. d. $691,620.

Ans: D, LO: 5, Topic: Cost of Goods Sold Under a Periodic System, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: $700,020  $11,200  $12,800 + $15,600  $691,620 (Purch. – purch. dis. – purch. ret./all. + fr. – in)

198.

Acme Supply Company's accounting records show the following at the year ending on December 31, 2025. Purchase Discounts $ 11,200 Freight-In 15,600 Purchases 700,020 Beginning Inventory 47,000 Ending Inventory 57,600 Purchase Returns and Allowances 12,800 Using the periodic system, the cost of goods sold is a. $702,220. b. $697,820. c. $681,020. d. $719,020.

Ans: C, LO: 5, Topic: Cost of Goods Sold Under a Periodic System, Subtopic: NA, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: [$47,000 + ($700,020  $11,200  $12,800 + $15,600)]  $57,600  $681,020 (Beg. inv. + (purch. – pur. dis. – pur. ret./all. + fr. – in) – end. inv.)

199.

Which of the following provides the best rationale regarding analysts' views about the informative value of the gross profit rate versus the gross profit amount? a. The gross profit amount is more informative than the gross profit rate because it is a dollar amount rather than a ratio. b. The gross profit amount is less informative than the gross profit rate because the latter presents a meaningful relationship between gross profit and net sales. c. The gross profit amount is more informative than the gross profit rate because the gross profit rate is only used to describe a few industries while the gross profit amount is universally used. d. The gross profit amount is more informative than the gross profit rate because high.

Merchandising Operations

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volume operations are able to calculate the gross profit rate but not the gross profit amount. Ans: B, LO: 6, Topic: Gross Profit and Profit Margin, Subtopic: NA, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

200.

Company A's gross profit rate last year was 32.0% and this year it is 28.4%. Which of the following would not be a possible cause for this decline in the gross profit rate? a. Company A must have paid higher prices to suppliers without passing these costs on to customers. b. Company A may have begun selling products with a higher markup. c. Company A's average margin between unit selling price and inventory unit cost is decreasing. d. Company A may have seen a decline in total gross profit while maintaining net sales.

Ans: B, LO: 6, Topic: Gross Profit and Profit Margin, Subtopic: Gross Profit Rate, Bloom: AN, Difficulty: Hard, Min: 2, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

201.

Acme Industries increased its gross profit rate from 18.4% in 2024 to 23.7% in 2025. Which of the following would be a possible explanation for this change? a. Acme's global sourcing efforts at the beginning of 2025 resulted in a lower cost of merchandise sold percentage. b. Acme's new product lines with lower margins became a larger component of total sales in 2025. c. Acme increased its product markdown percentages in 2025. d. Acme's average margin between the unit selling price and the inventory unit cost decreased over this two-year period.

Ans: A, LO: 6, Topic: Gross Profit and Profit Margin, Subtopic: Gross Profit Rate, Bloom: AN, Difficulty: Hard, Min: 2, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

202.

Which of the following statements is true regarding profit margin? a. Profit margin can be improved by decreasing the gross profit rate and/or controlling operating expenses and other costs. b. Profit margin does not vary across industries. c. Discount stores with high merchandise turnover generally have higher profit margins. d. If the profit margin has a higher value, this suggests favorable return on each dollar of sales.

Ans: D, LO: 6, Topic: Gross Profit and Profit Margin, Subtopic: Profit Margin, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

203.

The gross profit rate is computed by dividing gross profit by a. sales revenue. b. cost of goods sold. c. net sales. d. operating expenses.

Ans: C, LO: 6, Topic: Gross Profit and Profit Margin, Subtopic: Gross Profit Rate, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

204.

A decline in a company’s gross profit could be caused by all of the following except a. selling products with a lower markup. b. clearance of discontinued inventory at lower selling prices. .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

c. paying lower prices to its suppliers while maintaining a constant unit selling price. d. increasing competition resulting in a lower selling price while maintaining constant unit costs from vendors. Ans: C, LO: 6, Topic: Gross Profit and Profit Margin, Subtopic: Gross Profit Rate, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

205.

Financial information is presented below: Operating expenses Sales returns and allowances Sales discounts Sales revenue Cost of goods sold Gross profit would be a. $54,000. b. $57,000. c. $69,000. d. $66,000.

$ 42,000 12,000 3,000 165,000 96,000

Ans: A, LO: 6, Topic: Gross Profit and Profit Margin, Subtopic: Gross Profit Rate, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: ($165,000  $12,000  $3,000)  $96,000  $54,000 ((Sal. rev. – sal. ret./all. – sal.dis.) – COGS)

206.

Financial information is presented below: Operating expenses Sales returns and allowances Sales discounts Sales revenue Cost of goods sold The gross profit rate would be a. .64. b. .42. c. .36. d. .37.

$ 42,000 12,000 3,000 165,000 96,000

Ans: C, LO: 6, Topic: Gross Profit and Profit Margin, Subtopic: Gross Profit Rate, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: $165,000  $12,000  $3,000  $150,000; ($150,000  $96,000)  $150,000  .36 [(Sal. rev. – sal. ret./all. – sal. dis.) – COGS]  Net sal.

207.

Financial information is presented below: Operating expenses Sales returns and allowances Sales discounts Sales revenue Cost of goods sold The profit margin would be a. .36. b. .18. c. .06. d. .08. .

$ 42,000 12,000 3,000 165,000 96,000

Merchandising Operations

5-39

Ans: D, LO: 6, Topic: Gross Profit and Profit Margin, Subtopic: Gross Profit Rate, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: $165,000  $12,000  $3,000  $150,000; ($150,000  $96,000  $42,000)  $150,000  .08 [(Sal. rev. – sal. ret./all. – sal. dis.) – COGS – oper. exp.]  Net sal.

208.

If A1 Supply Company has net sales of $500,000 and cost of goods sold of $350,000, the company’s gross profit rate is a. 70%. b. 30%. c. 43%. d. 100%.

Ans: B, LO: 6, Topic: Gross Profit and Profit Margin, Subtopic: Gross Profit Rate, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: ($500,000  $350,000)  $500,000  30% (Net sal. – COGS) ÷ Net sal.

209.

If Acme Ink, Inc. has net sales of $400,000 and cost of goods sold of $320,000, the company’s gross profit rate is a. 80%. b. 25% c. 20%. d. 100%.

Ans: C, LO: 6, Topic: Gross Profit and Profit Margin, Subtopic: Gross Profit Rate, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: ($400,000  $320,000)  $400,000  20% (Net sal. – COGS) ÷ Net sal.

210.

Financial information is presented below: Operating expenses $ 40,000 Net sales 200,000 Cost of goods sold 150,000 Gross profit would be a. $160,000. b. $ 40,000. c. $ 50,000. d. $ 10,000.

Ans: C, LO: 6, Topic: Gross Profit and Profit Margin, Subtopic: Gross Profit Rate, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: $200,000  $150,000  $50,000 (Net sales – COGS)

211.

Financial information is presented below: Operating expenses $ 40,000 Net sales 200,000 Cost of goods sold 150,000 The gross profit rate would be a. .75. b. .20 c. .05. d. .25.

Ans: D, LO: 6, Topic: Multiple-Step Income Statement, Subtopic: Gross Profit, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

5-40

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution: ($200,000  $150,000)  $200,000  .25 (Net sales  COGS) ÷ Net sales

212.

Financial information is presented below: Operating expenses $ 40,000 Net sales 200,000 Cost of goods sold 150,000 The profit margin would be a. .75. b. .05. c. .25. d. .95.

Ans: B, LO: 6, Topic: Gross Profit and Profit Margin, Subtopic: Profit Margin, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: ($200,000  $150,000  $40,000)  $200,000  .05 ((Net sales  COGS  oper. exp.)  Net sales)

213.

Financial information is presented below: Operating expenses $ 28,000 Sales returns and allowances 7,000 Sales discounts 3,000 Sales revenue 150,000 Cost of goods sold 98,000 Gross profit would be a. $49,000. b. $42,000. c. $45,000. d. $52,000.

Ans: B, LO: 6, Topic: Gross Profit and Profit Margin, Subtopic: Gross Profit Rate, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: ($150,000  $7,000  $3,000)  $98,000  $42,000 ((Sal. rev.  sal.ret./all.  sal.dis.)  COGS)

214.

Financial information is presented below: Operating expenses $ 28,000 Sales returns and allowances 7,000 Sales discounts 3,000 Sales revenue 150,000 Cost of goods sold 98,000 The gross profit rate would be a. .35. b. .30. c. .70. d. .28. .

Merchandising Operations

5-41

Ans: B, LO: 6, Topic: Gross Profit and Profit Margin, Subtopic: Gross Profit Rate, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: $150,000  $7,000  $3,000  $140,000; ($140,000  $98,000)  $140,000  .30 [(Sal. rev.  sal.ret./all.  sal. disc.)  COGS]  Net sal.

215.

Financial information is presented below: Operating expenses $ 28,000 Sales returns and allowances 7,000 Sales discounts 3,000 Sales revenue 150,000 Cost of goods sold 98,000 The profit margin is a. .28. b. .09. c. .30. d. .10.

Ans: D, LO: 6, Topic: Gross Profit and Profit Margin, Subtopic: Profit Margin, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: $150,000  $7,000  $3,000  $140,000; ($140,000  $98,000  $28,000)  $140,000  .10 [(Sal.rev.  sal. ret./all.  sal. dis.)  COGS  oper. exp.]  Net sal.

216.

Financial information is presented below: Operating expenses Sales returns and allowances Sales discounts Sales revenue Cost of goods sold Gross profit would be a. $61,000. b. $64,000. c. $54,000. d. $67,000.

$ 45,000 3,000 7,000 160,000 96,000

Ans: C, LO: 4, Topic: Multiple-Step Income Statement, Subtopic: Gross Profit, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: ($160,000  $3,000  $7,000)  $96,000  $54,000 [(Sal.rev.  sal. ret./all.  sal. dis.)  COGS]

217.

Financial information is presented below: Operating expenses Sales returns and allowances Sales discounts Sales revenue Cost of goods sold The profit margin would be a. .36. b. .05. c. .12. d. .06.

$ 45,000 3,000 7,000 160,000 96,000

Ans: D, LO: 6, Topic: Gross Profit and Profit Margin, Subtopic: Profit Margin, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process

5-42

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

Solution: $160,000  $3,000  $7,000  $150,000; ($150,000  $96,000  $45,000)  $150,000  .06 [(Sal. rev. – sal. ret./all. – sal. dis.) – COGS – oper. exp.]  Net sal.

218.

A company shows the following balances: Sales Revenue $1,000,000 Sales Returns and Allowances 175,000 Sales Discounts 25,000 Cost of Goods Sold 600,000 What is the company’s gross profit rate? a. 60% b. 75% c. 40% d. 25%

Ans: D, LO: 6, Topic: Gross Profit and Profit Margin, Subtopic: Gross Profit Rate, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: [($1,000,000  $175,000  $25,000)  $600,000]  $800,000  25% [(Sal. rev. – sal. ret./all. – sal. dis.) – COGS] ÷ Net sal.

219.

Acme Industries reported net sales totaling $3,200,000 during the year. The company’s gross profit rate was determined to be 41%. Which statement is true? a. The company generated $1,312,000 of net income during the year. b. The company generated 41 cents of net income out of each dollar of assets owned by the company. c. The company generated 41 cents out of every sales dollar that is available to cover its operating expenses and contribute to profit. d. The inventory cost is 41% of the sales price of the inventory items.

220.

A company shows the following balances: Sales Revenue $ 800,000 Sales Returns and Allowances 75,000 Sales Discounts 25,000 Cost of Goods Sold 490,000 What is the company’s gross profit rate? a. 61% b. 70% c. 30% d. 39%

Merchandising Operations

5-43

Solution: [($800,000  $75,000  $25,000)  $490,000]  $700,000  30% [(Sal. rev. – sal. ret./all. – sal. dis.) – COGS] ÷ Net sal.

221.

What is a difference between the profit margin and the gross profit rate? a. None, these are interchangeable terms. b. The gross profit rate is computed by dividing net sales by gross profit and the profit margin is computed by dividing net sales by net income. c. The gross profit rate will normally be higher than the profit margin. d. A profit margin of 7% means that 7 cents of each net sales dollar ends up in net income and a gross profit rate of 7% means that the cost of the goods was 7% of the selling price.

Ans: C, LO: 6, Topic: Gross Profit and Profit Margin, Subtopic: NA, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

222.

A1 Fashions sold merchandise for $190,000 cash during the month of July. Returns that month totaled $4,000. If the company’s gross profit rate is 40%, A1 will report monthly net sales revenue and cost of goods sold of a. $190,000 and $114,000. b. $186,000 and $74,400. c. $186,000 and $111,600. d. $190,000 and $111,600.

Ans: C, LO: 6, Topic: Gross Profit and Profit Margin, Subtopic: Gross Profit Rate, Bloom: AP, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: $190,000  $4,000 = $186,000; $186,000  .60  $111,600 (Sales – ret.) × (1 – Gross profit rate)

223.

Financial information is presented below: Operating expenses Sales returns and allowances Sales discounts Sales revenue Cost of goods sold The gross profit rate would be a. .36. b. .64. c. .40. d. .34.

$ 45,000 3,000 7,000 160,000 96,000

Ans: A, LO: 6, Topic: Gross Profit and Profit Margin, Subtopic: Gross Profit Rate, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: $160,000  $3,000  $7,000  $150,000; ($150,000  $96,000)  $150,000  .36 [(Sal. rev. – sal. ret./all. – sal. dis.) – COGS]  Net sal.

224.

Company A sold merchandise for $171,000 cash during the month of July. Returns that month totaled $3,600. If the company’s gross profit rate is 40%, the company will report monthly net sales revenue and cost of goods sold of a. $171,000 and $102,600. b. $167,400 and $66,960. c. $167,400 and $100,440. d. $171,000 and $100,440.

Ans: C, LO: 6, Bloom: AP, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: $171,000  $3,600  $167,400  .60  $100,440 (Sales – ret.) × (1 – .40) = cost of goods sold

225.

Ace Importers reports net income of $60,000 and cost of goods sold of $540,000. If the .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

company’s gross profit rate was 40%, net sales were a. $900,000. b. $1,350,000. c. $1,410,000. d. $990,000. Ans: A, LO: 6, Topic: Gross Profit and Profit Margin, Subtopic: Gross Profit Rate, Bloom: AP, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: $540,000  (1  .40)  $900,000 (COGS ÷ (1 – .40))

226.

Ace Services and Supplies reports net income of $60,000 and cost of goods sold of $360,000. If Ace’s gross profit rate was 40%, net sales were a. $600,000. b. $900,000. c. $960,000. d. $660,000.

Ans: A, LO: 6, Topic: Gross Profit and Profit Margin, Subtopic: Gross Profit Rate, Bloom: AP, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: $360,000  (1  .40)  $600,000 (COGS)/ (1-gr.prof.rate)

*227. Acme Retail Corporation purchases $500 of merchandise on credit. Using the periodic inventory system, Acme would record this transaction as: a. Inventory 500 Accounts Payable 500 b. Accounts Payable 500 Purchases 500 c. Purchases 500 Accounts Payable 500 d. Accounts Payable 500 Inventory 500 Ans: C, LO: 7, Topic: Periodic Inventory System, Subtopic: Recording Purchases of Merchandise, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

*228. A1 Wholesale Supply Corporation recorded the return of $200 of goods originally sold on credit to Discount Industries. Using the periodic inventory system, A1 would record this transaction as: a. Inventory 200 Accounts Receivable 200 b. Sales Returns and Allowances 200 Accounts Receivable 200 c. Accounts Payable 200 Sales Returns and Allowances 200 d. Accounts Receivable 200 Sales Returns and Allowances 200 Ans: B, LO: 7, Topic: Periodic Inventory System, Subtopic: Sales Returns and Allowances, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Merchandising Operations

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*229. Ace Discount Retail Corporation returned $150 of goods originally purchased on credit from Dodgers Industries. Using the periodic inventory system, Ace would record this transaction as: 150 a. Inventory Accounts Payable 150 b. Accounts Payable 150 Inventory 150 150 c. Purchase Returns and Allowances 150 Accounts Payable 150 d. Accounts Payable 150 Purchase Returns and Allowances Ans: D, LO: 7, Topic: Periodic Inventory System, Subtopic: Purchase Returns and Allowances, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

*230. Ramos Company receives payment on account from Martinez Industries. Based on the original sale of $12,000 using the periodic inventory system, Ramos honors the 3% cash discount and records the payment. Which of the following is the correct entry for Ramos to record? a. Cash 11,640 Sales Discounts 360 Inventory 12,000 b. Accounts Receivable 12,000 Cash 7,840 Purchase Discounts 160 c. Cash 11,640 Sales Discounts 360 Accounts Receivable 12,000 d. Cash 11,640 Purchase Discounts 360 Accounts Payable 12,000 Ans: C, LO: 7, Topic: Periodic Inventory System, Subtopic: Sales Discounts, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control Solution: $12,000  .03  $360 sales discount (Sale amount × .03) = sal. dis.

*231. On September 14, 2025, Ace Company sells merchandise valued at $24,000 on account to A1 Service Inc. with terms 3/10, n/30. Both Ace and A1 Service use the periodic inventory system. A1 remits payment to Ace on September 23. Ace’s entry on that date is: a. Cash 23,280 Sales Discounts 720 Accounts Payable 24,000 b. Accounts Receivable 24,000 Cash 23,680 Purchase Discounts 320 c. Cash 23,280 Sales Discounts 720 Accounts Receivable 24,000 .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

d. Cash Sales Discounts Accounts Payable

23,280 720 24,000

Ans: C, LO: 7, Topic: Periodic Inventory System, Subtopic: Sales Discounts, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control Solution: $24,000  .03  $720 sales discount (Sale amount × .03) = sal. dis.

*232.

A1 Supply Company's financial information is presented below. Purchase returns and allowances Sales returns and allowances Net sales

$ 16,000 11,000 480,000

Purchases Ending inventory Cost of goods sold

$275,000 32,000 290,000

What is the company’s gross profit? a. $190,000 b. $147,000 c. $195,000 d. $179,000 Ans: A, LO: 7, Topic: Periodic Inventory System, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: $480,000  $290,000  $190,000 (Net Sales – COGS)

*233. Acme Corporation purchases $1,500 of merchandise on account from Enterprise Company, terms 2/10, n/30. Acme and Enterprise both use periodic inventory systems. Acme’s entry to record this transaction is: a. Inventory 1,500 Accounts Payable 1,500 b. Accounts Payable 1,500 Purchases 1,500 c. Purchases 1,500 Accounts Payable 1,500 d. Accounts Payable 1,500 Inventory 1,500 Ans: C, LO: 7, Topic: Periodic Inventory System, Subtopic: Recording Purchases of Merchandise, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

*234. Acme Corporation purchases $1,500 of merchandise on account from Enterprise Company, terms 2/10, n/30. Acme and Enterprise both use periodic inventory systems. Enterprise’s entry to record this transaction is: a. Inventory 1,500 Accounts Payable 1,500 b. Accounts Receivable 1,500 Purchases 1,500 c. Accounts Payable 1,500 Purchases 1,500 d. Accounts Receivable 1,500 Sales Revenue 1,500 Ans: D, LO: 7, Topic: Periodic Inventory System, Subtopic: Recording Sales of Merchandise, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA:

Merchandising Operations

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Reporting and Control

*235. A1 Service Corporation purchases merchandise on account from Acme Industries, terms 2/10, n/30. A1 and Acme both use periodic inventory systems. If the invoice is paid within the discount period, A1 will a. debit the amount of the discount to Purchases. b. credit the amount of the discount to Cash. c. credit the amount of the discount to Inventory. d. credit the amount of the discount to Purchases Discounts. Ans: D, LO: 7, Topic: Periodic Inventory System, Subtopic: Purchases Discounts, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

*236. A1 Service Corporation purchases merchandise on account from Acme Industries, terms 2/10, n/30. A1 and Acme both use periodic inventory systems. If the invoice is paid within the discount period, Acme will a. debit the amount of the discount to Sales Discounts. b. credit the amount of the discount to Cash. c. credit the amount of the discount to Purchases Discounts. d. credit the amount of the discount to Sales Revenue. Ans: A, LO: 7, Topic: Periodic Inventory System, Subtopic: Sales Discounts, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

*237. Acme Service Industries purchases merchandise on account from Ace, Inc., terms 2/10, n/30. Acme and Ace both use periodic inventory systems. If the invoice is paid within the discount period, Acme will debit a. Purchases. b. Cash. c. Inventory. d. Purchases Discounts. Ans: D, LO: 7, Topic: Periodic Inventory System, Subtopic: Purchases Discounts, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

*238. Ace Supply Corporation purchases merchandise on account from A1 Industries, terms 2/10, n/30. Ace and A1 both use periodic inventory systems. If the invoice is paid within the discount period, A1 will debit a. Sales Discounts. b. Inventory. c. Purchases Discounts. d. Sales Revenue. Ans: A, LO: 7, Topic: Periodic Inventory System, Subtopic: Sales Discounts, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

*239. If the goods are shipped FOB Shipping Point and the periodic inventory system is used, the buyer will debit .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

a. b. c. d.

Inventory. Purchases. Freight-In. Freight-Out.

Ans: C, LO: 7, Topic: Periodic Inventory System, Subtopic: Freight Costs, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

*240.

Costs incurred when purchased goods are shipped FOB Shipping Point are ultimately expensed in a. Purchases. b. Cost of Goods Sold. c. Freight-In. d. Freight-Out.

Ans: B, LO: 7, Topic: Periodic Inventory System, Subtopic: Freight Costs, Bloom: AP, Difficulty: Hare, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

*241.

If the goods purchased on account are returned and the buyer uses a periodic inventory system, the buyer will credit a. Inventory. b. Purchases Returns and Allowances. c. Purchases. d. Sales Returns and Allowances.

Ans: B, LO: 7, Topic: Periodic Inventory System, Subtopic: Purchases Returns and Allowances, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

*242.

If the goods sold on account are returned and the seller uses a periodic inventory system, the seller will debit a. Cost of Goods Sold. b. Purchases Returns and Allowances. c. Sales Revenue. d. Sales Returns and Allowances.

Ans: D, LO: 7, Topic: Periodic Inventory System, Subtopic: Purchases Returns and Allowances, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

*243.

The adjusting entries for estimated sales returns include debits to Sales Returns and Allowances and Estimated Inventory Returns and credits to a. Allowance for Inventory Returns and Accounts Receivable. b. Refund Liability and Cost of Goods Sold. c. Sales Revenue and Accounts Receivable. d. Refund Liability and Inventory.

Ans: B, LO: 8, Topic: Adjusting Entries for Credit Sales with Returns and Allowances, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

*244.

Which of the following statements is true regarding the financial statement presentation of accrued sales returns and related accounts. a. The balance in Estimated Inventory Returns is subtracted from Cost of Goods Sold on .

Merchandising Operations

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the Income Statement. b. Refund Liability is netted against Accounts Receivable on the Balance Sheet. c. Refund Liability is netted against Sales Revenue on the Income Statement d. The balance in Estimated Inventory Returns is added to Inventory on the Balance Sheet. Ans: D, LO: 8, Topic: Adjusting Entries for Credit Sales with Returns and Allowances, Subtopic: NA, Bloom Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

BRIEF EXERCISES Be. 245 Presented here are the components in Ace Retail Company’s income statement. Determine the missing amounts. Sales Revenue_ $75,000 (c)

Cost of Goods Sold (a) $56,000

Gross _Profit $35,000 $59,000

Operating Expenses (b) $48,000

Net Income $17,000 (d)

Ans: N/A, LO: 1,, Topic: Merchandising Operations and Inventory Systems, Subtopic: NA Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

Solution 245 a. b. c. d.

$ 40,000 (Sal. rev. – Gross prof.) $ 18,000 (Gross profit – Net Income) $115,000 (COGS + Gross prof.) $ 11,000 (Gross profit – Operating expenses)

Be. 246 On September 4, A1 Knickknacks buys merchandise on account from Acme Supply Company. The selling price of the goods is $900 and the cost of goods is $600. Both companies use the perpetual inventory systems. Journalize the transactions on the books of both companies. Ans: N/A, LO: 2,3, Topics: Recording Purchases Under a Perpetual System, Recording Sales Under a Perpetual System, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Solution 246 A1 Knickknacks Sept. 4

Inventory ............................................................................ Accounts Payable .....................................................

900 900

Acme Supply Company Sept. 4

Accounts Receivable ......................................................... Sales Revenue...........................................................

900

Cost of Goods Sold ............................................................

600

900

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

5-50

Inventory ...................................................................

600

Be. 247 Ace Company is a furniture retailer and uses the perpetual inventory system. On January 14, 2025, Ace purchased merchandise inventory for $45,000. Credit terms were 2/10, n/30. The inventory was sold on account for $60,000 on January 21, 2025. Credit terms were 1/10, n/30. The accounts payable was settled on January 23, 2025, and the accounts receivables were settled on January 30, 2025. Prepare journal entries to record each of these transactions. Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Solution 247 Jan. 14

Inventory ............................................................................. Accounts Payable.......................................................

45,000

Accounts Receivable........................................................... Sales Revenue ...........................................................

60,000

Cost of Goods Sold............................................................. Inventory ....................................................................

45,000

Accounts Payable ............................................................... Cash ($45,000 × .98).................................................. Inventory .................................................................... *(Inven. purch. × (1 – .02))

45,000

Cash ................................................................................... Sales Discounts .................................................................. Accounts Receivable .................................................. *(Sales price × (1 – .01))

59,400* 600

Jan. 21

Jan. 23

Jan. 30

45,000

60,000

45,000 44,100* 900

60,000

Be. 248 Prepare the journal entries to record the following transactions on Acme Home Company’s books using a perpetual inventory system. On February 6, Acme sold $105,000 of merchandise to A1 Interiors Company, terms 2/10, net /30. The cost of the merchandise sold was $70,000. On February 8, A1 returned $14,000 of the merchandise purchased on February 6. The cost of the merchandise returned was $9,000. On February 16, Acme received the balance due from A1. Ans: N/A, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Solution 248 Feb

Accounts Receivable ............................................................... 105,000 .

Merchandising Operations

Sales Revenue...........................................................

Feb

Feb 16

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105,000

Cost of Goods Sold ............................................................ Inventory ...................................................................

70,000

Sales Returns and Allowances .......................................... Accounts Receivable .................................................

14,000

Inventory ............................................................................ Cost of Goods Sold ...................................................

9,000

Cash ($91,000 x .98) ......................................................... Sales Discounts ................................................................. Accounts Receivable ($105,000 – $14,000) ..............

89,180* 1,820

70,000

14,000

9,000

91,000

*(Sales price – return) × (1 – .02) Be. 249 Ace Discount Retail Company provides this information for the month of November, 2025: sales on credit $140,000; cash sales $50,000; sales discounts $2,000; and sales returns and allowances $8,000. Prepare the sales revenues section of the income statement based on this information. Ans: N/A, LO: 4, Topic: Multiple- Step Income Statement, Subtopic: Sales, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

Solution 249 ACE DISCOUNT RETAIL COMPANY Income Statement (Partial) For the Month Ended November 30, 2025 Sales Revenue ($140,000 + $50,000) ................................ Less: Sales Returns and Allowances ............................... Sales Discounts ..................................................... Net Sales (Sal. rev. – sal. ret./all. – sal. dis.)

$190,000 $ 8,000 2,000

10,000 180,000

Be. 250 Suppose that Target uses a periodic inventory system and has these account balances: .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Purchases $570,000; Purchase Returns and Allowances $14,000; Purchases Discounts $9,000; and Freight-In $15,000. Determine net purchases and cost of goods purchased. Ans: N/A, LO: 5, Topic: Periodic Inventory System, Subtopic: Recording Merchandise Transactions, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

Solution 250 Calculation of net purchases and cost of goods purchased Purchases ........................................................................... Less: Purchases returns and allowances ......................... Purchase discounts ................................................ Net Purchases..................................................................... Add: Freight-in..................................................................... Cost of Goods Purchased ................................................... (Purch. – pur. ret./all. – pur. dis. + fr. – in.)

$570,000 $14,000 9,000

23,000 547,000 15,000 $562,000

Be. 251 Suppose that Target uses a periodic inventory system and has the following financial information: Purchases $620,000; Purchase Returns and Allowances $25,000; Purchases Discounts $11,000; Freight-In $19,000; beginning inventory of $45,000; ending inventory of $55,000, and net sales of $750,000. Determine the amounts to be reported for cost of goods sold and gross profit. Ans: N/A, LO: 5, Topic: Periodic Inventory System, Subtopic: Recording Merchandise Transactions, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

Solution 251 Calculation of cost of goods sold Inventory, beginning ............................................................ Cost of goods sold Purchases ........................................................................... Less: Purchases returns and allowances ......................... Purchase discounts ................................................ Net purchases ..................................................................... Add: Freight-In .................................................................... Cost of goods purchased..................................................... Cost of goods available for sale........................................... Inventory, ending................................................................. Cost of goods sold............................................................... Calculation of gross profit Net sales ............................................................................. .

$45,000 $620,000 $25,000 11,000

36,000 584,000 19,000 603,000 648,000 _ 55,000 $593,000 $750,000

Merchandising Operations

Cost of goods sold .............................................................. Gross profit .........................................................................

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593,000 $157,000

Be. 252 Ace Corporation reported net sales of $150,000, cost of goods sold of $96,000, operating expenses of $35,000, other expenses of $10,000, net income of $9,000. Calculate the following values: 1. Profit margin. 2. Gross profit rate. Ans: N/A, LO: 6, Topic: Gross Profit and Profit Margin, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

Solution 252 Net income

1. Profit margin =

Net sales Gross profit Net sales

2. Gross profit rate =

$ 9,000

=6%

$150,000

($150,000 - $96,000) $150,000

= 36%

Be. 253 Use the following multiple-step income statement of Company A to prepare a single-step version. Company A Income Statement For the Year Ended December 31, 2025 Sales Sales revenue ..................................................................... Less: Sales returns and allowances ................................. Net sales ............................................................................ Cost of goods sold .............................................................. Gross profit.............................................................. Operating expenses . Income from operations ...................................................... Other revenues and gains Interest revenue ...................................................... Other expenses and losses .

$98,000 2,000 $96,000 42,000 54,000 14,000 40,000 1,000

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Loss on sale of equipment ....................................... Net income ..........................................................................

500 $40,500

Ans: N/A, LO: 4, Topic: Multiple=Step Income Statement, Subtopic: Single-Step Income Statement, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

Solution 253 Company A Income Statement For the Year Ended December 31, 2025 Net sales Interest revenue

$96,000 1,000

Cost of goods sold Operating expenses Loss on sale of equipment Net Income

42,000 14,000 500

$97,000

56,500 $40,500

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Be. 254 Use the following single-step income statement for Company B to prepare a multiple-step version. Company B Income Statement For the Year Ended December 31, 2025 Net sales Gain on the sale of investments Cost of goods sold Operating expenses Interest expense Net Income

$133,000 2,500 63,000 24,000 1,500

$135,500

88,500 $ 47,000

Ans: N/A, LO: 4, Topic: Multiple=Step Income Statement, Subtopic: Single-Step Income Statement, Bloom Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

Solution 254 Company B Income Statement For the Year Ended December 31, 2025 Net sales ............................................................................ Cost of goods sold .............................................................. Gross profit.............................................................. Operating expenses . Income from operations ...................................................... Other revenues and gains Gain on sale of investments .................................... Other expenses and losses Interest expense ...................................................... Net income..........................................................................

$133,000 63,000 70,000 24,000 46,000 2,500 1,500 $ 47,000

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

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EXERCISES Ex. 255 Kim Kardashian is a new accountant with Ace Discount Retail Company. Ace purchased merchandise on account for $9,000. The credit terms are 1/10, n/30. Kim has talked with the company's banker and knows that she could earn 6% on any money invested in the company's savings account. Instructions (a) Should Kim pay the invoice within the discount period or should she keep the $9,000 in the savings account and pay at the end of the credit period? Support your recommendation with a calculation showing which action would be best. (b) If Kim forgoes the discount, it may be viewed as paying an interest rate of 1% for the use of $9,000 for 20 days. Calculate the annual rate of interest that this is equivalent to. Ans: N/A, LO: 2, Topic: Recording Purchases Under a Perpetual System, Subtopic: Purchase Discounts, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Solution 255 (a)

(b)

Yes, Kim should take the discount. Discount of 1% on $9,000 Interest received on $9,000 (for 20 days at 6%) Savings by taking the discount

$90 30 $60

(purch. amount × 1%) ($9,000  6%  20  360)

The equivalent annual interest rate is: 1%  360  20 = 18%.

Ex. 256 This information relates to A1 Supply Co. 1. On April 5 purchased merchandise from Acme Wholesale Company for $22,000, terms 2/10, n/10. 2. On April 6 paid freight costs of $900 on merchandise purchased from Acme Wholesale 3. On April 7 purchased equipment on account for $26,000. 4. On April 8 returned some of April 5 merchandise to Acme Wholesale which cost $2,000. 5. On April 15 paid the amount due to Acme Wholesale in full. Instructions (a) Prepare the journal entries to record the transactions listed above on the books of A1 Supply Co. The company uses a perpetual inventory system. (b) Assume that A1 Supply Co. paid the balance due to Acme Wholesale Company on May 4 instead of April 15. Prepare the journal entry to record this payment. Ans: N/A, LO: 2, Topic: Recording Purchases Under a Perpetual System, Subtopic: Summary of Purchasing Transactions, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

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Solution 256 (a)

(1) (2) (3) (4) (5)

(b)

April 5 April 6 April 7 April 8 April 15

May 4

Inventory ...................................................... Accounts Payable .................................

22,000

Inventory ...................................................... Cash .....................................................

900

Equipment .................................................... Accounts Payable .................................

26,000

Accounts Payable......................................... Inventory ...............................................

2,000

Accounts Payable ($22,000 – $2,000)................................... Inventory [($22,000 – $2,000)  2%] ................... Cash ($20,000  98%) ............................ (Purch. amount – ret.) × (1 – .02)

Accounts Payable ($22,000 – $2,000) ................. Cash ...........................................................

22,000 900 26,000 2,000 20,000 400 19,600

20,000 20,000

Ex. 257 (a)

Ace Company purchased merchandise on account from A1 Office Suppliers for $62,000 with terms of 1/10, n/30. During the discount period, Ace returned some merchandise and paid $59,400 as payment in full. Ace uses a perpetual inventory system. Prepare the journal entries that Ace Company made to record the: (1) purchase of merchandise. (2) return of merchandise. (3) payment on account.

(b)

Acme Supply Company sold merchandise to Ace Company on account for $84,000 with credit terms of ?/10, n/30. The cost of the merchandise sold was $63,000. During the discount period, Ace Company returned $4,000 of merchandise and paid its account in full (minus the discount) by remitting $78,400 in cash. Both companies use a perpetual inventory system. Prepare the journal entries that Acme Supply Company made to record the: (1) sale of merchandise. (2) return of merchandise. (3) collection on account.

Ans: N/A, LO: 2, 3, Topics: Recording Purchases Under a Perpetual System, Recording Sales Under a Perpetual System, Subtopic: Summary of Purchasing Transactions, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

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Solution 257 (a)

To compute the amount due after returns but before the discount divide $59,400 by .99 (100% - 1%). $59,400  .99 = $60,000. (Amount paid ÷ (1 – .01) Subtract $60,000 from $62,000 to determine that $2,000 of merchandise was returned. (1) (2)

(3)

(b)

Inventory ............................................................................ Accounts Payable ......................................................

62,000

Accounts Payable .............................................................. Inventory ...................................................................

2,000

Accounts Payable ($62,000 - $2,000) ................................ Inventory ($60,000 x .01)........................................... Cash ($60,000 x .99) .................................................

60,000

62,000

2,000 600 59,400

Ace Company returns $4,000 of merchandise and owes $80,000 to Acme Supply Company. $78,400  $80,000 = .98 100% - 98% = 2% The missing discount percentage is 2%. $80,000  2% = $1,600 sales discount. $80,000 - $1,600 = $78,400 cash received on account. (1)

(2)

(3)

Accounts Receivable .......................................................... Sales Revenue ...........................................................

84,000

Cost of Goods Sold ............................................................. Inventory ....................................................................

63,000

Sales Returns and Allowances ........................................... Accounts Receivable .................................................

4,000

Inventory ............................................................................. Cost of Goods Sold .................................................... * (cost = sales price x .75 as shown in sales entries)

3,000*

Cash .................................................................................. Sales Discounts ................................................................. Accounts Receivable .................................................

78,400* 1,600

*(Sales – sal. ret.) × (1 – .02)

84,000

63,000 4,000

3,000

80,000

Merchandising Operations

5-59

Ex. 258 June 4

Ace Discount Retail Company purchased $9,000 of merchandise; terms n/30 from A1 Supply Company. The cost of the merchandise was $6,300.

Ace Discount Retail returned $500 of goods to A1 Supply for full credit. The goods had a cost of $350 to A1 Supply.

Ace Discount Retail paid the account in full.

Instructions Prepare the journal entries to record these transactions in (a) Ace Discount Retail’s records and (b) A1 Supply’s records. Assume the use of the perpetual inventory system for both companies. Ans: N/A, LO: 2, 3, Topics: Recording Purchases Under a Perpetual System, Recording Sales Under a Perpetual System, Subtopic: Summary of Purchasing Transactions, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Solution 258 (a)

Ace Discount Retail’s books

June

12 12

Inventory Accounts Payable………………………………..

9,000

Accounts Payable………………………………………… Inventory

500

Accounts Payable………………………………………… Cash……………………………………………….

8,500

(b)

A1 Supply’s’ books

June

4 4

9,000

500 8,500

Accounts Receivable…………………………………….. Sales Revenue……………………………………

9,000

Cost of Goods Sold………………………………………. Inventory

6,300

Sales Returns and Allowance…………………………… Accounts Receivable…………………………….

500

Inventory ………………………………………………… Cost of Goods Sold……………………………

350

Cash……………………………………………………….. Accounts Receivable…………………………….

8,500

9,000 6,300

500

350 8,500

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

5-60 Ex. 259

On October 1, the A1 Bicycle Store had an inventory of 20 electric bicycles for $150 each. During the month of October, the following transactions occurred. Assume A1 uses a perpetual inventory system. Oct. 4

Purchased 180 bicycles for $145 each from the Ace Bicycle Company, terms 2/10, n/30.

Paid freight of $900 on the October 4 purchase.

Sold 10 bicycles from the October 1 inventory to Team America for $250 each, terms 2/10, n/30.

Received credit from the Ace Bicycle Company for the return of 8 defective bicycles.

Issued a credit memo to Team America for the return of a bicycle.

Paid Ace Bicycle Company in full, less discount.

Instructions Prepare the journal entries to record the transactions assuming the company uses a perpetual inventory system. Ans: N/A, LO: 2, 3, Topics: Recording Purchases Under a Perpetual System, Recording Sales Under a Perpetual System, Subtopic: Summary of Purchasing Transactions, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Solution 259 Oct. 4

Inventory (180 x $145) ........................................................ Accounts Payable ......................................................

26,100

Inventory ............................................................................ Cash ..........................................................................

900

Accounts Receivable (10 x $250)........................................ Sales Revenue ...........................................................

2,500

Cost of Goods Sold (10 x $150) .......................................... Inventory ...................................................................

1,500

Accounts Payable (8 x $145) .............................................. Inventory ...................................................................

1,160

Sales Returns and Allowances (1 x $250)........................... Accounts Receivable .................................................

250

Inventory (1 x $150) ............................................................ Cost of Goods Sold ...................................................

150

Accounts Payable ($26,100 - $1,160) ................................ Cash ($24,940  .98).................................................. Inventory ($24,940  .02) .......................................... *(Oct. 4 purch. – ret.) × (1 – .02) [rounded]

24,940

26,100 900

2,500

1,500 1,160

250

150

24,441* 499

Merchandising Operations

5-61

Ex. 260 Presented here are selected transactions for the Ace Pet Supply Company during April. Ace Pet Supply uses the perpetual inventory system. April

Sold merchandise to Pet Shop Company for $4,000, terms 2/10, n/30. The merchandise sold had a cost of $2,500.

Purchased merchandise from Wild Corporation for $8,000, terms 1/10, n/30.

Purchased merchandise from Ryan Company for $1,000, n/30.

Received payment from Pet Shop Company for purchase of April 1 less appropriate discount.

Paid Wild Corporation for April 2 purchase.

Instructions Journalize the April transactions for Ace Pet Supply Company. Ans: N/A, LO: 2, 3, Topics: Recording Purchases Under a Perpetual System, Recording Sales Under a Perpetual System, Subtopic: Summary of Purchasing Transactions, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Solution 260 April

4 10

Accounts Receivable .......................................................... Sales Revenue ........................................................

4,000

Cost of Goods Sold ............................................................. Inventory .................................................................

2,500

Inventory ............................................................................. Accounts Payable....................................................

8,000

Inventory ............................................................................. Accounts Payable....................................................

1,000

Cash ($4,000 x .98) ............................................................ Sales Discounts ($4,000 x .02) ........................................... Accounts Receivable ...............................................

3,920* 80

Accounts Payable ............................................................... Inventory ($8,000 x .01)........................................... Cash ($8,000 x .99) .................................................

8,000

*(Sale amount × (1 – .02)) **(Apr. purch. × (1 – .01))

4,000

2,500

8,000

1,000

4,000 80 7,920**

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

5-62 Ex. 261

A1 Restaurant Supply Company completed the following transactions in October: A1 uses a perpetual inventory system. Credit Sales Date Amount Oct. 3 $ 800 Oct. 11 1,500 Oct. 17 5,000 Oct. 21 1,700 Oct. 23 6,000

Terms 2/10, n/30 3/10, n/30 1/10, n/30 2/10, n/60 2/10, n/30

Sales Returns Date Amount Oct. 14 Oct. 20 Oct. 23 Oct. 27

Date of Collection Oct. 8 Oct. 16 Oct. 29 Oct. 27 Oct. 28

$ 300 1,200 400 500

Instructions (a) Indicate the cash received for each collection. Show your calculations. (b) Prepare the journal entry for the (1) Oct. 17 sale. The merchandise sold had a cost of $3,000. (2) Oct. 23 sales return. The merchandise returned had a cost of $200. (3) Oct. 28 collection. Ans: N/A, LO: 3, Topics: Recording Sales Under a Perpetual System, Subtopic: Sales Discounts, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Solution 261 $784

[Sales $800 - Sales discount $16 ($800  .02)]

$1,164

[Sales $1,500 - Sales return $300 = $1,200; $1,200 - Sales discount $36 ($1,200  .03)]

$3,800

[Sales $5,000 - Sales return $1,200 = $3,800; (discount lapsed)]

$1,274

[Sales $1,700 - Sales return $400 = $1,300; $1,300 - Sales discount $26 ($1,300  .02)]

$5,390

[Sales $6,000 - Sales return $500 = $5,500; $5,500 - Sales discount $110 ($5,500  .02)]

(a) Oct. 8

(b) (1)

(2)

(3)

Oct. 17

Oct. 23

Oct. 28

Accounts Receivable ........................................ Sales Revenue..........................................

5,000

Cost of Goods Sold............................................ Inventory ...................................................

3,000

Sales Returns and Allowances ......................... Accounts Receivable ................................

400

Inventory............................................................ Cost of Goods Sold ...................................

200

Cash ................................................................. Sales Discounts ................................................ Accounts Receivable ................................

5,390 110

5,000 3,000 400 200

5,500

Merchandising Operations

5-63

Ex. 262 The following transactions are for A1 Beauty Supply Company. (1) On December 3, A1 Beauty Supply sold $500,000 of merchandise to Sally Co., terms 1/10, n/30. The cost of the merchandise sold was $320,000. (2) On December 8, Sally Co. was granted an allowance of $20,000 for merchandise purchased on December 3. (3) On December 13, A1 Beauty Supply received the balance due from Sally Co. Instructions (a) Prepare the journal entries to record these transactions on the books of A1 Beauty Supply. A1 uses a perpetual inventory system. (b) Assume that A1 Beauty Supply received the balance due from Sally Co. on January 2 of the following year instead of December 13. Prepare the journal entry to record the receipt of payment on January 2. Ans: N/A, LO: 3, Topics: Recording Sales Under a Perpetual System, Subtopics: Sales Returns and Allowances, Sales Discounts, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Solution 262 (a) (1) Dec 3 Accounts Receivable ........................................ Sales Revenue ..........................................

500,000

Cost of Goods Sold .......................................... Inventory ...................................................

320,000

(2) Dec 8 Sales Returns and Allowances ......................... Accounts Receivable .................................

20,000

(3) Dec. 13 Cash ($480,000 – $4,800) ................................ Sales Discounts [($500,000 – $20,000)  1%]...................... Accounts Receivable ($500,000 – $20,000)................... *(Sale amount – ret.) × (1 – .01)

475,200*

(b)

Jan 2

Cash................................................................. Accounts Receivable ($500,000 – $20,000)...............................

500,000 320,000 20,000

4,800 480,000

480,000 480,000

Ex. 263 Instructions State the missing items identified by ?. 1. Gross profit - Operating expenses = ? 2. Cost of goods sold + Gross profit = ? 3. Sales revenue - (? + ?) = Net sales 4. Income from operations + ? - ? = Net income 5. Net sales - Cost of goods sold = ? Ans: N/A, LO: 4, Topic: Multiple-Step Income Statements, Subtopic: Multiple-Step Income Statement, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

5-64

Solution 263 1. 2. 3. 4. 5.

Income from operations (or Net income) Net sales Sales discounts, Sales returns and allowances Other revenues and gains, Other expenses and losses Gross profit

Ex. 264 Financial information is presented here for two companies. King Company $56,000 ? 50,000 33,000 ? 12,000 ?

Sales revenue Sales returns and allowances Net sales Cost of goods sold Gross profit Operating expenses Net income

Queen Company ? 5,000 80,000 ? 32,000 ? 14,000

Instructions (a) Compute the missing amounts. (b) Calculate the profit margin and the gross profit rate for each company. Ans: N/A, LO: 4,6, Topic: Gross Profit and Profit Margin, Subtopics: Gross Profit Rate, Profit Margin, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

Solution 264 (a)

King Company

Sales returns = $6,000 ($56,000 – $50,000 = $6,000) (Sal. rev. – net sal.) Gross profit = $17,000 ($50,000 – $33,000 = $17,000) Net income = $5,000 ($17,000 – $12,000) (Net sal. – COGS – oper. exp.) Queen Company Sales revenue = $85,000 ($80,000 + $5,000) Cost of goods sold = $48,000 ($80,000 – $32,000) Operating expenses = $18,000 ($32,000 – $14,000) (b) (Net inc./Net sal.)

King $5,000 = .10 $50,000

Queen $14,000 = .175 $80,000

Gross profit rate (Gross prof./Net sal.)

$17,000 $50,000

$32,000 $80,000

Profit margin

= .34

= .40

(Net sal. – gross prof.)

Merchandising Operations

5-65

Ex. 265 The following information is available for A1 Marine Supply Company: Sales revenue Sales returns and allowances Cost of goods sold Operating expenses Interest expense Interest revenue

$618,000 20,000 398,000 114,000 19,000 20,000

Instructions 1. Use the above information to prepare a multiple-step income statement for the year ended December 31, 2025. 2. Compute the profit margin. Ans: N/A, LO: 4,6, Topics: Multiple-Step Income Statement, Gross Profit and Profit Margin, Subtopics: Multiple-Step Income Statement, Profit Margin, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

Solution 265 1.

A1 MARINE SUPPLY COMPANY Income Statement For the Year Ended December 31, 2025

Sales Sales revenue ..................................................................... Less: Sales returns and allowances ................................. Net sales ............................................................................ Cost of goods sold .............................................................. Gross profit.............................................................. Operating expenses . Income from operations ...................................................... Other revenues and gains Interest revenue ...................................................... Other expenses and losses Interest expense ...................................................... Net income.......................................................................... 2. Profit margin: $87,000 ÷ $598,000 = 14.5% [rounded] (Net inc. ÷ Net sal.)

$618,000 20,000 $598,000 398,000 200,000 114,000 86,000 20,000 19,000 $ 87,000

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

5-66 Ex. 266

The adjusted trial balance of Ace Supply Company included the following selected accounts: Debit Credit Sales Revenue $645,000 Sales Returns and Allowances $ 50,000 Sales Discounts 9,500 Cost of Goods Sold 396,000 Freight-Out 2,000 Advertising Expense 15,000 Interest Expense 19,000 Salaries and Wages Expense 84,000 Utilities Expense 23,000 Depreciation Expense 3,500 Interest Revenue 25,000 Instructions 1. Use the above information to prepare a multiple-step income statement for the year ended December 31, 2025. 2. Calculate the profit margin and gross profit rate. Ans: N/A, LO: 4,6, Topics: Multiple-Step Income Statement, Gross Profit and Profit Margin, Subtopics: Multiple-Step Income Statement, Gross Profit Rate, Profit Margin, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

Solution 266 1.

ACE SUPPLY COMPANY Income Statement For the Year Ended December 31, 2025 Sales revenue..................................................................... Less: Sales returns and allowances ................................. Sales discounts ...................................................... Net sales ............................................................................ Cost of goods sold .............................................................. Gross profit ......................................................................... Operating expenses Salaries and Wages Expense ....................................... Utilities Expense ........................................................... Advertising Expense ..................................................... Depreciation Expense .................................................. Freight-Out.................................................................... Total operating expenses ........................................ Income from operations ...................................................... Other revenues and gains Interest revenue ............................................................ Other expenses and losses Interest expense ........................................................... Net income .........................................................................

$645,000 $ 50,000 9,500

59,500 585,500 396,000 189,500

$ 84,000 23,000 15,000 3,500 2,000 127,500 62,000 25,000 19,000 $ 68,000

2. Profit margin = $68,000 ÷ $585,500 = 11.6% (Net inc. ÷ Net sal.) [rounded] Gross profit rate = $189,500 ÷ $585,500 = 32.4% (Gross prof. ÷ Net sal.) [rounded] .

Merchandising Operations

5-67

Ex. 267 Presented below is information for Acme Supply Co, for the month of January 2025. Cost of goods sold $280,000 Freight-out 7,000 Insurance expense 12,000 Salaries and wages expense 42,000

Rent expense Sales discounts Sales returns and allowances Sales revenue

$35,000 8,000 13,000 421,000

Instructions (a) Prepare a multiple-step income statement. (b) Calculate the profit margin and the gross profit rate. Ans: N/A, LO: 4,6, Topics: Multiple-Step Income Statement, Gross Profit and Profit Margin, Subtopics: Multiple-Step Income Statement, Gross Profit Rate, Profit Margin, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

Solution 267 (a)

ACME SUPPLY CO. Income Statement For the Month Ended January 31, 2025

Sales Sales revenue...................................................... Less: Sales returns and allowances ........................................... Sales discounts.......................................... Net sales.............................................................. Cost of goods sold ......................................................... Gross profit .................................................................... Operating expenses Salaries and wages expense ................................ Rent expense........................................................ Insurance expense................................................ Freight-out ............................................................ Total operating expense ............................... Net income ...................................................................

$24,000

(b) Profit margin =

$400,000 $120,000

Gross profit rate =

$400,000

$421,000 $13,000 8,000

21,000 400,000 280,000 120,000

42,000 35,000 12,000 7,000 96,000 $ 24,000

= .06

= .30

5-68

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ex. 268 The trial balance of Ace Home Store at the end of its fiscal year ending August 31, 2025, includes these accounts: Inventory $29,200; Purchases $144,000; Sales Revenue $190,000; Freight-In $8,000; Sales Returns and Allowances $3,000; Freight-Out $1,000; and Purchases Returns and Allowances $5,000. The ending inventory is $25,000. Instructions Prepare a cost of goods sold section for the year ending August 31. Ans: N/A, LO: 5, Topic: Cost of Goods Sold Under a Periodic System, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

Solution 268 Inventory, September 1, 2024 ................................................. Purchases ............................................................................... Less: Purchase returns and allowances ................................. Net purchases ......................................................................... Add: Freight-in........................................................................ Cost of goods purchased......................................................... Cost of goods available for sale............................................... Inventory, August 31, 2025...................................................... Cost of goods sold............................................................

$ 29,200 $144,000 5,000 139,000 8,000 147,000 176,200 25,000 $151,200

Ex. 269 Below is a series of cost of goods sold sections for Elsa Inc., Idol Co., and R2D2 Inc.

Beginning inventory Purchases Purchase returns and allowances Net purchases Freight-in Cost of goods purchased Cost of goods available for sale Ending inventory Cost of goods sold

Elsa $ 450 1,700 40 (a) 130 (b) 2,240 310 (c)

Idol $ 120 1,080 (d) 1,020 (e) 1,230 1,350 (f) 1,130

R2D2 $ (g) 43,590 (h) 41,590 2,740 (i) 49,530 6,230 43,300

Instructions Fill in the lettered blanks to complete the cost of goods sold sections. Ans: N/A, LO: 5, Topic: Cost of Goods Sold Under a Periodic System, Subtopic: NA, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

Merchandising Operations

5-69

Solution 269 (a) (b) (c) (d) (e) (f) (g) (h) (i)

$1,660 ($1,700 – $40) $1,790 ($1,660 + $130) (Purch. – purch. ret./all. + fr. – in.) $1,930 ($2,240 – $310) $60 ($1,080 – $1,020) (Purch. – net purch.) $210 ($1,230 – $1,020) $220 ($1,350 – $1,130) (COG avail. for sale – COGS) $5,200 ($49,530 – $44,330 from (i)) [(COG avail. for sale – (Net purch. + fr. – in)] $2,000 ($43,590 – $41,590) $44,330 ($41,590 + $2,740)

Ex. 270 The following information is available from the annual reports of Company A and Company B. (amounts in millions) Company A Company B $32,622 $40,457 20,739 24,431 7,428 9,188 4,455 6,838 2,594 4,072

Net sales Cost of goods sold Operating expenses Income before taxes Net income Instructions

1. Calculate the profit margin and gross profit rate for each company. 2. What conclusion concerning the relative profitability of the two companies can be drawn from these data? Ans: N/A, LO: 6, Topic: Gross Profit and Profit Margin, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

Solution 270 1. Profit margin: (Net inc./Net sales) Gross profit rate: (Gross prof./Net sales)

Company A $2,594 ———— = 8.0%* $32,622

Company B $4,072 ———— = 10.1%* $40,457

$32,622 - $20,739 ———————— $32,622

$40,457 - $24,431 ———————— $40,457

$11,883 ———— = 36.4%* $32,622

$16,026 ———— = 39.6%* $40,457

*Rounded 2. Because all of Company B’s profitability ratios are higher than Company A’s, it can be concluded that Company B is the more profitable of the two companies.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

5-70 *Ex. 271 June 4

East Marine Company purchased $3,500 of merchandise, terms n/30 from Acme Marine Supply Company. The cost of the merchandise was $2,500.

East Marine returned $600 of goods to Acme Marine Supply for full credit. The goods had a cost of $400 to Gilbert.

East Marine paid the account in full.

Instructions Prepare the journal entries to record these transactions in (a) East Marine’s records and (b) Acme Marine Supply’s records. Assume the use of the periodic inventory system for both companies. Ans: N/A, LO: 7, Topic: Periodic Inventory System, Subtopic: Recording Merchandise Transactions, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

*Solution 271 (a)

East Marine’s books

June

Purchases ……………………………………………….. Accounts Payable……………………………….

3,500

Accounts Payable………………………………………… Purchase Returns and Allowances…………….

600

Acme Marine Supply’s books

June

600

Accounts Payable ($3,500 - $600) .................................... 2,900 Cash……………………………………………….

(b)

3,500

Accounts Receivable…………………………………….. Sales Revenue……………………………………

3,500

Sales Returns and Allowance…………………………… Accounts Receivable…………………………….

600

Cash……………………………………………………….. Accounts Receivable…………………………….

2,900

3,500

600 2,900

*Ex. 272 On September 1, Ace Supply Co. had an inventory of 18 backpacks at a cost of $20 each. The .

Merchandising Operations

5-71

company uses a periodic inventory system. During September, the following transactions and events occurred. Sept.

4 Purchased 50 backpacks at $20 each from Acme Outfitters, terms 2/10, n/30. 6 Received credit of $100 for the return of 5 backpacks purchased on Sept. 4 that were defective. 9 Sold 30 backpacks for $30 each to A1 Books, terms 2/10, n/30. 13 Sold 10 backpacks for $30 each to Max Office Supply, terms n/30. 14 Paid Acme Outfitters in full, less discount.

Instructions Journalize the September transactions for Ace Supply Co. Ans: N/A, LO: 7, Topic: Periodic Inventory System, Subtopic: Recording Merchandise Transactions, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

*Solution 272 Sept.

4 6

Purchases (50 x $20)....................................................... Accounts Payable ..................................................

1,000

Accounts Payable ........................................................... Purchase Returns and Allowances .........................

100

Accounts Receivable (30 x $30) ...................................... Sales Revenue........................................................

900

Accounts Receivable (10 x $30) ...................................... Sales Revenue........................................................

300

Accounts Payable ($1,000 - $100) .................................. Cash ($900 × .98) ................................................... Purchase Discounts ($900 × .02) ........................... *(Purch. – ret. ) × (1 – .02)

900

1,000

100

900 300 882* 18

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

5-72 *Ex. 273

Presented here are selected transactions for Company A during April. Company A uses the periodic inventory system. April

Sold merchandise to Company B for $4,000, terms 2/10, n/30. The merchandise sold had a cost of $2,000.

Purchased merchandise from Company C for $6,000, terms 1/10, n/30.

Purchased merchandise from Company D for $2,000, n/30.

Received payment from Company B for purchase of April 1 less appropriate discount.

Paid Company C for April 2 purchase.

Instructions Journalize the April transactions for Company A. Ans: N/A, LO: 7, Topic: Periodic Inventory System, Subtopic: Recording Merchandise Transactions, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

*Solution 273 April

Accounts Receivable…………………………………………… Sales Revenue…………………………………………

4,000

Purchases……………………………………………………… Accounts Payable……………………………………..

6,000

Purchases ……… ……………………………………………… Accounts Payable……………………………………..

2,000

Cash ($4,000 x .98) … ……………………………………….. Sales Discounts ($4,000 x .02)……………………………….. Accounts Receivable…………………………………… *(Sales amount × (1 – .02)

3,920* 80

Accounts Payable………………………………………………… Purchase Discounts ($6,000 x .01)….. Cash ($6,000 x .99)……………………………………. *(Purch. amount × (1 – .01))

6,000

4,000

6,000

2,000

4,000

60 5,940*

Merchandising Operations

5-73

*Ex. 274 This information relates to A1 Haircut Co. 1. On April 5 purchased merchandise from Acme Salon Supply Company for $33,000, terms 2/10, net/30. 2. On April 6 paid freight costs of $900 on merchandise purchased from Acme Salon Supply Company. 3. On April 7 purchased equipment on account for $26,000. 4. On April 8 returned some of the April 5 merchandise to Acme Salon Supply Company which cost $3,000. 5. On April 15 paid the amount due to Acme Salon Supply Company in full. Instructions (a) Prepare the journal entries to record these transactions on the books of A1 Haircut Co. using a periodic inventory system. (b) Assume that A1 Haircut Co. paid the balance due to Acme Salon Supply Company on May 4 instead of April 15. Prepare the journal entry to record this payment. Ans: N/A, LO: 7, Topic: Periodic Inventory System, Subtopic: Recording Merchandise Transactions, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

*Solution 274 (a)

(1) (2) (3) (4) (5)

(b)

April April April April

5 6 7 8

April 15

May 4

Purchases ................................................. Accounts Payable ..............................

33,000

Freight-In................................................... Cash ..................................................

900

Equipment ................................................. Accounts Payable ...............................

26,000

Accounts Payable...................................... Purchase Returns and Allowances ......

3,000

Accounts Payable...................................... Purchase Discounts ............................ [($33,000 – $3,000)  2%] Cash ($30,000  .98) .......................... *((Purch. amount – purch. ret.) × (1 – .02))

30,000

Accounts Payable...................................... ($33,000 – $3,000) Cash ...................................................

30,000

33,000 900 26,000 3,000 600 29,400*

30,000

5-74

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

COMPLETION STATEMENTS 275. A buys and sells inventory rather than performing services as their primary source of revenue. Ans: N/A, LO: 1, Topic: Merchandising Operations and Inventory Systems, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

276. Cost of goods sold is deducted from net sales revenue for the period in order to arrive at . Ans: N/A, LO: 1, Topic: Merchandising Operations and Inventory Systems, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

277. Inventory

hand can be obtained from detailed inventory system is maintained.

inventory

records

when

Ans: N/A, LO: 1, Topic: Merchandising Operations and Inventory Systems, Subtopic: Advantages of the Perpetual System, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

278. The acquisition of inventory is debited to the inventory system is used.

account when a perpetual

Ans: N/A, LO: 2, Topic: Recording Purchases Under a Perpetual System, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

279. The freight costs incurred by a seller on outgoing inventory are an the seller.

Ans: N/A, LO: 2, Topic: Recording Purchases Under a Perpetual System, Subtopic: Freight Costs, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

280. When a perpetual system is used and a customer returns inventory previously purchased on credit, the entry to record the credit granted to the customer by the seller requires a debit to the account and a credit to the account. Ans: N/A, LO: 3, Topic: Recording Purchases Under a Perpetual System, Subtopic: Purchase Returns and Allowances, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

281. Every credit sales transaction should be supported by a written evidence of the sale.

that provides

Ans: N/A, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

282. Sales Returns and Allowances and Sales Discounts are both and have normal balances.

accounts

Ans: N/A, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopics: Sales Returns and Allowances, Sales Discounts, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

283. Gross profit is obtained by subtracting

from

Ans: N/A, LO: 4, Topic: Multiple-Step Income Statement, Subtopic: Gross Profit, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

284. A useful measure of profitability is the ratio of net income to

Ans: N/A, LO: 6, Topic: Gross Profit and Profit Margin, Subtopic: Profit Margin, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

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Answers to Completion Statements 275. merchandiser 276. gross profit 277. perpetual 278. Inventory 279. operating expense 280. Sales Returns and Allowances, Accounts Receivable

281. 282. 283. 284.

sales invoice contra revenue, debit cost of goods sold, net sales net sales

MATCHING 285. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.

Net sales Sales discount Credit terms Periodic inventory system Gross profit rate

F. G. H. I. J.

Contra revenue Freight-out Gross profit Sales invoice Purchase discount

1. A reduction given by the seller for prompt payment of a credit sale. 2. Provides support for a credit sale. 3. Gross profit divided by net sales. 4. Sales less sales returns and allowances and sales discounts. 5. Specifies the amount of cash discount and the time period during which it is offered. 6. Net sales less cost of goods sold. 7. Freight cost to deliver goods to customers reported as an operating expense. 8. Requires a physical count of goods on hand to compute cost of goods sold. 9. A cash discount claimed by a buyer for prompt payment of a balance due. 10. An account that is offset against a revenue account on the income statement. Ans: N/A, LO: 1-6, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

Answers to Matching 1. 2. 3. 4. 5.

B I E A C

6. 7. 8. 9. 10.

H G D J F

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SHORT-ANSWER ESSAY QUESTIONS S-A E 286 A merchandising company frequently has a need to use contra accounts related to the sale of goods. Identify the contra accounts that have normal debit balances and explain why they are not considered expenses. Ans: N/A, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopics: Sales Returns and Allowances, Sales Discounts, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Communications, IMA: Reporting and Control

Solution 286 The contra accounts related to the sale of goods that have normal debit balances are Sales Discounts and Sales Returns and Allowances. These accounts have debit balances but are not expenses because they are adjustments of sales, not operating, selling, or administrative expenses. They are an adjustment of the inflow from the sale of goods, rather than a cost used to help earn revenue. S-A E 287 Ryan Seacrest believes revenues from credit sales may be earned before they are collected in cash. Do you agree? Explain. Ans: N/A, LO: 3, Topic: Recording Sales Under a Perpetual System, Subtopic: NA, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting and Control

Solution 287 Agree. Under the revenue recognition principle, sales revenues are generally considered to be earned when the goods are transferred from the seller to the buyer; that is, when the exchange transaction occurs. The earning of revenue is not dependent on the collection of credit sales. S-A E 288 To encourage bookstores to buy a broader range of book titles many publishers allow bookstores to return unsold books to the publisher. This results in very significant returns each year. To ensure proper recognition of revenues, how should publishing companies account for these returns? Ans: N/A, LO: 8, Topic: Adjusting Entries for Credit Sales with Returns and Allowances, Subtopic: NA, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting and Control

Solution 288 In most industries, returns are not significant, and they are, therefore, accounted for as they occur. When returns are expected to be significant, the company should make an adjusting entry at the end of the period to estimate the amount of returns that will result from the period's sales, so that revenues will not be overstated during the period.

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S-A E 289 In a single-step income statement, all data are classified into two categories: (1) Revenues, or (2) Expenses. If the income statement is recast in a multiple-step format, what additional information or intermediate components of income would be presented? Ans: N/A, LO: 4, Topic: Multiple-Step Income Statement, Subtopic: Multiple-Step Income Statement, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting and Control

Solution 289 The items reported in a multiple-step income statement that are not reported in a single-step income statement are gross revenues as well as net revenues, gross profit, detailed selling and administrative expenses, income from operations, other revenues and gains, and other expenses and losses. For companies using the periodic inventory system the computation of cost of goods sold using beginning and ending inventories, purchases (gross and net) are also broken out. S-A-E 290 Distinguish between cost of goods sold and operating expenses, describe the nature of these two items and their placement on the income statement. Ans: N/A, LO: 4, Topic: Multiple-Step Income Statement, Subtopic: Operating Expenses, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting and Control

Solution 290 Cost of goods sold includes the cost of obtaining the goods held for resale; it is deducted directly from net sales on the income statement. Operating expenses, on the other hand, include selling and general administrative expenses; they appear directly below the gross profit on the income statement. S-A E 291 The income statement for a merchandising company presents six amounts not shown on a service company’s income statement. Identify and briefly explain the six unique amounts. Ans: N/A, LO: 4, Topic: Multiple-Step Income Statement, Subtopic: Multiple-Step Income Statement, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting and Control

Solution 291 The items reported for a merchandising company that are not reported for a service company are sales revenue, sales returns and allowances, sales discounts, net sales, cost of goods sold, and gross profit. Sales revenue, sales returns and allowances, and sales discounts comprise net sales. Cost of goods sold represents the total cost of merchandise sold during the period. Gross profit is the excess of net sales over the cost of goods sold. S-A E 292 What factors affect a company's gross profit rate—that is, what can cause the gross profit rate to increase and what can cause it to decrease? Ans: N/A, LO: 6, Topic: Gross Profit and Profit Margin, Subtopic: Gross Profit Rate, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting and Control

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Solution 292 Factors affecting a company's gross profit rate include selling products with a higher (or lower) "markup," increased competition that results in lower selling prices, and price increases or decrease from suppliers. S-A E 293 The following are the gross profit rates for Ace Company: Year 2023 2024 2025 2026

Gross Profit Rate 33% 34% 36% 13%

List four possible explanations for the low gross profit rate in 2026. Ans: N/A, LO: 6, Topic: Gross Profit and Profit Margin, Subtopic: Gross Profit Rate, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Communications, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting and Control

Solution 293 Possible explanations for 2026’s low gross profit rate: 1. 2. 3. 4. 5. 6.

Errors have occurred. Cost of buying merchandise inventory increased, but the selling price was not increased. Merchandise inventory has been stolen. Some sales were not recorded. The economy is weak and commissioned sales personnel lowered selling prices without authorization. Inferior goods are being sold and customers are subsequently given sales allowances which reduce net sales.

Merchandising Operations

S-A E 294

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(Ethics)

Company A manufactures electronic components for use in many consumer products. Their raw materials are purchased literally from all over the world. Depending on the country involved, purchase terms vary widely. Some suppliers, for example, require full prepayment, while others are content to receive payment within six months of receipt of the goods. Because of this situation, Company A never closes its books until at least ten days after monthend. In this way, it can sort out ownership of goods in transit, and document which goods were received by month-end, and which were not. Kim Kardashian, a new accountant, was asked to record about $50,000 in inventory as having been received before month-end. She argued that the shipping documents clearly showed that the goods were actually received on the 8th of the current month. Her boss, busy with month-end reports, curtly tells Kim to check the shipping terms. She did so and found the notation "FOB (free on board) shipper's dock" on the document. She hadn't seen that particular notation before but reasoned that if the selling company considered it shipped when it reached their dock, Company A should consider it received when it reached Company A's dock. She did not record the sale until after month-end. Required: 1. Why are accountants concerned with the timing in the recording of purchases? 2. Was there a violation of ethical standards here? Explain. Ans: N/A, LO: 2, Topic: Recording Purchases Under a Perpetual System, Subtopic: Freight Costs, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting and Control

Solution 294 1. Accountants are concerned with timing because they seek to make sure that sales are recorded in the proper period so that revenues and expenses are properly matched; to make sure that goods recorded as owned by the company actually are owned as of the last date of the period, and to make certain that sales recorded have been actually completed. 2. The only ethical principle that may be involved is one of competence. Kim does not appear to know enough about reading shipping documents to make a proper determination of ownership. The goods were owned by Company A as soon as they left the shipper's dock. Otherwise, the goods would have been owned by no one while in transit. It does not appear that Kim compromised her integrity or that he sought some sort of gain from her mistake. It does seem likely that she should have known how to interpret the shipping documents.

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S-A E 295

(Communication)

Katy Perry and Jennifer Lopez, two salespersons in adjoining territories, regularly compete for bonuses. During the last month, their dollar volume of sales, on which the bonuses are based, was nearly equal. On May 30, 2025, each made a large sale. Both orders were shipped on May 31, 2025, the last day of the month, and both were received by the customers on June 5, 2025. Katy's sale was FOB shipping point (ownership passes to the buyer at the time of shipping), and Jennifer's was FOB destination (ownership passes to the buyer at the time of receipt). The printed policy of the company states that sales "count" for purposes of calculating bonuses on the date that ownership passes to the purchaser. Katy's sale was therefore counted in her May monthly total of sales while Jennifer's sale was not. Jennifer is quite upset. She has asked you just to include it or to take Katy's off as well. She also has told you that you are being unethical for allowing Katy to get a bonus just for choosing a particular shipping method. As the accounting manager write a memo to Jennifer on June 15, 2025, and explain your position. Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Communications, IMA: Reporting and Control

Solution 295 MEMO TO:

Jennifer Lopez

FROM:

Accounting Manager

RE:

Sales Bonuses

DATE:

June 15, 2025

As you know, sales bonuses are based on the revenue generated by each salesperson according to the company's printed policy. This policy states that you will receive bonus credit based on the date of title transfer for goods sold. Your disputed sale of May 30, 2025, was shipped on May 31, 2025, with terms “FOB Destination.” Our records indicate that this shipment was received by the customer on June 5, 2025. This puts title transfer into your June 2025 bonus payment. I can appreciate your being upset that this large sale was not counted in your May 2025 bonus but it will appear in your June 2025 bonus payment under the policy which is consistently applied. It would be unethical and unprofessional for me to change the written policy and it would violate the consistency of that policy’s application. I do understand your disappointment, but this sale does count in June—and it just may make the difference in June's bonus. Please call me if I can be of further help. (signature)

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IFRS QUESTIONS 1.

The Income statement is a. required under GAAP but not under IFRS. b. required under IFRS in the same format as under GAAP. c. required under IFRS but not under GAAP. d. required under IFRS with some differences as compared to GAAP.

Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

The basic accounting entries for merchandising are a. the same under GAAP and under IFRS. b. required under GAAP but not under IFRS. c. required under IFRS but not under GAAP. d. required under IFRS with some differences as compared to GAAP.

Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

Under GAAP, companies can choose which inventory system? Perpetual Periodic a. Yes No b. Yes Yes c. No Yes d. Yes No

Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

Under IFRS, companies can choose which inventory system? Perpetual Periodic a. Yes No b. Yes Yes c. No Yes d. Yes No

Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

Companies cannot use the a. periodic inventory system under GAAP. b. periodic inventory system under IFRS. c. perpetual system under IFRS. d. None of these answer choices are correct.

Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

Inventories are defined by IFRS as a. held-for-sale in the ordinary course of business. b. in the process of production for sale in the ordinary course of business. c. in the form of materials or supplies to be consumed in the production process or in the providing of services. d. All of these answer choices are correct.

Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

Under GAAP, companies generally classify income statement items by .

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a. b. c. d.

function. nature. nature or function date incurred.

Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

Under IFRS, companies must classify income statement items by a. function. b. nature. c. nature or function d. date incurred.

Ans: C, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

Under GAAP, income statement items are generally described as a. administration, distribution, manufacturing, etc. b. salaries, depreciation, utilities, etc. c. administration, depreciation, manufacturing, etc. d. salaries, distribution, utilities, etc.

Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

10.

Under IFRS, income statement items classified by nature are generally described as a. administration, distribution, manufacturing, etc. b. salaries, depreciation, utilities, etc. c. administration, depreciation, manufacturing, etc. d. salaries, distribution, utilities, etc.

Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

11.

For the income statement, IFRS requires a. single-step approach. b. multiple-step approach. c. single-step approach or multiple-step approach. d. no specific income statement approach.

Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

12.

Under IFRS, companies can apply revaluation to a. land, buildings, and intangible assets. b. land, buildings, but not intangible assets. c. intangible assets, but not land. d. no assets.

Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

Merchandising Operations

13.

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The number of years of income statement information to be presented is a. 2 years under both GAAP and IFRS. b. 3 years under both GAAP and IFRS. c. 2 years under GAAP and 3 years under IFRS. d. 3 years under GAAP and 2 years under IFRS.

Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

CHAPTER 6 REPORTING AND ANALYZING INVENTORY CHAPTER LEARNING OBJECTIVES 1. Discuss how to classify and determine inventory. Merchandisers need only one inventory classification, merchandise inventory, to describe the different items that make up total inventory. On the other hand, manufacturers usually classify inventory into three categories: raw materials, work in progress and finished goods. To determine inventory quantities, manufacturers (1) take a physical inventory of goods on hand and (2) determine the ownership of goods in transit or on consignment. 2. Apply inventory cost flow methods and discuss their financial effects. The primary basis of accounting for inventories is cost. Cost includes all expenditures necessary to acquire goods and place them in a condition ready for sale. Cost of goods available for sale includes (a) cost of beginning inventory and (b) cost of goods purchased. The inventory cost flow methods are: specific identification and three assumed cost flow methods—FIFO, LIFO, and average-cost. The cost of goods available for sale may be allocated to cost of goods sold and ending inventory by specific identification or by a method based on an assumed cost flow. When prices are rising, the first-in, first-out (FIFO) method results in lower cost of goods sold and higher net income than the average-cost and the last-in, first-out (LIFO) methods. The reverse is true when prices are falling. In the balance sheet, FIFO results in an ending inventory that is closest to the current value, whereas the inventory under LIFO is the farthest from the current value. LIFO results in the lowest income taxes (because of lower taxable income). 3. Explain the statement presentation and analysis of inventory. Companies use the lowerof-cost-or-net realizable-value (LCNRV) basis when the net-realizable-value (NRV) is less than cost. Under LCNRV, companies recognize the loss in the period in which the price decline occurs. Inventory turnover is calculated as cost of goods sold divided by average inventory. It can be converted to average days in inventory by dividing 365 days by the inventory turnover. A higher inventory turnover or lower average days in inventory suggests that management is trying to keep inventory levels low relative to its sales level. The LIFO reserve represents the difference between ending inventory using LIFO and ending inventory if FIFO were employed instead. For some companies, this difference can be significant and ignoring it can lead to inappropriate conclusions when using the current ratio or inventory turnover. *4. Apply the inventory cost flow methods to perpetual inventory records. Under FIFO, the cost of the earliest goods on hand prior to each sale is charged to cost of goods sold. Under LIFO, the cost of the most recent purchase prior to sale is charged to cost of goods sold. Under the average-cost method, a new weighted-average unit cost is computed after each purchase.

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*5. Indicate the effects of inventory errors on the financial statements. In the income statement of the current year: (1) An error in beginning inventory will have a reverse effect on net income (e.g. overstatement of inventory results in an understatement of net income, and vice versa). (2) An error in ending inventory will have a similar effect on net income (e.g. overstatement of inventory results in an overstatement of net income). If ending inventory errors are not corrected in the following period, their effect on net income for that period is reversed, and total net income for the two years will be correct. In the balance sheet: Ending inventory errors will have the same effect on total assets and total stockholders’ equity and no effect on liabilities. Difficulties: Easy: 112 Medium: 138 Hard: 3

Question List by Section 



Classifying and Determining Inventory: 245 o Classifying Inventory: 1, 2, 44, 61, 234, 235, 237 o Determining Inventory Quantities: 7, 8, 45, 55, 56, 57, 58, 59, 60, 210, 211, 212, 252  Taking a Physical Inventory: 47, 48, 49, 50, 62  Determining Ownership of Goods: 51, 200, 201  Goods in Transit: 3, 4, 5, 6, 46, 52, 53, 236  Consigned Goods: 9, 10, 54, 238, 253 Inventory Methods and Financial Effects: 245 o Specific Identification: 15, 18, 87, 95, 96, 97, 107, 136, 137, 240 o Cost Flow Assumptions: 11, 12, 14, 16, 22, 29, 63, 65, 88, 89, 90, 98, 99, 100, 102, 108, 124, 140, 202, 213, 214, 215, 216, 217, 218, 219, 220, 239, 241, 246  First-In, First-Out (FIFO): 17, 68, 72, 77, 78, 83, 84, 92, 94, 101, 103, 104, 120, 125, 127, 203  Last-In, First-Out (LIFO): 24, 38, 64, 67, 71, 79, 80, 81, 85, 86, 91, 93, 105, 106, 109, 126, 204, 205  Average-Cost: 13, 69, 74, 75, 76, 82, 121, 122, 123 o Financial statement and Tax Effects of Cost Flow Methods: 66, 114, 205, 247, 248  Income Statement Effects: 21, 23, 26, 28, 30, 31, 70, 73, 110, 111, 112, 113, 115, 116, 117, 118, 119, 130, 135, 138, 139, 141, 143, 145  Balance Sheet Effects: 19, 25, 128, 129, 131, 132, 133, 146, 249  Tax Effects: 134, 142, 223 o Using Inventory Cost Flow Methods Consistently: 20, 27, 144 Inventory Presentation and Analysis: 245 o Presentation: 39 o Lower-of-Cost-or-Net Realizable Value: 32, 33, 34, 35, 148, 149, 150, 151, 152, 153, 154, 155, 206, 221, 250 o Financial Analysis and Data Analytics: 147, 157, 158, 159, 160, 161, 164, 165, 207, 208, 222, 224, 225, 242, 243  Inventory Turnover: 36, 37, 156, 162, 163, 166, 167, 168, 169, 170, 171, 172, 173, 174 .

Reporting and Analyzing Inventory



6-3

o Adjustments for LIFO Reserve: 175, 176, 177, 178, 179, 180, 181, 182, 183, 184, 185, 186, 187, 244, 251 Inventory Cost Flow Methods in Perpetual Inventory Systems: o First-In, First-Out (FIFO): 40, 226, 227, 228 o Last-In, First-Out (LIFO): 188, 189, 190, 191, 226, 227, 228 o Average-Cost: 41, 192, 227, 228 Effects of Inventory Errors: o Income Statement Effects: 42, 43, 193, 194, 198, 199, 209, 229, 230, 231, 232, 233 o Balance Sheet Effects:195, 196, 197, 230, 233

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

TRUE-FALSE STATEMENTS 1.

Raw materials inventories are the goods that a manufacturing company has completed and are ready to be sold to customers.

Ans: F, LO: 1, Section: Classifying and Determining Inventory; Subsection: Classifying Inventory; Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

A manufacturer’s inventory consists of raw materials, work in process, and finished goods.

Ans: T, LO: 1, Section: Classifying and Determining Inventory; Subsection: Classifying Inventory; Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

When the terms of sale are FOB shipping point, legal title to the goods remains with the seller until the goods reach the buyer.

Ans: F, LO: 1, Section: Classifying and Determining Inventory; Subsection: Goods in Transit; Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Goods in transit shipped FOB shipping point should be included in the buyer’s ending inventory.

Ans: T, LO: 1, Section: Classifying and Determining Inventory; Subsection: Goods in Transit; Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Goods purchased FOB destination but are in transit, should be excluded from a physical count of goods by the buyer.

If the ownership of merchandise passes to the buyer when the seller ships the merchandise, the terms are stated as FOB destination.

A physical count of inventory at year-end is required for a perpetual but not a periodic inventory system.

Ans: F, LO: 1, Section: Classifying and Determining Inventory; Subsection: Determining Inventory Quantities; Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Under a periodic inventory system, the merchandise on hand at the end of the period is determined by a physical count of the inventory.

Ans: T, LO: 1, Section: Classifying and Determining Inventory; Subsection: Determining Inventory Quantities: Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

Consigned goods are held for sale by one party although ownership of the goods is retained by another party.

Ans: T, LO: 1, Section: Classifying and Determining Inventory; Subsection: Consigned Goods; Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

10.

Goods held on consignment should not be included in the ending inventory.

11.

In accounting for inventory, the assumed flow of costs must match the physical flow of goods.

Ans: F, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Cost Flow Assumptions; Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

Reporting and Analyzing Inventory

12.

6-5

Inventory methods such as FIFO and LIFO deal more with the flow of costs than with the flow of goods.

Ans: T, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Cost Flow Assumptions; Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

13.

The average-cost inventory method relies on a simple average calculation.

Ans: F, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Average-Cost; Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

14.

If prices never changed, then there would be no need for alternative inventory cost flow assumptions.

15.

The specific identification method of costing inventories tracks the actual physical flow of the goods available for sale.

Ans: T, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Specific Identification; Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

16.

Management may choose any inventory costing method it desires as long as the cost flow assumption chosen is consistent with the physical movement of goods in the company.

Ans: F, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Cost Flow Assumptions; Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

17.

The FIFO inventory method results in an ending inventory valued at the most recent cost.

Ans: T, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: FIFO; Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

18.

The specific identification method of inventory valuation is desirable when a company sells a large number of low-cost items.

Ans: F, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Specific Identification; Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

19.

If a company has no beginning inventory and the unit cost of inventory items does not change during the year, the value assigned to the ending inventory will be the same under LIFO and average cost flow assumptions.

Ans: T, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Balance Sheet Effects; Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

20.

A company can use different inventory methods for different categories of inventory and can elect to use a different inventory method each period.

Ans: F, LO: 2, Section: Inventory Methods and Financial Effects, Subsection: Using Inventory Cost Flow Methods Consistently, Bloom: K Difficulty: Easy Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

21.

If a company has no beginning inventory and the unit price of inventory is increasing during a period, the cost of goods available for sale during the period will be the same under the LIFO and FIFO inventory methods.

Ans: T, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Income Statement Effects; Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

6-6

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

22.

A company may use more than one inventory cost flow method at the same time for different categories of inventory.

Ans: T, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Financial Statement and Tax Effects of Cost Flow Methods; Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

23.

Use of the LIFO inventory valuation method enables a company to report paper or phantom profits.

Ans: F, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Income Statement Effects; Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

24.

The LIFO inventory method agrees with the actual physical movement of goods in most businesses.

Ans: F, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: LIFO; Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

25.

In periods of falling prices, LIFO will result in a higher ending inventory valuation than FIFO.

Ans: T, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Balance Sheet Effects; Bloom: AP Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

26.

In periods of falling prices, FIFO will result in a larger net income than the LIFO method.

Ans: F, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Income Statement Effects; Bloom: AP Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

27.

If a company changes its inventory valuation method, the effect of the change on net income should be disclosed in the financial statements.

Ans: T, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Using Inventory Cost Flow Methods Consistently; Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

28.

A major criticism of the FIFO inventory method is that it magnifies the effects of the business cycle on business income.

29.

The LIFO method is rarely used because most companies do not sell the last goods they purchase first.

Ans: F, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Cost Flow Assumptions; Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

30.

The Average-Cost inventory method tends to smooth out the peaks and valleys of a business cycle.

Ans: T, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Income Statement Effects Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

31.

Net realizable value is defined as cost less depreciation.

Ans: F, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Lower-of-Cost-or-Net Realizable Value; Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

32.

When the cost of inventory is higher than its net realizable value, the inventory is written down to its net realizable value.

Ans: T, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Lower-of-Cost-or-Net-Realizable-Value; Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Reporting and Analyzing Inventory

33.

6-7

Inventory disclosures include the major categories of inventory, basis of accounting and cost flow methods employed.

Ans: T, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Presentation; Bloom: K, Difficulty: Easy Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

34.

The write-down of inventory from cost to net realizable value should be made in the period in which the goods are sold.

Ans: F, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Lower-of-Cost-or-Net-Realizable-Value; Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

35.

Under the LCNRV basis, net realizable value is defined as current replacement cost.

Ans: F, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Lower-of-Cost-or-Net-Realizable-Value; Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

36.

The inventory turnover is calculated as cost of goods sold divided by ending inventory.

Ans: F, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Inventory Turnover, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

37.

An inventory turnover that is too high may indicate that the company is losing sales opportunities because of inventory shortages.

Ans: T, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Inventory Turnover, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

38.

The LIFO reserve is the difference between ending inventory using LIFO and ending inventory if FIFO were used instead.

Ans: T, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Adjustments for LIFO Reserve; Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

39.

The FIFO reserve is a required disclosure for companies that use FIFO.

Ans: F, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Adjustments for LIFO Reserve; Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

*40.

The use of FIFO with a perpetual inventory system yields the same results as with a periodic inventory system.

Ans: T, LO: 4, Section: Inventory Cost Flow Methods in Perpetual Inventory Systems, Subsection: First-In, First-Out (FIFO), Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

*41.

When the average-cost method is applied to a perpetual inventory system, a movingaverage unit cost is computed with each purchase.

Ans: T, LO: 4, Section: Inventory Cost Flow Methods in Perpetual Inventory Systems, Subsection: Average-Cost, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

*42.

An error in the ending inventory of the current period will have a similar effect on the net income of the next accounting period.

Ans: F, LO: 5, Section: Effects of Inventory Errors, Subsection: Income Statement Effects: Bloom: AP Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

*43.

An error that overstates the ending inventory will also cause net income for the period to be overstated.

Ans: T, LO: 5, Section: Effects of Inventory Errors, Subsection: Income Statement Effects: Bloom: AP Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

6-8

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

MULTIPLE CHOICE QUESTIONS 44.

Patagonia’s inventory that has begun the production process but is not yet completed is classified as a. work in process. b. raw materials. c. merchandise inventory. d. finished goods.

Ans: A, LO: 1, Section: Classifying and Determining Inventory; Subsection: Classifying Inventory; Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

45.

The factor which determines whether or not goods should be included in a physical count of inventory is a. physical possession. b. legal title. c. management's judgment. d. payment status.

Ans: B, LO: 1, Section: Classifying and Determining Inventory; Subsection: Goods in Transit; Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

46.

If goods in transit are shipped FOB destination, a. the seller has legal title to the goods until they are delivered. b. the buyer has legal title to the goods until they are delivered. c. the transportation company has legal title to the goods while the goods are in transit. d. no one has legal title to the goods until they are delivered.

Ans: A, LO: 1, Section: Classifying and Determining Inventory; Subsection: Goods in Transit; Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

47.

Independent internal verification of the physical inventory process occurs when a. the employee is required to count all items twice for the sake of verification. b. the items counted are compared to the inventory account balance. c. a second employee counts the inventory and compares the result to the count made by the first employee. d. all prenumbered inventory tags are accounted for.

Ans: C, LO: 1, Section: Classifying and Determining Inventory; Subsection: Taking a Physical Inventory; Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

48.

An employee assigned to counting head sets in boxes should a. estimate the number if there is a large quantity to be counted. b. read each box and rely on the box description for the contents. c. determine that each box contains a headset. d. rely on the warehouse records of the number of headsets.

Reporting and Analyzing Inventory

49.

6-9

After the physical inventory is completed, the a. financial statements are prepared. b. quantities are entered into various general ledger inventory accounts. c. accuracy of the inventory summary sheets is checked by the person listing the quantities on the sheets. d. unit costs are determined by dividing the quantities on the inventory summary sheets by the total inventory costs.

Ans: A, LO: 1, Section: Classifying and Determining Inventory, Subsection: Taking a Physical Inventory, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Internal Controls

50.

When is a physical inventory usually taken? a. When goods are not being sold or received b. When the company has its greatest amount of inventory c. When inventory levels are expected to be greatest d. When the company has its greatest amount of inventory and at the end of the company's fiscal year

Ans: A, LO: 1, Section: Classifying and Determining Inventory; Subsection: Taking a Physical Inventory; Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

51.

Which of the following should not be included in the physical inventory of a company? a. Goods held on consignment from another company b. Goods in transit from another company shipped FOB shipping point c. Goods shipped on consignment to another company d. All of these answer choices should be included

Ans: A, LO: 1, Section: Classifying and Determining Inventory; Subsection: Determining Ownership of Goods; Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

52.

Suppose that Amazon's goods in transit at December 31 include sales made (1) FOB destination (2) FOB shipping point and purchases made (3) FOB destination (4) FOB shipping point. Which items should be included in Amazon's inventory at December 31? a. (2) and (3) b. (1) and (4) c. (1) and (3) d. (2) and (4)

Ans: B, LO: 1, Section: Classifying and Determining Inventory; Subsection: Goods in Transit, Bloom: AP Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

53.

The term "FOB" denotes a. free on board. b. freight on board. c. free only to buyer. d. freight charge on buyer.

Ans: A, LO: 1, Section: Classifying and Determining Inventory; Subsection: Goods in Transit; Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

6-10 54.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Goods held on consignment are a. goods held by one party for sale on behalf of the owner. b. included in the ending inventory of the party holding the goods. c. kept for sale on the premises of the owner. d. included as part of no one’s ending inventory.

Ans: A, LO: 1, Section: Classifying and Determining Inventory; Subsection: Consigned Goods; Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

55.

Apple uses just-in-time inventory methods. Which of the following is not an advantage of this method? a. It limits the risk of having obsolete items in inventory. b. Companies may not have quantities to meet customer demand. c. It lowers inventory levels and costs. d. Companies can respond to individual customer requests.

Ans: B, LO: 1, Section: Classifying and Determining Inventory; Subsection: None; Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

56.

Walmart uses a perpetual inventory system. Which of the following is a reason why Walmart needs to take a physical inventory? a. To check the accuracy of the perpetual inventory records b. To determine cost of goods sold for the accounting period c. To compute inventory ratios d. All of the choices are correct.

Ans: A, LO: 1, Section: Classifying and Determining Inventory; Subsection: Determining Inventory Quantities; Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

57.

Which of the following statements is false? a. Taking a physical inventory involves actually counting, weighing, or measuring each kind of inventory on hand. b. No matter whether a periodic or perpetual inventory system is used, all companies need to determine inventory quantities at the end of each accounting period. c. An inventory count is generally more accurate when goods are not being sold or received during the counting. d. Companies that use a perpetual inventory system must take a physical inventory to determine inventory on hand on the balance sheet date and to determine cost of goods sold for the accounting period.

Ans: D, LO: 1, Section: Classifying and Determining Inventory; Subsection: Determining Inventory Quantities; Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

58.

Dick’s Sporting Goods is taking a physical inventory on January 30, the last day of its fiscal year. Which of the following must be included in this inventory count? a. Goods in transit to Dick’s Sporting Goods which were shipped FOB destination b. Goods that Dick’s Sporting Goods is holding on consignment for ENO c. Goods in transit that Dick’s Sporting Goods sold to Watauga County Recreation Center, FOB shipping point d. Goods that Dick’s Sporting Goods is holding in inventory on March 31 for which the related Accounts Payable is 15 days past due

Ans: D, LO: 1, Section: Classifying and Determining Inventory; Subsection: Determining Inventory Quantities; Bloom: AP Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Inventory

59.

6-11

At December 31, 2025, suppose that ENO Company’s inventory records indicated a balance of $632,000. Upon further investigation it was determined that this amount included the following:  $112,000 in inventory purchases made by ENO shipped from the seller on December 27, 2025 terms FOB destination, but not due to be received until January 2, 2026  $74,000 in goods sold by ENO with terms FOB destination on December 27, 2025. The goods are not expected to reach their destination until January 6, 2026  $6,000 of goods received on consignment from Tepui Company What is ENO’s correct ending inventory balance at December 31, 2025? a. $520,000 b. $626,000 c. $440,000 d. $514,000

Ans: D, LO: 1, Section: Classifying and Determining Inventory; Subsection: Determining Inventory Quantities; Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control Solution: $632,000  $112,000  $6,000  $514,000 (Beg. inv. bal. − inv. pur. − consign. goods)

60.

At December 31, 2025, suppose that Ulta Company’s inventory records indicated a balance of $878,000. Upon further investigation it was determined that this amount included the following:  $168,000 in inventory purchases made by Ulta shipped from the seller December 31, 2025 terms FOB destination, but not due to be received until January 2, 2026  $111,000 in goods sold by Ulta with terms FOB destination on December 27, 2025. The goods are not expected to reach their destination until January 6, 2026.  $9,000 of goods received on consignment from Cocokind Company What is Ulta’s correct ending inventory balance at December 31, 2025? a. $710,000 b. $869,000 c. $590,000 d. $701,000

Ans: D, LO: 1, Section: Classifying and Determining Inventory; Subsection: Determining Inventory Quantities; Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: $878,000  $168,000  $9,000  $701,000 (Beg. inv. bal. − inv. pur. − consign. goods)

61.

Manufacturers such as TREK Bicycle Company usually classify inventory into each of the following categories except: a. work in process b. finished goods c. merchandise inventory d. raw materials

Ans: C, LO: 1, Section: Classifying and Determining Inventory; Subsection: Classifying Inventory; Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

6-12

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

62.

For companies such as Target that use perpetual inventory systems, all of the following are purposes for taking a physical inventory except to: a. check the accuracy of the records. b. determine the amount of wasted raw materials. c. determine losses due to employee theft. d. determine ownership of the goods.

Ans: D, LO: 1, Section: Classifying and Determining Inventory; Subsection: Taking a Physical Inventory; Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

63.

Inventory costing methods place primary reliance on assumptions about the flow of a. goods. b. costs. c. resale prices. d. values.

Ans: B, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Cost Flow Assumptions; Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

64.

The LIFO inventory method assumes that the cost of the latest units purchased is a. the last to be allocated to cost of goods sold. b. the first to be allocated to ending inventory. c. the first to be allocated to cost of goods sold. d. not allocated to cost of goods sold or ending inventory.

Ans: C, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: LIFO; Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

65.

For what purpose does a company use LIFO, FIFO, or average-cost? a. To determine the proper valuation of each individual inventory item b. To determine the quantity and selling price of inventory items sold c. To determine the amount to assign to inventory items under a particular cost flow d. To parallel the physical flow of goods as they are sold

Ans: C, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Cost Flow Assumptions; Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

66.

Acme Company began operations on January 1. The company uses a periodic inventory system. It purchased three shredders as part of its inventory. The first shredder had a cost of $45; the second one cost $52; and the third shredder cost $58. The company decided to use LIFO and sold two shredders in January. If the company had used FIFO, by how much would gross profit for the period be greater or less than using the LIFO method? a. Gross profit would be $13 greater if FIFO is used. b. Gross profit would be $13 less if FIFO is used. c. Gross profit would be the same. d. Gross profit would be $6 less if FIFO is used.

Ans: A, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Income Statement Effects; Bloom: AP Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: ($58 + $52) – ($45 + $52) = $13 LIFO COGS – FIFO COGS

Reporting and Analyzing Inventory

67.

6-13

Acme Company just began business and made the following four inventory purchases in June: June 1 150 units $1,040 June 10 200 units 1,560 June 15 200 units 1,680 June 28 150 units 1,320 $5,600 The company uses a periodic inventory system. A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. Using the LIFO inventory method, the value of the ending inventory on June 30 is a. $1,456. b. $1,508. c. $1,848. d. $1,824.

Ans: B, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: LIFO; Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: $0 + $1,040 + [($1,560  200)  (210  150)]  $1,508 Beginning inventory cost + June 1 total cost + [(June 10 total cost  June 10 units) × (Units in ending inventory – Units in June 1 purch)]

68.

Barkery Bakery Company began business in June and made the following four inventory purchases: June 1 150 units $ 1,040 June 10 200 units 1,560 June 15 200 units 1,680 June 28 150 units 1,320 $5.600 The company uses a periodic inventory system. A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. Using the FIFO inventory method, the amount allocated to ending inventory for June is a. $1,456 b. $1,508 c. $1,824 d. $1,848

Ans: C, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: FIFO; Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: $1,320 + [($1,680  200)  (210  150)]  $1,824 Cost of 150 units in June 28 purchase + [(Cost of 200 units in June 15 purchase  No. units in June 15 purchase) × (Units in end. Inv. – Units in June 28 purchase)]

6-14

69.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Suppose that Cocokind Natural Cosmetics following four inventory purchases in June: June 1 150 units June 10 200 units June 15 200 units June 28 150 units

Company began business and made the $ 1,040 1,560 1,680 1,320 $5,600

The company uses a periodic inventory system. A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. Using the average-cost method, the amount allocated to the ending inventory on June 30 is a. $1,639. b. $1,824. c. $1,764. d. $1,680. Ans: D, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Average-Cost; Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: ($5,600  700)  210  $1,680 (Total cost of purchases  Total units purchased) × Units in ending inventory

70.

Acme Company began business and made the following four inventory purchases in June: June 1 150 units $ 1,040 June 10 200 units 1,560 June 15 200 units 1,680 June 28 150 units 1,320 $5,600 The company uses a periodic inventory system. A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. The inventory method which results in the highest gross profit for June is a. the FIFO method. b. the LIFO method. c. the Average-Cost method. d. not determinable.

Ans: A, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Income Statement Effects; Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: LIFO ending inventory = $1,508; FIFO ending inventory = $1,824; Average-cost ending inventory = $1,680. Under FIFO, ending inventory is highest, resulting in lowest COGS. With sales constant, lowest COGS = highest gross profit.

Reporting and Analyzing Inventory

71.

6-15

A1 Retail Solutions Company just began business and made the following four inventory purchases in June: June 1 150 units $ 990 June 10 200 units 1,344 June 15 200 units 1,368 June 28 150 units 1,062 $4,764 The company uses a periodic inventory system. A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand. Using the LIFO inventory method, the value of the ending inventory on June 30 is a. $1,326. b. $1,320. c. $1,404. d. $1,416.

Ans: A, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: LIFO; Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: $990 + [($1,344  200)  (200  150)]  $1,326 Total cost June 1 purch. + [(Tot. cost June 10 purch. ÷ June 10 units) × (Units in end. Inv. – Units June 10 purch.)]

72.

Ace Supply Inc. just began business and made the following four inventory purchases in June: June 1 150 units $ 990 June 10 200 units 1,344 June 15 200 units 1,368 June 28 150 units 1,062 $4,764 The company uses a periodic inventory system. A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand. Using the FIFO inventory method, the amount allocated to ending inventory for June is a. $1,326. b. $1,320. c. $1,404. d. $1,416.

Ans: C, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: FIFO; Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: $1,062 + [($1,368  200)  (200  150)]  $1,404 Cost of 150 units in June 28 purchase + [(Cost of 200 units in June 15 purchase  No. units in June 15 purchase) × (Units on hand – Units in June 28 purchase)

73.

In periods of rising prices, what will LIFO produce? a. Lower income taxes than FIFO b. Higher net income than FIFO c. Higher net income than Average-Costing d. Lower cost of goods sold than FIFO

Ans: A, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Tax Effects; Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

6-16

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

74.

Acme Manufacturing Company began business in June and made the following four inventory purchases: June 1 150 units $ 990 June 10 200 units 1,344 June 15 200 units 1,368 June 28 150 units 1,062 $4,764 The company uses a periodic inventory system. A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand. Using the average-cost method, the amount allocated to the ending inventory on June 30 is a. $1,361. b. $1,416. c. $1,320. d. $1,344.

Ans: A, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Average-Cost; Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: [($4,764  700)  200]  $1,361 (Total cost of purchases  Total units purchased) × Units in ending inventory

75.

Assume that Party City purchased inventory as follows: 200 units at $6.00 300 units at $6.60 The weighted-average unit cost for inventory is a. $6.00. b. $6.30. c. $6.36. d. $6.60.

Ans: C, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Average-Cost; Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control Solution: [($200  $6.00) + (300  $6.60)]  (200 + 300)  $6.36 (Total cost of purchases  Total units purchases)

76.

Suppose that Staples has the following inventory data: July 1 Beginning inventory 30 units at $19 7 Purchases 105 units at $20 22 Purchases 15 units at $22

$ 570 2,100 330 $3,000 The company uses a periodic inventory system. A physical count of merchandise inventory on July 31 reveals that there are 48 units on hand. Using the average-cost method, the value of ending inventory is a. $930. b. $960. c. $976. d. $990. Ans: B, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Average-Cost, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: [($3,000  150)  48]  $960 (Total cost of purchases  Total units purchased) × Units in ending inventory

Reporting and Analyzing Inventory

77.

6-17

Assume that Old Navy has the following inventory data: July 1 7 22

Beginning inventory Purchases Purchases

30 units at $19 105 units at $20 15 units at $22

$ 570 2,100 330 $3,000 The company uses a periodic inventory system. A physical count of merchandise inventory on July 31 reveals that there are 48 units on hand. Using the FIFO inventory method, the amount allocated to cost of goods sold for July is a. $930. b. $990. c. $2,010. d. $2,070. Ans: C, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: FIFO, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: $570 + [(150  48  30)  $20]  $2,010 Cost of 30 units in beg. Inv. + [(Total units available for sale – units in end. Inv. – units in beg. Inv.) × Unit cost of Jan. 7 purchase]

78.

Suppose that Home Depot Inc. has the following inventory data: July 1 Beginning inventory 30 units at $19 $ 570 7 Purchases 105 units at $20 2,100 22 Purchases 15 units at $22 330 $3,000 The company uses a periodic inventory system. A physical count of merchandise inventory on July 31 reveals that there are 48 units on hand. Using the FIFO inventory method, the amount allocated to ending inventory for July is a. $930. b. $990. c. $960. d. $1,056.

Ans: B, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: FIFO, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: $330 + [(48  15)  $20]  $990 Cost of 15 units in July 22 purchase + [(Units in end. Inv. – Units in July 22 purchase) × Unit price for July 7 purchase]

79.

A company uses LIFO to cost its inventory. Which statement is true? a. The company must sell its newer inventory items before its older items. b. The company will pay less income taxes in periods of rising prices than if it used FIFO. c. The cost of the company’s older inventory items are transferred to cost of goods sold prior to the cost of the newly acquired items. d. The company will sell in the reverse order in which they were purchased.

Ans: B, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Tax Effects, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

6-18

80.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Suppose that Lowes Hardware has the following inventory data: July 1 Beginning inventory 30 units at $19 $ 570 7 Purchases 105 units at $20 2,100 22 Purchases 15 units at $22 330 $3,000 The company uses a periodic inventory system. A physical count of merchandise inventory on July 31reveals that there are 48 units on hand. Using the LIFO inventory method, the amount allocated to cost of goods sold for July is a. $930. b. $990. c. $2,010. d. $2,070.

Ans: D, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: LIFO, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: $330 + [(150  48  15)  $20]  $2,070 Cost of 15 units in July 22 purchase + [(Total units available for sale – Units in end. Inv. – Units in July 22 purchase) × Unit price for July 7 purchase]

81.

Assume that Forever 21 Company has the following inventory data: July 1 Beginning inventory 30 units at $19 $ 570 7 Purchases 105 units at $20 2,100 22 Purchases 15 units at $22 330 $3,000 The company uses a periodic inventory system. A physical count of merchandise inventory on July 31 reveals that there are 48 units on hand. Using the LIFO inventory method, the amount allocated to ending inventory for July is a. $930. b. $912. c. $960. d. $1,056.

Ans: A, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: LIFO, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: $570 + [(48  30)  $20]  $930 Cost of 30 units in beginning inventory + [(Units in end inv. – Units in beg. Inv.) × Unit cost for July 7 purchase]

82.

A1 Supply Company has the following inventory data: July 1 Beginning inventory 40 units at $20 7 Purchases 140 units at $21 22 Purchases 20 units at $22

$ 800 2,940 440 $4,180

The company uses a periodic inventory system. A physical count of merchandise inventory on July 31reveals that there are 50 units on hand. Using the average cost method, the value of ending inventory is a. $1,070. b. $1,045. c. $1,050. d $1,100. Ans: B, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Average-Cost, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA

Reporting and Analyzing Inventory

6-19

BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: [($4,180  200)  50]  $1,045 [(Cost of goods available for sale  Units available for sale) × Units in end. Inv.]

83.

Ace Inc. has the following inventory data: July 1 Beginning inventory 40 units at $20 7 Purchases 140 units at $21 22 Purchases 20 units at $22

$ 800 2,940 440 $4,180

The company uses a periodic inventory system. A physical count of merchandise inventory on July 31 reveals that there are 50 units on hand. Using the FIFO inventory method, the amount allocated to cost of goods sold for July is a. $3,110. b. $3,170. c. $3,010. d. $3,080. Ans: A, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: FIFO, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: $800 + [(200  50  40)  $21]  $3,110 Cost of 40 units in beg. inv. + [(Units available for sale – units in end. Inv. – units in beg. Inv.) × Unit cost for July 7 purchase]

84.

Acme Company has the following inventory data: July 1 Beginning inventory 40 units at $20 7 Purchases 140 units at $21 22 Purchases 20 units at $22

$ 800 2,940 440 $4,180

The company uses a periodic inventory system. A physical count of merchandise inventory on July 31 reveals that there are 50 units on hand. Using the FIFO inventory method, the amount allocated to ending inventory for July is a. $1,170. b. $1,010. c. $1,070. d. $1,100. Ans: C, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: FIFO, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: $440 + [(50  20)  $21]  $1,070 Cost of 20 units for July 22 purchase + [(Units in end inv. – units in July 22 purch.) × Unit cost for July 7 purchase]

85.

Suppose that Sierra Trading Post has the following inventory data: July 1 Beginning inventory 40 units at $20 $ 800 7 Purchases 140 units at $21 2,940 22 Purchases 20 units at $22 440 $4,180 The company uses a periodic inventory system. A physical count of merchandise inventory on July 31 reveals that there are 50 units on hand. Using the LIFO inventory method, the amount allocated to cost of goods sold for July is a. $3,170. b. $3,080. c. $3,110. d. $3,010. .

6-20

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ans: A, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: LIFO, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: $440 + [(200  50  20)  $21]  $3,170 Cost of 20 units for July 22 purch. + [(Units available for sale – Units in end. Inv. – Units in July 22 purch.) × Unit cost for July 7 purchase]

86.

Suppose that Sierra Trading Post has the following inventory data: July 1 Beginning inventory 40 units at $20 $ 800 7 Purchases 140 units at $21 2,940 22 Purchases 20 units at $22 440 $4,180 The company uses a periodic inventory system. A physical count of merchandise inventory on July 31reveals that there are 50 units on hand. Using the LIFO inventory method, the amount allocated to ending inventory for July is a. $1,100. b. $1,010. c. $1,070. d. $1,000.

Ans: B, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: LIFO, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $800 + [(50  40)  $21]  $1,010 Cost of 40 units in beg. inv. + [(Units in end. Inv. – Units in beg. Inv.) × Unit cost for July 7 purchase]

87.

Which of the following is an inventory cost flow method? a. Periodic b. Specific identification c. Perpetual d. Lower of cost or market

Ans: B, LO: 2, Section: Inventory Methods and Financial Effects; Subsection; Specific Identification, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

88.

Inventory costing methods place primary reliance on assumptions about the flow of a. good. b. costs. c. resale prices. d. values.

Ans: B, LO: 2, Section: Inventory Methods and Financial Effects; Subsection; Cost Flow Assumptions, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

89.

Which of the following terms best describes the assumption made in applying the four inventory methods? a. Goods flow b. Cost flow c. Asset flow d. Physical flow

90.

An assumption about cost flow is used a. because it is required by the income tax regulations. b. even when there is no change in the purchase price of inventory. c. only when the flow of goods cannot be determined. d. because prices usually change, and tracking which units have been sold is difficult.

Ans: D, LO: 2, Section: Inventory Methods and Financial Effects; Subsection; Cost Flow Assumptions, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

Reporting and Analyzing Inventory

91.

6-21

Assume that Acme Inc. has the following inventory data: July 1 Beginning inventory 50 units at $120 5 Purchases 300 units at $112 14 Sale 200 units 21 Purchases 150 units at $115 30 Sale 140 units Assuming that a periodic inventory system is used, what is the cost of goods sold on a LIFO basis? a. $18,320 b. $18,370 c. $34,480 d. $38,530

Ans: D, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: LIFO, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: (50 × $120) + (300 × $112) + (150 × $115) = $56,850; (50 + 300 + 150) – (200 + 140) = 160; $56,850 – [(50 × $120) + (110 × $112)] = Beg. inv. cost + July 5 purch. cost + July 21 purch. cost = Cost of goods avail.; (Beg. Inv. Units + purch. units) – sales units = End. Inv. Units; Cost of goods avail. – end. Inv. = COGS

92.

Assume that Banana Republic has the following inventory data: July 1 Beginning inventory 50 units at $120 5 Purchases 300 units at $112 14 Sale 200 units 21 Purchases 150 units at $115 30 Sale 140 units Assuming that a periodic inventory system is used, what is the cost of goods sold on a FIFO basis? a. $18,320 b. $18,370 c. $38,480 d. $38,530

Ans: C, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: FIFO, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: (50  $120) + (300  $112) + (150 × $115)  $56,850; (50 + 300 + 150) – (200 + 140) = 160; $56,850 – [(150 × $115) + (10 × $112)] = $38,480 Beg. inv. cost + July 5 purch. cost + July 21 purch. cost = Cost of goods avail.; (Beg. Inv. Units + purch. units) – sales units = End. Inv. Units; Cost of goods avail. – cost of end. Inv. = COGS

6-22 93.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Suppose that Target has the following inventory data: July 1 Beginning inventory 50 units at $120 5 Purchases 300 units at $112 14 Sale 200 units 21 Purchases 150 units at $115 30 Sale 140 units Assuming that a periodic inventory system is used, what is the amount allocated to ending inventory on a LIFO basis? a. $18,320 b. $18,370 c. $38,480 d. $38,530

Ans: A, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: LIFO, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: (50 + 300  200 + 150  140)  160; (50  $120) + (110  $112)  $18,320 beg. Inv. units + July 5 unit purch – July 14 units sold + July 21 units purch. – July 30 units sold = 160 units end inv; cost of 50 units beg. Inv. + cost of 110 units July 5 Purch.

94.

Assume that Best Buy has the following inventory data: July 1 Beginning inventory 50 units at $120 5 Purchases 300 units at $112 14 Sale 200 units 21 Purchases 150 units at $115 30 Sale 140 units Assuming that a periodic inventory system is used, what is the amount allocated to ending inventory on a FIFO basis? a. $18,220 b. $18,370 c. $38,480 d. $38,530

Ans: B, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: FIFO, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: (50 + 300  200 + 150  140)  160; (150  $115) + (10  $112)  $18,370 End. Inv. Units; 150 units purch. July 21 + 10 units purch July 5 = End inv.

95.

Which of the following companies would likely use specific identification inventory costing?? a. grocery store b. custom hot tub manufacturer c. ice cream shop d. large discount retailer

Ans: B, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Specific Identification, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

96.

Of the following companies, which one would not likely employ the specific identification method for inventory costing? a. Music store specializing in organ sales b. Farm implement dealership c. Antique shop d. Hardware store

Ans: D, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Specific Identification, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

Reporting and Analyzing Inventory

97.

6-23

A problem with the specific identification method is that a. inventories can be reported at actual costs. b. management can manipulate income. c. matching is not achieved. d. the lower of cost or net realizable value basis cannot be applied.

Ans: B, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Specific Identification, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Ethical Conduct, IMA: Reporting and Control

98.

The selection of an appropriate inventory cost flow assumption for an individual company is made by a. the external auditors. b. the SEC. c. the internal auditors. d. management.

Ans: D, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Cost Flow Assumptions, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

99.

Which of the following is not a common cost flow assumption used in costing inventory? a. First-in, first-out b. Middle-in, first-out c. Last-in, first-out d. Average-cost

Ans: B, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Cost Flow Assumptions, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

100.

Which of the following statements is true regarding inventory cost flow assumptions? a. A company may use more than one costing method concurrently. b. A company must comply with the method specified by industry standards. c. A company must use the same method for domestic and foreign operations. d. A company may never change its inventory costing method once it has chosen a method.

Ans: A, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Cost Flow Assumptions, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

101.

Which of the following statements is correct with respect to inventories? a. The FIFO method assumes that the costs of the earliest goods acquired are the last to be sold. b. It is generally good business management to sell the most recently acquired goods first. c. Under FIFO, the ending inventory is based on the latest units purchased. d. FIFO seldom coincides with the actual physical flow of inventory.

Ans: C, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: FIFO, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

6-24

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

102.

Given equal circumstances, which inventory method would probably be the most timeconsuming? a. FIFO b. LIFO c. Average-cost d. Specific identification.

Ans: D, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Cost Flow Assumptions, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

103.

Suppose that Best Buy has the following inventory data: Nov. 1 Inventory 30 units @ $6.00 each 8 Purchase 120 units @ $6.45 each 17 Purchase 60 units @ $6.30 each 25 Purchase 90 units @ $6.60 each The company uses a periodic inventory system. A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Cost of goods sold under FIFO is a. $657. b. $1,269. c. $632. d. $1,295.

Ans: B, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: FIFO, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: (30  $6.00) + (120  $6.45) + [(300  100  30  120)  $6.30]  $1,269 Cost of beg. Inv. + Cost of Nov. 8 purchase + [(Units available for sale – Units in end. Inv. – Units in beg. Inv. – Units in Nov. 8 purchase) × Unit cost of Nov. 17 purchase]

104.

Suppose that GameStop Company has the following inventory data: Nov. 1 Inventory 30 units @ $6.00 each 8 Purchase 120 units @ $6.45 each 17 Purchase 60 units @ $6.30 each 25 Purchase 90 units @ $6.60 each The company uses a periodic inventory system. A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Ending inventory under FIFO is a. $657. b. $1,269. c. $632. d. $1,295.

Ans: A, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: FIFO, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: (90  $6.60) + [(100  90)  $6.30]  $657 Cost of 90 units in Nov. 25 purchase. + [(Units in end. Inv. – Units in Nov. 25 purchase) × Unit cost of Nov. 17 purchase]

Reporting and Analyzing Inventory

105.

6-25

Suppose that Redbox Automated Retail Company has the following inventory data: Nov. 1 Inventory 30 units @ $6.00 each 8 Purchase 120 units @ $6.45 each 17 Purchase 60 units @ $6.30 each 25 Purchase 90 units @ $6.60 each The company uses a periodic inventory system. A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Cost of goods sold under LIFO rounded to the nearest dollar is a. $657. b. $1,269. c. $632. d. $1,295.

Ans: D, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: LIFO, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: (30 + 120 + 60 + 90) = 300 units purchased – 100 units on hand = 200 units sold; (90  $6.60) + (60  $6.30) + [(200  90 - 60)  $6.45]  $1,295 ( Cost of 90 units in Nov. 25 purchase + Cost of 60 units in Nov.17 purchase + [(Units sold – Nov 25 and Nov.17 units) x Unit price for Nov. 8)]

106.

Acme Inc. has the following inventory data: Nov. 1 Inventory 30 units @ $6.00 each 8 Purchase 120 units @ $6.45 each 17 Purchase 60 units @ $6.30 each 25 Purchase 90 units @ $6.60 each The company uses a periodic inventory system. A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Ending inventory under LIFO rounded to the nearest dollar is a. $657. b. $632. c. $1,269. d. $1,295.

Ans: B, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: LIFO, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: (30  $6.00) + [(100  30)  $6.45]  $632 Cost of 30 units in beg. Inv. + [(Units in end. Inv. – Units in beg. Inv.) × Unit cost for Nov. 8 purchase]

107.

Enterprise Software has the following inventory data: Nov. 1 Inventory 30 units @ $6.00 each 8 Purchase 120 units @ $6.45 each 17 Purchase 60 units @ $6.30 each 25 Purchase 90 units @ $6.60 each The company uses a periodic inventory system. A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Assuming that the specific identification method is used and that ending inventory consists of 30 units from each of the three purchases and 10 units from the November 1 inventory, the cost of goods sold, rounded to the nearest dollar, is a. $640. b. $1,286. c. $1,281. d. $1,254.

Ans: B, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Specific Identification, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: (20  $6.00) + (90  $6.45) + (30  $6.30) + (60  $6.60)  $1,286 Cost of units sold from beg. Inv. + Cost of units sold from Nov. 8 purchase + Cost of units sold from Nov 17 purchase + Cost of units sold from Nov. 25 purchase

6-26 108.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Which inventory costing method would a gasoline retailer likely use? a. Average-Cost b. LIFO c. FIFO d. Either LIFO or FIFO.

Ans: D, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Cost Flow Assumptions, Bloom: K, Difficulty: Medium Min: 1, AACSB: None AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

109.

In periods of rising prices, which is an advantage of using the LIFO inventory costing method? a. Ending inventory will include the latest (most recent) costs and thus be more realistic. b. Cost of goods sold will include the latest (most recent) costs and thus will be more realistic. c. Net income will be the highest and thus reflect the prosperity of the company. d. Phantom profits are reported.

Ans: B, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: LIFO, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

110.

Acme Industries had the following inventory transactions occur during 2025: Units Cost/unit Feb. 1, 2025 Purchase 108 $45 Mar. 14, 2025 Purchase 186 $47 May 1, 2025 Purchase 132 $49 The company sold 306 units at $63 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s gross profit using LIFO? (rounded to the nearest dollar) a. $14,646 b. $14,190 c. $5,088 d. $4,632

Ans: D, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Income Statement Effects; Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: (132  $49) + [(306  132)  $47]  $14,646; [(306  $63)  $14,646]  $4,632 (Cost of May 1 purchase) + [(Units sold – Units in May 1 purchase) × Unit cost of Mar.14 purchase] = COGS; Sales rev. – COGS

111.

Acme Industries had the following inventory transactions occur during 2025: Units Cost/unit Feb. 1, 2025 Purchase 108 $45 Mar. 14, 2025 Purchase 186 $47 May 1, 2025 Purchase 132 $49 The company sold 306 units at $63 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, and operating expenses of $1,800, what is the company’s net income using LIFO? (rounded to the nearest dollar) a. $2,832 b. $3,288 c. $2,302 d. $1,982

Ans: D, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Income Statement Effects, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: (132  $49) + [(306  132)  $47]  $14,646; [(306  $63)  $14,646]  $4,632; ($4,632  $1,800)  .70  $1,982 (Cost of May 1 purchase) + [(Units sold – Units in May 1 purchase) × Unit cost of Mar. 14 purchase] = COGS; Sales rev. – COGS = Gross Profit; (Gross profit – Operating expenses) × (1 – tax rate)

Reporting and Analyzing Inventory

112.

6-27

Acme Industries had the following inventory transactions occur during 2025: Units Cost/unit Feb. 1, 2025 Purchase 108 $45 Mar. 14, 2025 Purchase 186 $47 May 1, 2025 Purchase 132 $49 The company sold 306 units at $63 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s gross profit using FIFO? (rounded to the nearest dollar) a. $14,646 b. $14,190 c. $5,088 d. $4,632

Ans: C, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Income Statement Effects, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: (108  $45) + (186  $47) + [(306  294)  $49]  $14,190; [(306  $63)  $14,190]  $5,088 (Cost of Feb, 1 purchase) + (Cost of Mar. 14 purchase) + [(Units sold – Units in Feb. 1 and Mar. 14 purchases) × Unit cost of May 1 purchase] = COGS; Sales rev. – COGS

113.

Assume that Walmart anticipates inflation in future periods. In a period of rising prices, which inventory method will result in the largest amount of net income? a. LIFO b. FIFO c. Average-Cost d. Specific identification

Ans: B, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Income Statement Effects, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

114.

Assume that Walgreens Company uses FIFO for inventory costing. During 2025, price levels increased. Which statement is true concerning the amounts reported on Walgreens’ balance sheet and income statement? a. The costs allocated to inventory on Walgreens' balance sheet reflect inventories that approximate current costs. b. The costs allocated to inventory on Walgreens' balance sheet may be understated in terms of current cost. c. The costs allocated to cost of goods sold on Walgreens' income statement may be overstated in terms of current cost. d. The costs allocated to cost of goods sold on Walgreens' income statement will reflect the costs that most closely approximate current costs.

Ans: B, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Financial Statement and Tax Effects of Cost Flow Methods, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

6-28

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

115.

Acme Industries had the following inventory transactions occur during 2025: Units Cost/unit Feb. 1, 2025 Purchase 108 $45 Mar. 14, 2025 Purchase 186 $47 May 1, 2025 Purchase 132 $49 The company sold 306 units at $63 each and has a tax rate of 30%. Assuming that a periodic inventory system is used and operating expenses of $1,800, what is the company’s net income using FIFO? (rounded to the nearest dollar) a. $2,832 b. $3,288 c. $2,302 d. $1,982

Ans: C, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Income Statement Effects, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: (108  $45) + (186  $47) + [(306  294)  $49]  $14,190; [(306  $63)  $14,190]  $5,088; ($5,088  $1,800)  .70  $2,302 (Cost of Feb, 1 purchase) + (Cost of Mar. 14 purchase) + [(Units sold – Units in Feb. 1 and Mar. 14 purchases) × Unit cost of May 1 purchase] = COGS; Sales rev. – COGS = Gross profit; Gross profit – Operating expenses = Pre-tax income; Pretax income × (1 – tax rate) = Net income

116.

Ace Industries had the following inventory transactions occur during 2025: Units Cost/unit Feb. 1, 2025 Purchase 90 $90 Mar. 14, 2025 Purchase 155 $94 May 1, 2025 Purchase 110 $98 The company sold 255 units at $126 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s gross profit using LIFO? (rounded to the nearest dollar) a. $24,410 b. $23,650 c. $8,480 d. $7,720

Ans: D, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Income Statement Effects Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: (110  $98) + [(255  110)  $94]  $24,410; [(255  $126)  $24,410]  $7,720 (Cost of May 1 purchase) + (Units sold – Units in May 1purchase) × (Unit cost of March 14 purchase) = COGS; Sales rev. – COGS = Gross profit

117.

Ace Industries had the following inventory transactions occur during 2025: Units Cost/unit Feb. 1, 2025 Purchase 90 $90 Mar. 14, 2025 Purchase 155 $94 May 1, 2025 Purchase 110 $98 The company sold 255 units at $126 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, and operating expenses of $2,500, what is the company’s net income using LIFO? (rounded to the nearest dollar) a. $5,220 b. $5,404 c. $4,186 d. $3,654

Ans: D, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Income Statement Effects, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: (110  $98) + [(255  110)  $94]  $24,410; [(255  $126)  $24,410]  $7,720; ($7,720  $2,500)  (1-.30)  $3,654 (Cost of May 1 purchase) + [(Units sold – Units in May 1purchase) × Unit cost of March 14 purchase] = COGS; Sales rev. – COGS = Gross profit; Gross profit – Operating expenses = Pre-tax income; Pretax income × (1 – tax rate) = Net income

Reporting and Analyzing Inventory

6-29

6-30

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

118.

Ace Industries had the following inventory transactions occur during 2025: Units Cost/unit Feb. 1, 2025 Purchase 90 $90 Mar. 14, 2025 Purchase 155 $94 May 1, 2025 Purchase 110 $98 The company sold 255 units at $126 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s gross profit using FIFO? (rounded to the nearest dollar) a. $24,410 b. $23,650 c. $8,480 d. $7,720

Ans: C, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Income Statement Effects Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: (90  $90) + (155  $94) + [(255  245)  $98]  $23,650; [(255  $126)  $23,650]  $8,480 (Cost of Feb. 1 purchase) + (Cost of Mar. 14 purchase) + [(Units sold – Units in Feb. 1 and Mar. 14 purchases) × Unit cost of May 1 purchase] = COGS; Sales rev. – COGS

119.

Ace Industries had the following inventory transactions occur during 2025: Units Cost/unit Feb. 1, 2025 Purchase 90 $90 Mar. 14, 2025 Purchase 155 $94 May 1, 2025 Purchase 110 $98 The company sold 255 units at $126 each and has a tax rate of 30%. Assuming that a periodic inventory system is used and operating expenses of $2,500, what is the company’s net income using FIFO? (rounded to the nearest dollar) a. $5,220 b. $5,980 c. $4,186 d. $3,654

Ans: C, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Income Statement Effects, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: (90  $90) + (155  $94) + [(255  245)  $98]  $23,650; [(255  $126)  $23,650]  $8,480; ($8,480  $2,500)  .70  $4,186 (Cost of Feb, 1 purchase) + (Cost of Mar. 14 purchase) + [(Units sold – Units in Feb. 1 and Mar. 14 purchases) × Unit cost of May 1 purchase] = COGS; Sales rev. – COGS = Gross profit; Gross profit – Operating expenses = Pre-tax income; Pretax income × (1 – tax rate) = Net income

120.

Alpha Company began business in August. The company purchased three inventory items at the following prices: First purchase $80; Second purchase $95; Third purchase $85. If the company sold two units for a total of $270 and used FIFO costing, the gross profit for the period would be a. $95. b. $105. c. $90. d. $80.

Ans: A, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: FIFO, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Reporting and Control Solution: $270  ($80 + $95)  $95 [Sales rev. − (1st pur. + 2nd pur.)]

Reporting and Analyzing Inventory

121.

6-31

On May 1, Heineken Company had beginning inventory consisting of 300 units with a unit cost of $7. During May, the company purchased inventory as follows: 600 units at $7 900 units at $8 The company sold 1,500 units during the month for $12 per unit. Heineken uses the average-cost method. Assuming that a periodic inventory system is used, the weightedaverage unit cost for May is a. $7.00. b. $7.50. c. $7.60. d. $8.00.

Ans: B, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Average -Cost, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control Solution: [(300 × $7) + (600  $7) + (900  $8)]  1,800  $7.50 (Cost of beg. Inv.+ Cost of first purchase + Cost of second purchase)  Units available for sale

122.

On May 1, Heineken Company had beginning inventory consisting of 300 units with a unit cost of $7. During May, the company purchased inventory as follows: 600 units at $7 900 units at $8 The company sold 1,500 units during the month for $12 per unit. Heineken uses the average-cost method. Assuming that a periodic inventory system is used, Heineken's gross profit for the month of May is a. $6,750 b. $11,250 c. $13,500 d. $18,000

Ans: A, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Average -Cost, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: [(300  $7) + (600  $7) + (900  $8)]  1,800  $7.50; [($12  $7.50)]  1,500  $6,750 (Cost of beg. Inv.+ Cost of first purchase + Cost of second purchase)  Units available for sale = Weighted-average unit cost; Weighted-average unit cost × Units sold = COGS; Sales revenue – COGS

123.

On May 1, Heineken Company had beginning inventory consisting of 300 units with a unit cost of $7. During May, the company purchased inventory as follows: 600 units at $7 900 units at $8 The company sold 1,500 units during the month for $12 per unit. Heineken uses the average-cost method. Assuming that a periodic inventory system is used, the value of Heineken's inventory at May 31 is a. $2,100 b. $2,250 c. $2,400 d. $13,500

Ans: B, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Average-Cost, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: [(300  $7) + (600  $7) + (900  $8)]  1,800  $7.50; [(1,800  1,500)  $7.50]  $2,250 (Cost of beg. Inv.+ Cost of first purchase + Cost of second purchase)  Units available for sale = Weighted-average unit cost; Weighted-average unit cost × Units sold

6-32

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

124.

Suppose GameStop Company uses a periodic inventory system. Details for the inventory account for the month of January are as follows: Units Unit Cost Total Balance, 1/1 300 $5.00 $1,500 Purchase, 1/15 150 5.30 795 Purchase, 1/28 150 5.50 825 An end of the month, inventory showed that 240 units were on hand. How many units did the company sell in January? a. 90 b. 240 c. 300 d. 360

Ans: D, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Cost Flow Assumptions, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control Solution: [(300 + 150 + 150)  240]  360 Units in beg. Inv. + Units in 1/15 purchase + Units in 1/28 purchase) – Units on hand

125.

Suppose GameStop Company uses a periodic inventory system. Details for the inventory account for the month of January are as follows: Units Unit Cost Total Balance, 1/1 300 $5.00 $1,500 Purchase, 1/15 150 5.30 795 Purchase, 1/28 150 5.50 825 An end of the month, inventory showed that 240 units were on hand. If the company uses FIFO, what is the value of the ending inventory? a. $1,320 b. $1,200 c. $1,302 d. $1,818

126.

Suppose GameStop Company uses a periodic inventory system. Details for the inventory account for the month of January are as follows: Units Unit Cost Total Balance, 1/1 300 $5.00 $1,500 Purchase, 1/15 150 5.30 795 Purchase, 1/28 150 5.50 825 An end of the month, inventory showed that 240 units were on hand. If the company uses LIFO, what is the value of the ending inventory? a. $1,264 b. $1,200 c. $1,302 d. $1,920

Ans: B, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: LIFO, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: (240  $5.00)  $1,200 (End. inv. units × beg. inv. price/unit)

Reporting and Analyzing Inventory

127.

6-33

Suppose GameStop Company uses a periodic inventory system. Details for the inventory account for the month of January are as follows: Units Unit Cost Total Balance, 1/1 300 $5.00 $1,500 Purchase, 1/15 150 5.30 795 Purchase, 1/28 150 5.50 825 An end of the month, inventory showed that 240 units were on hand. If the company uses FIFO and sells the units for $10 each, what is the gross profit for the month? a. $1,782 b. $1,818 c. $3,600 d. $2,400

Ans: A, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: FIFO, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: (300  $5.00) + [(600  240  300)  $5.30]  $1,818; [(600  240)  $10]  $1,818  $1,782; Tot. Units Avail. for sale = 300 + 150 + 150 = 600 Cost of beg. Inv + [(Total units available for sale – Units in end. Inv. – Units in beg. Inv.) × Unit cost for 1/15 purch.

128.

In periods of rising prices, the inventory cost flow assumption which results in the inventory value on the balance sheet that is closest to current cost is the a. FIFO method. b. LIFO method. c. average-cost method. d. tax method.

Ans: A, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Balance Sheet Effects, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

129.

In a period of declining prices, which of the following inventory cost flow assumptions generally results in the lowest balance sheet value for inventory? a. Average-cost method b. LIFO method c. FIFO method d. Need more information to answer

Ans: C, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Balance Sheet Effects, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

130.

In a period of rising prices, which of the following inventory cost flow assumptions generally results in the lowest amount of net income? a. Average-cost method b. LIFO method c. FIFO method d. Need more information to answer

131.

Which inventory cost flow assumption generally results in costs allocated to ending inventory that will approximate their current cost? a. LIFO b. FIFO c. Average-cost method d. Whichever method that produces the highest ending inventory figure

Ans: B, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Balance Sheet Effects, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

6-34

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

132.

Two companies report the same cost of goods available for sale but each employs a different inventory costing method. If the price of goods has increased during the period, then the company using a. LIFO will have the highest ending inventory. b. FIFO will have the highest cost of goods sold. c. FIFO will have the highest ending inventory. d. LIFO will have the lowest cost of goods sold.

Ans: C, LO: 2, Section: Inventory Methods and Financial Effects; Subsections: Balance Sheet Effects, Income Statement Effects, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

133.

If two companies have the same inventoriable costs but use different inventory flow assumptions when the price of goods have not been constant, then the a. cost of goods sold of the companies will be identical. b. cost of goods purchased during the year will be identical. c. ending inventory of the companies will be identical. d. net income of the companies will be identical.

Ans: B, LO: 2, Section: Inventory Methods and Financial Effects; Subsections: Balance Sheet Effects, Income Statement Effects, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

134.

In a period of increasing prices, which inventory flow assumption will result in the lowest amount of income tax expense? a. FIFO b. LIFO c. Average-cost method d. Income tax expense for the period will be the same under all assumptions.

Ans: B, LO: 2, Section: Inventory Methods and Financial Effects; Subsections: Tax Effects, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

135.

Given equal circumstances and generally rising costs, which inventory method will increase income tax expense the most? a. FIFO b. LIFO c. Average cost d. Income tax expense for the period will be the same under all assumptions.

Ans: A, LO: 2, Section: Inventory Methods and Financial Effects; Subsections: Income Statement Effects, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

136.

The specific identification method of costing inventories is used when the a. physical flow of units cannot be determined. b. company sells large quantities of relatively low-cost homogeneous items. c. company sells large quantities of relatively low-cost heterogeneous items. d. company sells a limited quantity of high-unit cost items.

Ans: D, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Specific Identification, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

137.

The specific identification method of inventory costing a. always maximizes a company's net income. b. always minimizes a company's net income. c. has no effect on a company's net income. d. may enable management to manipulate net income.

Ans: D, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Specific Identification, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None,

Reporting and Analyzing Inventory

6-35

AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

138.

The managers of Kardashian Company receive performance bonuses based on the net income of the firm. Which inventory costing method are they likely to favor in periods of declining prices? a. LIFO b. Average-Cost c. FIFO d. Physical inventory method

Ans: A, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Income Statement Effects, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

139.

In periods of inflation, phantom or paper profits may be reported as a result of using the a. perpetual inventory method. b. FIFO costing assumption. c. LIFO costing assumption. d. periodic inventory method.

Ans: B, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Income Statement Effects, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

140.

Selection of an inventory costing method by management does not usually depend on a. the fiscal year end. b. income statement effects. c. balance sheet effects. d. tax effects.

Ans: A, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Cost Flow Assumptions, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

141.

Kim Kardashian, the accountant at Acme Company is determining the difference in income taxes the company will pay depending on the choice of either FIFO or LIFO as an inventory costing method. The income tax rate is 30% and the FIFO method will result in income before taxes of $17,480. The LIFO method will result in income before taxes of $16,200. What is the difference in income tax that would be paid between the two methods? a. $1,280 b. $896 c. $384 d. Cannot be determined from the information provided.

142.

Ryan Seacrest, the accountant at Idol Company has determined that income before income taxes amounted to $11,000 using the FIFO costing assumption. If the income tax rate is 30% and the amount of income taxes paid would be $900 greater if the LIFO assumption were used, what would be the amount of income before taxes under the LIFO assumption? a. $11,900 b. $14,000 c. $8,000 d. $10,100

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

143.

Katy Perry, the manager of Idol Company is given a bonus based on net income before taxes. The net income is $59,500 for FIFO and $49,000 for LIFO. The tax rate is 30%. The bonus rate is 20%. How much higher is the manager's bonus if FIFO is adopted instead of LIFO? a. $15,000 b. $21,000 c. $3,000 d. $10,500

144.

The consistent application of an inventory costing method enhances a. conservatism. b. accuracy. c. comparability. d. efficiency.

Ans: C, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Using Inventory Cost Flow Methods Consistently, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

145.

Acme Supply Company is a retailer operating in an industry that typically experiences inflation (rising prices). Acme wants the most realistic cost of goods sold. Which inventory costing method should Acme consider using? a. Average-cost because all inventory costs will then represent an average amount b. Specific identification is the most realistic method because it involves the actual costs c. LIFO because the cost of goods sold represents the latest costs d. FIFO because the cost of goods sold represents the earliest costs

Ans: C, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Income Statement Effects, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

146.

A1 Energy Group is a retailer operating in an industry that typically experiences inflation (rising prices). A1 Energy Group wants the most realistic ending inventory. Which inventory costing method should the company consider using? a. Average-cost because all inventory costs will then represent an average amount. b. Specific identification is the most realistic method because it involves the actual costs. c. LIFO because ending inventory represents the earliest costs. d. FIFO because ending inventory represents the latest costs.

Ans: D, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Balance Sheet Effects, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

147.

What does the inventory turnover measure? a. The average amount of time inventory sits on a company’s shelves b. The dollar amount of funds tied up in inventory c. How quickly a company sells its goods d. The profit generated from the selling of inventory

Ans: C, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Financial Analysis and Data Analytics, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

Reporting and Analyzing Inventory

148.

6-37

The lower-of-cost-or-net-realizable-value basis of valuing inventories is an example of a. comparability. b. the historical cost principle. c. conservatism. d. consistency.

Ans: C, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Lower-of-Cost-or-Net-Realizable-Value, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

149.

When applying the lower-of-cost-or-net-realizable-value rule to inventory valuation, net realizable value refers to a. estimated selling price less cost to complete and sell. b. original cost. c. current replacement cost. d. original cost, less physical deterioration.

Ans: A, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Lower-of-Cost-or-Net-Realizable-Value, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

150.

Which of the following is not a required inventory disclosure? a. Cost flow method b. Major categories of inventory c. FIFO reserve d. Basis of accounting (cost or LCNRV)

Ans: C, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Presentation, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

151.

A departure from the cost basis of accounting to the lower-of- cost-or-net-realizable-value basis in valuing inventory is required when there has been a. a decline in the value of the inventory. b. an increase in selling price. c. an increase in the value of the inventory. d. a desire for more profit.

152.

Which of the following statements concerning lower-of-cost-or-net-realizable-value (LCNRV) is incorrect? a. LCNRV is an example of a company choosing the accounting method that will be least likely to overstate assets and income. b. Under the LCNRV basis, market value does not apply because assets are always recorded and maintained at cost. c. The LCNRV basis is justified because of a decline in the selling price of the inventory item. d. LCNRV is applied after one of the cost flow assumptions has been applied.

Ans: B, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Lower-of-Cost-or-Net-Realizable-Value, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

153.

Suppose that Home Depot developed the following information about its inventories in applying the lower-of-cost-or-net-realizable-value (LCNRV) basis in valuing inventories: Product A B C

Cost $114,000 80,000 160,000

NRV $120,000 76,000 162,000

After Home Depot applies the LCNRV rule, the value of the inventory reported on the balance sheet will be a. $354,000. b. $358,000. c. $350,000. d. $362,000. Ans: C, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Lower-of-Cost-or-Net-Realizable-Value, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: $114,000 + $76,000 + $160,000  $350,000 LCNRV product A + LCNRV product B + LCNRV product C

154.

Suppose that Lowes Corporation sells three different products. The following information is available on December 31: Inventory Item

Units

Cost per unit

Net realizable value per unit

X Y Z

300 600 1,500

$4.00 $2.00 $3.00

$3.50 $1.50 $4.00

After applying the lower-of-cost-or-net-realizable-value rule to each item, what amount will be reported for ending inventory? a. b. c. d.

$6,900 $6,450 $7,950 $6,600

Ans: B, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Lower-of-Cost-or-Net-Realizable-Value, Bloom: AP Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: (300  $3.50) + (600  $1.50) + (1,500  $3.00)  $6,450 LCNRV product X + LCNRV product Y + LCNRV product Z

Reporting and Analyzing Inventory

155.

6-39

Suppose that Columbia Corporation sells six different products. The following information is available on December 31: Inventory Item

Units

Cost per unit

Tin Titanium Stainless Steel Aluminum Iron Copper

60 20 80 80 40 40

$ 500 5,000 2,000 350 400 300

Net Realizable Value per unit $ 505 4,950 1,910 285 410 295

Estimated Selling Price per unit $ 515 5,100 1,985 290 425 310

When applying the lower-of-cost-or-net-realizable-value rule to each item, what amount will be reported for ending inventory? a. $346,000 b. $332,400 c. $333,100 d. $332,800 Ans: B, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Lower-of-Cost-or-Net-Realizable-Value, Bloom: AP Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: (60  $500) + (20  $4,950) + (80  $1,910) + (80 × $285) + (40  $400) + (40  $295)  $332,400 (LCNRV tin × tin units) + LCNRV titanium × titanium units) + (LCRNV stainless steel × stainless steel units) + (LCNRV aluminum × aluminum units) + LCNRV iron × iron units) + (LCNRV copper × copper units)

156.

Suppose that Walgreens Company has a high inventory turnover that has increased over the last year. All of the following statements are true regarding this situation except that Walgreens Company: a. is minimizing funds tied up in inventory. b. is increasing the amount of inventory on hand relative to sales. c. may be losing sales due to inventory shortages. d. has a cost of goods sold that is increasing relative to its average inventory.

Ans: B, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Inventory Turnover, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

157.

Use the following information regarding Black Company and Tan Company to determine Black Company's Days in Inventory for 2025 (round to one decimal place)?

Black Company

Tan Company

a. b. c. d.

Year 2023 2024 2025 2023 2024 2025

Inventory Turnover 8.7 8.4

Ending Inventory $26,340 $29,890 $30,100

7.0 7.5

$25,860 $24,750 $22,530

43.5 days 52.1 days 48.7 days 42.0 days

Ans: A, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Inventory Turnover, Bloom: AP Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: 365  8.4  43.5 (365 ÷ 2025 Black inv. turn.)

158.

Use the following information regarding Black Company and Tan Company to determine Tan Company's Days in Inventory for 2024 (round to one decimal place)?

Black Company

Tan Company

a. b. c. d.

Year 2023 2024 2025 2023 2024 2025

Inventory Turnover 8.7 8.4

Ending Inventory $26,340 $29,890 $30,100

7.0 7.5

$25,860 $24,750 $22,530

43.5 days 48.7 days 42.0 days 52.1 days

Ans: D, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Inventory Turnover, Bloom: AP Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: 365  7  52.1 (365 ÷ Tan 2024 inv. turn.)

Reporting and Analyzing Inventory

159.

6-41

Use the following information regarding Black Company and Tan Company to determine Black Company's Cost of Goods Sold for 2024 (round to the nearest dollar)?

Black Company

Tan Company

a. b. c. d.

Year 2023 2024 2025 2023 2024 2025

Inventory Turnover 8.7 8.4

Ending Inventory $26,340 $29,890 $30,100

6.8 7.5

$25,860 $24,750 $22,530

$252,840 $260,043 $244,601 $260,957

Ans: C, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Inventory Turnover, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: 8.7  [($26,340 + $29,890) ÷ 2]  $244,601 (Black 2024 inv. turn. × Black avg. inv.)

160.

Use the following information regarding Black Company and Tan Company to determine Tan Company's Cost of Goods Sold for 2025 (round to the nearest dollar)?

Black Company

Tan Company

a. b. c. d.

Year 2023 2024 2025 2023 2024 2025

Inventory Turnover 8.7 8.2

Ending Inventory $26,340 $29,890 $30,100

7.0 7.5

$25,860 $24,750 $22,530

$260,043 $189,788 $168,975 $177,300

Ans: D, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Inventory Turnover, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: 7.5  [($24,750 + $22,530) ÷ 2]  $177,300 (Tan 2025 inv. turn. × Tan avg. inv.)

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

161.

Which of the following companies would most likely have the highest inventory turnover? a. An art gallery. b. An automobile manufacturer. c. A piano manufacturer. d. A bakery.

Ans: D, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Inventory Turnover, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

162.

An aircraft company would most likely have a a. high inventory turnover. b. low profit margin. c. high volume. d. low inventory turnover.

Ans: D, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Inventory Turnover, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

163.

The inventory turnover is calculated by dividing cost of goods sold by a. beginning inventory. b. ending inventory. c. average inventory. d. 365 days.

Ans: C, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Inventory Turnover, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

164.

Days in inventory is calculated by dividing 365 days by a. average inventory. b. beginning inventory. c. ending inventory. d. the inventory turnover.

165.

Which of these actions would cause the inventory turnover ratio to increase the most? a. increasing the amount of inventory on hand b. keeping the amount of inventory on hand constant but increasing sales c. keeping the amount of inventory on hand constant but decreasing sales d. decreasing the amount of inventory on hand and increasing sales

Ans: D, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Inventory Turnover, Bloom: AP Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

166.

Suppose that the following information was available for Tesla Company at December 31, 2025: beginning inventory $80,000; ending inventory $120,000; cost of goods sold $630,000; and sales $900,000. Tesla’s inventory turnover, rounded to one decimal place, in 2025 was a. 9.0 times. b. 7.9 times. c. 6.3 times. d. 5.3 times.

Ans: C, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Inventory Turnover, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: $630,000  [($80,000 + $120,000)  2]  6.3 (COGS ÷ [(beg. inv. + end. inv.) ÷ 2])

Reporting and Analyzing Inventory

167.

6-43

Suppose that the following information was available for Tesla Company at December 31, 2025: beginning inventory $80,000; ending inventory $120,000; cost of goods sold $630,000; and sales $900,000. Tesla’s days in inventory, rounded to one decimal place, in 2025 was a. 40.6 days. b. 46.2 days. c. 57.9 days. d. 68.9 days.

Ans: C, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Inventory Turnover Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: $630,000  [($80,000 + $120,000)  2]  6.3; 365  6.3  57.9 (COGS ÷ [(beg. inv. + end. inv.) ÷ 2]); (365 ÷ inv. turn.)

168.

Suppose that the following information was available for Tata Company at December 31, 2025: beginning inventory $90,000; ending inventory $70,000; cost of goods sold $800,000; and sales $1,100,000. Tata’s inventory turnover, rounded to one decimal place, in 2025 was a. 13.8 times. b. 10.0 times. c. 11.4 times. d. 8.9 times.

Ans: B, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Inventory Turnover, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: $800,000  [($90,000 + $70,000)  2] = 10 times COGS ÷ [(beg. inv. + end. inv.) ÷ 2]

169.

Suppose that the following information was available for Tata Company at December 31, 2025: beginning inventory $90,000; ending inventory $70,000; cost of goods sold $800,000; and sales $1,100,000. Tata’s days in inventory, rounded to one decimal place, in 2025 was a. 26.4 days. b. 36.5 days. c. 32.0 days. d. 41.0 days.

170.

A low number of days in inventory may indicate all of the following except a. Sales opportunities may be lost because of inventory shortages. b. There is less chance of having obsolete inventory items. c. The company has fewer funds tied up in inventory. d. Management has achieved the best balance between too much and too little inventory levels.

Ans: A, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Inventory Turnover, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

6-44 171.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Suppose that Reebok International Ltd. had the following records: Ending inventory Cost of goods sold

2025 $32,650 213,600

2024 $30,490 209,040

What is Reebok’s inventory turnover for 2025? (rounded to one decimal place) a. 6.8 times b. 7.0 times c. 6.6 times d. 6.5 times Ans: A, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Inventory Turnover, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: $213,600  [($32,650 + $30,490)  2]  6.8 2025 COGS ÷ [(2025 E.I. + 2024 E.I.) ÷ 2]

172.

Suppose that Reebok International Ltd. had the following records: Ending inventory Cost of goods sold

2025 $32,650 213,600

2024 $30,490 209,040

What is Reebok’s average days in inventory for 2025? (rounded to one decimal place) a. 53.7 days b. 56.2 days c. 55.3 days d. 52.1 days Ans: A, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Inventory Turnover, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: $213,600  [($32,650 + $30,490)  2]  6.8; 365  6.8  53.7 2025 COGS ÷ [(2025 E.I. + 2024 E.I.) ÷ 2]; 365 ÷ inv. turn.

173.

Suppose that Nike Inc. had the following records: Ending inventory Cost of goods sold

2025 $32,650 306,300

2024 $30,490 313,600

What is Nike’s inventory turnover for 2025? (rounded to one decimal place) a. 9.4 times b. 9.7 times c. 9.9 times d. 10.0 times Ans: B, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Inventory Turnover, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: $306,300  [($32,650 + $30,490)  2]  9.7 2025 COGS ÷ [(2025 E.I. + 2024 E.I.) ÷ 2]

Reporting and Analyzing Inventory

174.

6-45

Suppose that Nike Inc. had the following records: Ending inventory Cost of goods sold

2025 $32,650 306,300

2024 $30,490 313,600

What is Nike’s average days in inventory for 2025? (rounded to one decimal place) a. 37.6 days b. 38.8 days c. 36.9 days d. 36.5 days Ans: A, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Inventory Turnover, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: $306,300  [($32,650 + $30,490)  2]  9.7; 365  9.7  37.6 2025 COGS ÷ [(2025 E.I. + 2024 E.I.) ÷ 2]; 365 ÷ inv. turn.

175.

The difference between ending inventory using LIFO and ending inventory using FIFO is referred to as the a. FIFO reserve. b. inventory reserve. c. LIFO reserve. d. periodic reserve.

Ans: C, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Adjustments for LIFO Reserve, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

176.

The LIFO reserve is a. the difference between the value of the inventory under LIFO and the value under FIFO. b. an amount used to adjust inventory to the lower of cost or market. c. the difference between the value of the inventory under LIFO and the value under average-cost. d. the amount used to adjust inventory to historical cost.

Ans: A, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Adjustments for LIFO Reserve, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

177.

Reporting which one of the following allows analysts to make adjustments to compare companies using different cost flow methods? a. FIFO reserve b. Inventory turnover c. LIFO reserve d. Current replacement cost

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

178.

Suppose that Tesla, Inc. reported ending inventory at December 31, 2025 of $1,200,000 under LIFO. It also reported a LIFO reserve of $210,000 at January 1, 2025, and $300,000 at December 31, 2025. Cost of goods sold for 2025 was $4,900,000. If CVS Company had used FIFO during 2025, its cost of goods sold for 2025 would have been a. $5,200,000. b. $4,990,000. c. $4,810,000. d. $4,600,000.

Ans: C, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Adjustments for LIFO Reserve, Bloom: AN Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: [$4,900,000  ($300,000  $210,000)]  4,810,000 COGS – (end. LIFO res. – beg. LIFO res.)

179.

To adjust a company’s LIFO cost of goods sold to FIFO cost of goods sold a. the ending LIFO reserve is added to LIFO cost of goods sold. b. the ending LIFO reserve is subtracted from LIFO cost of goods sold. c. an increase in the LIFO reserve is subtracted from LIFO cost of goods sold. d. a decrease in the LIFO reserve is subtracted from LIFO cost of goods sold.

Ans: C, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Adjustments for LIFO Reserve, Bloom: AN Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

180.

All of the following statements are true regarding the LIFO reserve except: a. Companies using LIFO are required to report the LIFO reserve. b. The equation (LIFO inventory – LIFO reserve = FIFO inventory) adjusts the inventory balance from LIFO to FIFO. c. The financial statement differences of using LIFO normally increase the longer a company uses LIFO. d. Current ratios and the inventory turnover can be significantly affected if a company has material LIFO reserves.

Ans: B, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Adjustments for LIFO Reserve, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

181.

What is a LIFO reserve? a. The tax savings resulting when LIFO is used during periods of rising prices b. The difference in net income when a company uses LIFO as compared to FIFO c. The difference between the inventory value and cost of goods sold when a company uses LIFO d. The difference between the inventory value under LIFO and FIFO

Ans: D, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Adjustments for LIFO Reserve, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

182.

What is a LIFO reserve? a. The amount of income taxes saved when using LIFO costing instead of FIFO costing. b. The difference between ending inventory using LIFO costing compared to FIFO costing c. The difference between inventory cost using LIFO costing in the balance sheet and cost of goods sold in the income statement using LIFO costing. d. The extra cost a company incurs as a result of using LIFO costing compared to FIFO costing in periods of rising prices.

Ans: B, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Adjustments for LIFO Reserve, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Inventory

183.

6-47

Use the following information for Boba Fett, Inc., Cage Company, Draco Industries, and Elsa Services to determine Draco's LIFO reserve for 2024.” (amounts in $ millions) Inventory Method for 2024 & 2025 2024 Ending inventory assuming LIFO 2024 Ending inventory assuming FIFO 2025 Ending inventory assuming LIFO 2025 Ending inventory assuming FIFO 2024 Current assets (reported on balance sheet) 2024 Current liabilities 2025 Current assets (reported on balance sheet) 2025 Current liabilities 2025 Cost of goods sold a. b. c. d.

Boba Fett LIFO $ 324 427 436 578

Cage

Draco

Elsa

FIFO N/A $ 535 N/A 612

LIFO $ 225 310 167 209

FIFO N/A $ 663 N/A 542

1,677 987

2,031 1,209

1,308 545

2,748 1,200

2,225 1,306 4,678

2,605 1,410 5,042

1,100 465 3,000

2,390 1,000 7,000

$535 $85 $42 $58

Ans: B, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Adjustments for LIFO Reserve, Bloom: AP Difficulty: Medium Min: 3 AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $310  $225  $85 (2024 FIFO E.I. – 2024 LIFO E.I.)

184.

Use the following information for Boba Fett, Inc., Cage Company, Draco Industries, and Elsa Services to determine which company has the strongest liquidity position for 2025 as expressed by the current ratio if the LIFO reserve adjustment is used. Boba (amounts in $ millions) Cage Draco Elsa Fett Inventory Method for 2024 & 2025 LIFO FIFO LIFO FIFO 2024 Ending inventory assuming LIFO $ 324 N/A $ 225 N/A 2024 Ending inventory assuming FIFO 427 $ 535 310 $ 663 2025 Ending inventory assuming LIFO 436 N/A 167 N/A 2025 Ending inventory assuming FIFO 578 612 209 542 2024 Current assets (reported on balance sheet) 1,677 2,031 1,308 2,748 2024 Current liabilities 987 1,209 545 1,200 2025 Current assets (reported on balance sheet) 2,225 2,605 1,100 2,390 2025 Current liabilities 1,306 1,410 465 1,000 2025 Cost of goods sold 4,678 5,042 3,000 7,000 a. b. c. d.

Boba Fett Cage Draco Elsa .

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Ans: D, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Adjustments for LIFO Reserve, Bloom: AP Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

185.

Use the following information for Boba Fett, Inc., Cage Company, Draco Industries, and Elsa Services to determine Boba Fett's inventory turnover for 2025 using LIFO (to the closest decimal place). (amounts in $ millions) Inventory Method for 2024 & 2025 2024 Ending inventory assuming LIFO 2024 Ending inventory assuming FIFO 2025 Ending inventory assuming LIFO 2025 Ending inventory assuming FIFO 2024 Current assets (reported on balance sheet) 2024 Current liabilities 2025 Current assets (reported on balance sheet) 2025 Current liabilities 2025 Cost of goods sold a. b. c. d.

Boba Fett LIFO $ 324 427 436 578

Cage

Draco

Elsa

FIFO N/A $ 535 N/A 612

LIFO $ 225 310 167 209

FIFO N/A $ 663 N/A 542

1,677 987

2,031 1,209

1,308 545

2,748 1,200

2,225 1,306 4,678

2,605 1,410 5,042

1,100 465 3,000

2,390 1,000 7,000

12.3 times 9.3 times 7.5 times 6.4 times

Ans: A, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Adjustments for LIFO Reserve, Bloom: AP, Difficulty: Medium, Min: 3 AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $4,678  [($324 + $436)  2]  12.3 2025 COGS ÷ [(2024 LIFO E.I. + 2025 LIFO E.I.) ÷ 2]

Reporting and Analyzing Inventory

186.

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Use the following information for Boba Fett, Inc., Cage Company, Draco Industries, and Elsa Services to determine which company shows the greatest improvement in its current ratio from 2024 to 2025 if the LIFO adjustment is used. (amounts in $ millions) Inventory Method for 2024 & 2025 2024 Ending inventory assuming LIFO 2024 Ending inventory assuming FIFO 2025 Ending inventory assuming LIFO 2025 Ending inventory assuming FIFO 2024 Current assets (reported on balance sheet) 2024 Current liabilities 2025 Current assets (reported on balance sheet) 2025 Current liabilities 2025 Cost of goods sold a. b. c. d.

Boba Fett LIFO $ 324 427 436 578

Cage

Draco

Elsa

FIFO N/A $ 535 N/A 612

LIFO $ 225 310 167 209

FIFO N/A $ 663 N/A 542

1,677 987

2,031 1,209

1,308 545

2,748 1,200

2,225 1,306 4,678

2,605 1,410 5,042

1,100 465 3,000

2,390 1,000 7,000

Boba Fett Cage Draco Elsa

Ans: B, LO: 3, Section: Inventory Presentation and Analysis; Subsection: Adjustments for LIFO Reserve, Bloom: AP, Difficulty: Medium, Min: 3 AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

*187. In a perpetual inventory system, a. LIFO cost of goods sold will be the same as in a periodic inventory system. b. Average-Costs are based entirely on unit cost simple averages. c. a new average is computed under the Average-Cost method after each sale. d. FIFO cost of goods sold will be the same as in a periodic inventory system. Ans: D, LO: 4, Section: Inventory Cost Flow Methods in Perpetual Inventory Systems, Subsection: FIFO , Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

*188. Suppose that Adidas has the following inventory data: July 1 Beginning inventory 5 Purchases 14 Sale 21 Purchases 30 Sale

30 units at $6.00 120 units at $6.60 80 units 60 units at $7.20 56 units

Assuming that a perpetual inventory system is used, what is the cost of goods sold on a LIFO basis for July? a. $931.20 b. $472.80 c. $1,404.00 d. $696.00 Ans: A, LO: 4, Section: Inventory Cost Flow Methods in Perpetual Inventory Systems, Subsection: LIFO, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: (80  $6.60) + (56  $7.20)  $931.20 (July 14 sales units × July 5 unit cost) + (July 30 sales units × July 21 unit cost)

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*189. Suppose that Adidas has the following inventory data: July 1 Beginning inventory 5 Purchases 14 Sale 21 Purchases 30 Sale

30 units at $6.00 120 units at $6.60 80 units 60 units at $7.20 56 units

Assuming that a perpetual inventory system is used, what is the value of ending inventory on a LIFO basis for July? a. $931.20 b. $1,404.00 c. $708.00 d. $472.80 Ans: D, LO: 4, Section: Inventory Cost Flow Methods in Perpetual Inventory Systems, Subsection: LIFO, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: (30  $6.00) + (40  $6.60) + (4  $7.20)  $472.80 (Beg. Inv units × Beg. Inv. cost) + (Unsold July 5 units × July 5 unit cost) + (Unsold July 21 units × July 21 unit cost)

*190. Suppose that Uniqlo has the following inventory data: July 1 Beginning inventory 30 units at $60 5 Purchases 180 units at $56 14 Sale 120 units 21 Purchases 90 units at $58 30 Sale 84 units Assuming that a perpetual inventory system is used, what is the cost of goods sold on a LIFO basis for July? a. $11,604 b. $11,544 c. $11,592 d. $11,832 Ans: C, LO: 4, Section: Inventory Cost Flow Methods in Perpetual Inventory Systems, Subsection: LIFO, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: (120  $56) + (84  $58)  $11,592 (July 14 unit sales × July 5 unit cost) + (July 30 unit sales × July 21 unit cost)

*191. Suppose that Uniqlo has the following inventory data: July 1 Beginning inventory 30 units at $60 5 Purchases 180 units at $56 14 Sale 120 units 21 Purchases 90 units at $58 30 Sale 84 units Assuming that a perpetual inventory system is used, what is the ending inventory on a LIFO basis for July? a. $5,496 b. $5,508 c. $5,544 d. $5,796 Ans: B, LO: 4, Section: Inventory Cost Flow Methods in Perpetual Inventory Systems, Subsection: LIFO, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: (30  $60) + (60  $56) + (6  $58)  $5,508 (Beg. Inv. unit × Beg. Inv. unit cost) + (Unsold July 5 units × July 5 unit cost) + (Unsold July 21 units × July 21 cost)

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*192. Suppose that Uniqlo has the following inventory data: July 1 Beginning inventory 30 units at $60 5 Purchases 180 units at $56 14 Sale 120 units 21 Purchases 90 units at $58 30 Sale 84 units Assuming that a perpetual inventory system is used, what is ending inventory under the average-cost method for July (round average unit costs to 4 decimal places)? a. $5,500 b. $5,568 c. $4,812 d. $5,544 Ans: A, LO: 4, Section: Inventory Cost Flow Methods in Perpetual Inventory Systems, Subsection: Average -Cost, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control Solution: [(30  $60) + (180  $56)]  210  $56.571; [(90  $56.571) + (90  $58)]  180  $57.286; 96  $57.286  $5,500 [(Beg. inv. units × Beg. Inv. unit cost) + (July 5 units × July 5 unit cost)]  [(Beg. Inv. units + July 5 units)]; Avg. unit cost 1; [(Avg. unit cost 1 × Unsold units from beg. Inv. and July 5 purchase) + (July 21 units × July 21 unit cost)]  (Unsold units from beg. Inv. and July 5 purchase + July 21 units) = Avg. Unit cost 2; End. Inv. units × Avg. unit cost 2

*193. An error in the physical count of goods on hand at the end of a period resulted in a $10,000 overstatement of the ending inventory. The effect of this error in the current period is Cost of Goods Sold Net Income a. Understated Understated b. Overstated Overstated c. Understated Overstated d. Overstated Understated Ans: C, LO: 5, Section: Effects of Inventory Errors, Subsection: Income Statement Effects, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

*194. Suppose that Patagonia’s beginning inventory is understated by $10,000. The effect of this error in the current period is Cost of Goods Sold Net Income a. Understated Understated b. Overstated Overstated c. Understated Overstated d. Overstated Understated Ans: C, LO: 5, Section: Effects of Inventory Errors, Subsection: Income Statement Effects, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

*195. Suppose that Samsung uses the periodic inventory method and the beginning inventory is overstated by $4,000 because the ending inventory in the previous period was overstated by $4,000; the ending inventory for this period is correct. The amounts reflected in the current end of the period balance sheet are Asset Stockholders’ Equity a. Overstated Overstated b. Correct Correct c. Understated Understated d. Overstated Correct Ans: B, LO: 5, Section: Effects of Inventory Errors, Subsection: Balance Sheet Effects, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

*196. An overstatement of the beginning inventory results in a. no effect on the period’s net income. b. an overstatement of net income. c. an understatement of net income. d. a need to adjust purchases. Ans: C, LO: 5, Section: Effects of Inventory Errors, Subsection: Income Statement Effects, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

*197. An overstatement of ending inventory in one period results in a. no effect on net income of the next period. b. an overstatement of net income of the next period. c. an understatement of net income of the next period. d. an overstatement of the ending inventory of the next period. Ans: C, LO: 5, Section: Effects of Inventory Error, Subsection: Income Statement Effects, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and control

*198.

Advantage Company’s ending inventory is overstated by $2,000. What is the effect of this error on the current year’s cost of goods sold and net income, respectively? a. Overstated and understated b. Overstated and overstated c. Understated and overstated d. Understated and understated

Ans: C, LO: 5, Section: Effects of Inventory Errors, Subsection: Income Statement Effects, Bloom: AP Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

*199. Ace Inc. made an error in the physical count of goods on hand at the end of June which resulted in a $1,200 understatement of the ending inventory. Which of the following is one effect of the error? a. Net income will be understated. b. Cost of goods available for sale will be overstated. c. Cost of goods sold will be understated. d. Gross profit will be overstated. Ans: A, LO: 5, Section: Effects of Inventory Errors, Subsection: Income Statement Effects, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Inventory

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BRIEF EXERCISES Be. 200 Assume that Samsung identifies the following items for possible inclusion in the physical inventory. Indicate whether each item should be included or excluded from the inventory taking. 1. Goods shipped on consignment by Samsung to another company. 2. Goods in transit from a supplier shipped FOB destination. 3. Goods shipped via common carrier to a customer with terms FOB shipping point. 4. Goods held on consignment from another company. Ans: N/A, LO: 1, Section: Classifying and Determining Inventory, Subsection: Determining Ownership of Goods, Bloom: C, Difficulty: Easy, Min: 5, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Solution 200 1. Included 2. Excluded 3. Excluded 4. Excluded Be. 201 Assume that a physical count of Adidas AG’s inventory at year-end determined that inventory on hand had a value of $1,605,000. Upon further investigation, it was determined that this amount included the following: 1. An inventory purchase of $52,000 made by Adidas shipped from Amazon on December 28 with terms FOB destination, but not due to be received until January 3. 2. Goods shipped to a customer with a cost of $74,000 with terms FOB destination on December 29, but not expected to reach their destination until January 3. 3. Goods shipped to a customer with a cost of $55,000 with terms FOB shipping point on December 30, but not expected to reach their destination until January 5. 4. Goods held on consignment from Lock Laces Company with a cost $16,000. Compute the amount that should be reported for inventory on Adidas AG’s balance sheet at December 31. Ans: N/A, LO: 1, Section: Classifying and Determining Inventory, Subsection: Determining Ownership of Goods, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Solution 201 $1,605,000  $52,000 – $55,000  $16,000  $1,482,000 Be. 202 In its first month of operations, Acme Company made three purchases of merchandise in the following sequence: (1) 200 units at $6, (2) 300 units at $7, and (3) 400 units at $8. Assuming there are 250 units on hand, compute the cost of the ending inventory under (1) the FIFO method and (2) the LIFO method. Acme uses a periodic inventory system. Ans: N/A, LO: 2, Section: Inventory Methods and Financial Effects. Subsections: Cash Flow Assumptions, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 202 1. FIFO 250 × $8 = $2,000 (units on hand × 3rd purch. cost) 2.

LIFO 200 × $6 = $1,200 (1st purch. units and cost) 50 × $7 = 350 (units on hand − 1st purch. units) × 2nd purch. cost $1,550

Be. 203 Suppose that Reebok's inventory records show the following data for the month of September:

Inventory, September 1 Purchases: September 8 September 18

Units 100 450 300

Unit Cost $3.00 3.50 3.70

A physical inventory on September 30 shows 150 units on hand. Calculate the value of ending inventory and cost of goods sold if the company uses FIFO inventory costing and a periodic inventory system. Ans: N/A, LO: 2, Section: Inventory Methods and Financial Effects. Subsection: FIFO, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 203 Ending inventory of 150 units: 150 × $3.70 = $555 (9/30 units × 9/18 unit cost) Cost of goods sold: Units available for sale (100 + 450 + 300) = 850 Units sold 850 – 150 = 700 100 × $3 = 450 × $3.50 = 150 × $3.70 = Cost of goods sold

300 1,575 555 $ 2,430

Be. 204 Suppose that Reebok’s inventory records show the following data for the month of September: Units Unit Cost Inventory, September 1 100 $3.00 Purchases: September 8 450 3.50 September 18 300 3.70 A physical inventory on September 30 shows 150 units on hand. Calculate the value of ending inventory and cost of goods sold if the company uses LIFO inventory costing and a periodic inventory system. Ans: N/A, LO: 2, Section: Inventory Methods and Financial Effects. Subsection: LIFO, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Inventory

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Solution 204 Ending inventory: (100 units × $3.00) + (50 units × $3.50) = $475 [(Beg. inv. × 9/1 unit cost) + (9/30 units – 9/1 units)] × 9/8 unit cost Cost of goods sold: (300 units × $3.70) + (400 units × $3.50) = $2,510 Be. 205 Suppose that the management of Home Depot is considering the effects of various inventory costing methods on its financial statements and its income tax expense. Assuming that the price the company pays for inventory is increasing, which method will: 1. Result in the lowest income tax expense? 2. Provide the highest net income? 3. Provide the highest ending inventory? 4. Result in the most stable earnings over a number of years? Ans: N/A, LO: 2, Section: Inventory Methods and Financial Effects. Subsection: Financial Statement and Tax Effects of Cost Flow Methods, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

Solution 205 1. In times of rising costs, the LIFO method will result in the lowest income tax expense. 2. In times of rising costs, the FIFO method will result in the highest net income. 3. In times of rising costs, the FIFO method will result in the highest ending inventory. 4. In times of rising costs, the average-cost method will result in the most stable earnings over a number of years. Be. 206 Suppose that Best Buy accumulates the following cost and net realizable value (NRV) data at December 31. Inventory Categories Earbuds Drones Docking stations

Cost Data _ $11,000 8,000 14,000

NRV _ Data_ $10,200 8,500 12,600

What is the lower-of-cost-or-net-realizable-value of the inventory? Ans: N/A, LO: 3, Section: Inventory Presentation and Analysis, Subsection: LCNRV, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 206 Inventory Categories Earbuds Drones Docking stations

Cost Data _ $11,000 8,000 14,000

NRV _ Data_ $10,200 8,500 12,600

Lower of Cost or NRV $10,200 8,000 12,600 $30,800

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Be. 207 At December 31, suppose that the following information (in thousands) was available for Banana Republic Inc.: ending inventory $22,600; beginning inventory $21,400; cost of goods sold $198,000, and sales revenue $430,000. Calculate the inventory turnover and days in inventory for Banana Republic (round to one decimal place). Ans: N/A, LO: 3, Section: Inventory Presentation and Analysis, Subsection: Inventory Turnover, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

Solution 207

Inventory Turnover =

$198,000 [($22,600 + $21,400) ÷ 2[

= 9.0 times

COGS ÷ [(beg. inv. + end. inv.) ÷ 2]

Days in Inventory =

365 9.0

= 40.6 days

365 ÷ Inv. turn. Be. 208 Suppose that the following information is available for Nike Inc. for the current year. Beginning inventory $ 12,230 Ending inventory 12,520 Cost of goods sold 84,350 Net sales 143,250 Instructions Calculate the inventory turnover, days in inventory, and gross profit rate for Nike Inc. for the current year (round to one decimal place). Ans: N/A, LO: 3, Section: Inventory Presentation and Analysis, Subsection: Financial Analysis and Data Analytics, Bloom: AP Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

Solution 208 Inventory turnover

$84,350 ($12,230 + $12,520)  2

COGS  [(Beg. inv. + end inv.)  2] $84,350 = 6.8 times $12,375 (365 ÷ Inv. turn) Days in inventory

365 = 53.7 days 6.8 .

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Gross $143,250 – $84,350 = .41 profit rate $143,250 Be. 209 Acme Supply Company reports net income of $120,000 in 2023. The ending inventory did not include goods valued at $9,000 that Acme Supply had consigned to Staples. Instructions (1) What impact will this error have on the income statement for 2023? (2) What is the correct net income for 2023? (3) What impact will this error have on the balance sheet at December 31, 2023? Ans: N/A, LO: 5 Section: Effects of Inventory Errors, Subsections: Income Statement Effects, Balance Sheet Effects, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

Solution 209 (1) If ending inventory is understated by $9,000, cost of goods sold will be overstated and net income will be understated by $9,000. (2) The correct net income is $129,000. (3) On the balance sheet, both inventory and retained earnings will be understated by $9,000.

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

EXERCISES Ex. 210 Suppose that Uniqlo has just completed a physical inventory count at year end, December 31, 2025. Only the items on the shelves, in storage, and in the receiving area were counted and costed on the FIFO basis. The inventory amounted to $80,000. During the audit, the independent CPA discovered the following additional information: (a) There were goods in transit on December 31, 2025 from a supplier with terms FOB destination, costing $10,000. Because the goods had not arrived, they were excluded from the physical inventory count. (b) On December 27, 2025, a regular customer purchased goods for cash amounting to $1,000 and had them shipped to a bonded warehouse for temporary storage on December 28, 2025. The goods were shipped via common carrier with terms FOB shipping point. The customer picked the goods up from the warehouse on January 4, 2026. Uniqlo had paid $500 for the goods and, because they were in storage, Uniqlo included them in the physical inventory count. (c) Uniqlo , on the date of the inventory count, received notice from a supplier that goods ordered earlier, at a cost of $4,000, had been delivered to the transportation company on December 28, 2025; the terms were FOB shipping point. Because the shipment had not arrived on December 31, 2025, it was excluded from the physical inventory. (d) On December 31, 2025, there were goods in transit to customers, with terms FOB shipping point, amounting to $800 (expected delivery on January 8, 2026). Because the goods had been shipped, they were excluded from the physical inventory count. (e) On December 31, 2025, Uniqlo shipped $2,500 worth of goods to a customer, FOB destination. The goods arrived on January 5, 2026. Because the goods were not on hand, they were not included in the physical inventory count. (f) Uniqlo, as the consignee, had goods on consignment that cost $3,000. Because these goods were on hand as of December 31, 2025, they were included in the physical inventory count. Instructions Analyze the above information and calculate a corrected amount for the ending inventory. Explain the basis for your treatment of each item. Ans: N/A, LO: 1, Section: Classifying and Determining Inventory, Subsection: Determining Inventory Quantities, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

Reporting and Analyzing Inventory

Solution 210 Start with Item (a)

$80,000 –

Item (b)

– 500

Item (c)

+ 4,000

Item (d)

–

Item (e)

+ 2,500

Item (f)

– 3,000

Corrected inventory

$83,000

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(Because the goods were shipped FOB destination title will pass to Uniqlo upon arrival. Properly excluded.) (Goods should be excluded. The customer accepted title when the goods left UniqloFOB shipping point.) (Goods belong to Uniqlo. Title passed when supplier delivered the goods to the transportation company.) (Because the goods were shipped FOB shipping point Uniqlo no longer has title to these goods. Properly excluded.) (Goods were shipped FOB destination. Uniqlo retains title until the customer receives them.) (These goods are owned by the consignor, not the consignee, and should not be included in Uniqlo's inventory.)

Ex. 211 Ulta Company was undergoing a year-end audit of its financial records. The auditors were in the process of reviewing Ulta’s inventory for year-end, December 31, 2025. An audit was completed on the year-end inventory. The value of the ending inventory prior to any adjustments was $185,000, but before finishing up they had a few questions. Discussion with Ulta’s accountant revealed the following: (a)

Ulta sold goods costing $60,000 to Aveda Beauty College FOB shipping point on December 28. The goods are not expected to reach Aveda until January 12. The goods were not included in the physical inventory because they were not in the warehouse.

(b)

The physical count of the inventory did not include goods costing $95,000 that were shipped to Ulta FOB destination on December 27 and were still in transit at year-end.

(c)

Ulta received goods costing $25,000 on January 2. The goods were shipped FOB shipping point on December 26 by Cocokind Company. The goods were not included in the physical count.

(d)

Ulta sold goods costing $40,000 to Amazon FOB destination on December 30. The goods were received by Amazon on January 8. Because the goods had been shipped, they were excluded from the physical inventory count.

(e)

Ulta received goods costing $42,000 on January 2 that were shipped FOB destination on December 29. The shipment was a rush order that was supposed to have arrived on December 31. This purchase was included in the ending inventory of $185,000. Ulta Company, as the consignee, had goods on consignment that cost $3,000. Because these goods were on hand as of December 31, they were included in the physical inventory count.

(f)

Instructions Analyze the above information and calculate a corrected amount for the ending inventory. Explain the basis for your treatment of each item. Ans: N/A, LO: 1, Section: Classifying and Determining Inventory, Subsection: Determining Inventory Quantities, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 211 Start with

$185,000

Item (a)

–

(Because the goods were shipped FOB shipping point title passed to Aveda upon shipping. Properly excluded.)

Item (b)

–

(Goods should be excluded. Title does not pass to Ulta until goods are received).

Item (c)

+25,000

(Goods belong to Ulta. Title passed when supplier delivered the goods to the transportation company.)

Item (d)

+40,000

Item (e)

–42,000

Item (f)

– 3,000

(Because the goods were shipped FOB destination point Ulta has title to these goods.) (Goods were shipped FOB destination. Ulta does not take title until they receive them no matter when expected.) (These goods are owned by the consignor, not the consignee, and should not be included in Ulta's inventory.)

Corrected inventory $205,000 Ex. 212 Luke Bryan, an auditor with A. Idol CPAs, is performing a review of Richie Company's inventory account. Richie did not have a good year, and top management is under pressure to boost reported income. According to its records, the inventory balance at year-end was $640,000. However, the following information was not considered when determining that amount. 1. Included in the company's count were goods with a cost of $200,000 that the company is holding on consignment. The goods were placed on consignment by Underwood Corporation. 2. The physical count did not include goods purchased by Richie with a cost of $40,000 that were shipped FOB shipping point on December 28 and did not arrive at Richie's warehouse until January 3. 3. Included in the inventory account was $22,000 of office supplies that were stored in the warehouse and were to be used by the company's supervisors and managers during the coming year. 4. The company received a customer’s order on December 29 that was boxed and was sitting on the loading dock awaiting pick-up on December 31. The shipper picked up the goods on January 1 and delivered them on January 6. The shipping terms were FOB shipping point. The goods had a selling price of $40,000 and a cost of $30,000. The goods were not included in the count because they were sitting on the dock. 5. On December 29, Richie shipped goods with a selling price of $90,000 and a cost of $70,000 to Perry Corporation FOB shipping point. The goods arrived on January 3. Perry had only ordered goods with a selling price of $10,000 and a cost of $8,000. However, a sales manager at Richie had authorized the shipment and said that if Perry wanted to ship the goods back next week, it could. 6. Included in the count was $50,000 of goods that were parts for a machine that the company no longer made. Given the high-tech nature of Richie's products, it was unlikely that these obsolete parts have any other use. However, management would prefer to keep them on the books at cost, "since that is what we paid for them, after all."

Reporting and Analyzing Inventory

Ex. 212

6-61

(Cont.)

Instructions Prepare a schedule to determine the correct inventory amount. Provide explanations for each item above, specifying why or why not an adjustment should be made for each item. Ans: N/A, LO: 1, Section: Classifying and Determining Inventory, Subsection: Determining Inventory Quantities, Bloom: AN, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Ethical Conduct, IMA: Reporting

Solution 212 Ending inventory-as reported 1. 2. 3. 4. 5.

$640,000

Subtract from inventory: The goods belong to Underwood Corporation. Richie is merely holding them as a consignee. (200,000) Add to inventory: The goods belong to Richie as soon as they are shipped (December 28). 40,000 Subtract from inventory: Office supplies should be carried in a separate account. They are not considered inventory held for resale. (22,000) Add to inventory: The goods belong to Richie until they are shipped (Jan. 1). 30,000 Add to inventory: Perry ordered goods with a cost of $8,000. Richie should record the corresponding sales revenue of $10,000. Richie's decision to ship extra "unordered" goods does not constitute a sale. The manager's statement that Perry could ship the goods back indicates that Richie knows this over-shipment is not a legitimate sale. The manager acted unethically in an attempt to improve Richie's reported income by over-shipping. 62,000* Subtract from inventory: GAAP requires that inventory be valued at the lower of cost or net realizable value. Obsolete parts should be adjusted from cost to zero if they have no other use. (50,000)

Correct inventory

$500,000

*($70,000 – $8,000)

Ex. 213 Suppose that Old Navy uses the periodic inventory system and has the following inventory information available: Units Unit Cost Total Cost 1/1 Beginning Inventory 100 $4 $ 400 1/20 Purchase 500 $5 2,500 7/25 Purchase 100 $7 700 10/20 Purchase 300 $8 2,400 1,000 $6,000 A physical count of inventory on December 31 revealed that there were 350 units on hand.

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ex. 213

(Cont.)

Instructions Answer the following independent questions and show computations supporting your answers. 1. Assume that the company uses the FIFO method. The cost of the ending inventory at December 31 is $ . 2. Assume that the company uses the average-cost method. The cost of the ending inventory on December 31 is $ . 3. Assume that the company uses the LIFO method. The cost of the ending inventory on December 31 is $ . 4. Determine the difference in the amount of income that the company would have reported if it had used the FIFO method instead of the LIFO method. Would income have been greater or less? Ans: N/A, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Cost Flow Assumptions; Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 213 1. FIFO: Ending inventory $2,750 300 units @$8 = 50 units @$7 = 350 units

$2,400 350 $2,750

(10/20 units × 10/20 unit cost) ((12/31 units – 10/20 units) × 7/25 unit cost)

2. Average-Cost: Ending inventory $2,100 $6,000  1,000 = $6.00 per unit  350 units = $2,100 ((Tot. cost ÷ Tot. units) × 12/31 units) 3. LIFO: Ending Inventory $1,650 100 units @$4 = $ 400 250 units @$5 = 1,250 350 units $1,650

(1/1 units × 1/1 unit cost) ((12/31 units – 1/1 units) × 1/20 unit cost)

4. FIFO: Cost of goods sold $3,250 100 units @$4 = $ 400 500 units @$5 = 2,500 50 units @$7 = 350 650 units $3,250 or [COGAS – EI = COGS; $6,000 - $2,750 (from 1)] LIFO: Cost of goods sold $4,475 300 units @$8 $2,400 100 units @$7 700 250 units @$5 1,250 650 units $4,350 or [COGAS – EI = COGS; $6,000 - $1,650 (from 3)] 1,000 units available – 350 ending inventory units = 650 units sold Income would have been $1,100 ($4,350 vs. $3,250) greater if the company used FIFO instead of LIFO.

Reporting and Analyzing Inventory

6-63

Ex. 214 Acme Company uses the periodic inventory system and had the following inventory information available: Units Unit Cost Total Cost 1/1 Beginning Inventory 100 $3 $ 300 1/20 Purchase 500 $4 2,000 7/25 Purchase 100 $5 500 10/20 Purchase 300 $6 1,800 1,000 $4,600 A physical count of inventory on December 31 revealed that there were 380 units on hand. Instructions Answer the following independent questions and show computations supporting your answers. 1. Assume that the company uses the FIFO method. The cost of the ending inventory at December 31 is $ . 2. Assume that the company uses the average-cost method. The cost of the ending inventory on December 31 is $ . 3. Assume that the company uses the LIFO method. The cost of the ending inventory on December 31 is $ . 4. Determine the difference in the amount of income that the company would have reported if it had used the FIFO method instead of the LIFO method. Would income have been greater or less? Ans: N/A, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Cost Flow Assumptions; Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 214 1. FIFO: Ending inventory $2,200 300 units @$6 = 80 units @$5 = 380 units

$1,800 400 $2,200

(10/20 units × 10/20 unit cost) ((12/31 units − 10/20 units) × 7/25 unit cost)

2. Average-Cost: Ending inventory $1,748 $4,600  1,000 = $4.60 per unit  380 units = $1,748 ((Tot. cost ÷ Tot. units) × 12/31 units) 3. LIFO: Ending Inventory $1,420 100 units @$3 = 280 units @$4 = 380 units

$ 300 1,120 $1,420

(1/1 units × 1/1 unit cost) ((12/31 units − 1/1 units) × 1/20 unit cost)

4. FIFO: Cost of goods sold $2,400 100 units @$3 = $ 300 500 units @$4 = 2,000 20 units @$5 = 100 620 units $2,400 or [COGAS – EI = COGS; $4,600 - $2,200 (from 1)] LIFO: Cost of goods sold $3,180 300 units @$6 $1,800 100 units @$5 500 220 units @$4 880 620 units $3,180 or [COGAS – EI = COGS; $4,600 - $1,420 (from 3)] .

6-64

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 214

(Cont.)

1,000 units available – 380 Ending Inventory units = 620 units sold Income would have been $780; ($3,180 vs. $2,400) greater if the company used FIFO instead of LIFO. Ex. 215 Compute the cost to be assigned to ending inventory for each of the methods indicated given the following information about purchases and sales during the year. Assume that the periodic inventory system is used. January May

1 1

December

Beginning Inventory Purchases Total Available Total Sales Ending Inventory

150 items @ $4 = $ 600 450 items @ $6 = 2,700 600 items $3,300 430 items 170

Cost assigned on an average-cost basis

Cost assigned on a FIFO basis

Costs assigned on a LIFO basis

Ans: N/A, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Cost Flow Assumptions; Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Solution 215 Average-cost: $935 [($3,300÷600) × 170] ((Tot. cost ÷ Tot. units) × 12/31 units) FIFO: $1,020 (170 × $6) LIFO: $720 [(150 × $4) + (20 × $6)] (1/1 items × 1/1 cost) + ((12/31 items − 1/1 items) × 5/1 cost) Ex. 216 Compute the cost to be assigned to ending inventory for each of the methods indicated given the following information about purchases and sales during the year. Assume that the periodic inventory system is used. January May

1 1

December

Beginning Inventory Purchases Total Available Total Sales Ending Inventory

100 items @ $7 = $ 700 400 items @ $8 = 3,200 500 items $3,900 360 items 140

Cost assigned on an average-cost basis

Cost assigned on a FIFO basis

Costs assigned on a LIFO basis

Ans: N/A, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Cost Flow Assumptions, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Reporting and Analyzing Inventory

6-65

Solution 216 Average-cost: $1,092 [($3,900÷500) × 140)] ((Tot. cost ÷ Tot. units) × 12/31 units) FIFO: $1,120 (140 × $8) LIFO: $1,020 [(100 × $7) + (40 × $8)] (1/1 items × 1/1 cost) + ((12/31 items − 1/1 items) × 5/1 cost) Ex. 217 Acme Supply Company sells many products. Gizmo is one of its popular items. Below is an analysis of the inventory purchases and sales of Gizmo for the month of March. Acme uses a periodic inventory. Purchases Sales Units Unit Cost Units Selling Price/Unit 3/1 Beginning inventory 100 $40 3/3 Purchase 60 $50 3/4 Sales 60 $80 3/10 Purchase 200 $55 3/16 Sales 70 $90 3/19 Sales 90 $90 3/25 Sales 60 $90 3/30 Purchase 40 $60 Instructions (a) Using the FIFO assumption, calculate the amount charged to cost of goods sold for March. (Show computations) (b) Using the average-cost method, calculate the amount assigned to the inventory on hand on March 31. (Show computations) (c) Using the LIFO assumption, calculate the amount assigned to the inventory on hand on March 31. (Show computations) Ans: N/A, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Cost Flow Assumptions; Bloom: AP, Difficulty: Medium Min: 20, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

Solution 217 3/1 3/3 3/4 3/10 3/16 3/19 3/25 3/30 (a)

(b)

Beginning inventory Purchase Sales Purchase Sales Sales Sales Purchase

Units 100 60 200

Purchases Unit Cost $40 $50

Units

Sales Selling Price/Unit

$80

70 90 60

$90 $90 $90

$55

40 $60 400 280 Using FIFO - the earliest units purchased were the first sold. 3/1 100 @ $40 = $ 4,000 (3/1 units × 3/1 cost) 3/3 60 @ 50 = 3,000 (3/3 units × 3/3 cost) 3/10 120 @ 55 = 6,600 ((Units sold − 3/1 units − 3/3 units) × 3/10 cost) 280 units $13,600 = Cost of goods sold Calculate the weighted-average unit cost: $20,400  400 = $51 (COG avail. for sale ÷ tot. units avail.) $51  units in ending inventory (400 available less 280 sold = 120) .

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

6-66

$51  120 = $6,120 (Wtd. ave. unit cost × end. inv. units Solution 217 (Cont.) (c)

There are 120 units in ending inventory. They are comprised of the first units purchased when LIFO is assumed. 3/1 100 @ $40 = $4,000 (3/1 units × 3/1 cost) 3/3 20 @ $50 = 1,000 ((End. inv. units − 3/1 units) × 3/3 cost) 120 units $5,000 = Ending inventory

Ex. 218 Suppose that Target Corporation uses the periodic inventory system to account for inventories and has the following Information at October 31: October

1 8 16 24

Beginning inventory Purchase Purchase Purchase Total units and cost

400 800 600 200 2,000

units @ $10.00 = units @ $10.40 = units @ $10.80 = units @ $11.60 = units

$ 4,000 8,320 6,480 2,320 $21,120

Instructions 1. Show computations to determine the ending inventory using the FIFO cost assumption if 500 units remain on hand at October 31. 2. Show computations to determine the ending inventory using the average-cost method if 500 units remain on hand at October 31. 3. Show computations to determine the ending inventory using the LIFO cost assumption if 500 units remain on hand at October 31. Ans: N/A, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Cost Flow Assumptions; Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 218 1. 500 units in ending inventory. Under FIFO, the units remaining in inventory are the ones purchased most recently. 10/24 200 units @ $11.60 = $2,320 (10/24 units × 10/24 cost) 10/16 300 units @ $10.80 = 3,240 ((10/31 units − 10/24 units) × 10/16 cost) 500 units $5,560 2. 500 units in ending inventory. Under the average-cost method, the weighted-average unit cost must be computed. $21,120  2,000 units = $10.56 500 units  $10.56 = $5,280 (Tot. cost ÷ tot. units) × 10/31 units) 3. 500 units in ending inventory. Under LIFO, the units remaining are the ones purchased earliest. 10/1 400 units @ $10.00 = $4,000 (10/1 units × 10/1 cost) 10/8 100 units @ $10.40 = 1,040 ((10/31 units − 10/1 units) × 10/8 cost) $5,040

Reporting and Analyzing Inventory

6-67

Ex. 219 Suppose that Patagonia Inc. uses the periodic inventory system to account for inventories and has the following information at January 31: January

1 8 16 24

Beginning inventory Purchase Purchase Purchase Total units and cost

400 units @ $12.00 = 800 units @ $12.40 = 600 units @ $12.80 = 200 units @ $13.20 = 2,000 units

$ 4,800 9,920 7,680 2,640 $25,040

Instructions 1. Show computations to determine the ending inventory using the FIFO cost assumption if 600 units remain on hand at January 31. 2. Show computations to determine the ending inventory using the average-cost method if 600 units remain on hand at January 31. 3. Show computations to determine the ending inventory using the LIFO cost assumption if 600 units remain on hand at January 31. Ans: N/A, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Cost Flow Assumptions; Bloom: AP, Difficulty: Medium, Min: 15 AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

Solution 219 1. 600 units in ending inventory. Under FIFO, the units remaining in inventory were the ones purchased most recently. 1/24 200 units @ $13.20 = $2,640 (1/24 units × 1/24 cost) 1/16 400 units @ $12.80 = 5,120 ((1/31 units − 1/24 units) × 1/16 cost) 600 units $7,760 2. 600 units in ending inventory. Under the average-cost method, the weighted-average unit cost must be computed. $25,040  2,000 units = $12.52 600 units  $12.52 = $7,512 (Tot. cost ÷ tot. units) × end. inv. units 3. 600 units in ending inventory. Under LIFO, the units remaining were the ones purchased earliest. 1/1 400 units @ 12.00 = $4,800 1/1 units × 1/1 cost 1/8 200 units @ 12.40 = 2,480 ((1/31 units − 1/1 units) × 1/8 cost) 600 units $7,280

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

6-68

Ex. 220 Suppose that Amazon uses a periodic inventory system and reports the following for the month of June: Date June 1 12 23 30

Explanation Inventory Purchase Purchase Inventory

Units 225 525 750 280

Unit Cost $5 6 7

Total Cost $1,125 3,150 5,250

(a) Compute the cost of the ending inventory and the cost of goods sold under (1) FIFO, (2) LIFO, and (3) average-cost. (b) Which costing method gives the highest ending inventory? The highest cost of goods sold? Why? (c) How do the average-cost values for ending inventory and cost of goods sold relate to ending inventory and cost of goods sold for FIFO and LIFO? Ans: N/A, LO: 2, Section: Inventory Methods and Financial Effects; Subsection: Cost Flow Assumptions; Bloom: AP, Difficulty: Medium Min: 20, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

Solution 220 (a)

(1) FIFO

Beginning inventory (225  $5) .......................................... Purchases June 12 (525  $6) ...................................................... June 23 (750  $7) ...................................................... Cost of goods available for sale ......................................... Less: Ending inventory (280  $7) ..................................... Cost of goods sold .............................................................

$1,125 $3,150 5,250

8,400 9,525 1,960 $7,565

(2) LIFO Cost of goods available for sale ......................................... Less: Ending inventory (225  $5) + (55  $6) .................... Cost of goods sold .............................................................

$9,525 1,455 $8,070

(3) AVERAGE-COST Cost of Goods Total Units Available for Sale ÷ Available for Sale $9,525 1,500

Weighted-Average Unit Cost $6.35

Ending inventory (280  $6.35) = $1,778 (End. inv. units  Ave. unit cost) Cost of goods sold [(1,500 – 280)  $6.35] $7,747 (Units sold  Ave. unit cost) or $9,525 – $1,778 = $7,747 (b) The FIFO method will produce the highest ending inventory because costs have been rising. Under this method, the earliest costs are assigned to cost of goods sold, and the latest costs remain in ending inventory. The LIFO method will produce the highest cost of goods sold for Amazon. Under LIFO the most recent costs are charged to cost of goods sold and the earliest costs are included in the ending inventory. .

Reporting and Analyzing Inventory

6-69

Solution 220 (Cont.) (c) The average-cost ending inventory ($1,778) is higher than LIFO ($1,455) but lower than FIFO ($1,960). For cost of goods sold, average-cost ($7,747) is higher than FIFO ($7,565) but lower than LIFO ($8,070). Ex. 221 Ritz Camera Shop Inc. uses the lower-of-cost-or-net-realizable-value (LCNRV) basis for its inventory. The following data are available at December 31. Cameras Nikon Canon Light Meters Olympus Pentax

Units

Cost/Unit

NRV/Unit

5 7

$175 148

$168 152

15 10

125 120

119 135

Instructions What amount should be reported on Ritz Camera Shop's financial statements, assuming the lowerof-cost-or-net-realizable-value rule is applied? Ans: N/A, LO: 3, Section: Inventory Presentation and Analysis, Subsection: Lower-of-Cost-or-Net-Realizable-Value, Bloom: AP, Difficulty: Medium, Min: 15 AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 221

Cameras: Nikon Canon Light Meters: Olympus Pentax Total

Units

Inventory at Lower-of-Costor-NRV

Cost/Unit

NRV /Unit

Lower-of-Costor-NRV

$175 148

$168 152

$168 148

5 7

$ 840 1,036

125 120

119 135

119 120

15 10

1,785 1,200 $4,861

Ex. 222 Suppose that Forever 21 has the following information available for 2024 and 2025: (in millions) Beginning inventory Ending inventory Cost of goods sold Net sales

2024 $ 2,290 2,522 24,351 43,251

2025 $ 2,522 2,618 23,099 43,232

Instructions Calculate the inventory turnover, days in inventory, and gross profit rate (rounded to one decimal place) for Forever 21 for 2024 and 2025. Comment on any trends. Ans: N/A, LO: 3, Section: Inventory Presentation and Analysis, Subsection: Financial Analysis and Data Analytics, Bloom: AP Difficulty: Medium, Min: 10 AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

6-70 Solution 222

2024 $24,351 ($2,290 + $2,522)  2

Inventory turnover

2025 $23,099 ($2,522 + $2,618)  2

COGS  [(Beg. inv. + end inv.)  2]

$24,351 = 10.1 times $2,406

$23,099 = 9.0 times $2,570

Days in inventory

365 = 36.1 days 10.1

365 = 40.6 days 9.0

Gross profit rate

$43,251 – $24,351 = 43.7% $43,251

$43,232 – $23,099 = 46.6% $43,232

(365/Inv. turn)

The inventory turnover decreased by approximately 11% from 2024 to 2025 while the days in inventory increased by a similar amount (12%) over the same period. Both of these changes would be considered unfavorable since it's better to have a higher inventory turnover with corresponding lower days in inventory. Forever 21's gross profit rate increased by 6.8% from 2024 to 2025. Ex. 223 Acme Company reported the following summarized annual data at the end of 2025: Sales revenue Cost of goods sold* Gross profit Operating expenses Income before income taxes

$1,600,000 900,000 700,000 400,000 $ 300,000

*Based on an ending FIFO inventory of $250,000. The income tax rate is 30%. The controller of the company is considering a switch from FIFO to LIFO. She has determined that on a LIFO basis, the ending inventory would have been $205,000. Instructions (a) Restate the summary information on a LIFO basis. (b) What effect, if any, would the proposed change have on Acme’s income tax expense, net income, and cash flows? (c) If you were an owner of this business, what would your reaction be to this proposed change? Ans: N/A, LO: 3, , Section: Inventory Methods and Financial Effects; Subsection: Tax Effects, Bloom: AEV Difficulty: Hard, Min: 25, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

Reporting and Analyzing Inventory

6-71

Solution 223 (a)

Restate to a LIFO basis:

Sales revenue Cost of goods sold Gross margin Operating expenses Income before income taxes

$1,600,000 945,000 655,000 400,000 $ 255,000

*Ending inventory would be $45,000 less ($250,000 – $205,000 = $45,000) under LIFO, thereby increasing cost of goods by $45,000. (b)

The taxes on the FIFO basis would be: $300,000  .30 = $90,000 Leaving net income of $210,000; ($300,000 – $90,000 = $210,000). The taxes on the LIFO basis would be: $255,000  .30 = $76,500 Leaving net income of $178,500; ($255,000 – $76,500 = $178,500). Switching to the LIFO basis will result in $13,500 less income tax expense and less net income of $31,500. The cash effect is $13,500; ($90,000 – $76,500 = $13,500) saved in taxes if LIFO were used.

(c)

The owner of the business may favor the LIFO basis since more cash will be available for use in the business. LIFO results in more cash being retained in the business since less is paid out for income taxes.

Ex. 224 Suppose that the following information is available from the annual reports of CVS and Walgreens:

2025 Ending Inventory 2024 Ending inventory Cost of goods sold Sales revenue 2025 LIFO reserve 2024 LIFO reserve

(Amounts in millions) CVS Walgreens $ 6,031 $ 4,816 6,162 5,044 25,937 31,983 29,656 36,704 227 — 225 —

Instructions (a)

Calculate the inventory turnover and days in inventory (round to one decimal place) for both companies.

(b)

Calculate CVS’s inventory turnover after adjusting for the LIFO reserve. Assume that CVS uses the LIFO inventory method.

(c)

What conclusion concerning the management of inventory can be drawn from these data?

Ans: N/A, LO: 3, Section: Inventory Presentation and Analysis, Subsection: Financial Analysis and Data Analytics, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

6-72 Solution 224 (a)

CVS $25,937

Inventory turnover

Days in inventory

Walgreens $31,983

($6,031 + $6,162) ÷ 2

($4,816 + $5,044) ÷ 2

$25,937 ———— = 4.3 times $6,096.5

$31,983 ——— = 6.5 times $4,930

365 ÷ 4.3 = 84.9 days

365 ÷ 6.5 = 56.2 days

(b)

2025 $6,031 227 $6,258

LIFO inventory LIFO reserve FIFO inventory

2021 $6,162 225 $6,387

LIFO cost of goods sold Less: Increase in LIFO reserve ($227 – $225) FIFO cost of goods sold Inventory turnover

$25,937 (2) $25,935

= $25,935 ÷ [($6,258 + $6,387) ÷ 2] = $25,935 ÷ $6,322.5 = 4.10

(c) Walgreens' inventory turnover ratio is approximately 51% [(6.5 – 4.3) ÷ 4.3)] higher than CVS’s ratio. In addition, Walgreens' days in inventory is 34% [84.9 – 56.2) ÷ 84.9] lower than CVS’s. Generally, a firm prefers to maintain as high an inventory turnover as possible. It can be concluded that Walgreens is more effective in managing inventory than CVS. Ex. 225 Suppose that the following information is available for Starbucks Company for 2025. (Assume that Starbucks uses the LIFO inventory method). Beginning inventory Ending inventory Beginning LIFO reserve Ending LIFO reserve Cost of goods sold Sales

$ 600,000 700,000 200,000 300,000 5,980,000 8,000,000

Instructions (a)

Calculate the inventory turnover and days in inventory (round to one decimal place) for Starbucks Company based on LIFO.

(b)

Calculate the inventory turnover and days in inventory (round to one decimal place) after adjusting for the LIFO reserve.

Ans: N/A, LO: 3, Section: Inventory Presentation and Analysis, Subsection: Financial Analysis and Data Analytics, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

Reporting and Analyzing Inventory

Solution 225 (a) Inventory turnover

Days in inventory =

= $5,980,000 ÷ [($600,000 + $700,000) ÷ 2] = $5,980,000 ÷ $650,000 = 9.2 times 365 days ÷ 9.2 = 39.7 days

(b)

Beginning $600,000 200,000 $800,000

LIFO inventory LIFO reserve FIFO inventory

Ending $ 700,000 300,000 $1,000,000

LIFO cost of goods sold Less: increase in LIFO reserve ($300,000 – $200,000) FIFO cost of goods sold Inventory turnover

6-73

$5,980,000 (100,000) $5,880,000

= $5,880,000 ÷ [($800,000 + $1,000,000) ÷ 2] = $5,880,000 ÷ $900,000 = 6.5 times

Days in inventory = 365 days ÷ 6.5 = 56.2 days *Ex. 226 Acme Supply Company sells many products. Gizmo is one of its popular items. Below is an analysis of the inventory purchases and sales of Gizmo for the month of March. Acme uses the perpetual inventory system.

3/1 3/3 3/4 3/10 3/16 3/19 3/25 3/30

Beginning inventory Purchase Sales Purchase Sales Sales Sales Purchase

Units 100 60 200

Purchases Unit Cost $40 $50

Units

Sales Selling Price/Unit

$80

90 70 60

$90 $90 $90

$55

$60

Instructions (a) (b)

Using the FIFO assumption, calculate the amount charged to cost of goods sold for March. (Show computations) Using the LIFO assumption, calculate the amount assigned to the inventory on hand on March 31. (Show computations)

Ans: N/A, LO: 4, Section: Inventory Cost Flow Methods in Perpetual Inventory Systems, Subsections: FIFO, LIFO, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

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*Solution 226 3/1 3/3 3/4 3/10 3/16 3/19 3/25 3/30 (a)

Units 100 60

Beginning inventory Purchase Sales Purchase Sales Sales Sales Purchase

200

40 400

Purchases Unit Cost $40 $50

Units

Sales Selling Price/Unit

$80

90 70 60

$90 $90 $90

$55

$60 280

Using FIFO - the earliest units purchased were sold first. 3/1 100 @ $40 = $ 4,000 3/3 60 @ 50 = 3,000 3/10 120 @ 55 = 6,600 280 units $13,600 = Cost of goods sold *Note: This analysis applies to the periodic system. Recall that for the FIFO method, the periodic and perpetual systems yield the same results.

(b)

There are 120 units in ending inventory (400 units available – 280 units sold). The beginning inventory layer was reduced by 20 units and the first two purchases were sold. The last purchase was made after all sales occurred. 3/1 3/30

80 @ $40 40 @ $60 120 units

= =

$3,200 2,400 $5,600 = Ending inventory

*Ex. 227 Acme Group sells many products. Gizmo is one of its popular items. Below is an analysis of the inventory purchases and sales of Gizmo for the month of March. Acme Group uses a perpetual inventory system.

3/1 3/3 3/4 3/10 3/16 3/19 3/25 3/30

(a) (b) (c)

Beginning inventory Purchase Sales Purchase Sales Sales Sales Purchase

Units 100 60 200

Purchases Unit Cost $55 $60

Units

Sales Selling Price/Unit

$120

90 70 50

$130 $130 $130

$65

$75

Instructions Using the FIFO assumption, calculate the amount charged to cost of goods sold for March. (Show computations) Using the FIFO assumption, calculate the amount assigned to ending inventory for March. Using the Moving-Average Cost method, calculate the amount assigned to the inventory on hand .

Reporting and Analyzing Inventory

on March 31. (Show computations and use three decimal places for unit costs)

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*Ex. 227 (Cont.) (d) Using the LIFO assumption, calculate the amount assigned to the inventory on hand on March 31. (Show computations) (e) Using the LIFO assumption, calculate the amount charged to cost of goods sold for March. (Show computations) Ans: N/A, LO: 4, Section: Inventory Cost Flow Methods in Perpetual Inventory Systems, Subsection: FIFO, LIFO, Average-Cost, Bloom: AP, Difficulty: Medium Min: 20, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 227 3/1 3/3 3/4 3/10 3/16 3/19 3/25 3/30 (a)

Beginning inventory Purchase Sales Purchase Sales Sales Sales Purchase

Units 100 60

Purchases Unit Cost $55 $60

200

40 400

Units

Sales Selling Price/Unit

$120

90 70 50

$130 $130 $130

$65

$75 270

Using FIFO - the earliest units purchased were sold first. 3/1 100 @ $55 = $ 5,500 3/3 60 @ 60 = 3,600 3/10 110 @ 65 = 7,150 270 units $16,250 = Cost of goods sold *Note: This analysis applies to the periodic system. Recall that for the FIFO method, the periodic and perpetual systems yield the same results.

(b)

Using FIFO – the latest purchased units were left in inventory. 3/30 40 @ $ 75 = $ 3,000 3/10 90 @ $ 65 = 5,850 130 $ 8,850

(c)

Calculate the amount assigned to ending inventory using the weighted average-cost:

(d)

Date

Purchases

3/1 3/3 3/4 3/10 3/16 3/19 3/25 3/30

Beginning Inventory (60 @ $60) $ 3,600

Cost of Goods Sold (60 @ $56.875)

(200 @ $65) $13,000 (90 @ $62.292) (70 @ $62.292) (50 @ $62.292) (40 @ $75) $ 3,000

Balance (100 @ $55) (160 @ $56.875) (100 @ $56.875) (300 @ $62.292) (210 @ $62.292) (140 @ $62.292) (90 @ $62.292) (130 @ $66.202)

$ 5,500.00 9,100.00 5,687.50 18,687.50 13,081.32 8,720.88 5,606.28 8,606.28

There are 130 units in ending inventory (400 available units – 270 units sold). They are comprised of the first units purchased prior to each sale when LIFO is assumed. 3/1 90 @ $55 = $4,950 3/3 40 @ $75 = 3,000 130 units $7,950 = Ending inventory .

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*Solution 227 (Cont.) (e) Using LIFO – the latest purchased units purchased prior to the sale were the first sold. 3/3 60 @ $60 = $ 3,600 3/10 90 @ $65 = 5,850 3/10 70 @ $65 = 4,550 3/10 40 @ $65 = 2,600 3/1 10 @ $55 = 550 270 units $17,150 *Ex. 228 Suppose that Ralph Lauren Company reports the following for the month of June. Date June 1 12 23 30

Explanation Inventory Purchase Purchase Inventory

Units 225 525 750 330

Unit Cost $5 6 7

Total Cost $1,125 3,150 5,250

Instructions (a)

Calculate the cost of the ending inventory and the cost of goods sold for each cost flow assumption, using a perpetual inventory system. Assume a sale of 570 units occurred on June 15 for a selling price of $8 and a sale of 600 units on June 27 for $9. (Note: For the movingaverage cost method, round unit cost to three decimal places.)

(b)

Why is the weighted-average unit cost not $6 [($5 + $6 + $7)  3 = $6]?

Ans: N/A, LO: 4, Section: Inventory Cost Flow Methods in Perpetual Inventory Systems, Subsections: FIFO, LIFO, Average Cost, Bloom: AP, Difficulty: Medium Min: 20, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

*Solution 228 (a) Date June 1

Purchases

June 12

(525 @ $6) $3,150

June 15 June 23

FIFO Cost of goods sold

(225 @ $5) (345 @ $6)

$1,125 $2,070

(750 @ $7) $5,250

June 27

(180 @ $6) (420 @ $7)

Ending inventory: $2,310. Cost of goods sold: $7,215

$1,080 $2,940 $7,215

Balance (225 @ $5) $1,125 (225 @ $5) (525 @ $6)

$4,275

(180 @ $6)

$1,080

(180 @ $6) (750 @ $7)

$6,330

(330 @ $7)

$2,310

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*Solution 228

(Cont.)

Date June 1

Purchases

June 12

(525 @ $6) $3,150

June 15 June 23

LIFO Cost of goods sold

(225 @ $5) (525 @ $6) (525 @ $6) (45 @ $5)

$3,150 $ 225

(750 @ $7) $5,250

June 27

Balance (225 @ $5) $1,125

(600 @ $7)

$4,200 $7,575

$4,275 $ 900

(180 @ $5) (180 @ $5) (750 @ $7)

$6,150

(180 @ $5) (150 @ $7)

$1,950

Ending inventory: $1,950. Cost of goods sold: $7,575 Moving Average Date June 1 June 12

Purchases (525 @ $6) $3,150

June 15 June 23

Cost of goods sold

(570 @ $5.70)

$3,249

(750 @ $7) $5,250

June 27

(600 @ $6.748)

$4,049* $7,298

Balance (225 @ $5) (750 @ $5.70)

$1,125 $4,275

(180 @ $5.70)

$1,026

(930 @ $6.748*)

$6,276

(330 @ $6.748)

$2,227

*rounded Ending inventory: $2,227. Cost of goods sold: $7,298. (b) The simple average would be [($5 + $6 + $7) ÷ 3] or $6. However, for the perpetual inventory system, the average-cost method uses a weighted-average unit cost that changes each time a purchase is made rather than a simple average. *Ex. 229 Suppose that StitchFix reported these income statement data for a 2-year period. 2024 2025 Sales $210,000 $250,000 Beginning inventory 30,000 40,000 Cost of goods purchased 173,000 202,000 Cost of goods available for sale 203,000 242,000 Ending inventory 40,000 50,000 Cost of goods sold 163,000 192,000 Gross profit $ 47,000 $ 58,000 Assume that StitchFix uses a periodic inventory system. The inventories at January 1, 2024 and December 31, 2025, are correct. However, the ending inventory at December 31, 2024 is overstated by $4,000. .

Reporting and Analyzing Inventory

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*Ex. 229 (Cont.) Instructions (a) (b)

Prepare correct income statement data for the 2 years. What is the cumulative effect of the inventory error on total gross profit for the 2 years?

Ans: N/A, LO: 5, Section: Effects of Inventory Errors, Subsection: Income Statement Effects, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

Solution 229 (a) Sales Cost of goods sold Beginning inventory Cost of goods purchased Cost of goods available for sale Ending inventory ($40,000 – $4,000) Cost of goods sold Gross profit

2024 $210,000

2025 $250,000

30,000 173,000 203,000

36,000 202,000 238,000

36,000 167,000 $ 43,000

50,000 188,000 $ 62,000

(b) The cumulative effect on total gross profit for the two years is zero as shown below: Incorrect gross profits: Correct gross profits: Difference

$47,000 + $58,000 = $105,000 $43,000 + $62,000 = 105,000 $ 0

*Ex. 230 For each of the independent events listed below, analyze the impact on the indicated items at the end of the current year by placing the appropriate code letter in the box under each item, assuming that the periodic inventory is used. Code: O = item is overstated U = item is understated NA = item is not affected Items Stockholders’ Cost of Net Events Assets Equity Goods Sold Income 1. The ending inventory in the previous period was overstated. 2. A physical count of goods on hand at the end of the current year resulted in some goods being counted twice.

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*Ex. 230

(Cont.)

3. Goods purchased on account in December of the current year and shipped FOB shipping point were recorded as purchases. The goods were not included in the count of goods on hand on December 31 because they had not arrived by December 31. 4. Goods purchased on account in December of the current year and shipped FOB destination were recorded as purchases. The goods were not included in the count of goods on hand on December 31 because they had not arrived by December 31. 5. The internal auditors discovered that the ending inventory in the previous period was understated $15,000 and that the ending inventory in the current period was overstated $25,000. Ans: N/A, LO: 5, Section: Effects of Inventory Errors, Subsections: Income Statement Effects, Balance Sheet Effects, Bloom: AN, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

*Solution 230 Items Stockholders’ Cost of Assets Equity Goods Sold NA NA O O O U U U O NA U O O O U

Events 1. 2. 3. 4. 5.

Net Income U O U U O

*Ex. 231 Condensed income statements for Acme Corporation are shown below for two years.

Sales Cost of Goods Sold Gross Profit Operating Expense Net Income

2024

2025

$75,000 45,000 30,000 15,000 $15,000

$90,000 54,000 36,000 15,000 $21,000

Compute the corrected net income for 2024 and 2025 assuming that the inventory as of the end of 2024 was mistakenly understated by $7,000. 2024

2025 $

Ans: N/A, LO: 5, Section: Effects of Inventory Errors, Subsection: Income Statement Effects, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

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*Solution 231 2021 = $22,000 (sales − (COGS − inv. understate.) − oper. exp.) 2025 = $14,000 ($21,000 - $7,000) *Ex. 232 Condensed income statements for The Energy Group are shown below for two years.

Sales Cost of Goods Sold Gross Profit Operating Expense Net Income

2024

2025

$75,000 45,000 $30,000 15,000 $15,000

$90,000 54,000 $36,000 15,000 $21,000

Compute the corrected net income for 2024 and 2025 assuming that the inventory at the end of 2024 was mistakenly overstated by $5,000. 2024

2025 $

*Solution 232 2024 = $10,000 (sales − (COGS + inv. overstate.) − oper. exp.) 2025 = $26,000 ($21,000 + $5,000) *Ex. 233 Suppose that Ralph Lauren Inc. reported cost of goods sold as follows: Beginning inventory Cost of goods purchased Cost of goods available for sale Ending inventory Cost of goods sold

2024 $ 54,000 847,000 901,000 64,000 $837,000

Assume that Ralph Lauren made two errors: (1) 2024 ending inventory was overstated by $6,000. (2) 2025 ending inventory was understated by $11,000.

2025 $ 64,000 891,000 955,000 55,000 $900,000

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

*Ex. 233

(Cont.)

Instructions Assuming the errors had not been corrected, indicate the dollar effect that the errors had on the items appearing on the financial statements listed below. Also, indicate if the amounts are overstated (O) or understated (U). 2024 2025 Overstated/ Overstated/ Amount Understated Amount Understated Total assets

Stockholders’ equity

Cost of goods sold

Net income

Ans: N/A, LO: 5, Section: Effects of Inventory Errors, Subsections: Income Statement Effects, Balance Sheet Effects, Bloom: AN, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

*Solution 233 2024 Overstated/ Amount Understated

2025 Overstated/ Amount Understated

Total assets

$6,000

$11,000

Stockholders’ equity

$6,000

$11,000

Cost of goods sold

$6,000

$17,000

Net income

$6,000

$17,000

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COMPLETION STATEMENTS 234. In a manufacturing company, goods that are ready to be sold to customers are referred to as , whereas in a merchandising company they are generally referred to as . Ans: N/A, LO: 1, Section: Classifying and Determining Inventory, Subsection: Classifying Inventory, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

235. In a manufacturing company, there are three categories of inventory: they are , , and . Ans: N/A, LO: 1, Section: Classifying and Determining Inventory, Subsection: Classifying Inventory, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

236. When the terms of sale are FOB , ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller. Ans: N/A, LO: 1, Section: Classifying and Determining Inventory, Subsection: Goods in Transit, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

237. The two systems for tracking inventories are the systems.

and

, Ans: N/A, LO: 1, Section: Classifying and Determining Inventory, Subsection: Classifying Inventory Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

238. When a business holds goods of other parties without taking ownership and tries to sell them for a fee, the goods are called goods. Ans: N/A, LO: 1, Section: Classifying and Determining Inventory, Subsection: Consigned Goods, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

239. Cost of goods available for sale must be allocated between cost of goods and . Ans: N/A, LO: 2, Section: Inventory Methods and Financial Effects, Subsection: Cost Flow Assumptions, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

240. The method tracks the actual physical flow of each unit of inventory available for sale; however, management may be able to manipulate by using this method. Ans: N/A, LO: 2, Section: Inventory Methods and Financial Effects, Subsection: Specific Identification, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

241. If the unit cost of inventory has continuously increased, the , first-out inventory valuation method will result in a higher valued ending inventory than if the , first-out method had been used. Ans: N/A, LO: 2, Section: Inventory Methods and Financial Effects, Subsection: Cost Flow Assumptions, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

242. Under the LCNRV basis, net realizable value is defined as estimated estimated .

less

Ans: N/A, LO: 3, Section: Inventory Presentation and Analysis, Subsection: Lower-of-Cost-or-Net Realizable Value, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

243. The

is calculated as cost of goods sold divided by average inventory.

Ans: N/A, LO: 3, Section: Inventory Presentation and Analysis, Subsection: Financial Statement Analysis and Data Analytics, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

6-84 244. The

is a required disclosure for companies that use LIFO.

Ans: N/A, LO: 3, Section: Inventory Presentation and Analysis, Subsection: Adjustments for LIFO Reserve, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control

Answers to Completion Statements 234. finished goods, merchandise inventory 235. raw materials inventory, work in process inventory, finished goods inventory 236. shipping point

239. 240. 241. 242.

237. periodic, perpetual 238. consigned

243. 244.

sold, ending inventory specific identification, income first-in, last-in selling price, costs to complete and sell inventory turnover LIFO reserve

MATCHING 245. Match the items below by entering the appropriate code letter in the space provided. A. Merchandise Inventory B. Work in process C. FOB shipping point D. FOB destination E. Specific identification method

F. G. H. I. J.

First-in, first-out (FIFO) method Last-in, first-out (LIFO) method Average-cost method LIFO reserve Inventory turnover ratio

1. The difference between inventory reported using LIFO and inventory using FIFO. 2. Tracks the actual physical flow for each inventory item available for sale. 3. Goods that are only partially completed in a manufacturing company. 4. Cost of goods sold consists of the most recent inventory purchases. 5. Goods ready for sale to customers by retailers and wholesalers. 6. Title to the goods transfers when the public carrier accepts the goods from the seller. 7. Ending inventory valuation consists of the most recent inventory purchases. 8. The same unit cost is used to value ending inventory and cost of goods sold. 9. Title to goods transfers when the goods are delivered to the buyer. 10. Measures the number of times the inventory sold during the period. Ans: N/A, LO: 1-3, Sections: Classifying and Determining Inventory; Inventory Methods and Financial Effects; Inventory Presentation and Analysis; Subsections: Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Inventory

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Answers to Matching 1. 2. 3. 4. 5.

I E B G A

6. 7. 8. 9. 10.

C F H D J

SHORT-ANSWER ESSAY QUESTIONS S-A E 246 A survey of major U.S. companies revealed that 769 of those companies used either LIFO or FIFO cost flow methods, while 16 used average-cost. Provide brief, yet concise responses to the following questions. a. Why are LIFO and FIFO so popular? b. Since computers and inventory management software are readily available, why aren’t more companies using specific identification? Ans: N/A, LO: 2, Section: Inventory Methods and Financial Effects. Subsection: Cost Flow Assumptions, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting and Control

Solution 246 a. FIFO and LIFO are based on cost flow assumptions that may be unrelated to the physical flow of goods. The reasons for using one of these methods involve the effects on the income statement, balance sheet, and taxes that the company must pay. In periods of rising prices (inflation), LIFO provides for a lower net income, thus resulting in a lower tax liability. LIFO reflects the most realistic cost of goods sold (the most recent or highest costs). However, the cost of inventory on the balance sheet is distorted because it consists of the earliest or lowest costs. In periods of rising prices, FIFO provides for the most realistic ending inventory cost on the balance sheet (using the most recent or highest costs). On the income statement, FIFO represents the least realistic cost of goods sold because the amount consists of the earliest or lowest costs. This makes net income higher, which is good for the external financial statements but it thus results in a higher tax liability. In periods of falling prices, the opposite results. b. With computers and inventory management software, it would appear that the specific identification method would be the most popular because it matches the actual cost of each item sold to its selling price. However, using computers to keep up with the information does not eliminate some of the problems with using specific identification. A major disadvantage of the specific identification method is that management may be able to manipulate net income. For example, it can boost net income by selling units purchased at a low cost or reduce net income by selling units purchased at a high cost. As long as customers receive the units they demand, they are indifferent when the company bought them. This manipulation means that net income is not objectively measured. Another problem is that the costs of maintaining a specific identification system may outweigh the benefits of using such a method. As mentioned in part a, the financial statement and tax effects of using FIFO and LIFO are more beneficial to companies than simply being able to match the actual cost of a unit to its selling price.

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S-A E 247 Your office is on the 18th floor of your building. The CEO’s office is on the 77th floor. The two of you are waiting for an elevator one morning. The CEO states “Our prices are rising and I want the lowest net income for tax purposes and the highest ending inventory for external reporting purposes. Which inventory method should we use? Requirement: You have three minutes to respond to the CEO. What is your response? Ans: N/A, LO: 2, Section: Inventory Methods and Financial Effects. Subsection: Financial Statement and Tax Effects of Cost Flow Methods, Bloom: C Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting and Control

Solution 247 You have asked a very good question and I am glad to respond to it. In periods of rising prices, LIFO results in the lowest net income, thus resulting in the lowest income tax. FIFO results in the highest net income, thus resulting in the most favorable external reporting information. Unfortunately, companies cannot use LIFO for tax purposes and FIFO for financial reporting purposes. The LIFO conformity rule states that if LIFO is used for tax purposes, it must also be used for financial reporting purposes. This LIFO conformity rule causes company decision-makers to weigh all of the pros and cons of each inventory method. While LIFO does produce the lowest net income when prices are rising, there is a danger in using it. Since LIFO ending inventory represents the oldest costs of the company, it becomes necessary to try to maintain a constant level of units of ending inventory. To avoid this problem, and to report the highest net income for external financial purposes, I suggest that the company use FIFO. S-A E 248 Your former college roommate is opening a new retail store and asks you “Which inventory costing method should I use?” What is your response? Include a comparison of the tax effect, balance sheet effect, and income statement effect for FIFO versus LIFO. Ans: N/A, LO: 2, Section: Inventory Methods and Financial Effects. Subsection: Financial Statement and Tax Effects of Cost Flow Methods, Bloom: AN Difficulty: Medium, Min: 5, AACSB: Communications, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting and Control

Solution 248 It is always good to hear from you and you have certainly asked a very good question. Since the consistency principle requires that you adopt accounting methods and stay with them (until there is need for a proper change), it is very important to consider the options before starting a business. I suggest that you consider one of the three cost flow assumptions – Average-Cost, First-In, FirstOut (FIFO), or Last-In, First-Out (LIFO). These methods are based on the assumption of cost flows instead of the actual physical flow of goods. The effects on the income statement, balance sheet, and tax returns depend on whether your company experiences rising prices or falling prices. Here is a summary of the effects for each inventory method, for companies that experience rising .

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prices (the opposite will be true for falling prices). Solution 248 (Cont.) Inventory Method AverageCost FIFO

Tax Effect Falls between FIFO and LIFO Highest net income, thus highest taxes

Income Statement Effect Falls between FIFO and LIFO

LIFO

Lowest net income, thus lowest taxes (works best if constant levels of inventory units are maintained)

Lowest net income due to highest cost of goods sold. (If you use LIFO for tax purposes, you must also use it for external financial reporting.)

Highest net income due to lowest cost of goods sold. Thus, more attractive for external financial reporting

Balance Sheet Effect Falls between FIFO and LIFO Most realistic ending inventory because the latest costs are matched to ending inventory Most unrealistic ending inventory because the earliest costs are matched to ending inventory

S-A E 249 FIFO and LIFO are the two most common cost flow assumptions used in costing inventories. The dollar values assigned to the same inventory items on hand may be different under each cost flow assumption. If a company has no beginning inventory, explain the difference in ending inventory values under the FIFO and LIFO cost bases when the price of inventory items purchased during the period have been (1) increasing, (2) decreasing, and (3) remaining constant. Ans: N/A, LO: 2, Section: Inventory Methods and Financial Effects. Subsection: Balance Sheet Effects, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting and Control

Solution 249 The FIFO method determines the ending inventory by the cost of the most recent or latest purchase. The LIFO method determines the ending inventory by the cost of the earliest purchase. Therefore, if the FIFO method is used and the prices during the period are increasing, the ending inventory under FIFO will be greater than under LIFO. Likewise, if the FIFO method is used and the prices during the period are decreasing, the ending inventory under FIFO will be less than under LIFO. If prices remain constant and the company has no beginning inventory, there will be no difference in ending inventory valuation. S-A E 250 Ryan Seacrest is studying for the next accounting midterm examination. What should Ryan know about (a) using another cost basis of accounting for inventories and (b) the meaning of "net realizable value" in the lower-of-cost-or-net-realizable-value method? Ans: N/A, LO: 3, Source: Inventory Presentation and Analysis, Subsection: Lower-of-Cost-or-Net Realizable Value, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting and Control

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 250 Ryan should know the following: (a) When the value of inventory is lower than its cost, companies must “write down” the inventory to its net realizable value. The write-down to net realizable value should be recognized in the period in which the price decline occurs. (b Net realizable value does not mean current replacement cost or simply selling price but instead, refers to the net amount that a company expects to realize or receive from the sale of its inventory. For a merchandising company, net realizable value is the estimated selling price in the normal course of business less costs to complete and sell. S-A E 251 What is the LIFO reserve? What are the consequences of ignoring a large LIFO reserve when analyzing a company? Ans: N/A, LO: 3, Section: Inventory Presentation and Analysis, Sub-section: Adjustments for LIFO Reserve, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 251 The LIFO reserve is a required disclosure for companies that employ LIFO. It is the difference between ending inventory using LIFO and ending inventory if FIFO were used instead. Ignoring a large LIFO reserve when analyzing a company can distort any comparisons that an analyst might try to make with a company's competitors that used FIFO. S-A E 252 (Ethics) Angie Wiggins and Neal Das are department managers in the housewares and shoe departments, respectively, for Brumfields, a large department store. Neal has observed Angie taking housewares inventory, apparently without paying for it. He hesitates to confront Angie because he is due to be promoted, and needs Angie's recommendation. He also does not want to notify the company management directly, because he doesn't want an ethics investigation on his record, believing that it will give him a “goody-goody” image. This week, Angie tried on several pairs of expensive running shoes in his department before finding a pair that suited her. She did not, however, buy them. That very pair was missing this morning. Brumfields recently replaced its old periodic inventory system with a perpetual inventory system using scanners and barcodes. In addition, the annual inventory is to be replaced by a monthly inventory conducted by an independent firm. On hearing the news of the changes, Neal relaxes. "The system will catch Angie now," he says to himself. Required: 1. Is Neal's attitude justified? Why or why not? 2. What, if any, action should Neal take now? Ans: N/A, LO: 1, Section: Classifying and Determining Inventory, Subsection: Determining Inventory Quantities, Bloom: E, Difficulty: Easy, Min: 5, AACSB: Ethics, Communications, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Ethical Conduct, IMA: Professional Ethics

Reporting and Analyzing Inventory

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Solution 252 1. Neal's attitude is not justified. The system will only be able to detect that merchandise is missing, not to determine who took it. 2. Neal should notify his superiors at once. He has knowledge of what may be criminal acts, and by concealing them, he is very close to becoming a party to the acts. Neal's apparent fear of not being promotable because of a “goody-goody” image seems unjustified. It would seem more likely that Neal's refusal to accept unethical (and illegal) acts by others would make him a more valuable manager. He may even be jeopardizing his career with Brumfields if someone else reports Angie's actions. The resulting investigation may implicate Neal because of his failure to notify the proper authorities in a timely manner. S-A E 253 (Communication) Patrick Bodkin, a new employee of Hobby Town, recorded $1,000 in consigned goods received as part of the firm's inventory. The goods were received one day after the end of the fiscal period, but Patrick reasoned that the goods should be included in inventory sooner because Hobby Town paid the freight. The mistake was brought to his attention by the purchasing department who said the goods should not have been recorded in Hobby Town’s inventory at all. Patrick told Eudelia Gomez, the purchasing supervisor, that nobody needed to worry because the mistake would cancel itself out the following month. In Patrick's opinion, there was no reason to get everyone excited over nothing, especially since it was monthly, and not annual, financial statements that were affected. Eudelia Gomez has reported the problem to the accounting department. Required: You are Patrick's supervisor. Write a memo to Patrick explaining why the error should have been corrected. Ans: N/A, LO: 1, Section: Classifying and Determining Inventory, Subsection: Consigned Goods. Bloom: AN, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting and Control

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

6-90 Solution 253

MEMO

TO:

Patrick Bodkin, Accounting Department

FROM:

Luke Bryan, Supervisor

DATE:

March 12, 20xx

It has come to my attention that $1,000 in consigned goods was included in the inventory reported in our January financial statements. You were informed that this amount should be removed from inventory, which you did not do, apparently believing that February's entries would correct the error. The error would have been corrected in February if it were only a matter of your recording inventory in the wrong month. January's inventory and expenses would have been overstated, and February's understated, but the net effect would have been zero. Since the $1,000 is a fairly large amount, however, that still would not have been appropriate. However, the error you made was to enter into inventory goods that the company did not own and will not own. Consigned goods are owned by the consignors until purchased by customers. Please correct the error at once. We may need to notify some of the other departments of the error as well. Please arrange to meet with me in my office as soon as possible to discuss the matter. (signature)

Reporting and Analyzing Inventory

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IFRS QUESTIONS 1.

The requirements for accounting for and reporting of inventories under IFRS, compared to GAAP, tend to be more a. detailed. b. rules-based. c. principles-based. d. full of disclosure requirements.

Ans: C, LO: 6, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Global and Industry Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Quantitative Methods

Under GAAP, companies can choose which inventory cost flow assumptions? a. b. c. d.

LIFO

FIFO

Yes Yes No Yes

No Yes Yes No

Ans: B, LO: 6, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Global and Industry Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Quantitative Methods

Under IFRS, companies can choose which inventory cost flow assumptions? a. b. c. d.

LIFO

FIFO

Yes Yes No Yes

No Yes Yes No

Specific Identification can be used for inventory valuation under a. b. c. d.

GAAP

IFRS

Yes Yes No No

No Yes No Yes

GAAP’s provision for ownership of goods (goods-in-transit or consigned goods), as well as which costs to include in inventory, as compared to IFRS are: a. b. c. d.

Ownership of goods

Costs to include in inventory

essentially similar essentially different essentially similar essentially different

essentially similar essentially different essentially different essentially similar

Ans: A, LO: 6, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Global and Industry Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Quantitative Methods

The acceptable cost flow assumptions under IFRS are a. FIFO and LIFO. b. FIFO and average-cost. c. LIFO and average-cost. d. FIFO, LIFO and average-cost. .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

LIFO can be used a. under neither GAAP nor IFRS. b. under IFRS but not GAAP. c. under GAAP but not IFRS. d. under both GAAP and IFRS.

IFRS defines net realizable value for lower-of-cost-or-net realizable-value as a. original cost. b. estimated selling price in the ordinary course of business less costs to complete and sell. c. replacement cost. d. replacement cost less costs of disposal.

Both IFRS and GAAP define net realizable value for lower-of-cost-or-net-realizable-value as a. acqisition cost. b. estimated selling price in the ordinary course of business less costs to complete and sell. c. current replacement cost. d. replacement cost less costs of disposal.

CHAPTER 7 FRAUD, INTERNAL CONTROL, AND CASH CHAPTER LEARNING OBJECTIVES 1. Define fraud and the principles of internal control. A fraud is a dishonest act by an employee that results in personal benefit to the employee at a cost to the employer. The fraud triangle refers to the three factors that contribute to fraudulent activity by employees: opportunity, financial pressure, and rationalization. Internal control consists of all the related methods and measures adopted within an organization to safeguard its assets, enhance the reliability of its accounting records, increase efficiency of operations, and ensure compliance with laws and regulations. The principles of internal control are establishment of responsibility; segregation of duties; documentation procedures, physical controls, independent internal verification, and human resource controls. 2. Apply internal control principles to cash. Internal controls over cash receipts include: (a) designating only personnel such as cashiers to handle cash; (b) assigning the duties of receiving cash, recording cash, and having custody of cash to different individuals; (c) obtaining remittance advices for mail receipts, cash register tapes or computer records for over-thecounter receipts, deposit slips or confirmations for bank deposits; (d) using company safes and bank vaults to store cash with access limited to authorized personnel, and using cash registers or point-of-sale (POS) terminals in executing over-the-counter receipts; (e) making independent daily counts of register receipts and daily comparisons of total receipts with total deposits; and (f) conducting background checks and bonding personnel who handle cash as well as requiring them to take vacations. Internal controls over cash disbursements include: (a) having only specified individuals such as the treasurer authorized to sign checks and approved vendors; (b) assigning the duties of approving items for payment, paying the items, and recording the payment to different individuals; (c) using prenumbered checks and accounting for all checks, with each check supported by an approved invoice; after payment, stamping each approved invoice “paid”; (d) storing blank checks in a safe or vault with access restricted to authorized personnel, and using a machine with indelible ink to imprint amounts on checks; (e) comparing each check with the approved invoice before issuing the check, and making monthly reconciliations of bank and book balances; and (f) bonding personnel who handle cash, requiring employees to take vacations, and conducting background checks. 3. Identify the control features of a bank account. In reconciling the bank account, it is customary to reconcile the balance per books and the balance per bank to their adjusted balance. The steps reconciling the Cash account are to determine deposits in transit, and electronic funds transfers received by the bank, outstanding checks, errors by the depositor or the bank, and unrecorded bank memoranda. 4. Explain the reporting of cash and the basic principles of cash management. Cash is listed first in the current assets section of the balance sheet. Companies often report cash together with cash equivalents. Cash restricted for a special purpose is reported separately as a current asset or as a noncurrent asset, depending on when the company expects to use the cash. The basic principles of cash management include: (a) increase the speed of receivables .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

collection, (b) keep inventory levels low, (c) monitor the timing of payment of liabilities, (d) plan the timing of major expenditures, and (e) invest idle cash. The three main elements of a cash budget are the cash receipts section, cash disbursements section, and financing section. *5. Explain the operation of a petty cash fund. In operating a petty cash fund, a company establishes the fund by appointing a custodian and determining the size of the fund. The custodian makes payments from the fund for documented expenditures. The company replenishes the fund as needed, and at the end of each accounting period. Accounting entries to record payments are made each time the fund is replenished.

Fraud, Internal Control, and Cash

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Difficulties: Easy: 207 Medium: 69 Hard: 11

Question List by Section Fraud and Internal Control: Fraud: 1, 2, 45, 56, 65, 83, 91, 278 The Sarbanes-Oxley Act: 46 Internal Control: 3, 16, 53, 54, 57, 66, 84, 260, 280, 286, 287 Principles of Internal Control Activities: 13, 15, 47, 48, 49, 50, 51, 58, 60, 223, 224, 237, 238 Establishment of Responsibility: 4, 5, 12, 55, 69, 71, 85 Segregation of Duties: 6, 20, 67, 68, 87, 261 Segregation of Related Activities: 59 Purchasing Activities: 17, 70, 72, 74, 86, 90 Sales Activities: 73, 89 Segregation of Recordkeeping from Physical Custody: 7, 61, 62, 75, 262 Documentation Procedures: 19, 92, 93, 264 Physical Controls: 76 Independent Internal Verification: 63, 77, 78, 263, 279, 281 Human Resource Controls: 8, 10, 11, 79, 80, 81, 88, 265 Data Analytics and Internal Controls: 21, 22, 94 Limitations of Internal Control: 9, 14, 18, 52, 64, 82, 266, 282 Cash Controls: 23, 95, 97, 99, 100, 102, 108 Cash Receipts Controls: 96, 98, 101, 225 Over-the-Counter Receipts: 115, 116 Electronic Receipts 113, 114, 268 Check Receipts: 24, 117, 118 Cash Disbursements Controls: 26, 27, 28, 103, 104, 105, 106, 107, 109, 110, 111, 112, 226, 267, 283 Voucher System Controls: 25 Petty Cash Fund: 119 Control Features of a Bank Account: Electronic Banking: 29, 120 Bank Statements: 121, 122, 123, 124, 125, 126, 127, 269 Reconciling the Bank Account: 30, 31, 33, 136, 284 Reconciliation Procedure: 32, 158, 159, 160, 161, 227, 231, 246, 248, 249, 250, 251, 270 Reconciling Items per Bank: 131, 133, 141, 142, 153, 271, 272 Reconciling Items per Books: 128, 129, 130, 132, 134, 135, 137, 138, 139, 140, 143, 144, 170, 171 Bank Reconciliation Illustrated: 149, 150, 151, 152, 154, 156, 157, 163, 164, 165, 166, 167, 168, 232, 233, 238, 239, 240, 241, 242, 243, 244, 245, 247 Entries from Bank Reconciliation: 145, 147, 155, 162, 228, 229, 230 Collection of Electronic Funds Transfer: NA Book Error: 169 NSF Check: 148 Bank Charge Expense: 146 Reporting Cash: 172, 173, 174 Cash Equivalents: 34, 35, 37, 175, 176, 177, 180 .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Restricted Cash: 36, 181 Managing and Monitoring Cash: 178, 179, 182, 183, 185, 186, 187, 188, 204 Basic Principles of Cash Management: 38, 42, 273, 285 Cash Budgeting: 39, 40, 41, 184, 189, 190, 191, 192, 193, 194, 195, 196, 197, 198, 199, 200, 201, 202, 203, 205, 206, 207, 208, 209, 234, 235, 236, 252, 253, 254, 255, 274 Operation of a Petty Cash Fund: 43, 44, 212, 215 Establishing the Petty Cash Fund: 222, 256, 257, 259 Making Payments from the Petty Cash Fund: 211, 275 Replenishing the Petty Cash Fund: 210, 213, 214, 216, 217, 218, 219, 220, 221, 258, 276

Fraud, Internal Control, and Cash

7-5

TRUE-FALSE STATEMENTS 1.

The most important element of the fraud triangle is rationalization.

Ans: F, LO: 1, Topic: Fraud and Internal Control, Subtopic: Fraud, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Professional Behavior, IMA: Internal Controls

Employees sometimes commit fraud because of personal financial problems caused by too much debt.

Ans: T, LO: 1, Topic: Fraud and Internal Control, Subtopic: Fraud, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Professional Behavior, IMA: Internal Controls

The safeguarding of assets is an objective of a company's system of internal control.

Ans: T, LO: 1, Topic: Fraud and Internal Control, Subtopic: Internal Control, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Professional Behavior, IMA: Internal Controls

When one individual is responsible for all related activities, the potential for errors and irregularities is decreased.

Ans: F, LO: 1, Topic: Fraud and Internal Control, Subtopic: Establishment of Responsibility, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Professional Behavior, IMA: Internal Controls

Internal control is most effective when several people are responsible for a given task.

Ans: F, LO: 1, Topic: Fraud and Internal Control, Subtopic: Establishment of Responsibility, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Professional Behavior, IMA: Internal Controls

An effective system of internal control centralizes functions in a single capable individual.

Ans: F, LO: 1, Topic: Fraud and Internal Control, Subtopic: Segregation of Duties, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Professional Behavior, IMA: Internal Controls

The responsibility for keeping the records for an asset should be separate from the physical custody of that asset.

Ans: T, LO: 1, Topic: Fraud and Internal Control, Subtopic: Segregation of Recordkeeping from Physical Custody, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

Requiring employees to take vacations is a weakness in the system of internal controls because it does not promote operational efficiency.

Ans: F, LO: 1, Topic: Fraud and Internal Control, Subtopic: Human Resource Controls, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

The extent of internal control features adopted by a company must be evaluated in terms of cost-benefit.

Ans: T, LO: 1, Topic: Fraud and Internal Control, Subtopic: Limitations of Internal Control, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

10.

Bonding means insuring a company against theft by employees.

Ans: T, LO: 1, Topic: Fraud and Internal Control, Subtopic: Human Resource Controls, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

11.

It is unlikely that a company would want to bond its employees who handle cash or inventory.

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

12.

An effective system of internal control requires that at least two individuals be assigned to one cash drawer so that each can serve as a check on the other.

13.

A good system of internal control will safeguard assets and enhance the accuracy and reliability of accounting records.

Ans: T, LO: 1, Topic: Fraud and Internal Control, Subtopic: Documentation Procedures, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

14.

A system of internal control cannot be considered good until the possibility of human error has been completely eliminated.

Ans: F, LO: 1, Topic: Fraud and Internal Control, Subtopic: Limitations of Internal Control, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

15.

Only large companies need to be concerned with a system of internal control.

Ans: F, LO: 1, Topic: Fraud and Internal Control, Subtopic: Principles of Internal Control Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

16.

Under an effective system of internal control, errors occur only because of fraud or dishonesty.

Ans: F, LO: 1, Topic: Fraud and Internal Control, Subtopic: Internal Control, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

17.

The responsibilities for ordering, receiving, and paying for merchandise should be assigned to different individuals.

Ans: T, LO: 1, Topic: Fraud and Internal Control, Subtopic: Purchasing Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

18.

The separation of duties feature of internal control can be negated when several employees are involved in a scheme.

Ans: T, LO: 1, Topic: Fraud and Internal Control, Subtopic: Limitations of Internal Control, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

19.

In order to prevent a transaction from being recorded more than once, a company should maintain only one journal.

Ans: F, LO: 1, Topic: Fraud and Internal Control, Subtopic: Documentation Procedures, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

20.

Segregation of duties among employees eliminates the possibility of collusion.

21.

Data analytics has drastically reduced investigations of period-end samples of transactions to identify potential internal control violations.

Ans: T, LO: 1, Topic: Fraud and Internal Control, Subtopic: Data Analytics and Internal Controls, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

Fraud, Internal Control, and Cash

22.

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Data analytics allows companies to continuously monitor virtually every transaction.

23.

For efficiency of operations and better control over cash, a company should maintain only one bank account.

Ans: F, LO: 3, Topic: Control Features of a Bank Account, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

24.

Checks received in the mail should be immediately stamped "NSF" to prevent unauthorized cashing of the check.

Ans: F, LO: 2, Topic: Cash Controls, Subtopic: Check Receipts, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

25.

The treasurer should prepare and sign a check only after authorization to issue a check has been provided.

Ans: T, LO: 2, Topic: Cash Controls, Subtopic: Cash Disbursements Controls, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

26.

Control over cash disbursements is improved if major expenditures are paid by check.

27.

Because EFT eliminates the need for employees to handle cash, internal controls are not needed.

Ans: F, LO: 2, Topic: Cash Controls, Subtopic: Cash Disbursements Controls, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

28.

An example of segregation of duties is having a check signer recording cash disbursements.

Ans: F, LO: 2, Topic: Cash Controls, Subtopic: Cash Disbursements Controls, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

29.

Electronic funds transfer (EFT) is a disbursement system that uses a telephone or a computer to transfer cash from one location to another.

Ans: T, LO: 2, Topic: Cash Controls, Subtopic: Electronic Receipts, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Technology and Tools, AICPA PC: None, IMA: None

30.

One example of a periodic independent internal verification is the bank reconciliation.

31.

To obtain maximum benefit from a bank reconciliation, the reconciliation should be prepared by the employee authorized to sign checks.

Ans: F, LO: 3, Topic: Control Features of a Bank Account, Subtopic: Reconciliation Procedure, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

32.

All reconciling items in determining the adjusted cash balance per books require the depositor to make adjusting journal entries to the cash account.

Ans: T, LO: 3, Topic: Control Features of a Bank Account, Subtopic: Reconciliation Procedure, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

33.

A bank reconciliation is generally prepared by the bank and sent to the depositor along with canceled checks.

Ans: F, LO: 3, Topic: Control Features of a Bank Account, Subtopic: Reconciling the Bank Account, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

Sound internal control activities dictate that the amount of cash on hand should be kept to a maximum.

Ans: F, LO: 3, Topic: Control Features of a Bank Account, Subtopic: None, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Business Economics

35.

Cash equivalents are highly liquid investments that can be converted into a specific amount of cash.

Ans: T, LO: 4, Topic: Reporting Cash, Subtopic: Cash Equivalents, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

36.

Cash equivalents include money market accounts, commercial paper, and U.S. Treasury bills held for ninety days or less.

37.

Cash restricted in use should be separately reported on the balance sheet.

Ans: T, LO: 4, Topic: Reporting Cash, Subtopic: Restricted Cash, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

38.

A basic principle of cash management is to increase the speed of paying liabilities.

Ans: F, LO: 4, Topic: Reporting Cash, Subtopic: Basic Principles of Cash Management, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Decision Modeling, AICPA PC: None, IMA: Reporting

39.

If a monthly cash budget is prepared properly, there will never be a cash deficiency at the end of any month.

Ans: F, LO: 4, Topic: Reporting Cash, Subtopic: Cash Budgeting, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Decision Modeling, AICPA PC: None, IMA: Reporting

40.

A cash budget contributes to more effective cash management.

Ans: T, LO: 4, Topic: Reporting Cash, Subtopic: Cash Budgeting, Topic: Reporting Cash, Subtopic: Cash Budgeting, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

41.

In budgeting cash, cash disbursements include payments to employees and suppliers as well as for depreciation.

42.

A liquid investment is one for which there is a ready market.

Ans: T, LO: 4, Topic: Reporting Cash, Subtopic: Basic Principles of Cash Management, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

*43.

A petty cash fund is used to pay relatively large amounts.

Ans: F, LO: 2, Topic: Cash Controls, Subtopic: Petty Cash Fund, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

*44.

A journal entry is not needed when a petty cash fund is replenished.

Ans: F, LO: 5, Topic: Operation of a Petty Cash Fund, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Fraud, Internal Control, and Cash

7-9

MULTIPLE CHOICE QUESTIONS 45.

Which of the following is not one of the main factors that contribute to fraudulent activity? a. Opportunity. b. Incompatible duties. c. Financial pressure. d. Rationalization.

Ans: B, LO: 1, Topic: Fraud and Internal Control, Subtopic: Fraud, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

46.

All of the following requirements about internal controls were enacted under the Sarbanes Oxley Act except a. independent outside auditors must attest to the adequacy of the internal control system. b. companies must maintain an adequate system of internal control. c. companies must ensure the internal controls are reliable and effective. d. independent outside auditors must eliminate redundant internal controls.

Ans: D, LO: 1, Topic: Fraud and Internal Control, Subtopic: The Sarbanes-Oxley Act, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

47.

Which one of the following is not an objective of a system of internal controls? a. Safeguard company assets. b. Ensure the effectiveness of management’s strategic plan. c. Enhance the accuracy and reliability of accounting records. d. Increase efficiency of operations.

Ans: B, LO: 1, Topic: Fraud and Internal Control, Subtopic: Internal Control, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

48.

Which one of the following is not an objective of a system of internal controls? a. Safeguard company assets. b. Enhance the accuracy and reliability of accounting records. c. Ensure fairness of the financial statements. d. Ensure compliance with laws and regulations.

Ans: C, LO: 1, Topic: Fraud and Internal Control, Subtopic: Internal control, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

49.

All of the following are examples of internal control procedures except a. using prenumbered documents. b. reconciling the bank statement. c. customer satisfaction surveys. d. insisting that employees take vacations.

Ans: C, LO: 1, Topic: Fraud and Internal Control, Subtopic: Principles of Internal Control Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

50.

Each of the following is a component of internal control except a. an extensive marketing plan. b. bonding of employees. c. segregation of duties. d. prenumbered documents.

Ans: A, LO: 1, Topic: Fraud and Internal Control, Subtopic: Principles of Internal Control Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

7-10 51.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Each of the following is a feature of internal control except a. limited access to assets. b. independent internal verifications. c. authorization of transactions. d. generic design of documents.

Ans: D, LO: 1, Topic: Fraud and Internal Control, Subtopic: Principles of Internal Control Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

52.

Which of the following is not a limitation of internal control? a. Cost versus benefit b. The human element c. Segregation of duties d. The size of the company

Ans: C, LO: 1, Topic: Fraud and Internal Control, Subtopic: Limitations of Internal Control, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

53.

Internal controls are concerned with a. only manual systems of accounting. b. the extent of government regulations. c. safeguarding assets. d. preparing income tax returns.

Ans: C, LO: 1, Topic: Fraud and Internal Control, Subtopic: Internal Control, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

54.

Internal control is defined, in part, as a plan that safeguards a. documents. b. assets. c. liabilities. d. capital stock.

55.

Under the concept of establishment of responsibility, how many people should have the ultimate responsibility for a given task? a. Everyone in the organization. b. An individual and his/her supervisor. c. Only one individual. d. The CEO.

Ans: C, LO: 1, Topic: Fraud and Internal Control, Subtopic: Establishment of Responsibility, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

56.

Which of the following is not an element of fraud in a business environment? a. Financial pressure b. Rationalization c. Opportunity d. Risk assessment

Ans: D, LO: 1, Topic: Fraud and Internal Control, Subtopic: Fraud, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

Fraud, Internal Control, and Cash

57.

7-11

Which one of the following is not an objective of internal control? a. To ensure compliance with laws and regulations b. To guarantee the accuracy of the accounting records c. To enhance the reliability of financial statements d. To safeguard assets

Ans: B, LO: 1, Topic: Fraud and Internal Control, Subtopic: Internal Control, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

58.

Which one of the following is a principle of internal control that requires that different individuals should be responsible for related activities? a. Establishment of responsibility b. Documentation procedures c. Management responsibility d. Segregation of duties

Ans: D, LO: 1, Topic: Fraud and Internal Control, Subtopic: Segregation of Duties, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

59.

Which internal control is demonstrated by assigning different individuals to be responsible for related activities? a. Documentation procedures b. Segregation of duties c. Establishment of responsibility d. Independent internal verification

Ans: B, LO: 1, Topic: Fraud and Internal Control, Subtopic: Segregation of Duties, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

60.

Internal controls are designed to safeguard assets from a. employee theft. b. robbery. c. unauthorized use. d. all of these answers are correct.

Ans: D, LO: 1, Topic: Fraud and Internal Control, Subtopic: Principles of Internal Control, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

61.

Having one person responsible for the related activities of ordering merchandise, receiving goods, and paying for them a. increases the potential for errors and fraud. b. decreases the potential for errors and fraud. c. is an example of good internal control. d. is a good example of safeguarding the company's assets.

Ans: A, LO: 1, Topic: Fraud and Internal Control, Subtopic: Segregation of Recordkeeping from Physical Custody, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

7-12 62.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

The custodian of a company asset should a. have access to the accounting records for that asset. b. be someone outside the company. c. not have access to the accounting records for that asset. d. be an accountant.

Ans: C, LO: 1, Topic: Fraud and Internal Control, Subtopic: Segregation of Recordkeeping from Physical Custody, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

63.

Internal auditors a. are hired by CPA firms to audit business firms. b. are employees of the IRS who evaluate the internal controls of companies filing tax returns. c. evaluate the system of internal controls for the companies that employ them. d. cannot evaluate the system of internal controls of the company that employs them.

Ans: C, LO: 1, Topic: Fraud and Internal Control, Subtopic: Independent Internal Verification, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

64.

When two or more people get together for the purpose of circumventing prescribed controls, it is called a. a fraud committee. b. collusion. c. a division of duties. d. bonding of employees.

Ans: B, LO: 1, Topic: Fraud and Internal Control, Subtopic: Limitations of Internal Control, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

65.

From an internal control standpoint, the asset most susceptible to improper diversion and use is a. prepaid insurance. b. cash. c. buildings. d. land.

Ans: B, LO: 2, Topic: Cash Controls, Subtopic: None, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

66.

A traditional definition of internal control specifically includes all of the following features except a. ensure compliance with laws and regulations. b. promotion of operational efficiency. c. reliability of accounting data. d. insistence that employees not take earned vacations.

Ans: D, LO: 1, Topic: Fraud and Internal Control, Subtopic: Internal Control, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

Fraud, Internal Control, and Cash

67.

7-13

A consequence of the segregation of duties is that a. theft by employees becomes impossible. b. operations become extremely inefficient. c. fewer employees will need to be bonded. d. theft is still possible when several employees are involved.

Ans: D, LO: 1, Topic: Fraud and Internal Control, Subtopic: Segregation of Duties, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

68.

A very small company would have the most difficulty in implementing which of the following internal control activities? a. Segregation of duties. b. Limited access to assets. c. Periodic independent verification. d. Sound personnel procedures.

Ans: A, LO: 1, Topic: Fraud and Internal Control, Subtopic: Segregation of Duties, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

69.

The principle of establishing responsibility does not include a. one person being responsible for one task. b. authorization of transactions. c. independent internal verification. d. approval of transactions.

70.

The control principle related to not having the same person authorize and pay for goods is known as a. establishment of responsibility. b. independent internal verification. c. segregation of duties. d. rotation of duties.

Ans: C, LO: 1, Topic: Fraud and Internal Control, Subtopic: Purchasing Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

71.

Two individuals at a retail store work the same cash register. You evaluate this situation as a. a violation of establishment of responsibility. b. a violation of segregation of duties. c. supporting the establishment of responsibility. d. supporting internal independent verification.

Ans: A, LO: 1, Topic: Fraud and Internal Control, Subtopic: Establishment of Responsibility, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

72.

An accounts payable clerk also has access to the approved supplier master file for purchases. The control principle of a. establishment of responsibility is violated. b. independent internal verification is violated. c. documentation procedures is violated. d. segregation of duties is violated.

Ans: D, LO: 1, Topic: Fraud and Internal Control, Subtopic: Purchasing Activities, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

7-14 73.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Related selling activities do not include a. ordering the merchandise. b. making a sale. c. shipping the goods. d. billing the customer.

Ans: A, LO: 1, Topic: Fraud and Internal Control, Subtopic: Sales Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

74.

Related purchasing activities include a. ordering, receiving, paying. b. ordering, selling, paying. c. ordering, shipping, billing. d. selling, shipping, paying.

Ans: A, LO: 1, Topic: Fraud and Internal Control, Subtopic: Purchasing Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

75.

Joe is a warehouse custodian and maintains the accounting records of the inventory held at the warehouse. An assessment of this situation indicates A. documentation procedures are violated. b. independent internal verification is violated. c. segregation of duties is violated. d. establishment of responsibility is violated.

76.

Physical controls to safeguard assets do not include a. cashier department supervisors. b. safes. c. safety deposit boxes. d. locked warehouses.

Ans: A, LO: 1, Topic: Fraud and Internal Control, Subtopic: Physical Controls, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

77.

In large companies, the independent internal verification procedure is often assigned to a. computer operators. b. management. c. internal auditors. d. outside CPAs.

78.

Maximum benefit from independent internal verification is best obtained when a. it is made on a pre-announced basis. b. it is done by the employee possessing custody of the asset. c. discrepancies are reported to management. d. it is done at the time of the audit.

Ans: C, LO: 1, Topic: Fraud and Internal Control, Subtopic: Independent Internal Verification, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

Fraud, Internal Control, and Cash

79.

7-15

If employees are bonded a. it means that they are not allowed to handle cash. b. they have worked for the company for at least 10 years. c. they have been insured against misappropriation of assets. d. it is impossible for them to steal from the company.

Ans: C, LO: 1, Topic: Fraud and Internal Control, Subtopic: Human Resource Controls, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

80.

In a small business, the lack of certain separations of duties can best be overcome by a. bonding the employees. b. getting the owner actively involved. c. hiring only honest employees. d. holding one person responsible for a given set of transactions.

Ans: B, LO: 1, Topic: Fraud and Internal Control, Subtopic: Human Resource Controls, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

81.

Ryan Seacrest has worked for Idol Inc. for 20 years without taking a vacation. An internal control principle that would address this situation would be a. human resource controls. b. establishment of responsibility. c. physical controls. d. documentation procedures.

Ans: A, LO: 1, Topic: Fraud and Internal Control, Subtopic: Human Resource Controls, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

82.

A system of internal control a. is infallible. b. can be rendered ineffective by employee collusion. c. invariably will have costs exceeding benefits. d. is premised on the concept of absolute assurance.

83.

Which of the following statements is correct? a. Due to its liquid nature, cash is the asset most susceptible to fraudulent activities. b. A good system of internal control will ensure that employees will not be able to steal cash. c. It takes two or more employees working together to be able to steal cash. d. All of these answer choices are correct.

Ans: A, LO: 2, Topic: Cash Controls, Subtopic: None, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

84.

Internal control measures a. only apply to publicly traded companies. b. are in place to safeguard assets. c. can eliminate all irregularities in the accounting process. d. All of these answer choices are correct.

7-16

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

85.

Acme Grocery Store has the following policy. ‘Only one cashier can have access to a cash drawer.’ Which internal control principle supports this policy? a. Documentation procedures. b. Segregation of duties. c. Physical controls. d. Establishment of responsibility.

Ans: D, LO: 1, Topic: Fraud and Internal Control, Subtopic: Establishment of Responsibility, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

86.

Luke Bryan has been a trusted employee for over 10 years. He is responsible for ordering merchandise inventory, receiving the inventory items, and authorizing the payment for these items. Which internal control principle, if any, is being violated? a. None. Luke has proven to be trustworthy and has enough experience to do a good job. b. Documentation procedures. c. Establishment of responsibility. d. Segregation of duties.

87.

What is the rationale for the internal control principle, segregation of duties? a. History has shown that employees are generally dishonest and thus cannot be entrusted with performing related duties. b. The work of one employee should, without duplication of effort, provide a reliable basis for evaluating the work of another employee. c. Control is most effective when only one person is responsible for a given task. d. Segregation of duties causes companies to hire more employees and thus it supports the economy.

Ans: B, LO: 1, Topic: Fraud and Internal Control, Subtopic: Segregation of Duties, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

88.

Bonding involves all of the following except a. the company obtains insurance protection against misappropriation of assets by a dishonest employee. b. the insurance company screens employees before they are added to the policy. c. the company informs employees that the insurance company will vigorously prosecute all offenders. d. employees do not commit inappropriate acts because of the threat of prosecution and their loyalty to the employer.

Ans: D, LO: 1, Topic: Fraud and Internal Control, Subtopic: Human Resource Controls, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

89.

Related sales activities include a. making a sale, billing the customer, and collecting the payment. b. ordering goods and approving payments. c. writing checks and preparing the bank reconciliation. d. ordering merchandise and receiving goods.

Fraud, Internal Control, and Cash

90.

7-17

Related purchasing activities include a. making a sale, billing the customer, and collecting the payment. b. ordering goods, receiving goods, and authorizing payment for the goods. c. approving cash disbursements and preparing the bank reconciliation. d. receiving goods and preparing the bank reconciliation.

Ans: B, LO: 1, Topic: Fraud and Internal Control, Subtopic: Purchasing Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

91.

Physical controls include all of the following except a. garment sensors. b. mandatory employee vacations. c. television monitors. d. passkey access to restricted areas.

Ans: B, LO: 1, Topic: Fraud and Internal Control, Subtopic: Physical Controls, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

92.

Examples of documentation supporting the recording of transactions include all of the following except a. sales invoices. b. shipping documents. c. purchase orders. d. All of these answer choices are examples of documentation supporting the recording of transactions .

Ans: D, LO: 1, Topic: Fraud and Internal Control, Subtopic: Documentation Procedures, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

93.

Which of the following is one of two documentation procedures that companies should establish as part of the system of internal controls? a. Employees should number sales invoices sequentially as sales are made. b. Transactions should be documented when the books are closed at the end of the accounting period. c. Source documents for accounting entries should be forwarded promptly to the accounting department. d. A bank reconciliation should be prepared monthly.

Ans: C, LO: 1, Topic: Fraud and Internal Control, Subtopic: Documentation Procedures, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

94.

All of the following are ways in which data analytics can enhance a system of internal controls except: a. Identify spikes in activity b. Ensure compliance with the policies regarding segregation of duties. c. Increase the need for investigations of period-end samples of transactions. d. Flag high dollar amounts in higher risk area.

Ans: C, LO: 1, Topic: Fraud and Internal Control, Subtopic: Data Analytics and Internal Controls, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

7-18 95.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Which of the following would not be included in the definition of cash? a. Money on deposit in a bank. b. Coins. c. NSF checks. d. Petty cash.

Ans: C, LO: 2, Topic: Cash Controls, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

96.

At A1 Enterprise, one accounting clerk prepares the cash deposits while the other clerk enters the collections in the journal and ledger. Which of the following is the best explanation of this type of internal control principle over cash receipts? a. Physical controls. b. Documentation procedures. c. Segregation of duties. d. Mechanical controls.

Ans: C, LO: 2, Topic: Cash Controls, Subtopic: Check Receipts, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

97.

Which one of the following items would not be considered cash? a. Coins. b. Money orders. c. Currency. d. Postdated checks.

Ans: D, LO: 2, Topic: Cash Controls, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

98.

The reconciliation of the cash register tape with the cash in the register is an example of a. other internal controls. b. independent internal verification. c. establishment of responsibility. d. segregation of duties.

Ans: B, LO: 2, Topic: Cash Controls, Subtopic: Over-the-Counter Receipts, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

99.

Which of the following is not an internal control procedure for cash? a. Payments should be made with cash. b. There should be limited access to cash. c. The amount of cash on hand should be kept to a minimum. d. Cash should be deposited daily.

Ans: A, LO: 2, Topic: Cash Controls, Subtopic: Cash Disbursements Controls, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

100.

Which of the following is not an internal control activity for cash? a. The number of persons who have access to cash should be limited. b. The functions of record keeping and maintaining custody of cash should be combined. c. Surprise audits of cash on hand should be made occasionally. d. All cash receipts should be recorded promptly.

Ans: B, LO: 2, Topic: Cash Controls, Subtopic: NA, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

Fraud, Internal Control, and Cash

101.

7-19

Supervisors counting cash receipts daily is an example of a. human resource controls. b. independent internal verification. c. establishment of responsibility. d. segregation of duties.

Ans: B, LO: 2, Topic: Cash Controls, Subtopic: Cash Receipts Controls, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

102.

Which of the following is not an internal control procedure for cash? a. Only designated personnel are authorized to handle cash. b. The same individual receives the cash and pays the bills. c. Surprise audits of cash on hand should be made occasionally. d. Access to cash is limited.

Ans: B, LO: 2, Topic: Cash Controls, Subtopic: NA, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

103.

Which of the following is not an internal control activity for cash? a. All payments should be made with currency, not checks. b. Banking facilities should be used as much as possible. c. The amount of cash on hand should be kept to a minimum. d. Employees who have access to cash should be bonded.

Ans: A, LO: 2, Topic: Cash Controls, Subtopic: Cash Disbursements Controls, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

104.

Control over cash disbursements is generally more effective when a. all bills are paid in cash. b. disbursements are made by the accounts payable subsidiary clerk. c. payments are made by check. d. all purchases are made on credit.

Ans: C, LO: 2, Topic: Cash Controls, Subtopic: Cash Disbursements Controls, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

105.

Which of the following is not a suggested procedure to establish internal control over cash disbursements? a. Anyone can sign the checks. b. Different individuals approve and make the payments. c. Blank checks are stored with limited access. d. The bank statement is reconciled monthly.

106.

The use of prenumbered checks is an example of a. documentation procedures. b. independent internal verification. c. establishment of responsibility. d. segregation of duties.

7-20

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

107.

Before a check authorization is issued, the following documents must be in agreement, except for the a. invoice. b. remittance advice. c. receiving report. d. purchase order.

Ans: B, LO: 2, Topic: Cash Controls, Subtopic: Cash Disbursements Controls, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

108.

Which of the following is an appropriate internal control activity for cash? a. Record keeping and custodianship over cash should be performed by the same person. b. Banking facilities should be used as little as possible. c. All payments should be made with currency, not checks. d. The amount of cash on hand should be kept to a minimum.

Ans: D, LO: 2, Topic: Cash Controls, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

109.

An exception to disbursements being made by check is acceptable when cash is paid a. to an owner. b. to employees as wages. c. from petty cash. d. to employees as loans.

Ans: C, LO: 2, Topic: Cash Controls, Subtopic: Petty Cash Fund, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

110.

Allowing only the treasurer to sign checks is an example of a. documentation procedures. b. segregation of duties. c. other controls. d. establishment of responsibility.

Ans: D, LO: 2, Topic: Cash Controls, Subtopic: Cash Disbursements Controls, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

111.

Blank checks a. should be safeguarded. b. should be pre-signed. c. do not need to be safeguarded. d. should not be pre-numbered.

112.

An employee authorized to sign checks should not record a. owner cash contributions. b. mail receipts. c. cash disbursement transactions. d. sales transactions.

Fraud, Internal Control, and Cash

113.

7-21

Examples of EFTs include all of the following except a. online bill payments. b. outstanding checks. c. purchases made with debit cards. d. direct deposits of payroll made to an employee’s account.

Ans: B, LO: 2, Topic: Cash Controls, Subtopic: Electronic Receipts, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

114.

Which of the following statements is false regarding EFTs? a. EFT reduces the opportunities for employees to misappropriate cash. b. EFT enhances cash management. c. EFT uses email to transfer funds from one location to another. d. Online bill payments and direct deposits to employee’s accounts are examples of EFTs.

Ans: C, LO: 2, Topic: Cash Controls, Subtopic: Electronic Receipts, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

115.

The term “float” refers to the a. amount of cash that the operator of a cash register is given to make change. b. maximum amount by which cash receipts can vary from the cash register tape. c. allowable amount of cash short or over. d. difference between the cash register total and sales for the day.

Ans: A, LO: 2, Topic: Cash Controls, Subtopic: Over-the-Counter Receipts, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

116.

An advantage of a point-of-sale cash register is a. employees do not handle cash. b. it segregates duties between the cashier and supervisor. c. perpetual inventory records can be updated at the time the sale is made. d. cashiers can use float to make change for customers.

Ans: C, LO: 2, Topic: Cash Controls, Subtopic: Over-the-Counter Receipts, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

117.

Which of the following policies enhances control over check receipts? a. Checks received in the mail should be forwarded with the remittance advices to the accounts receivable clerk. b. When a check is received at the point of sale, it should be included in the cash register and the daily sales total. c. All checks should be segregated and a separate deposit should be made weekly. d. Internal controls over check receipts are generally not necessary as few payments are made by check.

Ans: B, LO: 2, Topic: Cash Controls, Subtopic: Check Receipts, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

118.

Which of the following statements is not true regarding check receipts? a. The use of checks has diminished greatly with advances in technology. b. Many businesses still use checks for business-to-business transactions. c. The employee depositing the checks should update sales revenue and accounts receivable. d. Independent internal verification of the deposit slip enhances control over cash receipts.

Ans: C, LO: 2, Topic: Cash Controls, Subtopic: Check Receipts, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

7-22

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

119.

All of the following are items that would most likely be paid from a petty cash fund except a. postage due. b. taxi fares. c. administrative wages. d. freight-out.

Ans: C, LO: 2, Topic: Cash Controls, Subtopic: Petty Cash Fund, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

120.

Electronic funds transfer (EFT) is a disbursement system that transfers cash from one location to another using a a. telephone only. b. wire only. c. computer only. d. telephone, wire, or computer.

Ans: D, LO: 2, Topic: Cash Controls, Subtopic: Electronic Receipts, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Technology and Tools, AICPA PC: Technology and Tools, IMA: Business Applications

121.

A bank statement a. allows a depositor to know the financial position of the bank as of a certain date. b. is a credit reference letter written by the depositor's bank. c. is a bill from the bank for services rendered. d. shows the activities that increased or decreased the depositor's account balance.

Ans: D, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Bank Statements, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

122.

Which one of the following would not cause a bank to debit a depositor's account? a. Bank service charge. b. Collection of a note receivable. c. Wiring of funds to other locations. d. Checks marked NSF.

Ans: B, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Bank Statements, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

123.

A company maintains the asset account, Cash, on its books, while the bank maintains a reciprocal account that is a. a contra asset account. b. a liability account. c. also an asset account. d. a stockholders' equity account.

Ans: B, LO: 3, Topic: Control Features of a Bank Account: Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

124.

A deposit made by a company will appear on the bank statement as a a. debit. b. credit. c. debit memorandum. d. credit memorandum.

Ans: B, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Bank Statements, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Fraud, Internal Control, and Cash

125.

7-23

All of the following are true regarding bank statements except the bank statement a. will show a credit for deposits received from a company. b. balance will always agree with the company reported balance. c. is a copy of the bank's records sent to the customer for periodic review. d. will show a debit if a check is paid for a company issuing the check.

Ans: B, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Bank Statements, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

126.

Which of the following controls would best help detect the removal of a blank check by an employee from the back of a company's checkbook for subsequent misappropriation of funds? a. An accounting policies manual. b. Tracing any debit memorandums from the bank to the company's records. c. The use of prenumbered checks. d. A review of the cash budget.

Ans: C, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Bank Statements, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

127.

On a bank statement, paid checks are shown as a. credits. b. debits c. assets. d. liabilities.

Ans: B, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Bank Statements, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

128.

An NSF check should appear in which section of the bank reconciliation? a. Addition to the balance per books. b. Deduction from the balance per bank. c. Addition to the balance per bank. d. Deduction from the balance per books.

Ans: D, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Reconciling Items per Books, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

129.

Which of the following would be deducted from the balance per books on a bank reconciliation? a. Outstanding checks. b. Deposits in transit. c. Notes collected by the bank. d. Service charges.

Ans: D, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Reconciling Items per Books, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

130.

Which of the following would be added to the balance per books on a bank reconciliation? a. Outstanding checks. b. Deposits in transit. c. Notes collected by the bank. d. NSF check.

Ans: C, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Reconciling Items per Books, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

7-24

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

131.

Which of the following would not be subtracted from the balance per books on a bank reconciliation? a. Outstanding checks. b. NSF checks. c. Check printing charge. d. Service charges.

Ans: A, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Reconciling Items per Books, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

132.

Which of the following would be deducted from the balance per bank on a bank reconciliation? a. Outstanding checks. b. Deposits in transit. c. Notes collected by the bank. d. Service charges.

Ans: A, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Reconciling Items per Bank, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

133.

Which of the following would be added to the balance per bank on a bank reconciliation? a. Outstanding checks. b. Deposits in transit. c. Notes collected by the bank. d. Service charges.

Ans: B, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Reconciling Items per Bank, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

134.

A check returned by the bank marked "NSF" means a. no service fee. b. no signature found. c. not satisfactorily filled out. d. not sufficient funds.

135.

A debit memorandum would not be issued by the bank for a. a bank service charge. b. the issuance of traveler's checks. c. the wiring of funds. d. the collection of notes receivable.

Ans: D, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Reconciling Items per Books, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Fraud, Internal Control, and Cash

136.

7-25

A bank reconciliation should be prepared a. whenever the bank refuses to lend the company money. b. when an employee is suspected of fraud. c. to explain any difference between the depositor's balance per books with the balance per bank. d. by the person who is authorized to sign checks.

Ans: C, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Reconciling the Bank Account, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

137.

Deposits in transit a. have been recorded on the company's books but not yet by the bank. b. have been recorded by the bank but not yet by the company. c. have not been recorded by the bank or the company. d. are customers’ checks that have not yet been received by the company.

138.

In preparing a bank reconciliation, outstanding checks are a. added to the balance per bank. b. deducted from the balance per books. c. added to the balance per books. d. deducted from the balance per bank.

Ans: D, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Reconciling Items per Bank, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

139.

If a check correctly written and paid by the bank for $628 is incorrectly recorded on the company's books for $682, the appropriate treatment on the bank reconciliation would be to a. add $54 to the book's balance. b. subtract $54 from the book's balance. c. deduct $54 from the bank's balance. d. deduct $628 from the book's balance.

Ans: A, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Reconciling Items per Books, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $682 − $628 = $54 (Incor. amt. – Cor. amt)

140.

A check written by the company for $167 is incorrectly recorded by a company as $176. On the bank reconciliation, the $9 error should be a. added to the balance per books. b. deducted from the balance per books. c. added to the balance per bank. d. deducted from the balance per bank.

Ans: A, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Reconciling Items per Books, Bloom: AN, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

7-26

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

141.

For which of the following errors should the appropriate amount be added to the balance per bank on a bank reconciliation? a. Check for $63 recorded by the company as $36. b. Deposit of $600 recorded by the bank as $60. c. A returned $300 check recorded by the bank as $30. d. Check for $75 recorded by the company as $57.

Ans: B, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Reconciling Items per Bank, Bloom: AN, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

142.

For which of the following errors should the appropriate amount be subtracted from the balance per bank on a bank reconciliation? a. Check for $63 recorded by the company as $36. b. Deposit of $600 recorded by the bank as $60. c. A returned $300 check recorded by the bank as $30. d. Check for $75 recorded by the company as $57.

Ans: C, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Reconciling Items per Bank, Bloom: AN, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

143.

For which of the following errors would the appropriate amount be added to the balance per books on a bank reconciliation? a. Check written for $63, but recorded by the company as $36. b. Deposit of $600 recorded by the bank as $60. c. A returned $300 check recorded by the bank as $30. d. Check written for $57, but recorded by the company as $75.

Ans: D, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Reconciling Items per Books, Bloom: AN, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

144.

For which of the following errors would the appropriate amount be subtracted from the balance per books on a bank reconciliation? a. Check written for $63, but recorded by the company as $36. b. Deposit of $600 recorded by the bank as $60. c. A returned $300 check recorded by the bank as $30. d. Check written for $57, but recorded by the company as $75.

145.

Which of the following bank reconciliation items would not result in an adjusting entry? a. Service charge b. Deposits in transit c. NSF check of a customer d. Collection of a note by the bank

Ans: B, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Entries from Bank Reconciliation, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Fraud, Internal Control, and Cash

146.

7-27

Which of the following items on a bank reconciliation would require an adjusting entry on the company’s books? a. An error by the bank b. Outstanding checks c. A bank service charge d. A deposit in transit

Ans: C, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Bank Charge Expense, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

147.

All of the following bank reconciliation items would result in an adjusting entry on the company’s books except a. interest earned. b. deposits in transit. c. fee for collection of note by the bank. d. NSF check of a customer.

148.

Notification by the bank that a deposited customer check was returned NSF requires that the company make the following adjusting entry: a. Accounts Receivable Cash b. Cash Accounts Receivable c. Miscellaneous Expense Accounts Receivable d. No adjusting entry is necessary.

Ans: A, LO: 3, Topic: Control Features of a Bank Account: Subtopic: NSF Check, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

149.

Acme Construction Company had checks outstanding totaling $32,400 on its June bank reconciliation. In July, Acme issued checks totaling $233,400. The July bank statement shows that $157,800 in checks cleared the bank in July. A check from one of Acme's customers in the amount of $1,800 was also returned marked "NSF." The amount of outstanding checks on Acme’s July bank reconciliation should be a. $75,600. b. $108,000. c. $106,200. d. $43,200.

Ans: B, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Bank Reconciliation Illustrated, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $32,400 + $233,400  $157,800  $108,000 (June out. Checks + book disb – bank disb.)

7-28

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

150.

Ace Service Company had checks outstanding totaling $34,000 on its May bank reconciliation. In June, Ace issued checks totaling $212,800. The June bank statement shows that $158,400 in checks cleared the bank in June. A check from one of Ace’s customers in the amount of $1,600 was also returned marked "NSF." The amount of outstanding checks on Ace’s June bank reconciliation should be a. $86,800. b. $54,400. c. $88,400. d. $20,400.

Ans: C, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Bank Reconciliation Illustrated, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting a Solution: $34,000 + $212,800  $158,400  $88,400 (May out. Checks + book disb. – bank disb.)

151.

A1 Service Company gathered the following reconciling information in preparing its August bank reconciliation: Cash balance per books, 8/31 $28,000 Deposits in transit 1,200 Notes receivable and interest collected by bank 6,800 Bank charge for check printing 160 Outstanding checks 16,000 NSF check 1,360 The adjusted cash balance per books on August 31 is a. $33,280. b. $32,080. c. $18,400. d. $19,680.

Ans: A, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Bank Reconciliation Illustrated, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $28,000 + $6,800  $160  $1,360  $33,280 (Cash bal. + Note coll. – Print. Char. – NSF check)

Fraud, Internal Control, and Cash

152.

7-29

Acme Marine Supply Company gathered the following reconciling information in preparing its April bank reconciliation: Cash balance per books, 4/30 $17,600 Deposits in transit 2,400 Notes receivable and interest collected by bank 5,920 Bank charge for check printing 200 Outstanding checks 12,000 NSF check 1,120 The adjusted cash balance per books on April 30 is a. $24,600. b. $23,520. c. $22,200. d. $24,440.

Ans: C, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Bank Reconciliation Illustrated, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $17,600 + $5,920  $200  $1,120  $22,200 (Cash bal. + Note coll. – Print. char. – NSF check)

153.

Bank errors a. occur because of time lags. b. must be corrected by debits. c. are infrequent in occurrence. d. are corrected by making an adjusting entry on the depositor's books.

Ans: C, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Reconciling Items per Bank, Bloom: K, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

154.

A1 Beauty Supply Company gathered the following reconciling information in preparing its June bank reconciliation: Cash balance per books, 6/30 $12,600 Deposits in transit 900 Notes receivable and interest collected by bank 2,220 Bank charge for check printing 75 Outstanding checks 4,500 NSF check 420 The adjusted cash balance per books on June 30 is a. $15,225. b. $14,820. c. $14,325. d. $15,165.

Ans: C, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Bank Reconciliation Illustrated, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $12,600 + $2,220  $75  $420  $14,325 (Cash bal. + Note coll. – Print char. – NSF check)

7-30 155.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

An adjusting entry is not required for a. outstanding checks. b. collection of a note by the bank. c. NSF checks. d. bank service charges.

Ans: A, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Entries from Bank Reconciliation, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

156.

In the month of November, Acme Storage Company Inc. wrote checks in the amount of $55,500. In December, checks in the amount of $75,948 were written. In November, $50,808 of these checks were presented to the bank for payment and $65,298 in December. What is the amount of outstanding checks at the end of December, assuming that there were no checks outstanding on October 31? a. $10,650. b. $15,342. c. $4,692. d. $21,300.

Ans: B, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Bank Reconciliation Illustrated, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($55,500 + $75,948)  ($50,808 + $65,298)  $15,342 (Nov. book disb. + Dec. book disb.) – (Nov. bank disb. + Dec. bank disb.)

157.

In the month of November, A1 Beauty Supply Company Inc. wrote checks in the amount of $46,250. In December, checks in the amount of $63,290 were written. In November, $42,340 of these checks were presented to the bank for payment and $54,415 in December. What is the amount of outstanding checks at the end of December, assuming that there were no checks outstanding on October 31? a. $8,875. b. $3,910. c. $12,785. d. $17,750.

Ans: C, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Bank Reconciliation Illustrated, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($46,250 + $63,290)  ($42,340 + $54,415)  $12,785 (Nov. book disb. + Dec. book disb.)  (Nov. bank disb. + Dec. bank disb.)

158.

What causes the balance on the bank statement to differ from the cash balance in the general ledger? a. Time lags only b. Errors by the bank only c. Errors by the company only d. Time lags, and errors by the bank or company

Ans: D, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Reconciliation Procedure, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Fraud, Internal Control, and Cash

159.

7-31

Of the following employees, who should prepare the bank reconciliation? a. Lionel, the bookkeeper, because she is aware of all transactions that affected cash. b. Luke, the treasurer, because he has control of the checkbook and has taken more accounting courses than any other employee. c. Katy, the cashier, because she does not pay bills. d. Ryan, the purchasing agent, because he does not work in the accounting department.

160.

While preparing the bank reconciliation, you notice that a check, written by the company for $750, has been outstanding for 5 months. What is the best action for you to take? a. Void the check. If it has not been cashed in 5 months, it will never be cashed. b. Issue a replacement check because you assume the original check has been lost. c. Wait 3 more months to give the bank more time to clear the check. d. Investigate to determine why the check has not cleared.

161.

Which of the following items may cause the cash balance per bank to differ from the cash balance per books? a. Time lags and bank or book errors b. Bank errors and the existence of multiple bank accounts c. Time lags and the existence of multiple bank accounts d. Existence of amounts not yet paid by customers and time lags

Ans: A, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Reconciliation Procedure, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

162.

Which of the following is an example of a bank reconciliation item that requires an adjusting entry? a. NSF check. b. Deposit in transit. c. Bank error. d. None of these items requires an adjusting entry.

7-32 163.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

At April 30, Ace Office Supply Company has the following bank information: Cash balance per bank $6,900 Outstanding checks $420 Deposits in transit $825 Credit memo for interest $15 Bank service charge $30 What is Ace’s adjusted cash balance on April 30? a. $7,290. b. $7,320. c. $6,495. d. $7,305.

Ans: D, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Bank Reconciliation Illustrated, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: $6,900  $420 + $825  $7,305 (Cash bal. – out. Checks + dep. In tran.)

164.

At April 30, A1 Resource Company has the following bank information: Cash balance per bank $3,600 Outstanding checks $280 Deposits in transit $550 Credit memo for interest $10 Bank service charge $20 What is A1’s adjusted cash balance on April 30? a. $3,860. b. $3,880. c. $3,330. d. $3,870.

Ans: D, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Bank Reconciliation Illustrated, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: $3,600  $280 + $550  $3,870 (Cash bal. – out. checks + dep. In tran.)

165.

Ace Auto Supply Company wrote checks totaling $38,430 during October and $41,964 during November. $36,540 of these checks cleared the bank in October, and $40,995 cleared the bank in November. What was the amount of outstanding checks on November 30, assuming that there were no checks outstanding on September 30? a. $2,859. b. $519. c. $1,374. d. $4,455.

Ans: A, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Bank Reconciliation Illustrated, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($38,430 + $41,964)  ($36,540 + $40,995)  $2,859 (Oct. book disb. + Nov. Book disb.) – (Oct. bank disb. + Nov. bank disb.)

Fraud, Internal Control, and Cash

166.

7-33

Acme Wholesale Company assembled the following information in completing its March bank reconciliation: Balance per bank $19,100 Outstanding checks $3,875 Deposits in transit $6,250 NSF check $400 Bank service charges $125 Cash balance per books $22,000 As a result of this reconciliation, Acme will a. reduce its cash account by $2,375. b. reduce its cash account by $125. c. increase its cash account by $275. d. reduce its cash account by $525.

Ans: D, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Bank Reconciliation Illustrated, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $400 + $125  $525 (NSF check + Ser. Char.)

167.

A1 Bicycle Company assembled the following information in completing its March bank reconciliation: Balance per bank $12,224 Outstanding checks $2,480 Deposits in transit $4,000 NSF check $256 Bank service charges $80 Cash balance per books $14,080 As a result of this reconciliation, A1 will a. reduce its cash account by $1,520. b. reduce its cash account by $80. c. increase its cash account by $176. d. reduce its cash account by $336.

Ans: D, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Bank Reconciliation Illustrated, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $256 + $80  $336 (NSF check + Ser. Char.)

168.

If a check correctly written and paid by the bank for $491 is incorrectly recorded on the company’s books for $419, the appropriate treatment on the bank reconciliation would be to a. add $72 to the book’s balance. b. subtract $72 from the book’s balance. c. deduct $72 from the bank’s balance. d. deduct $491 from the book’s balance.

Ans: B, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Bank Reconciliation Illustrated, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $491 − $419 = $72 (Correct amt. – Incorrect amt.)

7-34

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

169.

A check written by the company for $275 is incorrectly recorded by a company as $257. On the bank reconciliation, the $18 error should be a. added to the balance per books. b. deducted from the balance per books. c. added to the balance per bank. d. deducted from the balance per bank.

170.

In the month of May, a company wrote checks in the amount of $74,000. In June, checks in the amount of $101,264 were written. In May, $67,744 of these checks were presented to the bank for payment and $87,064 in June. What is the amount of outstanding checks at the end of May, assuming that there were no checks outstanding on April 30? a. $14,200 b. $6,256 c. $20,456 d. $28,400

Ans: B, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Reconciling Items per Books, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $74,000  $67,744  $6,256 (May book disb. – May bank disb.)

171.

In the month of May, Ace Retail Company Inc. wrote checks in the amount of $64,750. In June, checks in the amount of $88,606 were written. In May, $59,276 of these checks were presented to the bank for payment and $76,181 in June. What is the amount of outstanding checks at the end of June, assuming that there were no checks outstanding on April 30? a. $12,425 b. $5,474 c. $17,899 d. $24,850

Ans: C, LO: 3, Topic: Control Features of a Bank Account: Subtopic: Reconciling Items per Books, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($64,750 + $88,606)  ($59,276 + $76,181)  $17,899 (May book disb + June book disb.) − (May bank disb. + June bank disb.)

172.

Which statement regarding negative cash balances is true? a. The amount is offset against other current assets because users need to know net current assets. b. The amount is shown as a current liability because a company cannot report a cash balance below zero. c. The company must obtain a loan to bring the cash balance to zero before financial statements are prepared. d. The negative cash balance is included as a current asset and discussed in a footnote to the financial statements.

Ans: B, LO: 4, Topic: Reporting Cash, Subtopic: Cash Equivalents, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Fraud, Internal Control, and Cash

173.

7-35

Which item is a current asset? a. Cash – regardless of whether it has a positive or negative balance. b. Cash equivalents. c. Cash that will be used to close a plant in eighteen months. d. Restricted cash that will not be used within the upcoming year.

174.

Which of the following would be classified as current asset at December 31, 2025? a. Cash balances of all checking accounts, regardless of positive or negative balances. b. Cash equivalents. c. Cash restricted for plant expansion in 2027. d. Cash restricted for payment of long-term contingent liabilities.

Ans: B, LO: 4, Topic: Reporting Cash, Subtopic: Cash Equivalents, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

175.

Which of the following would not be considered a cash equivalent? a. Money market fund. b. Commercial paper. c. Treasury bill. d. Restricted cash.

Ans: D, LO: 4, Topic: Reporting Cash, Subtopic: Cash Equivalents, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

176.

Cash equivalents do not include a. money market accounts. b. commercial paper. c. U.S. Treasury bills. d. long-term investments.

177.

Which of the following items is not considered to be a cash equivalent? a. Short-term highly liquid investments maturing in 30 days b. Commercial paper c. Restricted cash funds d. Money market funds

Ans: C, LO: 4, Topic: Reporting Cash, Subtopic: Cash Equivalents, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

178.

Which one of the following is not a key principle of cash management? a. Plan the timing of major expenditures b. Invest idle cash c. Keep inventory levels low d. Maintain as much cash as possible in order to pay obligations when due

Ans: D, LO: 4, Topic: Reporting Cash, Subtopic: Basic Principles of Cash Management, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Reporting

7-36

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

179.

Which of the following is not a method a company may use to accelerate cash receipts? a. Decrease the turnover of receivables by more aggressive collections efforts b. Sell receivables c. Use national credit cards d. Factoring

Ans: A, LO: 4, Topic: Reporting Cash, Subtopic: Managing and Monitoring Cash, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Reporting

180.

Which one of the following is not reported as part of ‘cash and cash equivalents’ on the balance sheet? a. Money orders b. Restricted cash c. Treasury bills d. Commercial paper

181.

Restricted cash should be reported a. always as a noncurrent asset. b. separately on the income statement. c. separately on the balance sheet. d. always as a current asset.

Ans: C, LO: 4, Topic: Reporting Cash, Subtopic: Restricted Cash, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

182.

All of the following are true regarding the management and monitoring of cash except a. companies may have plenty of sales, but insufficient cash to support operations. b. the cash to cash operating cycle for a manufacturer is generally shorter than that of a merchandising company. c. manufacturers may experience a significant lag between the purchase of raw materials and the receipt of cash from customers. d. companies should have sufficient cash to meet payments but minimize the amount of non-revenue-generating cash on hand.

Ans: B, LO: 4, Topic: Reporting Cash, Subtopic: Managing and Monitoring Cash, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Reporting

183.

Acme Company has implemented a just-in-time system, which relies on suppliers to deliver goods for resale as needed. This implementation is most consistent with which of the following basic principles of cash management? a. Increasing the speed of receivables collection b. Planning the timing of major expenditures c. Keeping inventory levels low d. Delaying the payment of liabilities

Ans: C, LO: 4, Topic: Reporting Cash, Subtopic: Managing and Monitoring Cash, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Technology and Tools, AICPA PC: Project Management, IMA: Reporting

Fraud, Internal Control, and Cash

184.

7-37

Which one of the following is provided by the cash budget? a. It can indicate the profitability of a company. b. It can identify projected expenses. c. It can identify when a company will need additional financing. d. It can identify if a company has adequate internal controls.

Ans: C, LO: 4, Topic: Reporting Cash, Subtopic: Cash Budgeting, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Technology and Tools, AICPA PC: Project Management, IMA: Reporting

185.

Management of cash is the responsibility of the company a. accountant. b. president. c. treasurer. d. vice-president.

Ans: C, LO: 4, Topic: Reporting Cash, Subtopic: Basic Principles of Cash Management, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Reporting

186.

Which of the following is not a basic principle of cash management? a. Increase the speed of collection on receivables b. Maintain idle cash c. Keep inventory levels low d. Delay payment of liabilities

Ans: B, LO: 4, Topic: Reporting Cash, Subtopic: Basic Principles of Cash Management, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Reporting

187.

Which of the following is not a basic principle of cash management? a. Increase the collection of receivables b. Keep inventory levels high c. Delay payment of liabilities d. Invest idle cash

188.

Which of the following is not a basic principle of cash management? a. Increase the collection of receivables b. Keep inventory levels low c. Pay all liabilities early d. Invest idle cash

189.

Which of the following does not appear as a separate section on the cash budget? a. Cash receipts b. Cash disbursements c. Cash sales d. Financing

Ans: C, LO: 4, Topic: Reporting Cash, Subtopic: Cash Budgeting, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting and Control

7-38

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

190.

The following information was taken from A1 Electrical Service Company cash budget for the month of July: Beginning cash balance $125,000 Cash receipts 120,000 Cash disbursements 170,000 If the company has a policy of maintaining an end of the month cash balance of $125,000, the amount the company would have to borrow is a. $50,000. b. $25,000. c. $75,000. d. $36,000.

Ans: A, LO: 4, Topic: Reporting Cash, Subtopic: Cash Budgeting, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: $125,000  ($125,000 + $120,000  $170,000)  $50,000 (End. cash bal. – (beg. Cash. bal. + rec. – disb.))

191.

The following information was taken from Ace Auto Supply Company cash budget for the month of June Beginning cash balance $69,000 Cash receipts 93,000 Cash disbursements 117,000 If the company has a policy of maintaining an end of the month cash balance of $60,000, the amount the company would have to borrow is a. $36,000. b. $15,000. c. $24,000. d. $0.

Ans: B, LO: 4, Topic: Reporting Cash, Subtopic: Cash Budgeting, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: $60,000  ($69,000 + $93,000  $117,000)  $15,000 (End. Cash bal. – (beg. Cash bal. + rec. – disb.))

192.

The following information was taken from Acme Building Supply Company cash budget for the month of April Beginning cash balance $120,000 Cash receipts 108,000 Cash disbursements 136,000 Depreciation 20,000 If the company has a policy of maintaining an end of the month cash balance of $100,000, the amount the company would have to borrow is a. $116,000. b. $28,000. c. $8,000. d. $0.

Ans: C, LO: 4, Topic: Reporting Cash, Subtopic: Cash Budgeting, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: $100,000  ($120,000 + $108,000  $136,000)  $8,000 (End cash bal. – (beg. Cash bal. + rec. – disb.))

Fraud, Internal Control, and Cash

193.

7-39

Which one of the following sections would not appear on a cash budget? a. Cash receipts. b. Financing. c. Investing. d. Cash disbursements.

194.

The following credit sales are budgeted by Ace Discount Retail Company: January $306,000 February 450,000 March 630,000 April 540,000 The company’s past experience indicates that 70% of the accounts receivable are collected in the month of sale, 20% in the month following the sale, and 8% in the second month following the sale. The anticipated cash inflow for the month of March is a. $555,480. b. $504,000. c. $540,000. d. $529,200.

Ans: A, LO: 4, Topic: Reporting Cash, Subtopic: Cash Budgeting, Bloom: AP, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($306,000  .08) + ($450,000  .20) + ($630,000  .70)  $555,480 (Jan. sal. × 8%) + (Feb. sal. × 20%) + (mar. sal. × 70%)

195.

The cash receipts section of a cash budget includes all of the following except a. cash sales. b. collections from customers. c. receipts of interest and dividends. d. expected borrowings.

Ans: D, LO: 4, Topic: Reporting Cash, Subtopic: Cash Budgeting, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

196.

The cash receipts section of a cash budget includes all of the following except a. collections of accounts receivable. b. expected borrowings. c. receipts of dividends on stock investments. d. proceeds from the sale of stock.

Ans: B, LO: 4, Topic: Reporting Cash, Subtopic: Cash Budgeting, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

197.

The cash receipts section of a cash budget includes all of the following except a. collections of notes receivable. b. receipt of income tax refund. c. receipts of interest on notes receivable. d. All of these answer choices would be included in the cash receipts section of a cash budget.

7-40

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

198.

Which of the following is not included in the cash disbursements section of a cash budget? a. Payments for materials b. Payments for income taxes c. Repayments of borrowed funds d. All of these answer choices are included in the cash disbursements section of a cash budget.

Ans: C, LO: 4, Topic: Reporting Cash, Subtopic: Cash Budgeting, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

199.

Which of the following is not included in the cash disbursements section of a cash budget? a. Payments to suppliers for inventory b. Payments to employees for salaries c. Payments for operating expenses, including depreciation d. All of these answer choices are included in the cash disbursements section of a cash budget.

200.

The following credit sales are budgeted by A1 Marine Supply Company: February 200,000 March 280,000 April 240,000 The company’s past experience indicates that 80% of the accounts receivable are collected in the month of sale, 20% in the month following the sale. The anticipated cash inflow for the month of April is a. $172,800. b. $201,600. c. $216,000. d. $248,000.

Ans: D, LO: 4, Topic: Reporting Cash, Subtopic: Cash Budgeting, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($280,000  .20) + ($240,000  .80)  $248,000 (Mar. sal. × 20%) + (Apr. sal. × 80%)

201.

The following credit sales are budgeted by Ace Wholesale Distributors Company: January $170,000 February 250,000 March 350,000 The company’s past experience indicates that 80% of the accounts receivable are collected in the month of sale, 20% in the month following the sale. The anticipated cash inflow for the month of March is a. $330,000. b. $280,000. c. $350,000. d. $340,000.

Ans: A, LO: 4, Topic: Reporting Cash, Subtopic: Cash Budgeting, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($250,000  .20) + ($350,000  .80)  $330,000 (Feb. sal. × 20%) + (mar. sal. × 80%)

Fraud, Internal Control, and Cash

202.

7-41

If the cash budget showed a projected cash shortage at the end of one period, the company would most likely a. make fewer purchases of inventory so they could control costs. b. lay off workers for that period. c. arrange to borrow the necessary cash for that period. d. cut salaries for that period.

Ans: C, LO: 4, Topic: Reporting Cash, Subtopic: Cash Budgeting, Bloom: AN, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

203.

Ace Salon Supply Company is preparing a cash budget for September. The company’s cash balance on September 1 is $34,800. The company anticipates cash receipts of $167,700 and cash disbursements of $175,980. If Ace desires a cash balance of $36,000, it must acquire financing of a. $1,200. b. $9,480. c. $7,080. d. $27,720.

Ans: B, LO: 4, Topic: Reporting Cash, Subtopic: Cash Budgeting, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: $36,000  ($34,800 + $167,700  $175,980)  $9,480 (Des. Cash bal. – (beg. Cash bal. + rec. – disb.)

204.

Which of the following is not a basic principle of cash management? a. Increase the speed of receivables collection b. Keep inventory levels high c. Monitor the payment of liabilities d. Defer the timing of major expenditures

Ans: B, LO: 4, Topic: Reporting Cash, Subtopic: Managing and Monitoring Cash, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Reporting

205.

A1 Integrated Health Company is preparing a cash budget for September. The company’s cash balance on September 1 is $23,200. The company anticipates cash receipts of $111,800 and cash disbursements of $117,320. If Petersen desires a cash balance of $24,000, it must acquire financing of a. $800. b. $6,320. c. $4,720. d. $18,480.

Ans: B, LO: 4, Topic: Reporting Cash, Subtopic: Cash Budgeting, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: $24,000  ($23,200 + $111,800  $117,320)  $6,320 (Des. Cash bal. – (beg. Cash bal. + rec. – disb.))

7-42 206.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

The following credit sales are budgeted by Acme Company: May $476,000 June 700,000 July 980,000 August 840,000 The company’s past experience indicates that 70% of the accounts receivable are collected in the month of sale, 20% in the month following the sale, and 8% in the second month following the sale. The anticipated cash inflow for the month of August is a. $864,080. b. $784,000. c. $840,000. d. $823,200.

Ans: C, LO: 4, Topic: Reporting Cash, Subtopic: Cash Budgeting, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($700,000  .08) + ($980,000  .20) + ($840,000  .70)  $840,000 (June sal. × 8%) + (July sal. × 20%) + (Aug. sal. × 70%)

207.

Which one of the following items would never appear on a cash budget? a. Payments for salaries b. Borrowing repayments c. Depreciation expense d. Payments for inventory

208.

Expected direct materials purchases in A1 Candy Company are $210,000 in the first quarter and $270,000 in the second quarter. Forty percent of the purchases are paid in cash as incurred, and the balance is paid in the following quarter. The budgeted cash payments for purchases in the second quarter are a. $288,000. b. $270,000. c. $234,000. d. $216,000.

Ans: C, LO: 4, Topic: Reporting Cash, Subtopic: Cash Budgeting, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($210,000  .60) + ($270,000  .40)  $234,000 (1st Q. purch × 60%) + (2nd Q. purch. × 40%)

209.

Expected materials purchases in Acme Wholesale Grocery Supply Company are $630,000 in the first quarter and $810,000 in the second quarter. Forty percent of the purchases are paid in cash as incurred, and the balance is paid in the following quarter. The budgeted cash payments for purchases in the second quarter are a. $864,000. b. $810,000. c. $702,000. d. $648,000.

Ans: C, LO: 4, Topic: Reporting Cash, Subtopic: Cash Budgeting, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($630,000  .60) + ($810,000  .40)  $702,000 (1st Q. purch × 60%) + (2nd Q. purch. × 40%)

Fraud, Internal Control, and Cash

7-43

*210. A credit balance in Cash Over and Short account is reported as a. an asset. b. a liability. c. a revenue. d. an expense. Ans: C, LO: 5, Topic: Operation of a Petty Cash Fund, Subtopic: Replenishing the Petty Cash Fund, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

*211. All of the following activities occur at the time of a cash disbursement from petty cash except a. the petty cash custodian signs the voucher. b. available supporting documents are attached to the voucher. c. a journal entry is made for each cash distribution. d. the individual receiving payment signs the voucher. Ans: C, LO: 5, Topic: Operation of a Petty Cash Fund, Subtopic: Making Payments from the Petty Cash Fund, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Internal Controls

*212. All of the following actions would strengthen internal control over a petty cash fund except a. surprise counts by a supervisor. b. cancellation of paid vouchers. c. submission of supporting documents. d. multiple petty cash custodians. Ans: D, LO: 5, Topic: Operation of a Petty Cash Fund, Subtopic: NA, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

*213. Which of the following is not a necessary internal control procedure for the replenishment of the petty cash fund? a. Segregation of duties. b. Documentation procedures. c. Independent internal verification. d. Bank reconciliation. Ans: D, LO: 5, Topic: Operation of a Petty Cash Fund, Subtopic: Replenishing the Petty Cash Fund, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

*214. The entry to replenish a petty cash fund includes a credit to a. Petty Cash. b. Cash. c. Freight-In. d. Postage Expense. Ans: B, LO: 5, Topic: Operation of a Petty Cash Fund, Subtopic: Replenishing the Petty Cash Fund, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

*215. A debit balance in Cash Over and Short is reported as a a. contra asset. b. miscellaneous asset. c. miscellaneous expense. d. miscellaneous revenue. Ans: C, LO: 5, Topic: Operation of a Petty Cash Fund, Subtopic: Replenishing the Petty Cash Fund, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

7-44

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

*216. A $250 petty cash fund has cash of $25 and receipts of $200. The journal entry to replenish the fund would include a credit to a. Cash for $225. b. Petty Cash for $225. c. Cash Over and Short for $25. d. Cash for $200. Ans: A, LO: 5, Topic: Operation of a Petty Cash Fund, Subtopic: Replenishing the Petty Cash Fund, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $250  $25  $225 (Fund amount – end. Bal. – rec.)

*217. A $300 petty cash fund has cash of $55 and receipts of $240. The journal entry to replenish the fund would include a a. debit to Cash for $240. b. credit to Petty Cash for $245. c. debit to Cash Over and Short for $5. d. credit to Cash for $240. Ans: C, LO: 5, Topic: Operation of a Petty Cash Fund, Subtopic: Replenishing the Petty Cash Fund, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $300  $55  $240  $5 (Fund amount – end. bal. – rec.)

*218. A $200 petty cash fund has cash of $32 and receipts of $172. The journal entry to replenish the fund would include a a. debit to Cash for $168. b. credit to Petty Cash for $168. c. credit to Cash Over and Short for $4. d. credit to Cash for $172. Ans: C, LO: 5, Topic: Operation of a Petty Cash Fund, Subtopic: Replenishing the Petty Cash Fund, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $172  ($200  $32)  $4 (Rec. – (fund amount – end. bal.))

*219. A $300 petty cash fund has cash of $39 and receipts of $255. The journal entry to replenish the fund would include a a. debit to Cash for $255. b. credit to Petty Cash for $255. c. debit to Petty Cash for $261. d. credit to Cash for $261. Ans: D, LO: 5, Topic: Operation of a Petty Cash Fund, Subtopic: Replenishing the Petty Cash Fund, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $300  $39  $261 (Fund amount – end. bal.)

Fraud, Internal Control, and Cash

7-45

*220. A $150 petty cash fund has cash of $21 and receipts of $126. The journal entry to replenish the fund would include a a. debit to Cash for $126. b. credit to Petty Cash for $126. c. credit to Cash Over and Short for $3. d. credit to Cash for $129. Ans: D, LO: 5, Topic: Operation of a Petty Cash Fund, Subtopic: Replenishing the Petty Cash Fund, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $150  $21  $129 (Fund amount – end. bal.)

*221. A petty cash fund should be replenished a. every day. b. at the end of every accounting period. c. once a year. d. as soon as an expense is paid from the fund. Ans: B, LO: 5, Topic: Operation of a Petty Cash Fund, Subtopic: Replenishing the Petty Cash Fund, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

*222. Entries are made to the Petty Cash account when a. establishing the fund. b. making payments out of the fund. c. recording shortages in the fund. d. replenishing the fund. Ans: A, LO: 5, Topic: Operation of a Petty Cash Fund, Subtopic: Establishing the Petty Cash Fund, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

7-46

BRIEF EXERCISES Be. 223 Below are descriptions of internal control problems. In the space to the left of each item, enter the code letter of the one best internal control principle that is related to the problem described. Internal Control Principles A. Establishment of responsibility B. Segregation of duties C. Physical control devices D. Documentation procedures E. Independent internal verification F. Human resource controls 1. The same person opens the incoming mail and posts the accounts receivable subsidiary ledger. 2. Three people handle cash sales from the same cash register drawer. 3. A clothing store is experiencing a high level of inventory shortages because people try on clothing and walk out of the store without paying for the merchandise. 4. The person who is authorized to sign checks approves purchase orders for payment. 5. Some cash payments are not recorded because checks are not prenumbered. 6. Cash shortages are not discovered because there are no daily cash counts by supervisors. 7. The treasurer of the company has not taken a vacation for over 20 years. Ans: N/A, LO: 1, Topic: Fraud and Internal Control, Subtopic: Principles of Internal Control Activities, Bloom: C, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

Solution 223 1. B 2. A 3. C

4. B 5. D 6. E

Fraud, Internal Control, and Cash

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Be. 224 Indicate whether each of the business practices listed below strengthens (S) or weakens (W) a company’s system of internal control. a.

Cashiers are not bonded.

All payments are made with checks.

Discouraging employees from taking paid vacations.

Two people handle cash sales from the same cash register drawer.

Using prenumbered sales tickets.

Ans: N/A, LO: 1, Topic: Fraud and Internal Control, Subtopic: Principles of Internal Control Activities, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Reporting and Control

Solution 224 a.

Be. 225 Identify the internal control principles applicable to cash receipts for Acme Discount Retail Company in each of the following situations. 1. All cashiers are bonded. 2. The treasurer compares the total cash receipts to the bank deposit daily. 3. The bookkeeper records cash receipts which are held by the treasurer. 4. Only the treasurer holds cash receipts. 5. Deposit slips are completed for each deposit. Ans: N/A, LO: 2, Topic: Cash Controls, Subtopic: Cash Receipt Controls, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

Solution 225 1. Human resource controls 2. Independent internal verification 3. Segregation of duties 4. Establishment of responsibility 5. Documentation procedures Be. 226 Identify the internal control principles applicable to cash disbursements followed by A1 Office Supply Company in each of the following cases. 1. Company checks are pre-numbered. 2. Only the treasurer is authorized to sign checks. 3. Bonding of employees that handle cash. 4. Blank checks are stored in a locked safe. 5. The bookkeeper, not the treasurer, records cash disbursements. Ans: N/A, LO: 2, Topic: Cash Controls, Subtopic: Cash Disbursements Controls, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

7-48

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 226 1. Documentation procedures 2. Establishment of responsibility 3. Human resource controls 4. Physical controls 5. Segregation of duties Be. 227 Identify whether each of the following items would be (a) added to the book balance, or (b) deducted from the book balance in a bank reconciliation. 1. EFT transfer to a supplier. 2. Bank service charge. 3. Check printing charge. 4. Error recording check # 214 which was written for $230 but recorded for $320. 5. Collection of note and interest by the bank on the company’s behalf. Ans: N/A, LO: 3, Topic: Control Features of a Bank Account, Subtopic: Reconciliation Procedure, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 227 1. b 2. b 3. b 4. a 5. a Be. 228 Identify which of the following reconciling items would require an adjusting entry to be made by Ace Supply Company. 1. Deposits in transit totaled $2,000. 2. A check written to the company for $350 by A1 Service Company was returned NSF. 3. The bank charged the company $46 for printing checks. 4. Outstanding checks totaled $1,667. 5. A debit memorandum reported an EFT of $178 to Gulf State Utilities. Ans: N/A, LO: 3, Topic: Control Features of a Bank Account, Subtopic: Entries from Bank Reconciliation, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 228 Adjusting entries would be required for 2, 3, and 5 because they are reconciling items for the books. Be. 229 Acme Company needs to make adjusting entries for each of the following reconciling items. Identify the account to be debited and the account to be credited in each case. 1) A check for $59 written to the company by K. Kardashian was returned NSF. 2) The monthly service charge by the bank was $34. 3) The bank collected a $1,000 note plus interest of $60 on the company’s behalf. The company had not accrued the interest. Ans: N/A, LO: 3, Topic: Control Features of a Bank Account, Subtopic: Entries from Bank Reconciliation, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Fraud, Internal Control, and Cash

Solution 229 1. Debit: Accounts Receivable 2. Debit: Bank Charge Expense 3. Debit: Cash

7-49

Credit: Cash Credit: Cash Credit: Notes Receivable, Interest Revenue

Be. 230 Given the following information for A1 Restaurant Supply Company, prepare the adjusting entries needed for its April bank reconciliation: Cash balance per books, 4/30 $18,000 Deposits in transit 2,250 Notes receivable collected by bank (including interest of $200) 7,200 Outstanding checks 6,050 NSF check from Randolph Company 1,150 Ans: N/A, LO: 3, Topic: Control Features of a Bank Account, Subtopic: Entries from Bank Reconciliation, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 230 April 30 Cash

7,200

Notes Receivable Interest Revenue (To record collection of note receivable and interest by the bank) 30 Accounts Receivable Cash (To record NSF check)

7,000 200

1,150 1,150

Be. 231 The following reconciling items are applicable to the bank reconciliation for the Acme Service Company. Indicate how each item should be shown on a bank reconciliation. a. b. c. d.

Outstanding checks. Bank credit memorandum for collecting a note for the depositor. Bank debit memorandum for service charge. Deposit in transit.

Ans: N/A, LO: 3, Topic: Control Features of a Bank Account, Subtopic: Reconciling Procedure, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 231 a. Outstanding checks should be deducted from the balance per bank. b. Bank credit memorandum should be added to the balance per books. c. Bank debit memorandum should be deducted from the balance per books. d. Deposits in transit should be added to the balance per bank. Be. 232 At August 31, 2025, A1 Nail Bar has this bank information: cash balance per bank $9,450; outstanding checks $762; deposits in transit $1,700; and a bank service charge $20. Determine the adjusted cash balance per bank at August 31, 2025. Ans: N/A, LO: 3, Topic: Control Features of a Bank Account, Subtopic: Bank Reconciliation Illustrated, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

7-50

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 232 A1 Nail Bar Partial Bank Reconciliation August 31, 2025 Cash balance per bank Add: Deposits in transit Less: Outstanding checks Adjusted cash balance per bank (Bank cash bal. + dep. In tran. – out. Checks)

$ 9,450 1,700 11,150 762 $10,388

Be. 233 Given the following information, determine the adjusted cash balance per books; Balance per books as of June 30 $8,800 Outstanding checks $600 NSF check returned with bank statement $130 Deposit mailed the afternoon of June 30 $300 Check printing charges $30 Interest earned on checking account $40 Ans: N/A, LO: 3, Topic: Control Features of a Bank Account, Subtopic: Bank Reconciliation Illustrated, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Solution 233 The adjusted cash balance is $8,680 ($8,800 − $130 − $30 + $40). (Book bal. – NSF check – print. char. + inter.) Be. 234 The following credit sales are budgeted by Acme Garden Supply Company: January $170,000 February 150,000 March 170,000 April 190,000 The company’s past experience indicates that 80% of the accounts receivable are collected in the month of sale and 20% in the month following the sale. Determine cash receipts for February and March. Ans: NA, LO: 4, Topic: Reporting Cash, Subtopic: Cash Budgeting, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Solution 234 February cash receipts ($170,000  .20) + ($150,000  .80)  $154,000 March cash receipts ($150,000  .20) + ($170,000  .80)  $166,000

Fraud, Internal Control, and Cash

7-51

Be. 235 A1 Garden Center has the following cash budget information available for the month of August: Beginning cash balance Cash receipts from sales and collections on account Collection of note receivable and interest Cash disbursements for operating expenses

$110,000 108,000 7,500 98,000

If the company has a policy of maintaining an end of the month cash balance of $100,000, determine the amount the company would have to borrow or the amount of excess cash it will have to invest in August. Ans: N/A, LO: 4, Topic: Reporting Cash, Subtopic: Cash Budgeting, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Solution 235 ($110,000 + $108,000 + $7,500  $98,000) − $100,000  $27,500 in excess cash to invest Be. 236 The following information is available for Ace Auto Supply Company for the month of February: expected cash receipts $40,000; expected cash disbursements $44,000; cash balance February 1, $11,000. Management wishes to maintain a minimum cash balance of $10,000. Prepare a basic cash budget for the month of February. Ans: N/A, LO: 4, Topic: Reporting Cash, Subtopic: Cash Budgeting, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Solution 236 Ace Auto Supply Company Cash Budget February Beginning cash balance $11,000 Add: Cash receipts 40,000 Total available cash 51,000 Less: Cash disbursements 44,000 Excess of available cash over cash disbursements 7,000 Financing needed 3,000 Ending cash balance $10,000

7-52

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Exercises Ex. 237 Jim Gant has worked for Dr. Katy Perry for several years. Jim demonstrates a loyalty that is rare among employees. He hasn't taken a vacation in the last three years. One of Jim's primary duties at the medical office is to open the mail and list the checks received. He also takes cash from patients at the cashier window as patients leave. At times it is so hectic that Jim doesn't bother with giving patients a receipt for the cash paid on their accounts. He assures them he will see to it that they receive the proper credit. When the traffic is slow in the office, Jim offers to help Kim post the payments to the patients' accounts receivable. She is always happy to receive his help because he is a very conscientious worker. Instructions Identify any principles of internal control that may be violated in this medical office situation. Ans: N/A, LO: 1, Topic: Fraud and Internal Control, Subtopic: Principles of Internal Control Activities, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Communication, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Communication, IMA: Internal Controls

Solution 237 Violations: 1. It is Kim's responsibility to post payments to patient accounts. In allowing Jim to assist her, the establishment of responsibility principle is violated. 2. Although it appears to be a small office, it is not appropriate that Jim opens the mail, receives and records cash receipts from patients, and also appears to have custody of cash. The segregation of duties principle is being violated. By posting to patients' accounts it would be possible to post credits to patient accounts and pocket the cash. 3. The documentation principle is being violated when patients are not given cash receipts. Although many professional offices do not have cash registers, computerized or manual receipts are customary and necessary. 4. Independent internal verification is also being violated. There is no independent counting of the cash and comparison to total receipts. 5. Human resource controls are being violated. There is no mention of Jim being bonded. Also, personnel should be required to take vacations.

Fraud, Internal Control, and Cash

7-53

Ex. 238 Listed below are seven errors or problems that might occur in the processing of cash transactions. Also shown is a list of internal control principles. Evaluate each possible error and cite a principle that is listed that would reduce the probability of the error occurring. If none of the principles given will correct the problem, write "None." If you think more than one principle is appropriate, list all principles that apply. Possible Errors or Problems 1. An employee steals the cash collected from a customer for an account receivable and conceals this theft by issuing a credit memorandum indicating that the customer returned the merchandise. 2. A small fire destroys 3 days of cash receipts. 3. The official designated to sign checks is able to steal blank checks and issue them without fear of detection. 4. A sales clerk in serving customers often rings up a sale for less than the actual amount and then keeps the additional cash collected from the customer. 5. Three cashiers use one cash register drawer and the cash in the drawer is often short of the balance kept on hand. 6. Each cashier counts his own register drawer each day and verbally reports the results to the supervisor. 7. Cashiers with over 5-years of experience are not bonded.

a. b. c. d. e. f.

Internal Control Principles Establishment of responsibility Segregation of duties Physical control devices Documentation procedures Independent internal verification Human resource controls

Ans: N/A, LO: 1, Topic: Fraud and Internal Control, Subtopic: Principles of Internal Control Activities, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

Solution 238 1. b, d 2. c 3. c 4. c

5. a and e 6. b, d, and e 7. f

Ex. 239 Using the following information, prepare a bank reconciliation for A1 Plumbing Company for July 31, 2025. a. b. c. d. e. f.

The bank statement balance is $3,506. The cash account balance is $3,930 Outstanding checks totaled $1,285. Deposits in transit are $1,670. The bank service charge is $30. A check for $98 for supplies was recorded as $89 in the ledger.

Ans: N/A, LO: 3, Topic: Control Features of a Bank Account, Subtopic: Bank Reconciliation Illustrated, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

7-54

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 239 A1 Plumbing Company Bank Reconciliation July 31, 2025 Cash balance per bank Add: (d) Deposits in transit

$ 3,506 1,670 5,176 1,285 $ 3,891

Less: (c) Outstanding checks Adjusted cash balance per bank Cash balance per books Less: (f) Check for supplies error (e) Bank service charge Adjusted cash balance per books (Cash bal. – sup. err. – ser. Char.) *$98 − $89 = $9

$3,930 $ 9* 30

39 $ 3,891

Ex. 240 Using the following information, prepare a bank reconciliation for Ace Beauty Supply Company for May 31, 2025. a. b. c. d. e. f.

The bank statement balance is $8,300. The cash account balance is $6,562 Outstanding checks totaled $1,950. Deposits in transit are $600. The bank service charge is $12. Collection of note by the bank, $400.

Solution 240 Ace Beauty Supply Company Bank Reconciliation May 31, 2025 Cash balance per bank Add: (d) Deposits in transit Less: (c) Outstanding checks Adjusted cash balance per bank Cash balance per books Add: (f) Collection of a note Less: (e) Bank service charge Adjusted cash balance per books (Cash bal. + note coll. – ser. char.)

$ 8,300 600 8,900 1,950 $ 6,950 $ 6,562 400 6,962 12 $ 6,950

Fraud, Internal Control, and Cash

7-55

Ex. 241 Using the following information, prepare a bank reconciliation for A1 Car Care Company for June 30, 2025. a. The bank statement balance is $7,650. b. The cash account balance is $6,422 c. Outstanding checks totaled $1,650. d. Deposits in transit are $900. e. The bank service charge is $22. f. Collection of note by the bank, $500. Ans: N/A, LO: 3, Topic: Control Features of a Bank Account, Subtopic: Bank Reconciliation Illustrated, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Solution 241 A1 Car Care Company Bank Reconciliation June 30, 2025 Cash balance per bank Add: (d) Deposits in transit Less: (c) Outstanding checks Adjusted cash balance per bank Cash balance per books Add: (f) Collection of a note Less: (e) Bank service charge Adjusted cash balance per books (Cash bal. + Note coll. – ser. char.)

$ 7,650 900 8,550 1,650 $ 6,900 $ 6,422 500 6,922 22 $ 6,900

7-56

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ex. 242 The Acme Marine Supply Company's bank statement for the month of November showed a balance per bank of $7,000. The company's Cash account in the general ledger had a balance of $5,659 at November 30. Other information is as follows: (1) Cash receipts for November 30 recorded on the company's books were $6,000 but this amount does not appear on the bank statement. (2) The bank statement shows a debit memorandum for $40 for check printing charges. (3) Check No. 119 payable to Maris Company was recorded in the cash payments journal and cleared the bank for $248. A review of the accounts payable subsidiary ledger shows a $36 credit balance in the account of Maris Company and that the payment to them should have been for $284. (4) The total amount of checks still outstanding at November 30 amounted to $5,800. (5) Check No. 138 was correctly written and paid by the bank for $409. The cash payment journal reflects an entry for Check No. 138 as a debit to Accounts Payable and a credit to Cash in Bank for $490. (6) The bank returned an NSF check from a customer for $560. (7) The bank included a credit memorandum for $2,060 which represents a collection of a customer's note by the bank for the company; the principal amount of the note was $2,000 and interest was $60. Interest has not been accrued. Instructions (a) Prepare a bank reconciliation for the Acme Marine Supply Company at November 30. (b) Prepare any adjusting entries necessary as a result of the bank reconciliation. Ans: N/A, LO: 3, Topic: Control Features of a Bank Account, Subtopic: Bank Reconciliation Illustrated, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Solution 242 (a)

ACME MARINE SUPPLY COMPANY Bank Reconciliation November 30 Cash balance per bank Add: (1) Deposit in transit

$7,000 6,000 13,000 5,800 $7,200

Less: (4) Outstanding checks Adjusted cash balance per bank Cash balance per books Add: (5) Accounts payable error (7) Collect $2,000 note and interest $60

$5,659 $ 81 2,060

2,141 7,800

Less: (2) Check printing 40 (6) NSF check 560 600 Adjusted cash balance per books $7,200 (Cash bal. + A/P err. + Note coll. – print. char. – NSF check) Note: Item (3) is not a reconciling item.

Fraud, Internal Control, and Cash

Solution 242 (b)

7-57

(Cont.)

Nov. 30 Cash

Accounts Payable (To correct error in recording Check No. 138) 30 Cash

2,060

Notes Receivable Interest Revenue (To record collection of note receivable and interest by the bank)

2,000 60

30 Bank Charge Expense Cash (To record check printing charges)

30 Accounts Receivable Cash (To record NSF check)

560

Ex. 243 The bank statement for Ace Pet Supply Company indicates a balance of $1,730 on June 30. The cash balance per books was $799 on this date. The following information pertains to the bank transactions for the company. 1. Deposit of $760, representing cash receipts of June 30, did not appear on the bank statement. 2. Outstanding checks totaled $340. 3. Bank service charges for June amounted to $25 4. The bank collected a note receivable for the company for $1,400 plus $56 interest revenue. 5. An NSF check for $80 from a customer was returned with the statement. Instructions a. Prepare a bank reconciliation for June 30. b. Prepare any adjusting entries necessary as a result of the bank reconciliation. Ans: N/A, LO: 3, Topic: Control Features of a Bank Account, Subtopic: Bank Reconciliation Illustrated, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

7-58 Solution 243 (a)

ACE PET SUPPLY COMPANY Bank Reconciliation June 30 Cash balance per bank Add: (1) Deposit in transit

$ 1,730 760 2,490 340 $ 2,150

Less: (2) Outstanding checks Adjusted cash balance per bank Cash balance per books Add: (4) $1,400 Note collected by bank plus interest of $56 Less: (3) Bank service charge (5) NSF check Adjusted cash balance per books (Cash bal. + Note coll. – ser. char. – NSF check) (b) June 30

$ 25 80

799 1,456 2,255

105 $ 2,150

Cash ............................................................................... Notes Receivable ................................................... Interest Revenue ..................................................... (To record collection of note receivable and interest by the bank)

1,456

Accounts Receivable ....................................................... Cash ....................................................................... (To record NSF check)

Bank Charge Expense ..................................................... Cash........................................................................ (To record bank service charge)

1,400 56

Ex. 244 The bank statement for Ace Exchange Company indicates a balance of $830 on July 31. The cash balance per books had a balance of $390 on this date. The following information pertains to the bank transactions for the company. 1. 2. 3. 4. 5.

Deposit of $840, representing cash receipts of July 31, did not appear on the bank statement. Outstanding checks totaled $390. Bank service charges for July amounted to $30. The bank collected a note receivable for the company for $1,200 plus $48 interest revenue. An NSF check for $328 from a customer was returned with the statement.

Instructions a. Prepare a bank reconciliation for July 31. b. Prepare any adjusting entries necessary as a result of the bank reconciliation. Ans: N/A, LO: 3, Topic: Control Features of a Bank Account, Subtopic: Bank Reconciliation Illustrated, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Fraud, Internal Control, and Cash

Solution 244 (a)

ACE EXCHANGE COMPANY Bank Reconciliation July 31

Cash balance per bank Add: (1) Deposit in transit

830 840 1,670 390 $ 1,280

Less: (2) Outstanding checks Adjusted cash balance per bank Cash balance per books Add: (4) $1,200 Note collected by bank plus interest of $48 Less: (3) Bank service charge (5) NSF Check Adjusted cash balance per books (Cash bal. + Note coll. – ser. char. – NSF check) (b) July

7-59

$ 30 328

390 1,248 1,638

358 $1,280

Cash ............................................................................... Notes Receivable ................................................... Interest Revenue..................................................... (To record collection of note receivable and interest by the bank)

1,248

Accounts Receivable ...................................................... Cash ...................................................................... (To record NSF check)

328

Bank Charge Expense ..................................................... Cash ....................................................................... (To record bank service charge)

1,200 48

328

Ex. 245 Acme Food Store used the following information in preparing its bank reconciliation for the month of April. Balance per books April 30 $ 905 Balance per bank statement April 30 $11,300 (1) (2) (3) (4) (5) (6) (7)

(8)

Checks written in April but still outstanding $6,300. Checks written in March but still outstanding $2,800. Deposits of April 30 not yet recorded by bank $4,900. NSF check of customer returned by bank $500. Check No. 210 for $594 was correctly issued and paid by the bank but incorrectly entered in the cash payments journal as payment on account for $549. Bank service charge for April was $40. A payment on account was incorrectly entered in the cash payments journal and posted to the accounts payable subsidiary ledger for $824 when Check No. 318 was correctly prepared for $284. The check cleared the bank in April. The bank collected a note receivable for the company of $6,000 plus $240 interest revenue. .

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

7-60

Ex. 245 (Cont.) Instructions Prepare a bank reconciliation at April 30. Ans: N/A, LO: 3, Topic: Control Features of a Bank Account, Subtopic: Bank Reconciliation Illustrated, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Solution 245 ACME FOOD STORE Bank Reconciliation April 30 Cash balance per books Add: (7) Error on check No. 318 (8) Collect $6,000 note and interest $240 Less: (4) NSF check (5) Error on check No. 210 (6) Bank service charge Adjusted cash balance per books

$ 905 $ 540 6,240

500 45 40

Cash balance per bank Add: (3) Deposits in transit

$11,300 4,900 16,200

6,780 7,685

585 $7,100

Less: (1) Apr. outstanding checks 6,300 (2) Mar. outstanding checks 2,800 9,100 Adjusted cash balance per bank $ 7,100

Ex. 246 Using the code letters below, indicate how each of the items listed would be handled in preparing a bank reconciliation. Enter the appropriate code letter in the space to the left of each item. Code A Add to cash balance per books B Deduct from cash balance per books C Add to cash balance per bank D Deduct from cash balance per bank E Does not affect the bank reconciliation Items: 1. Outstanding checks 2. Bank service charge 3. Check for $320 correctly written and paid by the bank but incorrectly entered in the cash payments journal for $230 4. Deposit in transit 5. Bank returns customer deposited check marked NSF 6. Bank collects notes receivable and interest for the depositor 7. Bank debit memorandum for check printing fees 8. Petty cash custodian has $86 in paid petty cash vouchers that have not been reimbursed.

Fraud, Internal Control, and Cash

Ex. 246

7-61

(Cont.) 9. The bank charged a check against the company, which should have been charged to another company.

10. A check for $236 was correctly paid by the bank but was incorrectly entered in the cash payments journal for $263 Ans: N/A, LO: 3, Topic: Control Features of a Bank Account, Subtopic: Reconciling Procedure, Bloom: C, Difficulty: Easy, Min: 10, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Solution 246 1. D 2. B 3. B 4. C 5. B

6. 7. 8. 9. 10.

A B E C A

Ex. 247 The adjusted cash balance per books for Ace Landscaping Company on November 30, 2025 is $10,740.93. The following checks and receipts were recorded for the month of December 2025: No. 17 18 19 20 21

Amount $372.96 780.62 157.00 587.50 234.15

Checks No. 22 23 24 25

Receipts Amount $ 578.84 1,687.50 921.30 246.03

Amount $ 843.86 941.54 808.58 1,367.00

Date 12/5 12/21 12/27 12/31

In addition, the bank statement for the month of December is presented below:

Balance Last Statement

Deposits and Credits No. Total Amount

Checks and Debits No. Total Amount

$5,404.84

$9,578.36

Checks and other debits

No.

Amount

No.

14 18 19 21

148.29 17 708.62 24 157.00 25 234.15 250.00 NSF

Amount

No.

Amount

372.96 22 921.30 246.03 15.00 SC

578.84

Symbols: NSF (Not sufficient funds) .

Balance This Statement

$3,632.19

$11,351.01

Deposits

Date

Balance

5,484.38 843.86 941.54 808.58 1,500.00 CM

12/1 12/8 12/23 12/29 12/31

$9,789.13 $9,003.07 $9,541.58 $10,101.01 $11,351.01

SC (Service charge)

CM (Credit Memo)

7-62

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ex. 247

(Cont.)

Check No. 18 was correctly written for $708.62 for a payment on account. Check No. 14 was the only outstanding check at the end of November. There was also one deposit in transit at the end of November. The NSF check was from S. Gill, a customer, in settlement of an account receivable. An entry has not been made for the NSF check. The credit memo is for the collection of a note receivable including interest of $60 that has not been accrued. The bank service charge is $15.00. Instructions (a) Prepare a bank reconciliation at December 31. (b) Prepare the adjusting journal entries required by the bank reconciliation. Ans: N/A, LO: 3, Topic: Control Features of a Bank Account, Subtopic: Bank Reconciliation Illustrated, Bloom: AP, Difficulty: Medium, Min: 30, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Solution 247 (a)

ACE LANDSCAPING COMPANY Bank Reconciliation December 31, 2025

Cash balance per bank statement ........................................ Add: Deposits in transit ....................................................... Less: Outstanding checks No. 20 ............................................................... No. 23 ............................................................... Adjusted cash balance per bank ........................................... Cash balance per books ....................................................... Add: Error in recording check No. 18 .................................. Note collected by bank ($1,440 principal plus $60 interest) ... Less: Bank service charge ................................................... NSF check .................................................................. Adjusted cash balance per books .........................................

$11,351.01 1,367.00 12,718.01 $ 587.50 1,687.50

2,275.00 $ 10,443.01 $ 9,136.01*

72.00 1,500.00 15.00 250.00

1,572.00 10,708.01 265.00 $10,443.01

*11/30 balance per books + Receipts – Checks written = 12/31 balance per books $10,740.93 + $3,960.98 – $5,565.90 = $9,136.01 (b) Dec. 31 Cash

72.00 Accounts Payable ................................................ (To correct recording error on check No. 18)

31 Cash

72.00

1,500.00 Notes Receivable ................................................ Interest Revenue ................................................. (To record collection of note and interest)

31 Bank Charge Expense ................................................. Cash .................................................................... (To record bank service charge for the month of December)

1,440.00 60.00

15.00 15.00

Fraud, Internal Control, and Cash

Solution 247

7-63

(Cont.)

31 Accounts Receivable—S. Gill ....................................... Cash .................................................................... (To record NSF check)

250.00 250.00

Ex. 248 Acme Salon received a notice with its bank statement that the bank had collected a note receivable for $18,000 plus $600 of interest. The bank had credited these amounts to the company's account.. (a) How will these items affect Acme Salon Company's bank reconciliation? (b) Prepare the journal entry that Acme Salon Company will make to record this information on its books. Ans: N/A, LO: 3, Topic: Control Features of a Bank Account, Subtopic: Reconciliation Procedure, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 248 (a) Acme Salon Company must add the amount of the note plus interest to its cash balance per books on the bank reconciliation. Add: Collection of note receivable $18,600 (b)

Cash ........................................................................................... Notes Receivable ............................................................... Interest Revenue ...............................................................

18,600 18,000 600

Ex. 249 The cash records of the A1 Restaurant Supply Company show the following: 1. The July 31 bank reconciliation indicated that deposits in transit totaled $390. During August the general ledger account, Cash shows deposits of $11,800, but the bank statement indicates that only $9,540 in deposits were received during the month. 2. The July 31 bank reconciliation also reported outstanding checks of $850. During the month of August, the company’s books show that $11,670 of checks were issued, yet the bank statement showed that $10,500 of checks cleared the bank in August. There were no bank debit or credit memoranda and no errors were made by either the bank or the A1 Restaurant Supply Company. Answer the following questions: (a) What were the deposits in transit at August 31? (b) What were the outstanding checks at August 31? Ans: N/A, LO: 3, Topic: Control Features of a Bank Account, Subtopic: Reconciling Procedure, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

7-64

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 249 (a) Deposits in Transit: Deposits per books in August ....................................... Deposits per the bank in August .................................. Less: July 31 deposits in transit ................................... August receipts deposited in August ............................ Deposits in transit, August 31 ......................................

$11,800 $9,540 390 9,150 $ 2,650

(b) Outstanding Checks: Checks per books in August ........................................ Checks clearing the bank in August .............................. Less: Outstanding checks, July 31 .............................. August checks clearing in August ................................ Outstanding checks, August 31 ....................................

$11,670 $10,500 850 9,650 $ 2,020

Ex. 250 The cash records of Ace Discount Company show the following: 1. In February, deposits per the bank statement totaled $37,700; deposits per books $38,000; and deposits in transit at February 28 were $3,550. 2. In February cash disbursements per books were $37,500; checks clearing the bank were $37,300, and outstanding checks at February 28 were $2,500. There were no bank debit or credit memoranda and no errors were made by either the bank or Ace Discount Company. Answer the following questions: (a) What were the deposits in transit at January 31? (b) What were the outstanding checks at January 31? Ans: N/A, LO: 3, Topic: Control Features of a Bank Account, Subtopic: Reconciliation Procedure, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 250 (a) Deposits in Transit: Deposits per bank statement in February .................. Add: Deposits in transit, February 28 ........................ Total deposits to be accounted for ............................ Less: Deposits per books .......................................... Deposits in transit, January 31 .................................. (b)

$37,700 3,550 41,250 38,000 $ 3,250

Outstanding Checks: Checks clearing the bank in February ........................ Add: Outstanding checks, February 28 ...................... Total checks to be accounted for .............................. Less: Cash disbursements per books ....................... Outstanding checks, January 31 ...............................

$37,300 2,500 39,800 37,500 $ 2,300

Fraud, Internal Control, and Cash

7-65

Ex. 251 Listed below are items that may be useful in preparing the March 2025 bank reconciliation for the Acme Machine Works. Using the code letters below, insert in the space before each item the letter where the amount would be located or otherwise treated in the bank reconciliation process. Code A B C D E

Located or Treated Add to the cash balance per books Deduct from the cash balance per books Add to the cash balance per bank Deduct from the cash balance per bank Does not affect the bank reconciliation

1. Included with the bank statement materials was a check from Joe Terrell for $40 stamped "account closed”. 2. A personal deposit by Ron Carrinton to his personal account in the amount of $300 for dividends on his General Electric common stock was credited to the company account. 3. The bank statement included a debit memorandum for $22.00 for four books of blank checks for Acme Machine Works. 4. The bank statement contains a credit memorandum for $42.75 interest on the average checking account balance. 5. The daily deposits of March 30 and March 31 for $3,362 and $3,125, respectively, were not included in the bank statement postings. 6. Two checks totaling $316.86, which were outstanding at the end of February, cleared in March and were returned with the March statement. 7. The bank statement included a credit memorandum dated March 28, 2025 for $62.00 for the monthly interest on a 6-month, $15,000 certificate of deposit that the company owns. 8. Four checks, #8712, #8716, #8718, #8719, totaling $5,369.65, did not clear the bank during March. 9. On March 24, 2025, the bank collected a $3,400, 3-month note from Tom Jacobs. A credit memorandum dated March 29, 2025 indicated the collection of the note and $102 of interest. 10. The bank statement included a debit memorandum for $20.00 for the collection service on the above note and interest. Ans: N/A, LO: 3, Topic: Control Features of a Bank Account, Subtopic: Reconciliation Procedure, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 251 1. B 2. D 3. B 4. A 5. C

6. 7. 8. 9. 10.

E A D A B

7-66

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ex. 252 A1 Car Care Company expects to have a cash balance of $43,000 on January 1, 2025. These are the relevant monthly budget data for the first two months of 2025. 1. Collections from customers: January $85,000, February $132,000 2. Payments to suppliers: January $40,000, February $50,000 3. Wages: January $34,000, February $40,000. Wages are paid in the month they are incurred. 4. Administrative expenses: January $24,000, February $31,000. These costs include depreciation of $1,000 per month. All other costs are paid as incurred. 5. Selling expenses: January $15,000, February $20,000. These costs are exclusive of depreciation. They are paid as incurred. 6. Sales of short-term investments in January are expected to realize $12,000 in cash. A1 Car Care Company has a line of credit at a local bank that enables it to borrow up to $40,000. The company wants to maintain a minimum monthly cash balance of $25,000. Instructions Prepare a cash budget for January and February. There were no outstanding borrowings at the end of 2024. Ans: N/A, LO: 4, Topic: Reporting Cash, Subtopic: Cash Budgeting, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Solution 252 A1 CAR CARE COMPANY Cash Budget For the Months Ending January 30 and February 28, 2025 Beginning cash balance ........................................................ Add: Receipts Collections from customers .......................................... Sale of short-term investments ..................................... Total receipts................................................................ Total available cash............................................................... Less: Disbursements Payments to suppliers .................................................. Wages .......................................................................... Administrative expenses............................................... Selling expenses .......................................................... Total disbursements ..................................................... Excess (deficiency) of available cash over disbursements .................................................................... Financing Borrowings ................................................................... Repayments ................................................................. Ending cash balance .............................................................

January $ 43,000

February $ 28,000

85,000 12,000 97,000 140,000

132,000 0 132,000 160,000

40,000 34,000 23,000 15,000 112,000

50,000 40,000 30,000 20,000 140,000

28,000*

20,000

0 0 $ 28,000

5,000 0 $ 25,000

Fraud, Internal Control, and Cash

7-67

7-68

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ex. 253 A1 Garden Supply Company has budgeted monthly sales revenue for the first 6 months of 2025 as follows: Budgeted Sales Revenues $55,000 80,000 90,000 65,000 50,000 15,000

January February March April May June

Past experience has indicated that 80% of sales each month are on credit and that collection of credit sales occurs as follows: 60% in the month of sale, 30% in the month following the sale, and 5% in the second month following the sale. The other 5% is uncollectible. Instructions Prepare a schedule which shows expected cash receipts from sales for the months of April, May, and June 2025. Ans: N/A, LO: 4, Topic: Reporting Cash, Subtopic: Cash Budgeting, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Solution 253 A1 GARDEN SUPPLY COMPANY Expected Cash Receipts from Sales For the Months of April, May and June 2025 April February sales Credit sales: ($80,000 × .80 × .05) March sales Credit sales: ($90,000 × .80 × .30) ($90,000 × .80 × .05) April sales Credit sales: ($65,000 × .80 × .60) ($65,000 × .80 × .30) ($65,000 × .80 × .05) Cash sales: ($65,000 × .20) May sales Credit sales: ($50,000 × .80 × .60) ($50,000 × .80 × .30) Cash sales: ($50,000 × .20) June sales Credit sales: ($15,000 × .80 × .60) Cash sales: ($15,000 × .20) Total cash receipts

May

June

$ 3,200

21,600 $ 3,600

31,200 15,600 $ 2,600 13,000

24,000 12,000 10,000

$69,000

$53,200

7,200 3,000 $24,800

Fraud, Internal Control, and Cash

7-69

Ex. 254 Ace Restaurant Supply Company has budgeted sales revenues as follows: June $35,000 18,000 $53,000

Credit sales Cash sales Total sales

July $30,000 51,000 $81,000

August $28,000 39,000 $67,000

Past experience indicates that 60% of the credit sales will be collected in the month of sale and the remaining 40% will be collected in the following month. Purchases of inventory are all on credit and 50% is paid in the month of purchase and the remaining 50% in the month following purchase. Budgeted inventory purchases are as follows: June July August

$65,000 53,000 21,000

Other budgeted cash disbursements: (a) selling and administrative expenses of $7,000 each month will be paid in cash, exclusive of depreciation, (b) dividends of $19,000 will be paid in July and (c) purchase of a computer in August for $6,000 cash. The company wishes to maintain a minimum cash balance of $10,000 at the end of each month. The company borrows money from the bank at 9% interest, if necessary, to maintain the minimum cash balance. Borrowed money is repaid in months when there is an excess cash balance. The beginning cash balance on July 1 was $10,000. Assume that borrowed money, in this case, is for one month. Instructions Prepare a cash budget for the months of July and August. Prepare separate schedules for expected collections from customers and expected payments for purchases of inventory. Ans: N/A, LO: 4, Topic: Reporting Cash, Subtopic: Cash Budgeting, Bloom: AP, Difficulty: Hard, Min: 25, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

7-70

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 254 ACE RESTAURANT SUPPLY COMPANY Cash Budget For the Months of July and August Beginning cash balance Add: Receipts Collections from credit customers Cash sales Total receipts Total available cash Less: Disbursements Purchases Selling and administrative expenses Dividends Computer purchase Total disbursements Excess (deficiency) of available cash over disbursements Financing Borrowings Repayments Ending cash balance

July $10,000

August $10,000

32,000 51,000 83,000 93,000

28,800 39,000 67,800 77,800

59,000 7,000 19,000

37,000 7,000

85,000 8,000(1)

6,000 50,000 27,800

2,000 $10,000

(2,015)* $25,785

(1) (Beg. cash bal. + cust. coll. + cash sal.) – (purch. + sell & adm. exp + div.) *$2,000 × 9% × 1/12 = $15 + $2,000 = $2,015. Schedule of Expected Collections from Customers Credit sales June ($35,000 × 40%) July ($30,000 × 60%), Aug ($30,000 × 40%) August ($28,000 × 60%) Total collections

July $14,000 18,000 $32,000

August $ 12,000 16,800 $28,800

Schedule of Expected Payments for Purchase of Inventory Inventory purchases June ($65,000  50%) July ($53,000  50%) August ($21,000  50%) Total payments

July $32,500 26,500 $59,000

August $26,500 10,500 $37,000

Fraud, Internal Control, and Cash

7-71

Ex. 255 The management of Acme Discount Supply Company estimates that credit sales for August, September, October, and November will be $180,000, $200,000, $230,000, and $160,000, respectively. Experience has shown that collections are made as follows: In month of sale In first month after sale In second month after sale

25% 60% 10%

Instructions Determine the collections from customers in October and November. Show all computations. Ans: N/A, LO: 4, Topic: Reporting Cash, Subtopic: Cash Budgeting, Bloom: AP, Difficulty: Hard, Min: 13, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 255 Collections from Customers August Sales ($180,000 × .10) September Sales ($200,000 × .60) ($200,000 × .10) October Sales ($230,000 × .25) ($230,000 × .60) November Sales ($160,000 × .25) Total collections

October $ 18,000

November $

-0-

120,000 20,000 57,500 138,000 -0$195,500

40,000 $198,000

Ex. *256 On October 1, 2025, A1 Nail Bar Company establishes a petty cash fund by issuing a check for $200 to Sara Mead, the custodian of the petty cash fund. On October 31, 2025, Sara Mead submitted the following paid petty cash vouchers for replenishment of the petty cash fund when there is $7 cash in the fund: Freight-In Supplies Expense Entertainment of Clients Postage Expense

$70 35 60 23

Instructions Prepare the journal entries required to establish the petty cash fund on October 1 and the replenishment of the fund on October 31. Ans: N/A, LO: 5,Topic: Operation of a Petty Cash Fund, Subtopic: Establishing the Petty Cash Fund, Subtopic: Replenishing the Petty Cash Fund, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

7-72

Solution *256 Oct. 1 Petty Cash .......................................................................... Cash .......................................................................... (To establish a petty cash fund) 31

200 200

Cash Over and Short ......................................................... 5 Freight-In ........................................................................... 70 Supplies Expense .............................................................. 35 Entertainment Expense ...................................................... 60 Postage Expense ............................................................... 23 Cash .......................................................................... (To record expenses for October and to replenish the petty cash fund)

193

Ex. *257 On September 1, 2025, Ace Auto Supply Company establishes a petty cash fund by issuing a check for $250 to Mike Martz, the custodian of the petty cash fund. On September 30, 2025, Mike Martz submitted the following paid petty cash vouchers for replenishment of the petty cash fund when there is $35 cash in the fund: Freight-In Supplies Expense Entertainment of Clients Postage Expense

$25 75 37 80

Instructions Prepare the journal entries required to establish the petty cash fund on September 1 and the replenishment of the fund on September 30. Ans: N/A, LO: 5, Topic: Operation of a Petty Cash Fund, Subtopic: Establishing the Petty Cash Fund, Subtopic: Replenishing the Petty Cash Fund, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution *257 Sept. 1 Petty Cash .......................................................................... Cash .......................................................................... (To establish a petty cash fund) 30

250 250

Freight-In ........................................................................... 25 Supplies Expense .............................................................. 75 Entertainment Expense ...................................................... 37 Postage Expense ............................................................... 80 Cash Over and Short ................................................. 2 Cash .......................................................................... 215 (To record expenses for September and to replenish the petty cash fund)

Fraud, Internal Control, and Cash

7-73

Ex. *258 The petty cash fund of $200 for Acme Beauty Supply Company appeared as follows on December 31, 2025.: Cash $50.60 Petty cash vouchers Freight-in $58.40 Postage 40.00 Balloons for a special occasion (Misc. Exp.) 20.00 Meals (Misc. Exp.) 25.00 Instructions 1. Briefly describe when the petty cash fund should be replenished. Because there is cash on hand, is there a need to replenish the fund at year end on December 31? Explain. 2. Prepare the general journal entry to replenish the fund. 3. On December 31, the office manager gives instructions to increase the petty cash fund by $50. Make the appropriate journal entry. Ans: N/A, LO: 5, Topic: Operation of a Petty Cash Fund, Subtopic: Replenishing the Petty Cash Fund, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution *258 1. Petty cash should be replenished on a periodic basis or when the cash is low. It must be replenished on the balance sheet date so that the expenses represented by the petty cash vouchers can be recorded in the proper accounting period. 2. Freight-In ....................................................................................... 58.40 Postage Expense .......................................................................... 40.00 Miscellaneous Expense ................................................................. 45.00 Cash Over and Short ..................................................................... 6.00 Cash ..................................................................................... 149.40 3. Petty Cash .................................................................................... 50.00 Cash ..................................................................................... 50.00 Ex. *259 During October, Ace Lighting Company experiences the following activities related to a petty cash fund: Oct. 1 A petty cash fund is established with a check for $150 issued to the petty cash custodian. 31 A count of the petty cash fund disclosed the following items used for replenishment: Currency $19.00 Coins 0.40 Expenditure receipts (vouchers): Office supplies (asset) $28.10 Telephone, Internet, and fax (Misc. Exp.) 16.40 Postage 75.00 Freight-out 6.80 31 The fund was increased to $300. Instructions Journalize the entries in October that pertain to the petty cash fund. Ans: N/A, LO: 5, Topic: Operation of a Petty Cash Fund, Subtopic: Establishing the Petty Cash Fund, Subtopic: Replenishing the Petty Cash Fund, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

7-74

*Solution 259 Oct. 1 Petty Cash ............................................................................. Cash ............................................................................... 31

150.00 150.00

Postage Expense............................................................ Supplies.......................................................................... Miscellaneous Expense .................................................. Freight-Out ..................................................................... Cash Over and Short ...................................................... Cash ($150.00 – $19.40) ............................................

75.00 28.10 16.40 6.80 4.30

Petty Cash ...................................................................... Cash ........................................................................

50.00

130.60 50.00

COMPLETION STATEMENTS 260. The purposes of internal control are to assets, enhance the accounting records, increase efficiency of operations, and ensure and regulations.

of with laws

Ans: N/A, LO: 1, Topic: Fraud and Internal Control, Subtopic: Internal Control, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

261. The principle of internal control that prevents one individual from being responsible for all the related activities of a given task is . Ans: N/A, LO: 1, Topic: Fraud and Internal Control, Subtopic: Segregation of Duties, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

262. The asset.

of an asset should not have access to the accounting records of that

Ans: N/A, LO: 1, Topic: Fraud and Internal Control, Subtopic: Segregation of Recordkeeping from Physical Custody, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

263. Employees of a company who evaluate the effectiveness of the company's system of internal controls on a year-round basis are called . Ans: N/A, LO: 1, Topic: Fraud and Internal Control, Subtopic: Independent Internal Verification, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

264. Using documents is a control measure that helps to prevent a transaction from being recorded more than once or to prevent the transactions from not being recorded. Ans: N/A, LO: 1, Topic: Fraud and Internal Control, Subtopic: Documentation Procedures, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

265. Employees who handle cash should be misappropriation of assets by dishonest employees.

in order to protect against

Ans: N/A, LO: 1, Topic: Fraud and Internal Control, Subtopic: Human Resource Controls, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

Fraud, Internal Control, and Cash

266.

Two limitations of systems of internal control are the concept of .

7-75 and the

Ans: N/A, LO: 1, Topic: Fraud and Internal Control, Subtopic: Limitations of Internal Control, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

267. Internal control over cash disbursements is more effective when payments are made by , rather than by . Ans: N/A, LO: 2, Topic: Cash Controls, Subtopic: Cash Disbursements Controls, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

268. A disbursement system that uses wire, telephone, computers, etc. to transfer cash from one location to another is referred to as . Ans: N/A, LO: 2, Topic: Cash Controls, Subtopic: Cash Disbursements Controls, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

269.

A debit memorandum issued by the bank depositor's account.

the cash balance in the

Ans: N/A, LO: 3, Topic: Control Features of a Bank Account, Subtopic: Bank Statement, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

270. The difference between the cash in bank balance shown on the company's books and the cash balance shown on the bank statement may be caused by and by in recording transactions by either party. Ans: N/A, LO: 3, Topic: Control Features of a Bank Account, Subtopic: Reconciling the Bank Account, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

271. In preparing a bank reconciliation, outstanding checks are balance per .

from the cash

Ans: N/A, LO: 3, Topic: Control Features of a Bank Account, Subtopic: Reconciling Items per Bank, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

272. A check correctly written for $370 was incorrectly entered in the cash payments journal for $730. In preparing a bank reconciliation, $ must be the cash balance per . Ans: N/A, LO: 3, Topic: Control Features of a Bank Account, Subtopic: Reconciling Items per Books, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

273. A basic principle of cash management is to delay payment of

Ans: N/A, LO: 4, Topic: Reporting Cash, Subtopic: Basic Principles of Cash Management, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

274. Three major sections of a cash budget are: (1) and (3) .

, (2)

Ans: N/A, LO: 4, Topic: Reporting Cash, Subtopic: Cash Budgeting, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

*275. A

fund is used to pay relatively small expenditures.

Ans: N/A, LO: 5, Topic: Operation of a Petty Cash Fund, Subtopic: Making Payments from the Petty Cash Fund, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

*276. A debit balance in Cash Over and Short is reported in the income statement as . Ans: N/A, LO: 5, Topic: Operation of a Petty Cash Fund, Subtopic: Replenishing the Petty Cash Fund, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Answers to Completion Statements 260. 261. 262. 263. 264. 265. 266.

safeguard, reliability, compliance segregation of duties custodian internal auditors prenumbered bonded size of business, human element 267. check, cash 268. electronic funds transfer (EFT)

269. 270. 271. 272. 273. 274.

reduces time lags, errors deducted, bank $360, added to, books liabilities cash receipts, cash disbursements financing *275. petty cash *276. miscellaneous expense

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MATCHING 277. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E. F.

Prenumbered documents Custody of an asset should be kept separate from the record-keeping for that asset Television monitors, garment sensors and burglar alarms are examples Bonding employees Collusion Cash

G. H. I. J. K. L. M. N.

Cash budget Restricted cash Invest idle cash Canceled checks NSF checks Outstanding checks Petty cash receipt Cash equivalents

1. Segregation of duties. 2. Cash that is not available for general use, but instead is limited to a particular purpose. 3. Two or more employees circumventing prescribed procedures. 4. Prevent a transaction from being recorded more than once. 5. Checks which have been returned by the maker's bank for lack of funds. 6. Checks which have been paid by the depositor's bank. 7. A projection of anticipated cash flows. 8. Anything that a bank will accept for deposit. 9. Physical control devices. 10. A basic principle of cash management. 11. Insurance protection against misappropriation of assets. 12. Document indicating the purpose of a petty cash expenditure. 13. Issued checks that have not been paid by the bank. 14. Highly liquid investments. Ans: N/A, LO: 1 - 4, Topic: NA, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Internal Controls

Answers to Matching 1. 2. 3. 4. 5.

B H E A K

6. 7. 8. 9. 10.

J G F C I

11. 12. 13. 14.

D M L N

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

SHORT-ANSWER ESSAY QUESTIONS S-A E 278 Fraud experts often say that there are three primary factors that contribute to employee fraud. Identify the three factors and explain what is meant by each. Ans: N/A, LO: 1, Topic: Fraud and Internal Control, Subtopic: Fraud, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Communication, IMA: Internal Controls

Solution 278 The three main factors that contribute to employee fraud are opportunity, financial pressure, and rationalization. Opportunities that an employee can take advantage of occur when the workplace lacks sufficient controls to deter and detect fraud. Financial pressure occurs when employees want to lead a lifestyle that they cannot afford on their current salary. Rationalization involves employees justifying fraud because they believe they are underpaid while their employer is making lots of money. S-A E 279 (a) Explain the control principle of independent internal verification. (b) What practices are important in applying this principle? Ans: N/A, LO: 1, Topic: Fraud and Internal Control, Subtopic: Independent Internal Verification, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Communication, IMA: Internal Controls

Solution 279 (a) Independent internal verification involves the review, comparison, and reconciliation of data prepared by employees. (b) Maximum benefit is obtained from independent internal verification when: (1) The verification is made periodically or on a surprise basis. (2) The verification is done by an employee who is independent of the personnel responsible for the information. (3) Discrepancies and exceptions are reported to a management level that can take appropriate corrective action. S-A E 280 Your friend, Lionel, has opened a movie theater. Lionel states that he does not have time to develop and implement a system of internal controls. a. Provide Lionel with the objectives of a system of internal control. b. Explain to Lionel why he should develop a system of internal control. Ans: N/A, LO: 1, Topic: Fraud and Internal Control, Subtopic: Internal Control, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Communication, IMA: Internal Controls

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Solution 280 a. The objectives of a system of internal control are to safeguard assets, enhance the reliability of accounting records, increase efficiency of operations, and ensure compliance with laws and regulations b. Lionel, here are some reasons why you must develop a system of internal control, 1. You will not be able to oversee every function of your business. For this reason, you must establish policies and procedures for your employees to follow. By designing these policies and procedures around the principles of internal control, you have a foundation for safeguarding assets and enhancing the accuracy and reliability of the accounting records. 2. A good system of internal controls will help you attract investors and creditors because they will value the rewards of the system. 3. A good system of internal controls works to eliminate fraud. No business can assume that fraud will not take place. S-A E 281 One of your accounting professors has alerted you to a job opportunity as an internal auditor. a. What is the role of an internal auditor? b. Is this position justified? Why or Why not? Ans: N/A, LO: 1, Topic: Fraud and Internal Control, Subtopic: Independent Internal Verification, Bloom: E, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Communication, IMA: Internal Controls

Solution 281 a. Internal auditors evaluate, on a continuous basis, the effectiveness of a company’s system of internal control. They periodically review the activities of departments and individuals to determine whether prescribed internal controls are being followed. b. Yes, the position is justified. Most fraud is uncovered through internal controls and internal audits. Internal auditors are trained to evaluate the effectiveness of internal control systems and make recommendations for improvements. They are independent of the day-to-day operations and thus can provide objective reviews. Internal auditors can deter fraud and ensure that procedures are being followed. This can help prevent fraud. S-A E 282 Important objectives of a system of internal controls are to safeguard assets and to enhance the accuracy and reliability of the accounting records. Briefly discuss how (1) cost-benefit considerations, (2) the human element, and (3) the size of the business affect the implementation of a system of internal controls. Ans: N/A, LO: 1, Topic: Fraud and Internal Control, Subtopic: Limitations of Internal Control, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Communication, IMA: Internal Controls

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 282 The implementation of a system of internal controls is affected by cost-benefit considerations, the human element, and the size of the business. A company's system of internal control can provide reasonable assurance, but not absolute assurance, that assets are properly safeguarded and that the accounting records are reliable. The concept of reasonable assurance rests on the premise that the costs of establishing control procedures should not exceed their expected benefit. A very costly set of safeguards may produce something approaching absolute assurance, but the value of the benefits received would not come close to outweighing the costs. The human element can cause a good system of internal control to become ineffective due to employee fatigue, carelessness, or indifference. Additionally, collusion between two or more employees to circumvent prescribed controls may significantly impair the effectiveness of the system. The size of a business impacts internal control because a smaller business may not have the necessary resources available to affect the implementation of desirable controls. S-A E 283 How do these principles apply to cash disbursements? (a) Physical controls? (b) Human resource controls? Ans: N/A, LO: 2, Topic: Cash Controls, Subtopic: Cash Disbursements Controls, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Communication, IMA: Internal Controls

Solution 283 (a) Physical controls apply to cash disbursements when: blank checks are stored in a safe, and access to the safe is restricted to authorized personnel, and a machine is used to print amounts on checks with indelible ink. (b) Human resource controls apply when the company bonds personnel who handle cash, requires employees to take vacations and conducts background checks. S-A E 284 The preparation of a bank reconciliation is an important cash control procedure. If a company deposits cash receipts daily and makes all cash disbursements by check, explain why the cash balance per books might not agree with the cash balance shown on the bank statement. Identify specific examples that may cause differences between the cash balance per books and the cash balance per bank. Ans: N/A, LO: 3, Topic: Control Features of a Bank Account, Subtopic: Reconciling the Bank Account, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Communication, IMA: Reporting

Solution 284 The cash balance per books will not agree with the cash balance shown on the bank statement due to time lags and errors by either party. A time lag could mean the bank records a transaction in a period later than the company records it (outstanding checks, deposits-in-transit) or the company records a transaction in a period later than the bank records it (NSF check, collection of a note, etc.).

Fraud, Internal Control, and Cash

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S-A E 285 A basic principle of cash management involves the investment of idle cash. a. Explain why this should be done. b. What type of investment is appropriate for the idle cash? Ans: N/A, LO: 4, Topic: Reporting Cash, Subtopic: Basic Principles of Cash Management, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Communication, IMA: Reporting

Solution 285 a. Companies should have a policy for investing idle cash because cash on hand earns nothing. Excess (idle) cash should be invested so it can earn a return for the company. b. The excess cash is generally invested for short periods of time. Thus, it should be invested in highly liquid and risk-free securities. The most common form of liquid investment is interest-paying U.S. government securities. S-A E 286 (Ethics) Ace Instruments is a rapidly growing manufacturer of medical devices. As a result of its growth, the company's management recently modified several of its procedures and practices to improve internal control. Some employees are upset with the changes. They have complained that all these changes just show that the company no longer trusts them. Required: "Internal controls exist because most people can't be trusted." Is this true? Explain. Ans: N/A, LO: 1, Topic: Fraud and Internal Control, Subtopic: Internal Control, Bloom: E, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Communication, IMA: Internal Controls

Solution 286 Internal controls exist, not because most people can't be trusted, but to protect the company's assets from those few who can't be trusted and to reduce the risk of unintentional errors. It is true that anyone is capable of practically any action if motivation and opportunity are both present. Since it is extremely difficult to measure motivation to directly or indirectly harm the company, let alone to monitor changes in motivation, a company's best recourse is to prevent opportunity. Rather than feel threatened by internal control measures, honest employees should feel grateful. When responsibility for all activities is clearly defined and when access to company assets is carefully controlled, the honest employees can demonstrate their honesty. When all employees are considered to be honest, on the other hand, and no controls exist, all employees are unfairly tainted when one among them is dishonest.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

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S-A E 287 (Communication) Acme Office Company is a medical office management franchise. There are currently twenty-five medical offices managed by an Acme franchisee. One of the services provided to franchisees is assistance in training various staff members. Acme is preparing a manual for the front office staff to use as a reference guide. It will be used in training new employees as well. One of the reasons the manual is being prepared is to stress the importance of strong internal controls. Required: Prepare a short paragraph, to be included in the training materials, describing the benefits of sound internal control, from the viewpoint of the employee. Ans: N/A, LO: 1, Topic: Fraud and Internal Control, Subtopic: Internal Control, Bloom: S, Difficulty: Hard, Min: 5, AACSB: Communication, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Communication, IMA: Internal Controls

Solution 287 All the controls discussed in this manual may seem unnecessary to you. It may also seem that management trusts no one. However, these practices and procedures actually benefit you, the employee. First, internal control policies clearly outline who is to be responsible for various activities, such as making the daily deposit of cash in the bank. If a problem arises regarding a deposit, it is very clear to whom the company should turn to resolve the problem. If correct procedures were not followed, blame is not placed on all employees. Only those who did not follow the correct procedures are held accountable for their actions. Also, strong internal controls discourage many opportunistic people, who find such opportunities to harm the company are extremely limited. Finally, all these systems, practices, and procedures result in a well-managed company that is less likely to suffer unnecessary losses and a much better place for you to work and build a career.

IFRS QUESTIONS 1.

The principles of internal control activities are used a. in the U.S. but not globally. b. internationally but not in the U.S. c. in the U.S. and Canada but not globally. d. globally.

Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

The Sarbanes Oxley Act applies to a. U.S companies but not international companies. b. international companies but not U.S. companies. c. U.S. and Canadian companies but not other international companies. d. U.S and international companies.

Ans: A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

The fraud triangle applies to a. U.S companies but not international companies. b. international companies but not U.S. companies.

Fraud, Internal Control, and Cash

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c. U.S. and Canadian companies but not other international companies. d. U.S and international companies. Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

What percentage of companies worldwide have experienced fraud in a recent 12-month period? a. 1% b. 10% c. 34% d. 100%

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

IFRS, compared to GAAP, tends to be more a. detailed. b. rules-based. c. principles-based. d. full of disclosures requirements.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

GAAP, compared to IFRS, tends to be more a. simple in accounting requirements. b. rules-based. c. principles-based. d. simple in disclosures requirements.

Ans: B, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

GAAP's, accounting and internal control procedures related to cash and the definition of cash equivalents, as compared to IFRS are: Accounting and internal control procedures Definition of cash equivalents a. essentially similar essentially similar b. essentially different essentially similar c. essentially similar essentially different d. essentially different essentially different

Ans: A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Cash is defined by IFRS as a. cash on hand. b. demand deposits. c. cash on hand and demand deposits. d. cash on hand, demand deposits, and highly liquid investments.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Cash equivalents are defined by IFRS as a. cash on hand. b. demand deposits. c. cash on hand and demand deposits. .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

d. short-term, highly liquid investments that are readily convertible into known amounts of cash. Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

CHAPTER 8 REPORTING AND ANALYZING RECEIVABLES CHAPTER LEARNING OBJECTIVES 1. Explain how companies recognize accounts receivable. Receivables are frequently classified as accounts, notes, and other. Accounts receivable are amounts customers owe on account. Notes receivable represent claims that are evidenced by formal instruments of credit. Other receivables include nontrade receivables such as interest receivable, loans to company officers, advances to employees, and income taxes refundable. Companies record accounts receivable when they provide a service on account or at the pointof-sale of merchandise on account. Sales returns and allowances and cash discounts reduce the amount received on accounts receivable. 2. Describe how companies value accounts receivable and record their disposition. The two methods of accounting for uncollectible accounts are the allowance method and the direct write-off method. Under the allowance method, companies estimate uncollectible accounts as a percentage of receivables. It emphasizes the cash realizable value of the accounts receivable. An aging schedule is frequently used with this approach. 3. Explain how companies recognize, value, and dispose of notes receivable. The formula for computing interest is: Face value of note  annual interest rate  Time in terms of one year. Notes can be held to maturity, at which time the borrower (maker) pays the face value plus accrued interest and the payee removes the note from the accounts. However, similar to accounts receivable, in many cases, the holder of the note speeds up the conversion by selling the receivable to another party. In some situations, the maker of the note dishonors the note (defaults), and the note is written off. 4. Describe the statement presentation of receivables and the principles of receivables management. Companies should identify each major type of receivable in the balance sheet or in the notes to the financial statements. Short-term receivables are considered current assets. Companies report the gross amount of receivables and the allowance for doubtful accounts. They report bad debt and service charge expenses in the income statement as operating (selling) expenses, and interest revenue as other revenues and gains in the nonoperating section of the statement. To properly manage receivables, management must (a) determine to whom to extend credit, (b) establish a payment period, (c) monitor collections, (d) evaluate the liquidity of receivables, and (e) accelerate cash receipts from receivables when necessary. The accounts receivable turnover and the average collection period both are useful in analyzing management’s effectiveness in managing receivables. The accounts receivable aging schedule also provides useful information. If the company needs additional cash, management can accelerate the collection of cash from receivables by selling (factoring) its receivables or by allowing customers to pay with bank credit cards.

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Difficulties: Easy: 174 Medium: 108 Hard: 9

Question List by Section Recognition of Accounts Receivable: 62, 63, Types of Receivables: 1, 2, 3, 4, 5, 58, 59, 60, 61, 64, 65 66, 67, 69, 230, 231, 265, 266 Recognizing Accounts Receivable: 6, 7, 8, 68, 70, 72, 232, 233, 245 Valuation and Disposition of Accounts Receivable: 71, 283, 284, Valuing Accounts Receivable: 9, 24, 73, 87, 88, 89, 101, 102, 103, 136, 138, 140, 246, 247, 248, 249, 268, 269, 270, 280 Direct Write-off Method for Uncollectible Accounts: 17, 18, 23, 27, 28, 30, 92, 94, 100, 128, 129, 144 Allowance Method for Uncollectible Accounts: 10, 11, 20, 21, 22, 25, 26, 75, 76, 82, 84, 86, 90, 104, 123, 153, 159, 234, 237, 250, 251, 252, 253, 254, 255, 267, 272 Recording Estimated Uncollectibles: 12, 13, 29, 74, 79, 81, 91, 95, 105, 106, 107, 110 Recording the Write-off of an Uncollectible Account: 14, 19, 30, 31, 77, 83, 85, 108, 111, 113, 114, 115, 125, 133, 134, 135, 142, 271 Recovery of an Uncollectible Account: 33, 93, 112, Estimating the Allowance: 10, 15, 16, 32, 80, 96, 97, 98, 99, 109, 116, 117, 118, 119, 120, 121, 122, 124, 126, 127, 130, 131, 132, 137, 139, 141, 235, 236, 238 Disposing of Accounts Receivable: 143, 145, 146, 239, 256 Sale of Receivables to a Factor: 34, 78, 147, 148, 154, 155, 157, 273 National Credit Card Sales: 149, 150, 35, 36, 156, 281, 282 Accounting for Credit Card Sales: 151, 152, 158, 160 Notes Receivable: 37, 38, 39, 161, 162, 163, 171, 172, 173, 285, 286 Determining the Maturity Date: 40, 177, 240, 274 Computing Interest: 38, 39, 40, 41, 42, 43, 44, 48, 164, 165, 166, 167, 168, 169, 170, 178, 179, 180, 241, 257, Recognizing Notes Receivable: 45, 174, 175, Valuing Notes Receivable: 169, 176 Disposition of Notes Receivable: 184, 258, 259, 261, 262 Honor of Notes Receivable: 172, 186, 188, 190, 191, 192, 260, 275 Accrual of Interest Receivable: 171, 187, 242, 243 Dishonor of Notes Receivable: 46, 47, 183, 185, 189, 276, 286, 287 Receivables Presentation and Management: Financial Statement Presentation of Receivables: 49, 50, 193, 199, Managing Receivables: 195, 225, 288, 289 Extending Credit: 194, 226, 227 Establishing a Payment Period: 228 Monitoring Collections: 51, 52, 53, 229, 277 Evaluating Liquidity of Receivables: 54, 55, 196, 197, 198, 200, 201, 202, 203, 204, 205, 206, 207, 208, 209, 210, 211, 212, 244, 263, 264, 278, Accelerating Cash Receipts: 213, 214, 215, 216, 217, 218, 219, 220, 221, 222, 223, 224, Data Analytics and Receivables Management: 56, 57

Reporting and Analyzing Receivables

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TRUE-FALSE STATEMENTS 1.

Trade receivables occur when two companies trade or exchange notes receivables.

Ans: F, LO: 1, Topic: Recognition of Accounts Receivable, Subtopic: Types of Receivables, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

Trade receivables can be an account receivable or a note receivable.

Ans: T, LO: 1, Topic: Recognition of Accounts Receivable, Subtopic: Types of Receivables, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

Other receivables include nontrade receivables such as loans to company officers.

Advances to employees are referred to as accounts receivable.

Both accounts receivable and notes receivable represent claims expected to be collected in cash.

Accounts receivable are one of a company’s least liquid assets.

Ans: F, LO: 1, Topic: Recognition of Accounts Receivable, Subtopic: Recognizing Accounts Receivable, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

Accounts receivable are the result of cash and credit sales.

Accounts Receivable are usually the least significant type of claim held by a company.

Ans: F, LO: 1, Topic: Recognition of Accounts Receivable, Subtopic: Recognizing Accounts Receivable, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Business Economics

Receivables are valued and reported in the balance sheet at their gross amount less any sales returns and allowances and any cash discounts.

Ans: F, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Valuing Accounts Receivable, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

10.

An aging of accounts receivable schedule is based on the premise that the longer the period an account remains unpaid, the greater the probability that it will eventually be collected.

Ans: F, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Estimating the Allowance, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Business Economics

11.

The allowance method of accounting for bad debts violates the matching principle.

Ans: F, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Allowance Method for Uncollectible Accounts, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

12.

When using the allowance method, bad debt expense is recorded when an individual customer defaults.

Ans: F, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Recording Estimated Uncollectibles, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

8-4

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

13.

Uncollectible accounts must be estimated because it is not possible to know which accounts will not be collected.

Ans: T, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Recording Estimated Uncollectibles, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

14.

If a company uses the allowance method to account for uncollectible accounts, the entry to write off an uncollectible account involves only balance sheet accounts.

Ans: T, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Recording the Write-off of an Uncollectible Account, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

15.

The percentage of receivables basis of estimating uncollectible accounts ignores the existing balance in the Allowance for Doubtful Accounts in the calculation of bad debts expense.

Ans: F, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Estimating the Allowance, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

16.

Under the accounts receivable aging method, the balance in Allowance for Doubtful Accounts must be considered prior to adjusting for estimated uncollectible accounts.

Ans: T, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Estimating the Allowance, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

17.

Under the direct write-off method, no attempt is made to match bad debt expense to sales revenues in the same accounting period.

Ans: T, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Direct Write-off Method for Uncollectible Accounts, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

18.

The Allowance for Doubtful Accounts is debited under the direct write-off method when an account is determined to be uncollectible.

Ans: F, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Direct Write-off Method for Uncollectible Accounts, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

19.

When the allowance method is used to account for bad debts, the write-off of an account receivable results in an expense at the time of write-off.

Ans: F, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Recording the Write-off of an Uncollectible Account, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

20.

Allowance for Doubtful Accounts is a contra account that is deducted from Accounts Receivable on the balance sheet.

Ans: T, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Allowance Method for Uncollectible Accounts, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

21.

The Allowance for Doubtful Accounts is a liability account.

Ans: F, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Allowance Method for Uncollectible Accounts, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

22.

Cash realizable value is determined by subtracting Allowance for Doubtful Accounts from Net Sales.

23.

If bad debt losses are significant, the direct write-off method is acceptable for financial reporting purposes.

Ans: F, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Direct Write-off Method for Uncollectible Accounts, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Receivables

24.

8-5

Bad debt losses are a cost of selling on credit.

Ans: T, LO: 2 Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Valuing Accounts Receivable, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

25.

The allowance method of accounting for bad debts violates the matching principle.

26.

The Allowance for Doubtful Accounts is similar to Accumulated Depreciation in that it shows the total of all accounts written off over the years.

27.

The direct write-off method of recognizing uncollectible accounts is not in accordance with generally accepted accounting principles.

Ans: T, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Direct Write-off Method for Uncollectible Accounts, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

28.

When using the direct write-off method, year-end adjustments for bad debt expense must be made.

29.

When using the allowance method, year-end adjustments for bad debt expense must be made.

30.

Under the allowance method, Bad Debt Expense is debited when an account is deemed uncollectible and must be written off.

31.

Under the allowance method, the cash realizable value of receivables is the same both before and after an account has been written off.

32.

An aging schedule is prepared only for accounts receivable that have been past due for more than one year.

Ans: F, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Estimating the Allowance, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

33.

When an account receivable that was previously written off is collected, it is first necessary to reverse the entry to reinstate the customer’s account before recording the collection.

Ans: T, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Recovery of an Uncollectible Account, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

34.

A factor buys receivables from businesses for a fee and collects the payment directly from customers.

Ans: T, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Sale of Receivables to a Factor, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

8-6

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

35.

A major advantage of national credit cards to retailers is that there is no charge to the retailer by the credit card companies for their services.

Ans: F, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Accounting for Credit Card Sales, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

36.

If a retailer accepts a national credit card such as Visa, the retailer must maintain detailed records of customer accounts.

Ans: F, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: National Credit Card Sales, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

37.

A note receivable is a written promise by the maker to the payee to pay a specified amount of money at a definite time.

Ans: T, LO: 3, Topic: Notes Receivable, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

38.

The two key parties to a note are the maker and the payee.

39.

In a promissory note, the party to whom payment is to be made is called the maker.

Ans: F, LO: 3, Topic: Notes Receivable, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

40.

In determining a note's maturity date, the date the note is issued is included, but the due date is omitted.

Ans: F, LO: 3, Topic: Notes Receivable, Subtopic: Determining the Maturity Date, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

41.

When the term of a note is stated in months, the time factor in computing interest is the number of months divided by 360 days.

Ans: F, LO: 3, Topic: Notes Receivable, Subtopic: Computing Interest, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

42.

The interest rate on a note is always expressed as an annual rate.

Ans: T, LO: 3, Topic: Notes Receivable, Subtopic: Computing Interest, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

43.

Interest on a 6-month, 10 percent, $10,000 note is calculated by multiplying $10,000  0.10  6/12.

44.

The basic formula for computing interest on an interest-bearing note is the face value of note × annual interest rate × time in terms of one year.

45.

When a note is written to settle an open account, no entry is necessary.

Ans: F, LO: 3, Topic: Notes Receivable, Subtopic: Recognizing Notes Receivable, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

46.

A dishonored note is a note that is not paid in full at maturity.

Ans: T, LO: 3, Topic: Notes Receivable, Subtopic: Dishonor of Notes Receivable, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

Reporting and Analyzing Receivables

47.

8-7

If a promissory note is dishonored, the payee should not record interest revenue.

Ans: F, LO: 3, Topic: Notes Receivable, Subtopic: Dishonor of Notes Receivable, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

48.

The holder of a note adjusts for accrued interest by debiting Interest Receivable and crediting Interest Revenue.

Ans: T, LO: 3, Topic: Notes Receivable, Subtopic: Computing Interest, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

49.

Both the gross amount of Accounts Receivables and the Allowance for Doubtful Accounts should be reported in the balance sheet.

Ans: T, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Financial Statement Presentation of Receivables, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

50.

Bad debt expense and interest revenue are reported in the income statement under other revenues and expenses.

Ans: F, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Financial Statement Presentation of Receivables, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

51.

If a company has a significant concentration of credit risk, it is not required to discuss that in its notes to its financial statements as that could increase the related risk.

Ans: F, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Monitoring Collections, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

52.

A concentration of credit risk is a threat of nonpayment from a single customer or class of customers that could adversely affect the financial health of the company.

Ans: T, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Monitoring Collections, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Business Economics

53.

If a company has significant concentrations of credit risk, it must discuss this risk in the notes to its financial statements.

Ans: T, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Monitoring Collections, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

54.

The accounts receivable turnover ratio is computed by dividing total sales by the average net receivables during the year.

Ans: F, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Evaluating Liquidity of Receivables, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

55.

The average collection period is frequently used to assess the effectiveness of a company’s credit and collection policies.

Ans: T, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Evaluating Liquidity of Receivables, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

56.

Visualization software presents data in sophisticated graph format and can enhance successful receivables management.

Ans: T, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Data Analytics and Receivables Management, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

57.

Data analytics of receivables uses descriptive analysis to evaluate customers’ purchasing patterns.

Ans: F, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Data Analytics and Receivables Management, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

8-8

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

MULTIPLE-CHOICE QUESTIONS 58.

Interest is usually associated with a. accounts receivable. b. notes receivable. c. doubtful accounts. d. bad debts.

Ans: B, LO: 1, Topic: Recognition of Accounts Receivable, Subtopic: Types of Receivables, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

59.

The receivable that is usually evidenced by a formal instrument of credit is a(n) a. trade receivable. b. note receivable. c. accounts receivable. d. income tax receivable.

Ans: B, LO: 1, Topic: Recognition of Accounts Receivable, Subtopic: Types of Receivables, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

60.

Which of the following receivables would not be classified as an "other receivable”? a. Advance to an employee b. Refundable income tax c. Notes receivable d. Interest receivable

Ans: C, LO: 1, Topic: Recognition of Accounts Receivable, Subtopic: Types of Receivables, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

61.

Notes or accounts receivables that result from sales transactions are often called a. sales receivables. b. nontrade receivables. c. trade receivables. d. merchandise receivables.

62.

The term "receivables" refers to a. amounts due from individuals or companies. b. merchandise to be collected from individuals or companies. c. cash to be paid to creditors. d. cash to be paid to debtors.

Ans: A, LO: 1, Topic: Recognition of Accounts Receivable, Subtopic: N/A, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

63.

Receivables are a. one of the most liquid assets and thus are always considered current assets. b. claims that are expected to be collected in cash. c. shown on the income statement at cash realizable value. d. always the result of revenue recognition.

Ans: B, LO: 1, Topic: Recognition of Accounts Receivable, Subtopic: N/A, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

Reporting and Analyzing Receivables

64.

8-9

Nontrade receivables should be reported separately from trade receivables. Why is this statement either true or false? a. It is true because trade receivables are current assets and nontrade receivables are long-term. b. It is false because all current receivables must be grouped together in one account. c. It is true because nontrade receivables do not result from business operations and should not be included with accounts receivable. d. It is false because management can decide how to report receivables.

65.

Ace Delights is a corporation that sells breakfast cereal. Based on the accounts listed below, what are Ace’s total trade receivables? Income tax refund due Advance due to the company from the company president 3-month note due from Ace’s main customer Interest due this month on the above note Due and unpaid from this month’s sales Due and unpaid from last month’s sales a. b. c. d.

$ 500 300 2,000 100 9,000 1,000

$10,000 $12,000 $11,000 $12,900

Ans: B, LO: 1, Topic: Recognition of Accounts Receivable, Subtopic: Types of Receivables, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: $2,000 + $9,000 + $1,000  $12,000 (3-Mon. Note + current & last mon. unpaid sal.)

66.

Which of the following would probably be the most significant type of a claim held by a company? a. notes receivable b. nontrade receivables c. accounts receivable d. interest receivable

8-10 67.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

A1 Service Company had the following items to report on its balance sheet: Employee advances Amounts owed by customers for the sale of services (due in 30 days) Refundable income taxes Interest receivable Accepted a formal instrument of credit for services (due in 18 months) A loan to company president Dishonored note which will eventually be collected

$ 1,580 3,050 1,120 950 2,220 10,000 1,380

Based on this information, what amount should appear in the "Other Receivables" category? a. $20,300 b. $13,650 c. $15,030 d. $17,250 Ans: B, LO: 1, Topic: Recognition of Accounts Receivable, Subtopic: Types of Receivables, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: $1,580 + $1,120 + $950 + $10,000  $13,650 (Emp. adv. + inc. tax. ref. + int. rec. + pres. loan.)

68.

On January 15, Acme Wholesale Company sells merchandise on account to Jones Associates for $5,000 with terms 3/10, n/30. On January 20, Jones returns $1,000 of this merchandise to Acme. On January 24, payment is received from Jones for the balance due. What is the amount of cash received? a. $4,000 b. $3,880 c. $3,850 d. $2,800

Ans: B, LO: 1, Topic: Recognition of Accounts Receivable, Subtopic: Recognizing Accounts Receivable, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($5,000  $1,000)  .97  $3,880 (Sale amount – ret.) × (1 – .03)

69.

Which of the following represent the three classifications of receivables? a. Accounts receivable, notes receivable, and other receivables b. Accounts to be collected, accounts estimated that will not be collected, accounts that were not collected c. Receivables that are recognized, receivables that are valued, receivables that are accelerated d. Interest-related receivables, receivables from customers, receivables from employees/ officers

Ans: A, LO: 1, Topic: Recognition of Accounts Receivable, Subtopic: Types of Receivables, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Receivables

70.

8-11

A1 Sports sells athletic equipment. On November 14, they sold $4,000 of uniforms to Middleboro Middle School, terms 2/10, n/30. On November 21, they received an order from Bay High School for $2,400 of custom printed bats to be produced in December. On November 30, Middleboro Middle School returned $400 of defective merchandise. A1 has received no payments from either school as of month-end. What amount will be reported as accounts receivable, net on the balance sheet as of November 30? a. $6,400 b. $6,000 c. $4,000 d. $3,600

Ans: D, LO: 1, Topic: Recognition of Accounts Receivable, Subtopic: Recognizing Accounts Receivable, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: $4,000  $400  $3,600 (Sale amount – ret.)

71.

Three accounting issues associated with accounts receivable are a. depreciating, returns, and valuing. b. depreciating, valuing, and collecting. c. recognizing, valuing, and disposing. d. accrual, bad debts, and disposing.

Ans: C, LO: 1, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

72.

A1 Supply Company on July 15 sells merchandise on account to Acme Co. for $3,000, terms 2/10, n/30. On July 20, Acme Co. returns $1,200 of merchandise to A1 Supply Company. On July 24, payment is received from Acme Co. for the balance due. What is the amount of cash received? a. $1,800 b. $1,764 c. $1,740 d. $3,000

Ans: B, LO: 1, Topic: Recognition of Accounts Receivable, Subtopic: Recognizing Accounts Receivable, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($3,000  $1,200)  .98  $1,764 (Sale amount – ret.) × (1– .02)

73.

Which one of the following is not an accounting problem (issue) associated with accounts receivable? a. Depreciating accounts receivable b. Recognizing accounts receivable c. Valuing accounts receivable d. Accelerating cash receipts from accounts receivable

Ans: A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Valuing Accounts Receivable, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

74.

Accounts receivable are valued and reported on the balance sheet a. in the investments section. b. at gross amounts less sales returns and allowances. c. at cash realizable value. d. only if they are not past due.

Ans: C, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Recording Estimated Uncollectibles, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

8-12 75.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Which of the following is one reason that companies estimate uncollectible accounts? a. To identify which customers’ accounts will become uncollectible b. To write off the amounts which will not be collected from customers c. To match the expense associated with receivables against the related revenues d. To determine the total amount owed by customers

Ans: C, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Allowance Method for Uncollectible Accounts, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

76.

Which one of the following indicates when Bad Debt Expense should be recorded? a. Each time a credit sale is made b. At the end of an accounting period during the adjusting process c. Whenever a customer gets behind in paying for receivables d. Whenever an account is written off as uncollectible

Ans: B, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Allowance Method for Uncollectible Accounts, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

77.

What happens when a company writes off an uncollectible account under the allowance method? a. The cash realizable value of total accounts receivable stays the same. b. Expenses increase. c. The Allowance for Doubtful Accounts account increases. d. The amount the company expects to collect from its total accounts receivable declines.

Ans: A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Recording the Write-off of an Uncollectible Account, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

78.

What occurs when a company factors its receivables? a. An estimate for bad debts is made b. Accounts are written off c. Receivables are sold d. An aging analysis is performed

Ans: C, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Sale of Receivables to a Factor, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

79.

At what point in time does a company recognize an expense when it uses the allowance method of accounting for uncollectible accounts? a. When a customer’s account is identified as being uncollectible b. In the same period as the revenue is recognized c. At the time expenses related to the collection activities are incurred d. At the time the account is written off

Ans: B, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Recording Estimated Uncollectibles, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Receivables

80.

8-13

Acme Discount Wholesale Company has a $145,000 balance in Accounts Receivable and a $420 debit balance in Allowance for Doubtful Accounts at year-end just prior to recording adjusting entries. Credit sales for the period totaled $960,000. How much is the amount of the bad debt adjusting entry if Acme estimates that 1.5% of its receivables will be uncollectible? a. $2,595 b. $2,175 c. $14,400 d. $1,755

Ans: A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Estimating the Allowance, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: $145,000 × 1.5% + $420 = $2,595 ((A/R bal. × 1.5%) + ADA bal.)

81.

The Allowance for Doubtful Accounts is necessary because a. when recording uncollectible accounts expense, it is not possible to know which specific accounts will not pay. b. uncollectible accounts that are written off must be accumulated in a separate account. c. a liability results when a credit sale is made. d. management needs to accumulate all the credit losses over the years.

Ans: A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Recording Estimated Uncollectibles, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

82.

The account Allowance for Doubtful Accounts is classified as a(n) a. liability. b. contra account to Bad Debt Expense. c. expense. d. contra account to Accounts Receivable.

Ans: D, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Allowance Method for Uncollectible Accounts, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

83.

Under the allowance method, bad debt expense is recorded a. when an individual account is written off. b. when the loss amount is known. c. for an amount that the company estimates it will not collect. d. several times during the accounting period.

Ans: C, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Recording the Write-off of an Uncollectible Account, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

84.

The expense recognition principle a. requires that all credit losses be recorded when an individual customer cannot pay. b. necessitates the recording of an estimated amount for bad debts. c. results in the recording of a known amount for bad debt losses. d. is not involved in the decision of when to expense a credit loss.

Ans: B, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Allowance Method for Uncollectible Accounts, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

8-14 85.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Under the allowance method, writing off an uncollectible account a. affects only balance sheet accounts. b. affects both balance sheet and income statement accounts. c. affects only income statement accounts. d. is not an acceptable practice.

86.

The net amount expected to be received in cash from receivables is termed the a. cash realizable value. b. cash-good value. c. gross cash value. d. cash-equivalent value.

Ans: A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Allowance Method for Uncollectible Accounts, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

87.

If a company fails to record estimated bad debt expense, a. cash realizable value is understated. b. expenses are understated. c. revenues are understated. d. receivables are understated.

Ans: B, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Valuing Accounts Receivable, Bloom: AN, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

88.

If the amount in Bad Debt Expense is understated at year-end a. net income will be understated. b. stockholders’ equity will be understated. c. Allowance for Doubtful Accounts will be overstated. d. the cash realizable value of accounts receivable will be overstated.

Ans: D, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Valuing Accounts Receivable, Bloom: AN, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

89.

If the amount in Bad Debt Expense is overstated at year-end a. net income will be overstated. b. stockholders’ equity will be overstated. c. Allowance for Doubtful Accounts will be understated. d. the cash realizable value of accounts receivable will be understated.

90.

The expense recognition principle relates to credit losses by stating that bad debt expense should be recorded a. in the same period as allowed for tax purposes. b. in the period of the sale. c. for an exact amount. d. in the period of the loss.

Reporting and Analyzing Receivables

91.

8-15

When the allowance method is used to account for uncollectible accounts, Bad Debts Expense is debited when a. a sale is made. b. an account becomes bad and is written off. c. management estimates the amount of uncollectible accounts. d. a customer's account becomes past due.

Ans: C, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Recording Estimated Uncollectibles, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

92.

When the direct write-off method is used, when an account becomes uncollectible and must be written off a. Allowance for Doubtful Accounts should be credited. b. Accounts Receivable should be credited. c. Bad Debt Expense should be credited. d. Sales Revenue should be debited.

Ans: B, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Direct Write-Off Method for Uncollectible Accounts, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

93.

The collection of an account that had been previously written off under the allowance method of accounting for uncollectible accounts a. will increase income in the period it is collected. b. will decrease income in the period it is collected. c. requires a correcting entry for the period in which the account was written off. d. does not affect income in the period it is collected.

Ans: D, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Recovery of an Uncollectible Account, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

94.

The direct write-off method of accounting for uncollectible accounts a. emphasizes the matching of expenses with revenues. b. emphasizes balance sheet relationships. c. emphasizes cash realizable value. d. is not generally accepted as a basis for estimating bad debts.

Ans: D, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Direct Write-off Method for Uncollectible Accounts, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

95.

An aging of a company's accounts receivable indicates that $9,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $2,400 credit balance, the adjustment for the period will require a a. debit to Bad Debt Expense for $9,000. b. debit to Allowance for Doubtful Accounts for $6,600. c. debit to Bad Debt Expense for $6,600. d. credit to Allowance for Doubtful Accounts for $9,000.

Ans: C, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Recording Estimated Uncollectibles, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $9,000  $2,400  $6,600 (Est. Uncoll. accts. – ADA bal.)

8-16

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

96.

An aging of a company's accounts receivable indicates that $9,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $3,200 debit balance, the adjustment for the period will require a a. debit to Bad Debt Expense for $9,000. b. debit to Bad Debt Expense for $12,200. c. credit to Allowance for Doubtful Accounts for $5,800. d. credit to Allowance for Doubtful Accounts for $9,000.

Ans: B, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Estimating the Allowance, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $9,000 + $3,200  $12,200 (Est. Uncolls. accts. + ADA bal.)

97.

An aging of a company's accounts receivable indicates that $9,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $3,200 credit balance, the adjustment for the period will require a a. credit to Bad Debt Expense for $9,000. b. debit to Allowance for Doubtful Accounts for $5,800. c. debit to Bad Debt Expense for $5,800. d. credit to Allowance for Doubtful Accounts for $9,000.

Ans: C, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Estimating the Allowance, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $9,000  $3,200  $5,800. (Est. Uncoll. accts. – ADA bal.)

98.

An aging of a company's accounts receivable indicates that $9,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $2,400 debit balance, the adjustment for the period will require a a. debit to Bad Debt Expense for $9,000. b. debit to Allowance for Doubtful Accounts for $11,400. c. debit to Bad Debt Expense for $11,400. d. credit to Allowance for Doubtful Accounts for $9,000.

Ans: C, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Estimating the Allowance, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $9,000 + $2,400  $11,400 (Est. Uncoll. accts. + ADA bal.)

99.

A debit balance in the Allowance for Doubtful Accounts account a. is the normal balance for that account. b. indicates that actual write-offs have been greater than what was estimated. c. indicates that actual write-offs have been less than what was estimated. d. cannot occur if the percentage of receivables method of estimating uncollectibles is used.

Ans: B, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Estimating the Allowance, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Receivables

100.

8-17

Under the direct write-off method of accounting for uncollectible accounts, Bad Debt Expense is debited a. when a credit sale is past due. b. at the end of each accounting period. c. whenever a predetermined amount of credit sales have been made. d. when an account is determined to be uncollectible.

101.

An alternative name for Bad Debt Expense is a. Deadbeat Expense. b. Uncollectible Accounts Expense. c. Collection Expense. d. Credit Loss Expense.

Ans: B, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Valuing Accounts Receivable, Bloom: K, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

102.

Bad Debt Expense is considered a. an avoidable cost in doing business on a credit basis. b. an internal control weakness. c. a necessary risk of doing business on a credit basis. d. avoidable unless there is a recession.

Ans: C, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Valuing Accounts Receivable, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Business Economics

103.

Two methods of accounting for uncollectible accounts are the a. allowance method and the accrual method. b. allowance method and the net realizable method. c. direct write-off method and the accrual method. d. direct write-off method and the allowance method.

Ans: D, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Valuing Accounts Receivable, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

104.

The allowance method of accounting for uncollectible accounts is required if a. the company makes any credit sales. b. uncollectibles are significant in amount. c. the company is a retailer. d. the company charges interest on accounts receivable.

105.

Bad Debt Expense is reported on the income statement as a. part of cost of goods sold. b. an expense subtracted from net sales to determine gross profit. c. an operating expense. d. a contra revenue account.

8-18

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

106.

When the allowance method of accounting for uncollectible accounts is used, Bad Debt Expense is recorded a. in the year after the credit sale is made. b. in the same year as the credit sale. c. as each credit sale is made. d. when an account is written off as uncollectible.

Ans: B, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Recording Estimated Uncollectibles, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

107.

To record estimated uncollectibles using the allowance method, the adjusting entry would be a a. debit to Accounts Receivable and a credit to Allowance for Doubtful Accounts. b. debit to Bad Debt Expense and a credit to Allowance for Doubtful Accounts. c. debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable. d. debit to Loss on Credit Sales and a credit to Accounts Receivable.

108.

Under the allowance method of accounting for uncollectibles, a. the cash realizable value of accounts receivable is greater before an account is written off than after it is written off. b. Bad Debt Expense is debited when a specific account is written off as uncollectible. c. the cash realizable value of accounts receivable in the balance sheet is the same before and after an account is written off. d. Allowance for Doubtful Accounts is closed each year to Income Summary.

Ans: C, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Recording the Write-off of an Uncollectible Account, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

109.

The balance in Allowance for Doubtful Accounts must be considered prior to the end of period adjustment when using which of the following methods? a. Cash realizable method b. Direct write-off method c. Accrual method d. Allowance method

Ans: D, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Estimating the Allowance, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

110.

Allowance for Doubtful Accounts on the balance sheet a. is offset against total current assets. b. increases the cash realizable value of accounts receivable. c. appears under the heading "Other Assets." d. is deducted from accounts receivable.

Ans: D, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Recording Estimated Uncollectibles, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Receivables

111.

8-19

When an account is written off using the allowance method, the a. cash realizable value of total accounts receivable will increase. b. net accounts receivable will decrease. c. allowance account will increase. d. net accounts receivable will stay the same.

Ans: D, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Recording the Write-off of an Uncollectible Account, Bloom: AN, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

112.

Using the allowance method, if an account is collected after having been previously written off a. the Allowance for Doubtful Accounts account should be debited. b. only Accounts Receivable is credited. c. both income statement and balance sheet accounts will be affected. d. there will be both a debit and a credit to Accounts Receivable.

113.

You have just received notice that a customer of yours with an account receivable balance of $100 has gone bankrupt and will not make any future payments. Assuming you use the allowance method, the entry you make is to a. debit Allowance for Doubtful Accounts and credit Bad Debt Expense. b. debit Allowance for Doubtful Accounts and credit Accounts Receivable. c. debit Bad Debt Expense and credit Allowance for Doubtful Accounts. d. debit Bad Debt Expense and credit Accounts Receivable.

Ans: B, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Recording the Write-off of an Uncollectible Account, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

114.

When an account is written off using the allowance method, accounts receivable a. is unchanged and the allowance account increases. b. increases and the allowance account increases. c. decreases and the allowance account decreases. d. decreases and the allowance account increases.

Ans: C, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Recording the Write-off of an Uncollectible Account, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

115.

Under the allowance method, when a specific account is written off a. total assets will be unchanged. b. net income will decrease. c. total assets will decrease. d. total assets will increase.

Ans: A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Recording the Write-off of an Uncollectible Account, Bloom: AN, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

116.

The percentage of receivables basis for estimating uncollectible accounts emphasizes a. cash realizable value. b. the relationship between accounts receivable and bad debts expense. c. income statement relationships. d. the relationship between sales and accounts receivable.

Ans: A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Estimating the Allowance, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

8-20

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

117.

Ace Company uses the percentage of receivables method for recording bad debts expense. The accounts receivable balance is $250,000 and credit sales are $1,000,000. Management estimates that 4% of accounts receivable will be uncollectible. What adjusting entry will Ace Company make if the Allowance for Doubtful Accounts has a credit balance of $2,500 before adjustment? a. Bad Debt Expense 10,000 Allowance for Doubtful Accounts 10,000 b. Bad Debt Expense 7,500 Allowance for Doubtful Accounts 7,500 c. Bad Debt Expense 7,500 Accounts Receivable 7,500 d. Bad Debt Expense 10,000 Accounts Receivable 10,000

Ans: B, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Estimating the Allowance, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($250,000  .04)  $2,500  $7,500 ((A/R bal. × 4%) − ADA bal.)

118.

Using the percentage-of-receivables method for recording bad debt expense, estimated uncollectible accounts are $55,000. If the balance of the Allowance for Doubtful Accounts is an $11,000 debit before adjustment, what is the credit balance after adjustment? a. $55,000 b. $11,000 c. $66,000 d. $44,000

Ans: A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Estimating the Allowance, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: $55,000 estimated uncollectible accounts

119.

Using the percentage-of-receivables method for recording bad debt expense, estimated uncollectible accounts are $55,000. If the balance of the Allowance for Doubtful Accounts is an $11,000 debit before adjustment, what is the amount of bad debt expense for that period? a. $55,000 b. $11,000 c. $66,000 d. $44,000

Ans: C, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Estimating the Allowance, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: $55,000 + $11,000  $66,000 (Est. uncoll. accts. + ADA bal.)

Reporting and Analyzing Receivables

120.

8-21

Using the percentage-of-receivables method for recording bad debt expense, estimated uncollectible accounts are $45,000. If the balance of the Allowance for Doubtful Accounts is a $6,000 credit before adjustment, what is the amount of bad debt expense for that period? a. $45,000 b. $39,000 c. $51,000 d. $6,000

Ans: B, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Estimating the Allowance, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: $45,000  $6,000  $39,000 (Est. uncoll. accts. − ADA bal.)

121.

Using the percentage-of-receivables method for recording bad debt expense, estimated uncollectible accounts are $45,000. If the balance of the Allowance for Doubtful Accounts is a $6,000 debit before adjustment, what is the balance after adjustment? a. $45,000 b. $51,000 c. $39,000 d. $6,000

122.

Acme Pet Supply Company uses the percentage-of-receivables method for recording bad debt expense. The Accounts Receivable balance is $250,000 and credit sales are $1,000,000. Management estimates that 6% of accounts receivable will be uncollectible. What adjusting entry will Acme make if the Allowance for Doubtful Accounts has a credit balance of $2,500 before adjustment? a. Bad Debt Expense 17,500 Allowance for Doubtful Accounts 17,500 b. Bad Debt Expense 5,000 Allowance for Doubtful Accounts 5,000 c. Bad Debt Expense 12,500 Allowance for Doubtful Accounts 12,500 d. Bad Debt Expense 10,000 Accounts Receivable 10,000

Ans: C, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Estimating the Allowance, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($250,000  .06)  $2,500  $12,500 ((A/R bal. × 6%) – ADA bal.)

123.

Under the allowance method, when a year-end adjustment is made for estimated uncollectible accounts a. total assets decrease. b. total assets are unchanged. c. net income is unchanged. d. liabilities decrease.

8-22 124.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

One might infer from a debit balance in Allowance for Doubtful Accounts that a. a posting error has been made. b. more accounts have been written off than had been estimated. c. the direct method is being used. d. Bad Debt Expense has been overestimated.

125.

In reviewing the accounts receivable, the cash realizable value is $28,000 before the writeoff of a $2,000 account. What is the cash realizable value after the write-off? a. $28,000 b. $2,000 c. $30,000 d. $26,000

Ans: A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Recording the Write-off of an Uncollectible Account, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: $28,000 before and after write-off

126.

In 2025, the A1 Service Co. had net credit sales of $900,000. On January 1, 2025, the Allowance for Doubtful Accounts had a credit balance of $22,500. During 2025, $36,000 of uncollectible accounts receivable were written off. Past experience indicates that the allowance should be 10% of the balance in receivables (percentage-of-receivables basis). If the accounts receivable balance at December 31 was $240,000, what is the required adjustment to the Allowance for Doubtful Accounts at December 31, 2025? a. $24,000. b. $37,500. c. $46,500. d. $36,000.

Ans: B, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Estimating the Allowance, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($240,000  .10) + ($36,000  $22,500)  $37,500 (End. A/R bal. × 10 %) + (A/R writ. off – beg. ADA bal.)

127.

The balance of Allowance for Doubtful Accounts prior to making the adjusting entry to record Bad Debt Expense a. is relevant when using the percentage-of-receivables basis. b. is relevant when using the direct write-off method. c. is relevant to both the percentage-of-receivables basis and the direct write-off method. d. will never show a debit balance at this stage in the accounting cycle.

Ans: A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Estimating the Allowance, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

128.

The direct write-off method of accounting for uncollectibles a. uses an allowance account. b. uses a contra asset account. c. does not require estimates of bad debt losses. d. is the preferred method under generally accepted accounting principles.

Ans: C, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Direct Write-off Method for Uncollectible Accounts, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

Reporting and Analyzing Receivables

129.

8-23

Under the direct write-off method of accounting for uncollectible accounts, a. the allowance account is increased for the actual amount of bad debt at the time of write-off. b. a specific account receivable is decreased for the actual amount of bad debt at the time of write-off. c. balance sheet relationships are emphasized. d. bad debt expense is always recorded in the period in which the revenue was recorded.

Ans: B, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Direct Write-off Method for Uncollectible Accounts Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

130.

Net credit sales for the month are $900,000. The accounts receivable balance is $192,000. The allowance is calculated as 5% of the receivables balance using the percentage-ofreceivables basis. If the Allowance for Doubtful Accounts has a credit balance of $6,000 before adjustment, what is the balance after adjustment? a. $ 9,600 b. $ 3,600 c. $15,600 d. $ 9,900

Ans: A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Estimating the Allowance, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: $192,000  .05  $9,600 (A/R bal. × 5%)

131.

In 2025, Ace Auto Service Company had net credit sales of $2,250,000. On January 1, 2025, Allowance for Doubtful Accounts had a credit balance of $54,000. During 2025, $90,000 of uncollectible accounts receivable were written off. Past experience indicates that the allowance should be 10% of the balance in receivables (percentage of receivables basis). If the accounts receivable balance at December 31 was $600,000, what is the required adjustment to the Allowance for Doubtful Accounts at December 31, 2025? a. $ 60,000 b. $ 25,000 c. $ 96,000 d. $ 90,000

Ans: C, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Estimating the Allowance, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($600,000  .10) + ($90,000  $54,000)  $96,000 [(End A/R bal. × 10%) + (accts. writ. off – beg. ADA bal.)]

8-24

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

132.

An analysis and aging of the accounts receivable of Acme Marine Service Company at December 31 reveal these data: Accounts receivable $3,200,000 Allowance for doubtful accounts per books before adjustment (credit) 200,000 Amounts expected to become uncollectible 260,000 What is the cash realizable value of the accounts receivable at December 31 after adjustment? a. $2,740,000 b. $3,000,000 c. $3,200,000 d. $2,940,000

Ans: D, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Estimating the Allowance, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: $3,200,000  $260,000  $2,940,000 (A/R bal. – exp. Uncoll. amount)

133.

The bookkeeper/cashier at Ace Enterprises recorded the following journal entry: Allowance for Doubtful Accounts Accounts Receivable – Richard James

1,000 1,000

Which one of the following statements is false? a. This entry is only prepared on the last day of the accounting period. b. There should be written authorization for this transaction from someone who does not have responsibilities related to recording cash. c. There could be a violation of internal control policies. d. James’ account was written off because it was determined to be uncollectible. Ans: A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Recording the Write-off of an Uncollectible Account, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

134.

The following information is related to December 31, 2024 balances.  Accounts receivable $1,400,000  Allowance for doubtful accounts (credit) (120,000)  Cash realizable value 1,280,000 During 2025, sales on account were $390,000 and collections on account were $230,000. The company wrote off $22,000 in uncollectible accounts. An analysis of outstanding receivable accounts at year-end indicated that uncollectibles should be estimated at $144,000. The change in the cash realizable value from 12/31/24 to 12/31/25 was a. $136,000 increase. b. $160,000 increase. c. $114,000 increase. d. $138,000 increase.

Ans: C, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Recording the Write-off of an Uncollectible Account, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: [($1,400,000 + $390,000  $230,000 - $22,000)  $144,000]  $1,280,000  $136,000 ((A/R bal. + cr. sal. – coll. – Write--Off) – ADA bal.) – Cash real. val.)

Reporting and Analyzing Receivables

135.

8-25

The following information is related to December 31, 2024 balances.  Accounts receivable $1,400,000  Allowance for doubtful accounts (credit) (120,000)  Cash realizable value 1,280,000 During 2025, sales on account were $390,000 and collections on account were $230,000. The company wrote off $22,000 in uncollectible accounts. An analysis of outstanding receivable accounts at year-end indicated that uncollectibles should be estimated at $144,000. Bad debt expense for 2025 is: a. $46,000. b. $24,000. c. $144,000. d. $ 2,000.

Ans: A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Recording the Write-off of an Uncollectible Account, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: $144,000  ($120,000  $22,000)  $46,000 (Est. Uncollectibles – (2024 ADA bal. – accts. writ. off))

136.

During 2025, A1 Inc. had sales on account of $528,000, cash sales of $216,000, and collections on account of $336,000. In addition, they collected $5,800 which had been written off as uncollectible in 2024. As a result of these transactions, the change in the accounts receivable balance from the beginning of the year to the end of the year indicates a a. $402,200 increase. b. $192,000 increase. c. $186,200 increase. d. $408,000 increase.

Ans: B, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Valuing Accounts Receivable, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $528,000  $336,000  $192,000 (Cr. sal. – coll.)

137.

A1 Marine Corporation’s unadjusted trial balance includes the following balances (assume normal balances):  Accounts receivable $1,865,000  Allowance for doubtful accounts $ 35,500 Uncollectibles are estimated to be 6% of outstanding receivables. What amount of bad debt expense will the company record? a. $119,400 b. $76,400 c. $74,270 d. $114,030

Ans: B, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Estimating the Allowance, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($1,865,000  .06)  $35,500  $76,400 (A/R bal. × 6%) – ADA bal.)

8-26 138.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

The following information is related to December 31, 2024 balances.  Accounts receivable $3,150,000  Allowance for doubtful accounts (credit) (270,000)  Cash realizable value $2,880,000 During 2025, sales on account were $870,000 and collections on account were $516,000. The company wrote off $48,000 in uncollectible accounts. An analysis of outstanding receivable accounts at year-end indicated that uncollectibles should be estimated at $324,000. The change in the cash realizable value from 12/31/24 to 12/31/25 was a a. $300,000 increase. b. $354,000 increase. c. $252,000 increase. d. $306,000 increase.

Ans: C, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Valuing Accounts Receivable, Bloom: AN, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: [($3,150,000 + $870,000  $516,000 - $48,000)  $324,000]  $2,880,000  $252,000 ((2024 A/R bal. + Cr. sal. – coll. - WO) – 2025 est. uncollectibles) – 2024 cash real. val.)

139.

The following information is related to December 31, 2024 balances: Accounts receivable $3,150,000 Allowance for doubtful accounts (credit) (270,000) Cash realizable value 2,880,000 During 2025, sales on account were $870,000 and collections on account were $516,000. The company wrote off $48,000 in uncollectible accounts. An analysis of outstanding receivable accounts at year-end indicated that uncollectibles should be estimated at $324,000. Bad debt expense for 2025 is a. $102,000. b. $ 54,000. c. $324,000. d. $ 6,000.

140.

During 2025, Acme Inc. had sales on account of $792,000, cash sales of $324,000, and collections on account of $504,000. In addition, the company collected $8,700 which had been written off as uncollectible in 2024. As a result of these transactions, the change in the accounts receivable indicates a a. $603,300 increase. b. $288,000 increase. c. $279,300 increase. d. $612,000 increase.

Ans: B, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Valuing Accounts Receivable, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $792,000  $504,000 + $8,700  $8,700  $288,000 (Cr. sal. – coll. + accts. writ. off – writ. off accts. coll.)

Reporting and Analyzing Receivables

141.

8-27

Ace Auto Service’s unadjusted trial balance includes the following balances (assume normal balances): Accounts Receivable $1,119,000 Allowances for Doubtful Accounts 21,300 Uncollectibles are estimated to be 6% of outstanding receivables. What amount of bad debt expense will the company record? a. $67,140 b. $45,840 c. $44,562 d. $68,418

Ans: B, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Estimating the Allowance, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($1,119,000  .06)  $21,300  $45,840 (A/R bal. × 6%) – ADA bal.)

142.

A write-off of specific accounts receivable under the allowance method a. increases bad debt expense for the accounting period. b. should occur on the last day of the accounting period. c. decreases the cash realizable value of accounts receivable. d. should be formally approved by an authorized employee.

Ans: D, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Recording the Write-off of an Uncollectible Account, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

143.

Which one of the following is not a reason that a company may sell its receivables? a. The amount due from customers is relatively large compared to other assets owned by a company. b. Factoring companies possess expertise in accounts receivable processing and collections. c. Selling receivables is a reasonable source of cash, often less costly than loans. d. Billing and collecting amounts due from customers is time-consuming and costly.

Ans: A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Disposing of Accounts Receivable, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

144.

The direct write-off method is acceptable for financial reporting purposes only if the bad debt losses are insignificant. a. This is a false statement because the direct write-off method violates the matching principle. b. This is a true statement based on the concept of materiality. c. This is a false statement because the direct write-off method can only be used for tax reporting. d. This is a true statement because companies can choose either the direct write-off or the allowance method for financial reporting, as long as they consistently apply the method.

Ans: B, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Direct Write-off Method for Uncollectible Accounts, Bloom: K, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

8-28 145.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Which of the following is a reason why a company might sell its receivables? a. The company has excess cash on hand. b. The company wants to lengthen the cash-to-cash operating cycle. c. The company has sufficient expertise in collections. d. The company needs cash and borrowing costs are high.

Ans: D, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Disposing of Accounts Receivable, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

146.

What is the traditional disposition of accounts receivable? a. The accounts are collected and removed from the records. b. The accounts are written off as uncollectible. c. The accounts are sold to a factor to accelerate cash receipts. d. The accounts are dishonored then subsequently collected.

147.

The entry to record the sale of accounts receivables to a factor typically includes a debit to a. Allowance for Uncollectible Accounts. b. Bad Debt Expense. c. Service Charge Expense. d. Interest Expense

148.

Which of the following statements is false regarding the factoring of accounts receivable? a. The service charge incurred when a company often factors its receivables is reported as an operating expense. b. When a company factors its receivables, it collects the receivables and remits the cash to the factor. c. Factoring of a company’s accounts receivable shortens its cash-to-cash operating cycle. d. Factoring arrangements vary widely but typically a fee of between 1 and 3% is charged.

Ans: B, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Sale of Receivables to a Factor, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

149.

The parties involved when national credit cards are used for retails sales include all of the following except. a. the national credit card company b. the supplier c. the customer d. the retailer

Ans: B, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: National Credit Card Sales, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

150.

Which of the following is not one of the advantages to the retailer of accepting national credit cards? a. To retailer receives cash more quickly. b. The issuer investigates the creditworthiness of customers. c. The retailer absorbs any losses from uncollectible accounts. d. The issuer maintains customer accounts.

Ans: C, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: National Credit Card Sales, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Receivables

151.

8-29

The entry to record sales revenue when a national credit card is used includes a debit to a. Accounts Receivable. b. Sales Discounts. c. Cash. d. Unearned Revenue.

Ans: C, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Accounting for Credit Card Sales, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

152.

Katy Perry purchases $2,000 of equipment from Ace Equipment Supply Co., using her Capital One Visa Card. Capital One charges a service fee of 2%. The entry to record this transaction by Ace includes a. a debit to Cash for $1,960. b. a debit to Accounts Receivable for $2,000 c. a credit to Sales Revenue for $1,960. d. a credit to Sales Discounts for $40.

Ans: A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Accounting for Credit Card Sales, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: $2,000 × .02 = $40; $2,000 – $40 = $1,960 (Sales rev. × serv. fee per.) = Serv. chg.; Sales rev. – Serv. chg.= Cash

153.

Under the allowance method of accounting for uncollectibles, why must uncollectible accounts receivable be estimated at the end of the accounting period? a. To allow the collection department to schedule work for the next accounting period. b. To determine the gross realizable value of accounts receivable. c. The IRS rules require the company to make the estimate. d. To match bad debt expense to the period in which the revenues were earned.

Ans: D, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Allowance Method for Uncollectible Accounts, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

154.

If a company sells its accounts receivable to a factor a. the seller pays a fee to the factor. b. the factor pays a fee to the seller. c. there is a gain on the sale of the receivables. d. the seller defers recognition of sales revenue until the account is collected.

Ans: A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Sale of Receivables to a Factor, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

8-30

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

155.

Acme Furniture factors $700,000 of receivables to A1 Factors, Inc. A1 Factors assesses a 3% service charge on the amount of receivables sold. Acme Furniture factors its receivables regularly with A1 Factors. What journal entry does Acme make when factoring these receivables? a. Cash 679,000 Loss on Sale of Receivables 21,000 Accounts Receivable 700,000 b. Cash 679,000 Accounts Receivable 679,000 c. Cash 500,000 Accounts Receivable 679,000 Gain on Sale of Receivables 21,000 d. Cash 679,000 Service Charge Expense 21,000 Accounts Receivable 700,000

Ans: D, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Sale of Receivables to a Factor, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Reporting, IMA: Reporting Solution: $700,000  (1  .03)  $679,000 (Sales  (1  .03))

156.

When customers make purchases with a national credit card, the retailer a. is responsible for maintaining customer accounts. b. is not involved in the collection process. c. absorbs any losses from uncollectible accounts. d. receives cash equal to the full price of the merchandise sold.

157.

On April 5, Ace’s Boutique accepted a Visa card for a $750 purchase. Visa charges a 2% service fee. The entry to record this transaction would include a a. credit to Cash of $735. b. debit to Cash of $750. c. debit to Service Charge Expense of $15. d. credit to Service Charge Expense of $15.

Ans: C, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Sale of Receivables to a Factor, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Reporting, IMA: Reporting Solution: $750  .02  $15 (Sale amount × 2%)

158.

Acme Retailers accepted $40,000 of Discover credit card charges for merchandise sold on August 1. Discover charges 4% for its credit card use. The entry to record this transaction by Acme Retailers will include a credit to Sales Revenue of $40,000 and a debit to (or debits to) a. Cash for $38,400 and Service Charge Expense for $1,600. b. Accounts receivable for $38,400 and Service Charge Expense for $2,400. c. Cash for $40,000. d. Accounts Receivable for $40,000.

Ans: A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Accounting for Credit Card Sales, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Reporting, IMA: Reporting Solution: $40,000  (1  .04)  $38,400 (Sale amount × (1 – .04))

Reporting and Analyzing Receivables

159.

8-31

Acme Inc. reported the following item in its balance sheet at December 31, 2024: Accounts receivable, net of $940 allowance… ......................................... $56,300 Which statement is true? a. Acme’s customers owe $56,300. b. During the year, customers charged $56,300 on account. c. The balance owed by customers is $55,360. d. Acme expects its customers to pay $56,300.

Ans: D, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Allowance Method for Uncollectible Accounts, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics Solution: $56,300 + $940 = $57,260 (A/R bal.net + Allow.)

160.

The retailer considers Visa and MasterCard sales as a. cash sales. b. promissory sales. c. credit sales. d. contingent sales.

Ans: A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Accounting for Credit Card Sales, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

161.

A promissory note a. is not a formal credit instrument. b. may be used to settle accounts receivable. c. has the party to whom the money is due as the maker. d. cannot be factored (sold) to another party.

Ans: B, LO: 3, Topic: Notes Receivable, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

162.

Which of the following is not true regarding a promissory note? a. Promissory notes may not be transferred to another party by endorsement. b. Promissory notes may be sold to another party. c. Promissory notes give a stronger legal claim to the holder than accounts receivable. d. Promissory notes may be bearer notes and not specifically identify the payee by name.

Ans: A, LO: 3, Topic: Notes Receivable, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Business Economics

163.

The two key parties to a promissory note are the a. maker and a bank. b. debtor and the payee. c. maker and the payee. d. sender and the receiver.

Ans: C, LO: 3, Topic: Notes Receivable, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Business Economics

164.

When calculating interest on a promissory note of less than one year, with the maturity date stated in terms of days, the a. maker pays more interest if 365 days are used instead of 360. b. maker pays the same interest regardless if 365 or 360 days are used. c. payee receives more interest if 360 days are used instead of 365. d. payee receives less interest if 360 days are used instead of 365.

Ans: C, LO: 3, Topic: Notes Receivable, Subtopic: Computing Interest, Bloom: AN, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

8-32 165.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

The interest on a $10,000, 10%, 1-year note receivable is a. $10,000. b. $1,000. c. $11,000. d. $10,900.

Ans: B, LO: 3, Topic: Notes Receivable, Subtopic: Computing Interest, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $10,000  .10  $1,000 (Face val. × int. rate)

166.

The interest on a $20,000, 6%, 60-day note receivable is a. $1,200. b. $200. c. $400. d. $600.

167.

The interest on a $15,000, 6%, 90-day note receivable is a. $900. b. $450. c. $225. d. $675.

Ans: C, LO: 3, Topic: Notes Receivable, Subtopic: Computing Interest, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $15,000  .06  90/360  $225 (Face val. × 6% × 90/360)

168.

The interest on a $25,000, 10%, 1-year note receivable is a. $250. b. $208. c. $2,500. d. $27,500.

169.

The interest on a $15,000, 6%, 60-day note receivable is a. $75. b. $900 c. $450. d. $150.

Ans: D, LO: 3, Topic: Notes Receivable, Subtopic: Computing Interest, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $15,000  .06  60/360  $150 (Face val. × 6% × 60/360)

Reporting and Analyzing Receivables

170.

8-33

The interest on a $10,000, 9%, 90-day note receivable is a. $225. b. $900. c. $75. d. $150.

Ans: A, LO: 3, Topic: Notes Receivable, Subtopic: Computing Interest, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $10,000  .09  90/360  $225 (Face val. × 9% × 90/360)

171.

A note receivable is a negotiable instrument which a. eliminates the need for a bad debt allowance. b. can be transferred to another party by endorsement. c. takes the place of checks in a business firm. d. can only be collected by a bank.

Ans: B, LO: 3, Topic: Notes Receivable, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

172.

When a company receives an interest-bearing note receivable, it will a. debit Notes Receivable for the maturity value of the note. b. credit Notes Receivable for the maturity value of the note. c. debit Notes Receivable for the face value of the note. d. credit Notes Receivable for the face value of the note.

Ans: C, LO: 3, Topic: Notes Receivable, Subtopic: Recognizing Notes Receivable, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

173.

The face value of a note refers to the amount a. that can be received if sold to a factor. b. borrowed plus interest received at maturity from the maker. c. at which the note receivable is recorded. d. remaining after a service charge has been deducted.

Ans: C, LO: 3, Topic: Notes Receivable, Subtopic: Recognizing Notes Receivable, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

174.

Rosen Company receives a $9,000, 3-month, 6% promissory note from Bay Company in settlement of an open accounts receivable. What entry will Rosen Company make upon receiving the note? a. Notes Receivable 9,135 Accounts Receivable—Bay Company 9,135 b. Notes Receivable 9,135 Accounts Receivable—Bay Company 9,000 Interest Revenue 135 c. Notes Receivable 5,000 Interest Receivable 135 Accounts Receivable—Bay Company 9,000 Interest Revenue 135 d. Notes Receivable 9,000 Accounts Receivable—Bay Company 9,000

Ans: D, LO: 3, Topic: Notes Receivable, Subtopic: Recognizing Notes Receivable, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: $9,000 face value

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

175.

Acme Company receives a $10,000, 3-month, 6% promissory note from A1 Company in settlement of an open accounts receivable. What entry will Acme make upon receiving the note? a. Notes Receivable 10,150 Accounts Receivable—A1 Company 10,150 b. Notes Receivable 10,150 Accounts Receivable— A1Company 10,000 Interest Revenue 150 c. Notes Receivable 10,000 Interest Receivable 150 Accounts Receivable—A1 Company 10,000 Interest Revenue 150 d. Notes Receivable 10,000 Accounts Receivable—A1 Company 10,000

176.

Short-term notes receivable a. have a related allowance account called Allowance for Doubtful Notes Receivable. b. are reported at their gross realizable value. c. use the same estimations and computations as accounts receivable to determine cash realizable value. d. are typically classified as noncurrent assets

Ans: C, LO: 3, Topic: Notes Receivable, Subtopic: Valuing Notes Receivable, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

177.

A 90-day note dated June 30, 2025 would mature on a. September 30, 2025. b. September 27, 2025. c. September 28, 2025. d. September 29, 2025.

Ans: C, LO: 3, Topic: Notes Receivable, Subtopic: Determining the Maturity Date, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: 90  (31 + 31)  28

178.

The interest rate for a three-month loan would normally be stated in terms of which of the following rates of interest? a. Daily b. Monthly c. Quarterly d. Annual

Ans: D, LO: 3, Topic: Notes Receivable, Subtopic: Computing Interest, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

Reporting and Analyzing Receivables

179.

8-35

Ace Beauty Supply Company has a 90-day note that carries an annual interest rate of 8%. If the amount of the total interest on the note is equal to $900, then what is the principal of the note? a. $11,250 b. $45,000 c. $64,800 d. $28,800

Ans: B, LO: 3, Topic: Notes Receivable, Subtopic: Computing Interest, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: P  .08  90/360  $900; P  ($900  360/90)  .08  $45,000 ((Tot int. × 360/90) ÷ 8%)

180.

Acme Service Company has a $60,000 note that carries an annual interest rate of 10%. If the amount of the total interest on the note is equal to $4,500, then what is the duration of the note in months? a. 6 months b. 4 months c. 12 months d. 9 months

Ans: D, LO: 3, Topic: Notes Receivable, Subtopic: Computing Interest, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: $4,500  ($60,000  .10)  .75; .75  12  9 [(Tot. int. ÷ (Face val. × 10%)] × 12

181.

Ace Finance Company lends Acme Industries $40,000 on August 1, 2025, accepting a 9month, 9% interest note. If Ace prepares its financial statements as of December 31, 2025, what adjusting entry must it make? a. Interest Receivable 1,500 Interest Revenue 1,500 b. Accounts Receivable 1,500 Interest Receivable 1,500 c. Cash 1,500 Interest Revenue 1,500 d. Notes Receivable 1,500 Interest Revenue 1,500

Ans: A, LO: 3, Topic: Notes Receivable, Subtopic: Accrual of Interest Receivable, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: $40,000  .09  5/12  $1,500 (Face val. × 9% × 5/12)

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

182.

Ace Finance Company lends Acme Industries $40,000 on August 1, 2025, accepting a 9month, 9% interest note. If Ace accrued interest at its December 31, 2025 year-end, what entry must it make to record the collection of the note and interest at its maturity date? a. Cash 42,700 Notes Receivable 40,000 Interest Revenue 2,700 b. Cash 42,700 Notes Receivable 42,700 c. Notes Receivable 40,000 Interest Receivable 1,500 Interest Revenue 1,200 Cash 42,700 d. Cash 42,700 Notes Receivable 40,000 Interest Receivable 1,500 Interest Revenue 1,200

Ans: D, LO: 3, Topic: Notes Receivable, Subtopic: Honor of Notes Receivable, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: $40,000  .09  5/12  $1,500; $40,000  .09  4/12  $1,200 (Face val. × 9% × 5/12 ); (Face val. × 9% × 4/12)

183.

Ace Finance Company lends Acme Industries $40,000 on January 1, 2025, accepting a 9month, 9% interest note. If Acme dishonors the note and does not pay it in full at maturity but Young expects that it will eventually be able to collect the debt, which of the following entries would most likely be made by Ace Finance Company? a. Cash 40,000 Notes Receivable 40,000 b. Accounts Receivable 40,000 Notes Receivable 40,000 c. Accounts Receivable 42,700 Notes Receivable 40,000 Interest Revenue 2,700 d. Accounts Receivable 42,700 Notes Receivable 40,000 Interest Receivable 2,700

Ans: C, LO: 3, Topic: Notes Receivable, Subtopic: Dishonor of Note Receivable, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: $40,000  .09  9/12  $2,700 (Face val. × 9% × 9/12)

184.

Which of the following is a way of disposing of a note receivable? a. Holding it until it is paid on the maturity date. b. Selling it to receive cash before the maturity date. c. Writing it off when the maker defaults on the maturity date. d. All of the answer choices are correct.

Ans: D, LO: 3, Topic: Notes Receivable, Subtopic: Disposition of Note Receivable, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

Reporting and Analyzing Receivables

185.

8-37

A dishonored note receivable a. is no longer negotiable. b. must be written off by the lender. c. creates a claim against the maker for the amount of principal only. d. is one that is not paid in full within 10 days of maturity.

Ans: A, LO: 3, Topic: Notes Receivable, Subtopic: Dishonor of Note Receivable, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

186.

The maturity value of a $60,000, 9%, 40-day note receivable dated July 3 is a. $60,000. b. $66,000. c. $65,400. d. $60,600.

Ans: D, LO: 3, Topic: Notes Receivable, Subtopic: Honor of Notes Receivable, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics Solution: $60,000 + ($60,000  .09  40/360)  $60,600 (Face val. + (Face val. × 9% × 40/360))

187.

A1 Finance Company lends Ace Manufacturing Company $40,000 on April 1, accepting a four-month, 6% interest note. A1 Finance Company prepares financial statements on April 30. What adjusting entry should be made before the financial statements can be prepared? a. Note Receivable 40,000 Cash 40,000 b. Interest Receivable 200 Interest Revenue 200 c. Cash 200 Interest Revenue 200 d. Interest Receivable 600 Interest Revenue 600

Ans: B, LO: 3, Topic: Notes Receivable, Subtopic: Accrual of Interest Receivable, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $40,000  .06  1/12  $200 (Face val. + (Face val. × 6% × 1/12)

188.

The maturity value of a $10,000, 6%, 60-day note receivable dated February 10th is a. $10,100. b. $10,050. c. $10,000. d. $10,600.

Ans: A, LO: 3, Topic: Notes Receivable, Subtopic: Honor of Notes Receivable, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $10,000 + ($10,000  .06  60/360)  $10,100 (Face val. + (Face val. × 6% × 60/360))

189.

When a note is dishonored, the payee’s entry includes a a. debit to Interest Revenue. b. credit to Accounts Receivable. c. debit to Interest Expense. d. credit to Notes Receivable.

Ans: D, LO: 3, Topic: Notes Receivable, Subtopic: Dishonor of Note Receivable, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

190.

A note receivable is issued in December. When the note is paid the following February, the payee’s entry includes (assuming a calendar-year accounting period and no reversing entries) a a. credit to Interest Receivable. b. credit to Cash. c. debit to Notes Receivable. d. debit to Interest Revenue.

Ans: A, LO: 3, Topic: Notes Receivable, Subtopic: Honor of Notes Receivable, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

191.

The maturity value of a $50,000, 12%, 3-month note receivable is a. $51,500. b. $50,600. c. $56,000. d. $50,500.

Ans: A, LO: 3, Topic: Notes Receivable, Subtopic: Honor of Notes Receivable, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $50,000 + ($50,000  .12  3/12)  $51,500 (Face val. + (Face val. × 12% × 3/12))

192.

Ace Finance Co. holds A1 Supply Inc.’s $30,000, 120-day, 9% note. The entry made by Ace when the note is collected, assuming no interest has previously been accrued is: a. Cash 30,000 Notes Receivable 30,000 b. Accounts Receivable 30,900 Notes Receivable 30,000 Interest Revenue 900 c. Cash 30,900 Notes Receivable 30,000 Interest Revenue 900 d. Accounts Receivable 30,900 Notes Revenue 30,000 Interest Revenue 900

Ans: C, LO: 3, Topic: Notes Receivable, Subtopic: Honor of Note Receivable, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: $30,000  .09  120/360  $900 (Face val. × 9% × 120/360)

193.

All of the following statements regarding the financial statement presentation of receivables are true except: a. Short-term receivables are reported in the current assets section of the balance sheet. b. The gross amount of receivables less the allowance for doubtful accounts is equal to the net receivables. c. Short-term receivables are reported above the short-term investments in the balance sheet. d. Companies report bad debt expense under "Selling Expenses" in the operating expenses section of the income statement.

Ans: C, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Financial Statement Presentation of Receivables, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Receivables

194.

8-39

Which of the following is least likely to help a company minimize losses related to uncollectible accounts receivables? a. Require potential customers to provide bank guarantees. b. Ask a potential customer for references regarding payment history. c. Increase the estimate of uncollectible accounts at the end of each period. d. Check a potential customer's credit rating.

Ans: C, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Extending Credit, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Business Economics

195.

Which one of the following is not a principle of sound accounts receivable management? a. Determine to whom to extend credit. b. Delay cash receipts from receivables if necessary. c. Monitor collections. d. Determine a payment period.

Ans: B, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Managing Receivables, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Business Economics

196.

The accounts receivable turnover is computed by dividing a. total sales by average net accounts receivables. b. total sales by ending net accounts receivables. c. net credit sales by average net accounts receivables. d. net credit sales by ending net accounts receivables.

Ans: C, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Evaluating Liquidity of Receivables, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

197.

The accounts receivable turnover is used to analyze a. profitability. b. liquidity. c. risk. d. long-term solvency.

Ans: B, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Evaluating Liquidity of Receivables, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

198.

A high accounts receivable turnover ratio indicates a. the company’s sales are increasing. b. a large proportion of the company’s sales are on credit. c. customers are making payments very quickly. d. customers are making payments slowly.

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

199.

Ace Mattress Supply sells mattresses for cash and on credit. At the end of 2025, the following appeared in the company’s balance sheet: Accounts receivable, net of $2,460 allowance… ............................ $166,200 Which one of the following statements for Ace Mattress Supply is correct? a. Customers owe $168,660 to Ace Mattress Supply., b. Ace Mattress Supply expects to collect $163,470 from customers. c. Ace Mattress Supply wrote off $2,460 of uncollectible accounts during 2025. d. The cash realizable value of Ace Mattress Supply’s accounts receivable totals $163,740.

Ans: A, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Financial Statement Presentation of Receivables, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics Solution: $166,200 + $2,460 = $168,660 (AR, net + Allow.)

200.

The accounts receivable turnover is used to calculate a. the average collection period in days. b. market risk. c. return on assets. d. current ratio.

Ans: A, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Evaluating Liquidity of Receivables, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

201.

The average collection period for receivables is computed by dividing 365 days by a. net credit sales. b. average accounts receivable. c. ending accounts receivable. d. accounts receivable turnover.

Ans: D, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Evaluating Liquidity of Receivables, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

202.

The financial statements of the A1 Manufacturing Company report net credit sales of $360,000 and net accounts receivable of $50,000 and $30,000 at the beginning of the year and the end of the year, respectively. What is the accounts receivable turnover for Nelson? a. 4.5 times b. 7.2 times c. 12.0 times d. 9.0 times

Ans: D, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Evaluating Liquidity of Receivables, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics Solution: $360,000  [($50,000 + $30,000)  2]  9.0 (Net credit sal. ÷ [(beg. net A/R + end. net A/R) ÷ 2]

Reporting and Analyzing Receivables

203.

8-41

The financial statements of the Acme Manufacturing Supply Company report net credit sales of $360,000 and net accounts receivable of $50,000 and $30,000 at the beginning of the year and the end of the year, respectively. What is the average collection period for accounts receivable in days? a. 81.1 b. 40.6 c. 50.7 d. 30.4

Ans: B, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Evaluating Liquidity of Receivables, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics Solution: $360,000  [($50,000 + $30,000)  2]  9.0; 365  9.0  40.6 365 ÷ A/R turn.

204.

The financial statements of the A1 Manufacturing Service Center report net credit sales of $600,000 and net accounts receivable of $80,000 and $40,000 at the beginning of the year and the end of the year, respectively. What is the accounts receivable turnover for A1? a. 10.0 times b. 15.0 times c. 7.5 times d. 5.0 times

Ans: A, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Evaluating Liquidity of Receivables, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics Solution: $600,000  [($80,000 + $40,000)  2]  10.0 (Net credit sal. ÷ [(beg. net A/R + end. net A/R) ÷ 2])

205.

The financial statements of the Acme Equipment Company report net credit sales of $600,000 and net accounts receivable of $80,000 and $40,000 at the beginning of the year and the end of the year, respectively. What is the average collection period for accounts receivable in days? a. 24.3 times b. 73.0 times c. 36.5 times d. 48.7 times

Ans: C, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Evaluating Liquidity of Receivables, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics Solution: $600,000  [($80,000 + $40,000)  2]  10.0; 365  10.0  36.5 (365 ÷ A/R turn.)

206.

A popular variation of the accounts receivable turnover is the a. credit risk ratio. b. concentration of credit risk. c. bad debts ratio. d. average collection period.

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

207.

The accounts receivable turnover a. is computed by dividing net credit sales for the accounting period by the cash realizable value of accounts receivable on the last day of the accounting period. b. can be used to compute the average collection period. c. is a method of evaluating the solvency of net accounts receivable. d. is only important to internal users of accounting information.

208.

A1 Salon Supply Corporation had net credit sales during the year of $1,200,000 and cost of goods sold of $720,000. Net accounts receivable at the beginning of the year was $120,000 and at the end of the year was $180,000. What was the accounts receivable turnover? a. 8.0 b. 10.0 c. 6.7 d. 4.8

Ans: A, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Evaluating Liquidity of Receivables, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics Solution: $1,200,000  [($120,000 + $180,000)  2]  8.0 (Net Cr. sal. ÷ [(beg. net A/R + end. net A/R) ÷ 2])

209.

Ace Discount Retail Corporation sells its goods on terms of 2/10, n/30. It has an accounts receivable turnover of 6. What is its average collection period (days)? a. 90 b. 40 c. 61 d. 48

210.

All of the following statements are true regarding the average collection period except: a. it is a popular variant of the accounts receivable turnover. b. it is used to assess the effectiveness of a company's credit and collection policies. c. it should generally exceed the credit term period. d. its increase may suggest a decline in the financial health of customers.

Ans: C, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Evaluating Liquidity of Receivables, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

Reporting and Analyzing Receivables

211.

8-43

In the table below the information for four companies is provided. Accounts Receivable Company Average collection period turnover A 13.9 26.3 B 13.3 27.4 C 10.4 35.1 D 14.5 25.2 Industry Average 13.0 28.1 If Company D's net credit sales are $435,000, what is its average net accounts receivable? a. $17,262 b. $30,000 c. $63,075 d. $109,620

Ans: B, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Evaluating Liquidity of Receivables, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics Solution: $435,000  14.5  $30,000 (Net Cr. sal. ÷ A/R turn.)

212.

In the table below the information for four companies is provided. Accounts Receivable Company Average collection period turnover A 13.9 26.3 B 13.3 27.4 C 10.4 35.1 D 14.5 25.2 Industry Average 13.0 28.1 Assuming all four companies are in the same industry, which company appears to have the greatest likelihood of paying its current obligations? a. Company A b. Company B c. Company C d. Company D

Ans: D, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Evaluating Liquidity of Receivables, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

213.

A1 Retailers accepted $80,000 of Citibank Visa credit card charges for merchandise sold on July 1. Citibank charges 4% for its credit card use. The entry to record this transaction by A1 Retailers will include a credit to Sales Revenue of $80,000 and a debit to (or debits to) a. Cash $76,800 and Service Charge Expense $3,200. b. Accounts Receivable $76,800 and Service Charge Expense $3,200. c. Cash $76,800 and Interest Expense $3,200. d. Accounts Receivable $80,000.

Ans: A, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Accelerating Cash Receipts, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: $80,000  .04  $3,200; $80,000 − $3,200 (Sales amount × 4%)

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

214.

Selling accounts receivables to factors and allowing credit terms such as 2/10, n/30 a. represent common business practices. b. represent ways to accelerate receivables collections. c. result in collections that are less than the gross accounts receivable. d. All of the answer choices are correct.

Ans: D, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Accelerating Cash Receipts, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

215.

Factoring arrangements a. are ways to accelerate receivable collections. b. involve no commissions or service charges because the factor is guaranteed collections on the due date. c. are only used by businesses that are insolvent. d. are mainly used in the fast food industry.

Ans: A, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Accelerating Cash Receipts, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

216.

Company A accepted a national credit card for a $9,000 purchase. The cost of the goods sold is $7,200. The credit card company charges a 3% fee. What is the impact of this transaction on net operating income? a. Increase by $1,746. b. Increase by $1,800. c. Increase by $1,530. d. Increase by $8,730.

Ans: C, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Accelerating Cash Receipts, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($9,000  $7,200)  ($9,000  .03)  $1,530. [(Sale amount – COGS) – (sale amount × 3%)]

217.

Company X accepted a national credit card for a $10,000 purchase. The cost of the goods sold is $8,000. The credit card company charges a 3% fee. What is the impact of this transaction on net operating income? a. Increase by $1,940. b. Increase by $2,000. c. Increase by $1,700. d. Increase by $9,700.

Ans: C, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Accelerating Cash Receipts, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($10,000  $8,000)  ($10,000  .03)  $1,700. [(Sale amount – COGS) – (sale amount × 3%)]

218.

A company sells $800,000 of accounts receivable to a factor for cash, incurring a 2% service charge. The entry to record the sale should not include a a. debit to Interest Expense for $16,000. b. debit to Cash for $784,000. c. debit to Service Charge Expense for $16,000. d. credit to Accounts Receivable for $800,000.

Ans: A, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Accelerating Cash Receipts, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: $800,000  .02  $16,000 (A/R amount × 2%) = Service Charge Expense

Reporting and Analyzing Receivables

219.

8-45

The sale of receivables by a business a. indicates that the business is in financial difficulty. b. is generally the major revenue item on its income statement. c. is an indication that the business is owned by a captive finance company. d. can be a quick way to generate cash for operating needs.

Ans: D, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Accelerating Cash Receipts, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

220.

If a retailer regularly sells its receivables to a factor, the service charge of the factor should be classified as a(n) a. operating expense. b. interest expense. c. other expense. d. contra asset.

221.

The sale or transfer of accounts receivable in order to raise funds is called a. pledging. b. factoring. c. leasing. d. collateralizing.

Ans: B, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Accelerating Cash Receipts, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

222.

A captive finance company refers to a. a finance company that is owned by individuals who borrow money from the company. b. finance companies that won't allow early repayment of loans. c. a company that is wholly owned by another company and provides financing to purchasers of its owner company's goods. d. any company that issues a major credit card.

Ans: C, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Accelerating Cash Receipts, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

223.

Receivables might be sold to a. lengthen the cash-to-cash operating cycle. b. take advantage of deep discounts on the cash realizable value of receivables. c. generate cash quickly. d. finance companies at an amount greater than cash realizable value.

Ans: C, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Accelerating Cash Receipts, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

224.

A company regularly sells its receivables to a factor who assesses a 2% service charge on the amount of receivables purchased. Which of the following statements is true for the seller of the receivables? a. The loss section of the income statement will increase each time receivables are sold. b. The credit to Accounts Receivable is less than the debit to Cash when the receivables are sold. c. Operating expenses will increase each time accounts are sold. d. The other expenses section of the income statement will increase each time receivables are sold.

Ans: C, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Accelerating Cash Receipts, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

8-46 225.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Which of the following is not a step in managing receivables? a. Monitor collections b. Evaluate the solvency of receivables c. Accelerate cash receipts d. Determine which customers should be extended credit

Ans: B, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Managing Receivables, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

226.

One concern if a company’s credit policy is too “tight” is that a. many customers will not pay their accounts. b. customers will be late in paying accounts c. sales will be lost. d. customers will need to provide letters of credit.

Ans: C, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Extending Credit, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

227.

One downside to having a credit policy that is too “loose” is that a. some customers will pay their accounts late or not pay their accounts at all. b. cash payments to suppliers will be accelerated. c. sales will be lost to competitors. d. the cash-to-cash operating cycle will be shortened.

Ans: A, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Extending Credit, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

228.

In establishing a payment period, a company should consider a. supplier’s policies. b. competitor’s policies. c. its profit margin. d. its gross margin.

Ans: B, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Establishing a Payment Period, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

229.

By monitoring the accounts receivable aging schedule, companies can a. identify opportunities to take purchase discounts. b. determine which customers need additional inventory. c. monitor whether a customer’s credit risk is increasing. d. calculate length of the cash-to-cash operating cycle.

Ans: C, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Monitoring Collections, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

Reporting and Analyzing Receivables

8-47

BRIEF EXERCISES Be. 230 Presented below are various receivable transactions entered into by Renner Tool Company. Indicate whether the receivables are reported as accounts receivable, notes receivable, or other receivables on the balance sheet. a. Advanced $1,000 to a trusted employee. b. Accepted a $2,000 promissory note from a customer as payment on account. c. Determined that a $10,000 income tax refund is due from the IRS. d. Sold goods to a customer on account for $5,000. e. Recorded $500 accrued interest on a note receivable due next year. f. Loaned a company officer $4,000. Ans: N/A, LO: 1, Topic: Recognition of Accounts Receivable, Subtopic: Types of Receivables, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Solution 230 a. Other Receivables b. Notes Receivable c. Other Receivables d. Accounts Receivable e. Other Receivables f. Other Receivables Be. 231 Acme had the following transactions during March 2025. 1. Acme performed $14,000 of services for A1 Enterprises, terms 2/10, n30. 2. A1 Enterprises also signed a contract for $4,600 of future services on the last day of the month. th 3. Acme lent $1,000 to its company president, who promised to repay the loan on the 15 day of the next month. 4. Acme performed services for Ace Traders on 3/31. Ace Traders gave a $2,500 promissory note to Acme, agreeing to pay in 3 months.. 5. Other current assets totaled $50,000. Acme received no cash arising from the above transactions during March. Based only on the above transactions, and ignoring beginning balances, compute the accounts receivable as a percentage of the total current assets as of month-end. Ans: N/A, LO: 1, Topic: Recognition of Accounts Receivable, Subtopic: Types of Receivables, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Solution 231 Current Assets: Accounts Receivable Notes Receivable Employee Receivable Other Total Current Assets

$14,000 2,500 1,000 50,000 $67,500

$14,000 ÷ $67,500 = 21% Note: A1 Enterprises’ contract for $5,000 does not generate a current asset.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

8-48

Be. 232 The following are selected transactions of The Holiday Store during February. The Holiday Store sells seasonal holiday items. 2/3 Sold 50 heart balloons for $5 cash each. 2/8 Sold 100 boxes of chocolates at $10 each, terms 2/10, n/30. Collected within the discount period. 2/10 Sold 50 heart necklaces for $25 each with no discount. Have not collected as of month-end. 2/14 Sold 100 bouquets of roses at $30 per bouquet. Half the sales were on account. By monthend, 75% of the credit sales were collected. 2/28 Sold 20 leftover heart necklaces to a discount store for $15 each on credit. 2/28 Provided a loan to the company president for $240. Determine the balance in Accounts Receivable at 2/28. Ans: N/A, LO: 1, Topic: Recognition of Accounts Receivable, Subtopic: Recognizing Accounts Receivable, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Solution 232 2/10 50 necklaces  $25 2/14 50 bouquets (½  100 bouquets)  $30  25% 2/27 20 necklaces  $15 Total Accounts Receivable

$1,250 375 300 $1,925

Note: The loan from the company president should be classified as an other receivable. Be. 233 Prepare journal entries to record the following transactions entered into by the Ace Wholesale Company. Omit cost of goods sold entries. 2025 Nov. 1

Sold merchandise on account to Acme Inc., for $18,000, terms 2/10, n/30.

Nov.

Acme returned merchandise worth $1,000.

Nov.

Received payment in full from Acme.

Ans: N/A, LO: 1, Topic: Recognition of Accounts Receivable, Subtopic: Recognizing Accounts Receivable, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Solution 233 2025 Nov. 1 Accounts Receivable—Acme Inc. ...................................... Sales Revenue ........................................................... Nov.

Nov.

18,000 18,000

Sales Returns and Allowances ........................................... Accounts Receivable—Acme Inc. ..............................

1,000

Cash ................................................................................ Sales Discounts ($17,000  .02) ........................................ Accounts Receivable—Acme Inc. .............................. *(sales – ret.) × (1 – .02)

16,660* 340

Be. 234

1,000

17,000

Reporting and Analyzing Receivables

8-49

Assuming that the allowance method is being used, prepare general journal entries without explanations to record the following transactions. Omit cost of goods sold entries. January 1 Sold merchandise to Ava Baden for $500 on account. February 1 Received $300 from Baden. July 1 Wrote off Baden’s account as uncollectible. September 1 Unexpectedly received payment in full from Baden. Ans: N/A, LO: 2, Topic: Valuation and Disposition of Accounts Receivables, Subtopic: Allowance Method for Uncollectible Accounts, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Solution 234 January 1 February

July 1 September 1

Accounts Receivable—Baden .................................... Sales .................................................................

500

Cash ....................................................................... Accounts Receivable—Baden ...........................

300

Allowance for Doubtful Accounts................................ Accounts Receivable—Baden ...........................

200

Accounts Receivable—Baden .................................... Allowance for Doubtful Accounts ......................

200

Cash ......................................................................... Accounts Receivable—Baden ...........................

200

500 300 200 200 200

Be. 235 The ledger of the Ramirez Company at the end of the current year shows Accounts Receivable of $200,000. Instructions (a) If Allowance for Doubtful Accounts has a credit balance of $3,000 in the trial balance and uncollectibles are expected to be 8% of accounts receivable, journalize the adjusting entry for the end of the period. (Show all calculations.) (b) If Allowance for Doubtful Accounts has a debit balance of $3,000 in the trial balance and uncollectibles are expected to be 8% of accounts receivable, journalize the adjusting entry for the end of the period. (Show all calculations.) Ans: N/A, LO: 2, Topic: Valuation and Disposition of Accounts Receivables, Subtopic: Estimating the Allowance, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Solution 235 (a) Bad Debt Expense ....................................................................... 13,000 Allowance for Doubtful Accounts ($16,000* – $3,000) ........ (To adjust the allowance account to total estimated uncollectible, $200,000  .08 = $16,000) (b) Bad Debt Expense ....................................................................... 19,000 Allowance for Doubtful Accounts ($16,000* + $3,000) ........ (To adjust the allowance account to total estimated uncollectible) *(Acct. Rec. bal. × 8%) Be. 236 .

13,000

19,000

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

8-50

Acme Products uses the allowance method in estimating uncollectible accounts. On December 31, 2025, the balance in Accounts Receivable was $650,000. An aging analysis of the accounts receivable indicated that $29,500 in accounts are expected to be uncollectible. Prepare the adjusting entry to record estimated bad debts expense using the percentage of receivables basis under each of the following independent assumptions: (a) Allowance for Doubtful Accounts has a credit balance of $3,000 before adjustment. (b) Allowance for Doubtful Accounts has a debit balance of $830 before adjustment. Ans: N/A, LO: 2, Topic: Valuation and Disposition of Accounts Receivables, Subtopic: Estimating the Allowance, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 236 (a) Bad Debt Expense ($29,500 – $3,000) ........................................ Allowance for Doubtful Accounts ........................................... (b) Bad Debt Expense ($29,500 + $830) ........................................... Allowance for Doubtful Accounts ...........................................

26,500 26,500 30,330 30,330

Be. 237 Ace Company uses the allowance method for estimating uncollectible accounts. Prepare journal entries to record the following transactions, Omit cost of goods sold entries. January

Sold merchandise to Ryan Seacrest for $1,800, terms n/15.

April

Received $400 from Ryan Seacrest on account.

August

Wrote off as uncollectible the balance of the Ryan Seacrest account when he declared bankruptcy.

October

Unexpectedly received a check for $650 from Ryan Seacrest.

Ans: N/A, LO: 2, Topic: Valuation and Disposition of Accounts Receivables, Subtopic: Allowance Method for Uncollectible Accounts, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Solution 237 January 5 Accounts Receivable – R. Seacrest ................................ Sales Revenue ........................................................ April

August 21 October 5

1,800 1,800

Cash ............................................................................... Accounts Receivable—R. Seacrest ........................

400

Allowance for Doubtful Accounts ..................................... Accounts Receivable—R. Seacrest .........................

1,400

Accounts Receivable—R. Seacrest ................................. Allowance for Doubtful Accounts ............................

650

Cash ............................................................................... Accounts Receivable—R. Seacrest ........................

650

Be. 238

400 1,400 650 650

Reporting and Analyzing Receivables

8-51

Acme Inc. determines that at the end of December, they have the following aging schedule of Accounts Receivable: Customer

Total Not yet due

K. Perry $500 J. Montgomery 300 100 C. Klein 150 C. Sheen 200 200 ? 300 % Uncollectible 1% Total Estimated Uncollectible Amounts ? ?

1–30 $300

Number of Days Past Due 31–60 61–90 $200 200 50

Over 90

100

300 5%

250 10%

200 25%

100 50%

Compute the total estimated uncollectible accounts based on the above information at the end of December Ans: N/A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Estimating the Allowance, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Solution 238 Customer

Total

K. Perry J. Montgomery C Klein C. Sheen

$ 500 300 150 200 $1,150

% uncollectible Total Estimated Uncollectible Amounts

$ 143

Not yet due

Number of Days Past Due 1–30 $300

31–60 $200

$100

61–90 $200

50 200 $300 1% $ 3

Over 90

$300 5% $ 15

$250 10% $ 25

$100 $200 25% $ 50

$100 50% $ 50

Be. 239 Ace Pet Supply Company has the following accounts in its general ledger at July 31: Accounts Receivable $40,000 and Allowance for Doubtful Accounts $2,500. During August, the following transactions occurred. Oct. 15

Sold $30,000 of accounts receivable to Fast Factors, Inc. who assesses a 3% finance charge. Made sales of $900 on Visa credit cards. The credit card service charge is 2%.

Instructions Journalize the transactions. Omit cost of goods sold entries. Ans: N/A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Disposing of Accounts Receivable, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Solution 239

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

8-52

Oct. 15

Cash .................................................................................. 29,100* Service Charge Expense ($30,000  3%) ..................... 900 Accounts Receivable ............................................. *(Acct. rec. amount × (1 – .03)) Cash ............................................................................. Service Charge Expense ($900  2%) ......................... Sales Revenue.......................................................

30,000

882 18 900

Be. 240 Compute the maturity value as indicated for each of the following notes receivable. 1. A $9,000, 6%, 3-month note dated July 20. Maturity value $

2. A $16,000, 9%, 150-day note dated August 5. Maturity value $

Ans: N/A, LO: 3 Topic: Notes Receivable, Subtopic: Determining the Maturity Date, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 240 1. Maturity value: $9,135 $9,000  6%  3/12 = $135 + $9,000 = $9,135 (Face val. + (Face val. × 6% × 3/12) 2. Maturity value: $16,600 $16,000  9%  150/360 = $600 + $16,000 = $16,600 (Face val. + (Face val. × 9% × 150/360) Be. 241 Determine the interest on the following notes: (a) (b) (c) (d)

$5,000 at 6% for 90 days. $800 at 9% for 5 months. $6,000 at 8% for 60 days $1,600 at 7% for 6 months

Ans: N/A, LO: 3, Topic: Notes Receivable, Subtopic: Computing Interest, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 241 (a) $75

($5,000 × .06 × 90/360) (Face val. × 6% × 90/360)

(b)

$30

($800  .09  5/12) (Face val. × 9% × 5/12)

(c)

$80

($6,000  .08  60/360) (Face val. × 8% × 60/360)

(d)

$56

($1,600  .07  6/12) (Face val. × 7% × 6/12)

Be. 242

Reporting and Analyzing Receivables

8-53

A1 Distributors has the following transactions related to notes receivable during the last two months of the year. Dec.

Loaned $16,000 cash to K. Perry on a 1-year, 6% note.

Sold goods to L. Bryan, receiving a $4,800, 60-day, 7% note.

Accrued interest revenue on all notes receivable.

Instructions Journalize the transactions for A1 Distributors. Omit cost of goods sold entries. Ans: N/A, LO: 3, Topic: Notes Receivable, Subtopic: Accrual of Interest Receivable, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Solution 242 Dec 1 Notes Receivable................................................................ Cash ........................................................................ (To record loan made to K. Perry) Dec 16

Dec. 31

16,000 16,000

Notes Receivable................................................................ Sales Revenue........................................................... (To record sale to L. Bryan)

4,800

Interest Receivable ............................................................ Interest Revenue* ..................................................... (To record accrued interest)

4,800

*Calculation of interest revenue Perry note: $16,000  6%  30/360 = $80 (Face val. × 6% × 30/360) Bryan note: 4,800  7%  15/360 = 14 (Face val. × 7% × 15/360) Total accrued interest $94 Be. 243 Acme Company has the following transactions related to notes receivable during 2025. Oct 1

Exchanged A1 Sport Supply Inc.’s $5,000 accounts receivable for a 2-year, 5% note.

Dec 31 Accrued interest revenue on the note receivable. Instructions Journalize the transactions for Acme Company (round to the nearest dollar). Ans: N/A, LO: 3, Topic: Notes Receivable, Subtopic: Accrual of Interest Receivable, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting AICPA PC: None, IMA: Reporting

Solution 243

8-54 Oct 1

Dec 31

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Notes Receivable ................................................................ 5,000 Accounts Receivable .................................................. (To record exchange of A1’s accounts receivable for a note) Interest Receivable ............................................................ Interest Revenue* ...................................................... (To record accrued interest)

5,000

63 63

*Calculation of interest revenue $5,000  5%  3/12 = $63 (Face val. × 5% × 3/12)

Be. 244 The following data exists for Ace Merchandising Company. Net Accounts Receivable Net Credit Sales

2025 $ 80,000 560,000

2024 $ 70,000 410,000

Calculate the accounts receivable turnover and the average collection period in days for 2025. Ans: N/A, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Evaluating Liquidity of Receivables, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Solution 244 Accounts receivable turnover =

Average collection period =

$560,000 ($80,000 + $70,000) ÷ 2

365 days 7.5

= 7.5 times (Net credit sal. ÷ ave. net A/R)

= 48.7 days (365 ÷ A/R turn.)

Reporting and Analyzing Receivables

8-55

EXERCISES Ex. 245 On January 10, Kim Kardashian uses her Aprio Co. credit card to purchase merchandise from Aprio Co. for $2,600. On February 10, she is billed for the amount due of $2,600. On February 12, Kardashian pays $1,600 on the balance due. On March 10, Kardashian is billed for the amount due, including interest at 1% per month on the unpaid balance as of February 12. Instructions Prepare the entries on Aprio Co.'s books related to the transactions that occurred on January 10, February 12, and March 10. Omit cost of goods sold entries. Ans: N/A, LO: 1, Topic: Recognition of Receivables, Subtopic: Recognizing Accounts Receivable, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Solution 245 Jan. 10

Feb. 12

Mar. 10

Accounts Receivable—Kardashian ................. Sales Revenue...........................................

2,600

Cash ............................................................... Accounts Receivable—Kardashian ............

1,600

Accounts Receivable—Kardashian ............... Interest Revenue [1%  ($2,600 – $1,600)] ....................... (1%  (sales – coll.))

2,600

1,600

Ex. 246 At the beginning of the current period, Ace Corp. had balances in Accounts Receivable of $200,000 and in Allowance for Doubtful Accounts of $9,000 (credit). During the period, it had credit sales of $650,000 and collections of $590,000. It wrote off as uncollectible accounts receivable of $5,000. However, a $3,000 account previously written off as uncollectible was recovered before the end of the current period. Uncollectible accounts are estimated to total $20,000 at the end of the period. Instructions (a) Prepare the entries to record sales and collections during the period. Omit cost of goods sold entries. (b) Prepare the entry to record the write-off of uncollectible accounts during the period. (c) Prepare the entries to record the recovery of the uncollectible account during the period. (d) Prepare the entry to record bad debt expense for the period. (e) Determine the ending balances in Accounts Receivable and Allowance for Doubtful Accounts. (f) Calculate the cash realizable value of the receivables at the end of the period. Ans: N/A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Valuing Accounts Receivable, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

8-56

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 246 (a) Accounts Receivable ...................................................... Sales Revenue.......................................................... Cash ............................................................................... Accounts Receivable................................................. (b)

(c)

(d)

650,000 650,000 590,000 590,000

Allowance for Doubtful Accounts .................................... Accounts Receivable.................................................

5,000

Accounts Receivable ...................................................... Allowance for Doubtful Accounts............................... Cash ............................................................................... Accounts Receivable.................................................

3,000

5,000

3,000 3,000

Bad Debts Expense ........................................................ 13,000 Allowance for Doubtful Accounts............................... (Est. uncoll. accts. – (Beg. ADA* bal. + acct. recov. – acct. writ. off))

3,000 13,000

* Allow. for Doubt. Accts. (e) Accounts Receivable Beg. Bal. 200,000 Collections Sales Rev. 650,000 Write-off Recovery 3,000 Collections End Bal 255,000 (f)

590,000 5,000 3,000

Allowance for Doubtful Accounts Beg. Bal. 9,000 3,000 Write-off 5,000 Recovery Bad Debts 13,000 End Bal 20,000

Cash realizable value of receivables is $235,000 ($255,000 – $20,000) (End. A/R bal. – end. ADA bal.)

Ex. 247 The December 31, 2024 balance sheet of the A1 Discount Supply Company had Accounts Receivable of $650,000 and a credit balance in Allowance for Doubtful Accounts of $33,000. During 2025, the following transactions occurred: sales on account $1,550,000; sales returns and allowances, $100,000; collections from customers, $1,250,000; accounts written off, $35,000; previously written off accounts of $8,000 were collected. Instructions (a) Journalize the 2025 transactions. Omit cost of goods sold entries. (b) If the company uses the percentage of receivables basis to estimate bad debt expense and determines that uncollectible accounts are expected to be 6% of accounts receivable, what is the adjusting entry at December 31, 2025? Ans: N/A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Valuing Accounts Receivable, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Receivables

Solution 247 (a) Accounts Receivable ................................................................... 1,550,000 Sales Revenue ................................................................... (To record credit sales) Sales Returns and Allowances .................................................... Accounts Receivable ......................................................... (To record credits to customers) Cash ........................................................................................... Accounts Receivable ......................................................... (To record collection of receivables)

8-57

1,550,000

100,000 100,000 1,250,000 1,250,000

Allowance for Doubtful Accounts ................................................. Accounts Receivable ......................................................... (To write off specific accounts)

35,000

Accounts Receivable ................................................................... Allowance for Doubtful Accounts ....................................... (To reverse write-off of account)

8,000

Cash ........................................................................................... Accounts Receivable ......................................................... (To record collection of account)

8,000

35,000

8,000

(b) Percentage of receivables basis: Bal.

Bal.

Accounts Receivable 650,000 100,000 1,550,000 1,250,000 8,000 35,000 8,000 815,000

Allowance For Doubtful Accounts Bal. 33,000 35,000 8,000 Bal. 6,000

Required balance ($815,000  .06) .................................................................... Balance before adjustment ......................................................................... Adjustment required .................................................................................... Dec. 31

Bad Debt Expense ....................................................... Allowance for Doubtful Accounts ......................... ((A/R end. bal. × 6%) – ADA end. bal.)

$48,900 6,000 $42,900

42,900 42,900

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

8-58

Ex. 248 An inexperienced accountant made the following entries. In each case, the explanation to the entry is correct. Assume that at 12/31, the correct balance of the Allowance account before adjustment is $-0-. Dec. 17

Cash ........................................................................................... 3,000 Sales Discounts .................................................................... 60 Accounts Receivable .................................................... (To record collection of 12/4 sales of $3,000, terms 2/10, n/30) Cash ........................................................................................... 1,200 Bad Debt Expense ....................................................... (Collection of account previously written off as uncollectible under allowance method) Bad Debt Expense ...................................................................... 1,800 Allowance for Doubtful Accounts .................................. (To recognize estimated uncollectibles based on 3% of accounts receivable of $600,000)

3,060

1,200

1,800

Instructions Prepare the correcting entries. Errors were identified at the end of the year. Ans: N/A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Valuing Accounts Receivable, Bloom: AP, Difficulty: Hard, Min: 12, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Solution 248 Dec. 31 Accounts Receivable .......................................................... Sales Discounts ......................................................... (To correct accounts for granting sales discount when discount period had lapsed) 31

60 60

Accounts Receivable........................................................... Allowance for Doubtful Accounts ............................... (To reverse write off of collected account)

1,200

Bad Debt Expense ............................................................. Accounts Receivable ................................................. (To correct erroneous collection entry)

1,200

Bad Debt Expense ............................................................. 16,200 Allowance for Doubtful Accounts ............................... [To adjust balance in Bad Debts Expense to $18,000 or (3%  $600,000); previous allowance is $0] *((A/R bal. × 3%) – bad debt exp. record.)

1,200

16,200

Reporting and Analyzing Receivables

8-59

Ex. 249 Prepare journal entries to record the following transactions entered into by the Acme Company, Omit cost of goods sold entries. 2024 June 1

Received a $10,000, 6%, 1-year note from Luke Bryan as full payment on his account.

Nov.

Sold merchandise on account to Ace, Inc., for $14,000, terms 2/10, n/30.

Nov.

Ace, Inc., returned merchandise worth $1,000.

Nov.

Received payment in full from Ace, Inc.

Dec. 31

Accrued interest on Bryan's note.

2025 June 1

Luke Bryan honored his promissory note by sending the face amount plus interest.

Ans: N/A, LO: 2, 3, Topic: Valuation and Disposition of Accounts Receivable, Notes Receivable, Subtopics: Valuing Accounts Receivable, Disposition of Notes Receivable, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Solution 249 2024 June

Nov.

Dec. 31

2025 June 1

Notes Receivable ............................................................... Accounts Receivable—L. Bryan ................................

10,000

Accounts Receivable—Ace, Inc. ........................................ Sales Revenue...........................................................

14,000

Sales Returns and Allowances .......................................... Accounts Receivable—Ace, Inc. ...............................

1,000

Cash ................................................................................ Sales Discounts ($13,000  .02) ........................................ Accounts Receivable—Ace, Inc. ............................... *(sales – ret.) × (1 – .02)

12,740* 260

Interest Receivable ............................................................ Interest Revenue ....................................................... ($10,000  6%  7/12 = $350) (Note face val. × 6% × 7/12)

350

10,000

14,000 1,000

13,000

Cash ........................................................................................ 10,600* Notes Receivable ...................................................... Interest Receivable ................................................... Interest Revenue ....................................................... ($10,000  6%  5/12) *((Note face. val. × 6%) + Note face val.)

350

10,000 350 250

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

8-60

Ex. 250 Ace Sign Company uses the allowance method in accounting for uncollectible accounts. Past experience indicates that 6% of accounts receivable will eventually be uncollectible. Selected account balances at December 31, 2024 and December 31, 2025 appear below: Net Credit Sales Accounts Receivable Allowance for Doubtful Accounts

12/31/2024 $400,000 80,000 4,000

12/31/2025 $500,000 100,000 ?

Instructions (a) Record the following events in 2025. Aug. 10 Determined that the account of Ryan Seacrest for $900 is uncollectible. Sept. 12 Determined that the account of Katy Perry for $3,000 is uncollectible. Oct. 10 Received a check for $300 as payment on account from Ryan Seacrest, whose account had previously been written off as uncollectible. (b) Prepare the adjusting journal entry to record the bad debt provision for the year ended December 31, 2025. Assume that only transactions in part a impacted the Allowance for Doubtful Accounts in 2025. (c) What is the balance of Allowance for Doubtful Accounts at December 31, 2025? Ans: N/A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Allowance Method for Uncollectible Accounts, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 250 (a) Aug. 10

Sept. 12

Oct. 10

(b) Dec. 31

Allowance for Doubtful Accounts ............................... Accounts Receivable - Seacrest ....................... (To write off Ryan Seacrest account)

900

Allowance for Doubtful Accounts ............................... Accounts Receivable—Perry ............................ (To write off K. Perry account)

3,000

Accounts Receivable—Seacrest ............................... Allowance for Doubtful Accounts ...................... (To reinstate Ryan Seacrest account previously written off)

300

Cash .......................................................................... Accounts Receivable—Seacrest........................ (To record collection on account)

300

900

3,000

300

Bad Debt Expense [($100,000  6%) – $400*].................. 5,600** Allowance for Doubtful Accounts ...................... (To record estimate of uncollectible accounts) *($4,000 – $900 – $3,000 + $300 = $400). **(End. A/R × 6%) – end. ADA)

300

5,600

Reporting and Analyzing Receivables

8-61

Ex. 251 Ace Manufacturing Company had a $300 credit balance in Allowance for Doubtful Accounts at December 31, 2025, before the current year's provision for uncollectible accounts. An aging of the accounts receivable revealed the following: Estimated Percentage Uncollectible Current Accounts $170,000 1% 1–30 days past due 15,000 3% 31–60 days past due 12,000 6% 61–90 days past due 5,000 15% Over 90 days past due 9,000 30% Total Accounts Receivable $211,000 Instructions (a) Prepare the adjusting entry on December 31, 2025 to recognize bad debts expense. (b) Assume the same facts as above except that the Allowance for Doubtful Accounts account had a $300 debit balance before the current year's provision for uncollectible accounts. Prepare the adjusting entry for the current year's provision for uncollectible accounts. Ans: N/A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Allowance Method for Uncollectible Accounts, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 251

Current Accounts $170,000 1–30 days past due 15,000 31–60 days past due 12,000 61–90 days past due 5,000 Over 90 days past due 9,000 Total Accounts Receivable $211,000 *(A/R amounts × est. uncoll. %)

Estimated Percentage Uncollectible 1% 3% 6% 15% 30%

Estimated Uncollectible $1,700 450 720 750 2,700 $6,320*

(a) Bad Debt Expense ....................................................................... 6,020 Allowance for Doubtful Accounts ($6,320 – $300) .............. (To adjust the allowance account to total estimated uncollectible) (Est. uncoll. amount – end. ADA bal.) (b) Bad Debt Expense ....................................................................... 6,620 Allowance for Doubtful Accounts ($6,320 + $300) .............. (To adjust the allowance account to total estimated uncollectible)

6,020

6,620

8-62

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ex. 252 On December 31, 2024, when its Allowance for Doubtful Accounts had a credit balance of $1,500, Acme Garden Supply Company estimates that 6% of its accounts receivable balance of $95,000 will become uncollectible. On March 3, 2025, Acme determined that Bernie Madoff’s account of $950 was uncollectible. On May 15, 2025, Madoff paid the amount previously written off. Instructions Prepare the journal entries for December 31, 2024, March 3, 2025, and May 15, 2025. Ans: N/A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Allowance Method for Uncollectible Accounts, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Solution 252 Dec. 31, 2024

Mar. 3, 2025

May 15, 2025

Bad Debt Expense [($95,000  .06) – $1,500] ........ Allowance for Doubtful Accounts .................... (To record the bad debt expense) *((End. A/R × 6%) – end. ADA bal.)

4,200*

Allowance for Doubtful Accounts ............................ Accounts Receivable—B. Madoff.................... (To write off B. Madoff account deemed uncollectible)

950

Accounts Receivable—B. Madoff ............................ Allowance for Doubtful Accounts .................... (To reinstate an account previously written off)

950

Cash

950

.................................................................... Accounts Receivable—B. Madoff.................... (To record payment on account in full)

4,200

950

Ex. 253 The percentage of receivables approach to estimating bad debt expense is used by A1 Auto Supply Company. On February 28 (the fiscal year-end), the firm had accounts receivable in the amount of $585,000, and Allowance for Doubtful Accounts had a credit balance of $370 before adjustment. Net credit sales for February amounted to $3,000,000. The credit manager estimated that uncollectible accounts would amount to 5% of accounts receivable. On March 10, an accounts receivable from Tom Jones for $2,100 was determined to be uncollectible and written off. However, on March 31, Jones received an inheritance and immediately paid his past due account in full. (a) Prepare the journal entries made by A1 Auto Supply Company on the following dates: 1. February 28 2. March 10 3. March 31 (b) Assume no other transactions occurred that affected the allowance account during March. Determine the balance of Allowance for Doubtful Accounts at March 31. Ans: N/A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Allowance Method for Uncollectible Accounts, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Receivables

8-63

Solution 253 (a) 1. Feb. 28 Bad Debt Expense [($585,000  .05) – $370] ........ Allowance for Doubtful Accounts ................... (To record the bad debt expense for February) *((End. A/R × 5%) – end. ADA bal.)

28,880*

2. Mar. 10 Allowance for Doubtful Accounts ............................ Accounts Receivable—T. Jones .................... (To write off T. Jones account deemed uncollectible)

2,100

3. Mar. 31 Accounts Receivable—T. Jones ............................. Allowance for Doubtful Accounts ................... (To reinstate an account previously written off)

2,100

Mar. 31 Cash

.................................................................... Accounts Receivable—T. Jones .................... (To record payment on account in full)

28,880

2,100

2,100 2,100

(b) $370 + 28,880 – $2,100 + $2,100 = $29,250. Ex. 254 Acme Computer Store has credit sales of $450,000 in 2024 and a debit balance of $600 in the Allowance for Doubtful Accounts at year-end. As of December 31, 2024, $130,000 of accounts receivable remains uncollected. The credit manager of Acme prepared an aging schedule of accounts receivable and estimates that $7,800 will prove to be uncollectible. On March 4, 2025, the credit manager authorizes a write-off of the $1,000 balance owed by J. Myers. Instructions (a) Prepare the adjusting entry to record the estimated uncollectible accounts expense in 2024. (b) Show the balance sheet presentation of Accounts Receivable on December 31, 2024. (c) On March 4, before the write-off, assume the balance of Accounts Receivable account is $145,000 and the balance of Allowance for Doubtful Accounts is a credit of $5,000. Make the appropriate entry to record the write-off of the Myers account. Also, show the balance sheet presentation of Accounts Receivable before and after the write-off. Ans: N/A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Allowance Method for Uncollectible Accounts, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

8-64 Solution 254

(a) Bad Debt Expense ($7,800 + $600) ............................................. Allowance for Doubtful Accounts ........................................ * (Est. uncoll. amount + end. ADA bal.) (b) Accounts Receivable Less: Allowance for Doubtful Accounts

8,400 $130,000 7,800

(c) Allowance for Doubtful Accounts .................................................. Accounts Receivable—J. Myers ......................................... Accounts Receivable Less: Allowance for Doubtful Accounts Cash Realizable Value

8,400*

Before Write-off $145,000 5,000 $140,000

$122,200

1,000 1,000 After Write-off $144,000 4,000 $140,000

Ex. 255 A1 Salon Supply Company has accounts receivable of $95,100 at March 31, 2025. An analysis of the accounts shows these amounts: Balance, March 31 Month of Sale 2025 2024 March $65,000 $75,000 February 12,600 8,000 December and January 10,100 2,400 October and November 7,400 1,100 $95,100 $86,500 Credit terms are 2/10, n/30. At March 31, 2025, there is a $2,500 credit balance in Allowance for Doubtful Accounts prior to adjustment. The company uses the percentage of receivables basis for estimating uncollectible accounts. The company's estimates of uncollectibles are as shown below:

Age of Accounts Current 1–30 days past due 31–90 days past due Over 90 days past due

Estimated Percentage Uncollectible 2% 7 25 50

Instructions (a) Determine the total estimated uncollectible accounts receivable at March 31, 2025. (b) Prepare the adjusting entry at March 31, 2025 to record bad debts expense. Ans: N/A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Allowance Method for Uncollectible Accounts, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Receivables

8-65

Solution 255 (a)

Accounts Receivable Current 1–30 days past due 31–90 days past due Over 90 days past due

Amount $65,000 12,600 10,100 7,400

% 2 7 25 50

Estimated Uncollectible $1,300 882 2,525 3,700 $8,407*

*(A/R amounts × est. uncoll. %) (b)

Mar. 31

Bad Debt Expense ...................................... Allowance for Doubtful Accounts ($8,407 – $2,500) ......................... *(Est. uncoll. amount – end. ADA bal.)

5,907* 5,907

Ex. 256 Ace Supply Company has the following accounts in its general ledger at July 31: Accounts Receivable $49,000 and Allowance for Doubtful Accounts $3,400. During August, the following transactions occurred. Aug. 15

Sold $30,000 of accounts receivable to A1 Factors, Inc. who assesses a 2% finance charge.

Made sales of $2,500 on Visa credit cards. The credit card service charge is 3%.

Made sales of $4,000 on Ace Supply credit cards.

Instructions (a) Journalize the transactions. Omit cost of goods sold entries. (b) Indicate the statement presentation of service charges. Ans: N/A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Disposing of Accounts Receivable, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Solution 256 (a) Aug. 15

Cash ............................................................................ Service Charge Expense ($30,000 × 2%) .................... Accounts Receivable ............................................ *(A/R amount × (1 – .02))

29,400* 600

Cash ............................................................................ Service Charge Expense ($2,500 × 3%) ...................... Sales Revenue ...................................................... *(sales × (1 – .03)

2,425* 75

Accounts Receivable .................................................... Sales Revenue .........................................................

4,000

(b) Service Charge Expense is reported as an operating expense.

30,000

2,500

4,000

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

8-66

Ex. 257 Compute the missing amount for each of the following notes: Principal

Annual Interest Rate

Time

Total Interest

(a)

$50,000

2.5 years

(b)

$120,000

9 months

$7,200

(c)

90 days

$1,350

(d)

$60,000

$1,200

Ans: N/A, LO: 3, Topic: Notes Receivable, Subtopic: Computing Interest, Bloom: AN, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 257 (a) $6,250

($50,000  .05  2.5 years) (Prin. × 5% × 2.5 yrs.)

(b)

($120,000  ?  9/12 = $7,200; ? = 8%) [(Tot. int. ÷ Prin.) ÷ (9/12)]

(c)

$60,000

(?  .09  90/360 = $1,350; ? = $60,000) [(Tot. int. ÷ 9%) ÷ (90/360)]

(d)

4 months

($60,000  .06  ? = $1,200; ? = 4/12) [(Tot. int. ÷ Prin.) ÷ 6%] × 12

Ex. 258 Record the following transactions in general journal form for the Acme Company. July

Received a $9,000, 8%, 3-month note, dated July 1, from Kim Kardashian in payment of her open account.

Oct.

Received notification from Kim Kardashian that she was unable to honor her note at this time. It is expected that Kardashian will pay at a later date.

Nov. 15

Received full payment from Kim Kardashian for a note receivable previously dishonored.

Ans: N/A, LO: 3, Topic: Notes Receivable, Subtopic: Disposition of Notes Receivable, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Receivables

8-67

Solution 258 July

Oct.

Nov. 15

Notes Receivable ............................................................... Accounts Receivable—Kardashian ............................ (To record acceptance of K. Kardashian note as payment on account)

9,000

Accounts Receivable—Kardashian .................................... Notes Receivable ...................................................... Interest Revenue ($9,000  8%  3/12) .................... (To record dishonored note, $9,000, plus interest) *(Note face val. × 8% × 3/12) + (Note face val.)

9,180*

Cash ................................................................................ Accounts Receivable—Kardashian ............................ (To record payment on account)

9,180

9,000

9,000 180

9,180

Ex. 259 A1 Boat Company often requires customers to sign promissory notes for major credit purchases. Journalize the following transactions for A1 Boat Company. Omit cost of goods sold entries. Feb. 12

Accepted a $35,000, 6%, 60-day note from Bill Wiggins for the sale of a 19-foot motorboat built to his specifications.

April 14

Received notification from Bill Wiggins that he was unable to honor his promissory note but that he expects to pay the amount owed in May.

May 26

Received a check from Bill Wiggins for the total amount owed.

June 10

Received notification by the bank that Bill Wiggins’ check was being returned “NSF” and that Mr. Wiggins had declared personal bankruptcy.

Ans: N/A, LO: 3, Topic: Notes Receivable, Subtopic: Disposition of Notes Receivable, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 259 Feb. 12 Notes Receivable ............................................................... Sales Revenue...........................................................

35,000

April 14

Accounts Receivable—B. Wiggins ..................................... Notes Receivable ...................................................... Interest Revenue ($35,000  6%  60/360)................ *((Note face val. × 6% × 60/360) + Note face val.)

35,350*

Cash .................................................................................. Accounts Receivable—B. Wiggins ............................

35,350

Accounts Receivable—B. Wiggins ..................................... Cash .........................................................................

35,350

Allowance for Doubtful Accounts ....................................... Accounts Receivable—B. Wiggins ............................

35,350

May 26

June 10

35,000

35,000 350

35,350

35,350 35,350

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

8-68

Ex. 260 Compute the maturity value as indicated for each of the following notes receivable. 1. An $8,000, 6%, 3-month note dated April 20. Maturity value $

2. A $20,000, 9%, 72-day note dated March 5. Maturity value $

3. A $12,000, 5%, 30-day note dated September 10. Maturity value $

4. A $9,000, 7%, 6-month note dated November 15. Maturity value $

Ans: N/A, LO: 3, Topic: Notes Receivable, Subtopic: Honor of Notes Receivable, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 260 1. Maturity value: $8,120 $8,000  6%  3/12 = $120 + $8,000 = $8,120 ((Face val. × 6% × 3/12) + face val.) 2. Maturity value: $20,360 $20,000  9%  72/360 = $360 + $20,000 = $20,360 ((Face val. × 9% × 72/360) + face val.) 3. Maturity value: $12,050 $12,000  5%  30/360 = $50 + $12,000 = $12,050 ((Face val. × 5% × 30/360) + face val.) 4. Maturity value: $9,315 $9,000  7%  6/12 = $315 + $9,000 = $9,315 ((Face val. × 7% × 6/12) + face val.) Ex. 261 Ace Supply Co. has the following transactions related to Notes Receivable during the last 2 months of the year. Nov. Dec.

1 11 16 31

Loaned $75,000 cash to K. Perry on a 1-year, 8% note. Sold goods to Acme, Inc., receiving a $9,000, 90-day, 7% note. Received a $20,000, 6-month, 9% note to settle an open account from L. Richie. Accrued interest revenue on all notes receivable.

Instructions Journalize the transactions for Ace Supply Co. Omit cost of goods sold entries. Ans: N/A, LO: 3, Topic: Notes Receivable, Subtopic: Disposition of Notes Receivable, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Receivables

Solution 261 Nov. 1 Notes Receivable.......................................... Cash ......................................................

75,000

Dec.

Notes Receivable.......................................... Sales Revenue ......................................

9,000

Notes Receivable.......................................... Accounts Receivable—L. Richie ............

20,000

Interest Receivable ......................................... Interest Revenue* ....................................

1,110

*Calculation of interest revenue: Perry's note: $75,000  8%  2/12 Acme's note: 9,000  7%  20/360 Richie's note: 20,000  9%  15/360 Total accrued interest

8-69

75,000

9,000

20,000 1,110

= $1,000 (Face val. × 8% × 2/12) = 35 (Face val. × 7% × 20/360) = 75 (Face val. × 9% × 15/360) = $1,110

Ex. 262 These transactions took place for Acme Garden Co. during the years 2024 and 2025. 2024 May

Dec. 2025 May

1 Received a $15,000, 1-year, 9% note in exchange for an outstanding account receivable from L. Bryan. 31 Accrued interest revenue on the L. Bryan note.

1 Received principal plus interest on the L. Bryan note. (No interest has been accrued since December 31, 2024.)

Instructions Record the transactions in the general journal. Ans: N/A, LO: 3, Topic: Notes Receivable, Subtopic: Disposition of Notes Receivable, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

8-70 Solution 262 May

Dec.

May

2024 Notes Receivable ................................................ Accounts Receivable—L. Bryan................... Interest Receivable ............................................. Interest Revenue ($15,000  9%  8/12). (Face val. × 9% × 8/12) 2025 Cash ................................................................. Notes Receivable......................................... Interest Receivable ...................................... Interest Revenue ($15,000  9%  4/12)..... *((Face val. × 9%) + Face val.)

15,000 15,000 900 900

16,350* 15,000 900 450

Ex. 263 Presented here is basic financial information (in millions) from the annual reports of Nike and adidas. Net credit sales revenue Allowance for doubtful accounts, Jan. 1 Allowance for doubtful accounts, Dec. 31 Accounts receivable balance (gross), Jan 1 Accounts receivable balance (gross), Dec. 31

Nike $18,627 71.5 78.4 2,566.2 2,873.7

adidas $10,299 112 111 1,527 1,570

Instructions Calculate the accounts receivable turnover and average collection period for both companies. Comment on the difference in their collection experiences. Ans: N/A, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Evaluating Liquidity of Receivables, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

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Solution 263 Accounts receivable turnover

Nike

adidas

$18,627 ($2,494.7a + $2,795.3b)/2

$10,299 ($1,415c + $1,459d)/2

$18,627 $2,645

$10,299 $1,437

= 7.0* times

= 7.2 times

*(Sales ÷ ave. net A/R) a

2,566.2 – 71.5

2,873.7 – 78.4 365

Average collection period *(365 ÷ A/R turn.)

7.0

1,527 – 112

= 52.1 days

1,570 – 111 365

= 50.7 days

7.2

adidas's accounts receivable turnover was about 3% higher [(7.2 – 7.0) ÷ 7.0] than Nike's, which means that adidas was slightly more efficient than Nike in turning accounts receivable into cash. Ex. 264 The following information is available from the annual reports of Company A and Company B. (In millions) A B Net sales revenue $112,500 $32,000 Beginning accounts receivable, net 19,000 3,500 Ending accounts receivable, net 18,500 4,400 Instructions (a) Based on the preceding information, compute the following for each company: 1. Accounts receivable turnover. (Assume all sales were credit sales.) 2. Average collection period. (b) What conclusion concerning the management of accounts receivable can be drawn from these data? Ans: N/A, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Evaluating Liquidity of Receivables, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

8-72

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 264 (a)

A 1. Accounts receivable turnover

2. Average collection period

$112,500 $32,000 ($19,000 + $18,500) ÷ 2 ($3,500 + $4,400) ÷ 2 $112,500 ÷ $18,750 $32,000 ÷ $3,950 = 6.0 times = 8.1 times (net credit sales ÷ ave. Net A/R) 365 days ÷ 6.0 = 60.8 days (365 ÷ A/R turn.)

365 days ÷ 8.1 = 45.1 days

(b) Generally, companies like to have a high accounts receivable turnover and a correspondingly low average collection period. Company B’s accounts receivable turnover is 35% [(8.1 – 6.0) ÷ 6.0)] higher than Company A’s ratio and Company B’s average collection period is only 74% [(45.1 − 60.8) ÷ 60.8] as long as Company A’s collection period. It can be concluded that Company B does a better job of managing its accounts receivable than Company A.

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COMPLETION STATEMENTS 265. Notes and accounts receivable that result from sales transactions are often called receivables. Ans: N/A, LO: 1, Topic: Recognition of Accounts Receivable, Subtopic: Types of Receivables, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

266. Two accounting issues associated with accounts receivable are (1) (2) accounts receivable.

and

Ans: N/A, LO: 1, Topic: Recognition of Accounts Receivable, Subtopic: Types of Receivables, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

267. The net amount expected to be collected in cash from receivables is the

Ans: N/A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Allowance Method for Uncollectible Accounts, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

268. When credit sales are made, necessary risk of doing business on a credit basis.

Expense is considered a normal and

Ans: N/A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Valuing Receivables: Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

269. The two methods used in accounting for uncollectible accounts are the method and the method. Ans: N/A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Valuing Receivables: Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

270. Allowance for Doubtful Accounts is a from Accounts Receivable on the balance sheet.

account which is

Ans: N/A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Valuing Accounts Receivable: Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

271. When the allowance method is used to account for uncollectible accounts, is debited when an account is determined to be uncollectible. Ans: N/A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Recording the Write-Off of an Uncollectible Account: Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

272. The approximation of

basis of estimating uncollectibles normally results in the best value.

Ans: N/A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Allowance Method for Uncollectible Accounts: Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

273. A finance company or bank that purchases receivables from businesses is known as a . Ans: N/A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Sale of Receivables to a Factor, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

274. A 75-day note receivable dated July 5 would mature on

Ans: N/A, LO: 3, Topic: Notes Receivable, Subtopic: Determining the Maturity Date, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

275. Collection of a note receivable will result in a credit to of the note and a credit to .

for the face value

Ans: N/A, LO: 3, Topic: Notes Receivable, Subtopic: Honor of Notes Receivable, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

276. A note that is not paid on the maturity date is said to be

Ans: N/A, LO:3, Topic: Notes Receivable, Subtopic: Dishonor of Notes Receivable, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

277. A concentration of class of customers.

is a threat of nonpayment from a single customer or

Ans: N/A, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Monitoring Collections, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Business Economics

278. Ratios used to assess the liquidity of accounts receivable are .

and

Ans: N/A, LO: 4, Topic: Receivables Presentation and Management, Subtopic: Evaluating the Liquidity of Receivables, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

Answers to Completion Statements 265. trade 266. recognizing, valuing 267. cash realizable value 268. Bad Debt 269. allowance, direct write-off 270. contra, deducted 271. Allowance for Doubtful Accounts

272. 273. 274. 275. 276. 277. 278.

percentage of receivables, cash realizable factor September 18 Notes Receivable, Interest Revenue dishonored credit risk accounts receivable turnover, average collection period

MATCHING 279. Match the items below by entering the appropriate code letter in the space provided. A. Aging the accounts receivable B. Direct write-off method C. Obligation due D. Trade receivables E. Accounts receivable turnover

F. G. H. I. J.

Percentage of receivables basis Promissory note Dishonored note Cash realizable value Credit card sales

1. A written promise to pay a specified amount on demand or at a definite time 2. Sales that involve the customer, the retailer, and the credit card issuer 3. A measure of the liquidity of receivables 4. Notes and accounts receivable that result from sales transactions 5. A note which is not paid in full at maturity 6. Analysis of customer account balances by the length of time they have been unpaid 7. Emphasizes expected cash realizable value of accounts receivable 8. Bad debt losses are not estimated and no allowance account is used 9. The net amount expected to be received in cash Ans: N/A, LO: 1-4, Topic: NA, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

Reporting and Analyzing Receivables

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Answers to Matching 1. 2. 3. 4. 5.

G J E D H

6. 7. 8. 9.

A F B I

SHORT-ANSWER ESSAY QUESTIONS S-A E 280 Two methods can be used in accounting for uncollectible accounts. Identify and contrast the two methods. How do the methods differ regarding the time periods in which bad debt expense is recognized? Ans: N/A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: Valuing Accounts Receivable, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Communications, AICPA BB: None, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Business Economics

Solution 280 The two methods used in accounting for uncollectible accounts are: (1) the allowance method and (2) the direct write-off method. Under the allowance method, the emphasis is on establishing the proper amount to carry as a balance in the allowance account. Uncollectible accounts receivable are estimated and matched against sales revenue in the same accounting period in which the sales occurred. Under the direct write-off method, bad debt losses are not estimated and no allowance account is used. With the direct write-off method, bad debt expense is often recorded in a period different from the period in which the revenue was recorded. S-A E 281 Banks that issue credit cards generally charge retailers a fee of 2 to 4% of the amount of sale. List reasons why companies are willing to pay these fees. Ans: N/A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic National Credit Card Sales, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

Solution 281 1. The use of bank credit cards increases sales. Many people want to use credit cards to make purchases. If a company does not offer this service, customers will buy from a competitor that does offer the services. 2. Bad debts are absorbed by the credit card company. 3. The company receives its cash (less the fees) immediately. 4. The company does not have to hire employees to approve credit and make collections for these sales. S-A E 282 Customer purchases using credit cards are a significant source of revenue for many retailers. From the standpoint of a retailer, briefly discuss some advantages and disadvantages of a retail store having its own credit card as opposed to accepting one of the national credit cards. Ans: N/A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: National Credit Card Sales, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: None, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Business Economics

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 282 The advantages of a retail store using its own credit card are the avoidance of a 2 to 4 percent charge by the national credit card and the ability to issue credit to the customers of its choice. In addition, with its own credit card operation, the retailer earns the interest on the unpaid balances. The disadvantages of a retail store using its own credit card are the risk of nonpayment (bad debts), the delay in receiving cash from the sales (cash is collected immediately from the national credit card company), and the costs of record keeping and managing (approving credit and collection) its own credit operation. S-A E 283 (Ethics) Two Brothers, a small book publishing company, wrote off the debt of The Learning Place, and the Academy of Basic Education, both small private schools, after it determined that the schools were facing serious financial difficulty. No notice of the action was sent to the schools; Two Brothers simply stopped sending bills. Nearly a year later, The Learning Place was given a large endowment and a government grant. The resulting publicity brought the school to the attention of Two Brothers, which immediately reinstated the account, and sent a new bill to the school, including interest for the entire time the debt was outstanding. No further action was taken regarding the Academy of Basic Education, which was still operational. Required: Did Two Brothers act ethically in reinstating the debt of one client, and not the other? Explain. Ans: N/A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: NA, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Ethics, AICPA BB: None, AICPA FC: None, AICPA PC: None, IMA: Business Economics

Solution 283 Yes, it is ethical to reinstate the debt of The Learning Place, especially since there was no evidence given that The Learning Place attempted to negotiate a reduction or elimination of the debt, or even that it was aware that the debt had been written off by Two Brothers. Two Brothers' discovery that one bad debt may be collectible places the company under no obligation to attempt to collect any or all of its other bad debts, so it need not have reinstated the other account receivable. The addition of interest to the debt is another question. Whether the interest would be collectible depends upon the laws of the state and whether the addition of interest was specified as a possibility when the debt was incurred. It is questionable whether Two Brothers can also collect because they apparently did not include interest in earlier bills sent to these clients and because they stopped sending bills for some period of time. Note that this solution is different from the case in which a debt is written off because of a bankruptcy. Had The Learning Place become bankrupt, Two Brothers could not have legally reinstated the debt, even if The Learning Place became solvent at some time in the future.

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S-A E 284 (Communication) Schmidt Company received a letter from Deborah Stine, a customer. Deborah had purchased $325 worth of clothing from Schmidt on credit. She has made two payments of $50 each. She has missed the last two payments and has received a collection letter from Schmidt. Her total debt presently, with interest and late fees, is $251.13. Deborah sent a letter to Schmidt in which she asked for her debt to be forgiven. She said she had heard that companies make allowances for accounts they are doubtful about collecting and that Schmidt certainly should have been doubtful about her—that as a college student, she had changed her major three times. She also said that she could not enjoy a high quality of life when making such high payments, but that she didn't want to be embarrassed by bill collectors, either. She especially didn't want her parents to find out that she had not paid her debts. Having Schmidt write off her account seemed to her the best solution in the circumstances. She added that the clothes she bought at Schmidt were among the best she had ever owned and that she "told everybody" that Schmidt was definitely the best place to get clothes. Required: You are the accounting manager for Schmidt. Write a short letter to Deborah explaining why her debt cannot be written off. Ans: N/A, LO: 2, Topic: Valuation and Disposition of Accounts Receivable, Subtopic: NA, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Communications, AICPA BB: None, AICPA FC: None, AICPA PC: None, IMA: Business Economics

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

8-78 Solution 284

(Letterhead) (Date) Ms. Deborah Stine 123 College View Apartments, #717 Lakeland University Lakeland, Michigan 60771 Dear Ms. Stine: Thank you for your recent letter explaining your delay in paying your account. We appreciated hearing about your satisfaction with Schmidt clothing, and we're glad you tell your friends about us. As you know, your account is becoming seriously past due. Presently, the total charges, including late payment penalties and interest (detailed on the attached billing form), are $251.13. Your account cannot be simply "forgiven" as you request in your letter. Our "Allowance for Doubtful Accounts" does not mean that we have certain customers whose debts we are willing to cancel readily. When Schmidt extends credit to anyone, it is our expression of confidence in that person's ability and willingness to pay. In other words, we aren't "doubtful" about any of our customers. The Allowance account is simply our recognition that a few customers, though very willing to pay, may become unable to do so because of circumstances beyond their control. If we detect some problem that may indicate a present or future unwillingness to pay, we do not extend credit. To do so would not be fair to Schmidt or to the customer. We were sure about your ability and willingness to pay when we granted you credit. We were very pleased to receive your first two payments right on time. Won't you reconsider and send your next payment today? If you need to renegotiate the size of the payments, you may contact Beverly in the Credit Department to discuss the matter. I look forward to receiving your payment. Sincerely,

Martha King Accounting Manager

S-A E 285 a. List the characteristics of promissory notes. b. List situations where promissory notes may be used. c. What action relating to promissory notes must be taken at the end of the accounting period? Ans: N/A, LO: 3, Topic: Notes Receivable, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

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Solution 285 (a) Characteristics of promissory notes include: 1. Promissory notes give the holder stronger legal claims to assets than accounts receivable, thus they are preferable if the maker declares bankruptcy. 2. Promissory notes have definite due dates and bear interest at a stated rate. 3. Promissory notes are formal promises to pay. (b) Promissory notes may be used 1. when individuals and companies lend or borrow money. 2. in settlement of accounts receivable. 3. to accommodate transactions for which the amount or credit period exceeds normal limits. (c) At the end of the accounting period, it is necessary to accrue interest from the date of the note to the end of the accounting period. This creates interest revenue that is reported on the income statement and interest receivable that is reported on the balance sheet. S-A E 286 Your roommate is uncertain about the advantages of a promissory note. Compare the advantages of a note receivable with those of an account receivable. Ans: N/A, LO: 3, Topic: Notes Receivable, Subtopic: NA, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

Solution 286 A promissory note gives the holder a stronger legal claim than one on an account receivable. As a result, it is easier to sell to another party. Promissory notes are negotiable instruments, which means they can be transferred to another party by endorsement. The holder of a promissory note also can earn interest. S-A E 287 Ace Company dishonors a note at maturity. What are the options available to the lender? Ans: N/A, LO: 3, Topic: Notes Receivable, Subtopic: Dishonor of Notes Receivable, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

Solution 287 When Ace Company dishonors a note, the lender can renegotiate new terms for the receivable which is equal to the full amount of the note plus the interest due. It will then try to collect the balance due, or as much as possible. If there is no hope of collection, the company will write-off the note receivable. S-A E 288 An article in the Wall Street Journal indicated that companies are selling receivables at a record rate. Why do companies sell their receivables? Ans: N/A, LO: 4, Topic: Receivables Presentation and Management, Subtopic Managing Receivables, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 284 The reasons companies sell their receivables are: (1) For competitive reasons, companies often must provide financing to purchasers of their goods. Such financing can result in receivables balances that are larger than the company wishes to hold. Selling the receivables reduces the excessive balance. (2) Receivables may be sold because they may be the only reasonable source of cash. (3) Billing and collection are often time-consuming and costly. As a result, it is often easier for a retailer to sell the receivables to another party that has expertise in billing and collecting receivables. S-A E 289 Your friend Lionel has opened an office supply store. He will extend open credit to local businesses and is concerned about potential uncollectibles. What can Lionel do to reduce potential uncollectibles? Ans: N/A, LO: 4, Topic: Receivables Presentation and Management, Subtopic Managing Receivables, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: None, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Business Economics

Solution 289 1. Establish a reasonable policy for extending credit. The company needs to consider the risks of having either a ‘too tight’ or ‘too loose’ credit policy. Potential credit customers should be screened appropriately. 2. The company should decide upon the required payment period and communicate it to customers and employees. This period should be in line with the ones established by competitors. Also, employees should enforce the collection period but yet exercise judgment in unusual circumstances. 3. The company should evaluate the relationship between sales, accounts receivable, and cash collections to monitor trends and watch for potential problems. 4. The company should prepare an accounts receivable aging schedule on a regular basis. The collection department should follow up on past due accounts in a timely and professional manner. There should be a clear company policy regarding collection efforts and when to write off accounts. S-A E 290 Company Name B P Y

Net Credit Sales $180,000 $400,000 $ 75,000

Beginning Net Receivables $ 5,000 $52,000 $ 5,400

Ending Net Receivables $30,000 $42,000 $ 5,800

(a) Which company is doing the best job of managing its accounts receivable? Why? Be sure to support your answer with computations. (b) What are your concerns about these companies? Ans: N/A, LO: 4, Topic: Receivables Presentation and Management, Subtopic Evaluating Liquidity of Receivables, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Communications, AICPA BB: None, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: None, IMA: Business Economics

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Solution 290 Accounts receivable turnover $180,000

B = 10.3 times

$ 17,500

$400,000

P = 8.5 times

$ 47,000

$75,000

Y = 13.4 times

$ 5,600

(Net cr. sal. ÷ [(beg. net rec. + end. net rec.) ÷ 2]) Average Collection Period B P 365 365 = 35.4 days = 42.9 days 10.3 8.5 (365 ÷ A/R turn.)

Y 365 13.4

= 27.2 days

(a) Company Y is doing the best job of managing its accounts receivable because it has the shortest collection period. It is able to collect accounts receivable in an average of about 27 days. (b) 1 Y is the smallest company in size of net credit sales and accounts receivable. Its average collection period may be lower because it has well-established customers and is not trying to expand. 2

The net receivables for Company B increased $25,000 or 500% during the year. This indicates that B is expanding and increasing its credit sales. The company should have appropriate policies for extending credit and making collections. One major concern is whether the credit sales can be collected.

It is taking Company P about 43 days to collect its receivables. Management should determine if this period can be shortened.

IFRS QUESTIONS 1.

Which receivables accounting and reporting issue is not essentially the same for IFRS and GAAP? a. The use of allowance accounts and the allowance method. b. How to record discounts. c. How to record factoring. d. All of these answer choices are essentially the same for IFRS and GAAP.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics

Which receivables accounting and reporting issue is essentially the same for IFRS and GAAP? a. The use of allowance accounts and the allowance method. b. How to record discounts. c. How to record factoring. d. All of these answer choices are essentially the same for IFRS and GAAP.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics

8-82 3.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

IFRS requires loans and receivables to be recorded at a. amortized cost. b. amortized cost, adjusted for allowances for doubtful accounts. c. unamortized cost. d. unamortized cost, adjusted for allowances for doubtful accounts.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics

IFRS sometimes refers to allowances as a. revenues. b. discounts. c. provisions. d. reserves.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics

IFRS a. implies that receivables with different characteristics should be reported separately. b. requires that receivables with different characteristics should be reported separately. c. implies that receivables with different characteristics should be reported as one unsegregated amount. d. requires that receivables with different characteristics should be reported as one unsegregated amount.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics

Which board(s) has(have) worked to implement fair value measurement for financial instruments? a. FASB, but not IASB. b. IASB, but not FASB. c. both FASB and IASB. d. neither FASB nor IASB.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics

Which board(s) has(have) faced bitter opposition when working to implement fair value measurement for financial instruments? a. FASB, but not IASB. b. IASB, but not FASB. c. Both FASB and IASB. d. Neither FASB nor IASB.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics

Which is part of IFRS accounting for financial instruments? Disclosure of fair value information Optional recording of some financial for receivables in the notes instruments at fair value a. Yes Yes b. Yes No c. No Yes d. No No

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None,

Reporting and Analyzing Receivables

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IMA: Business Economics

What criteria are used to determine how to record a factoring transaction? GAAP IFRS a. risks and rewards, and loss of control risks and rewards, and loss of control b. risks and rewards, and loss of control loss of control c. loss of control loss of control d. loss of control risks and rewards, and loss of control

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics

10.

Which permits partial derecognition of receivables? GAAP IFRS a. yes no b. yes yes c. no no d. no yes

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics

CHAPTER 9 REPORTING AND ANALYZING LONG-LIVED ASSETS CHAPTER LEARNING OBJECTIVES 1. Explain the accounting for plant asset expenditures. The cost of plant assets includes all expenditures necessary to acquire the asset and make it ready for its intended use. Once cost is established, a company uses that amount as the basis of accounting for the plant asset over its useful life. 2. Apply depreciation methods to plant assets. Depreciation is the process of allocating to expense the cost of a plant asset over its useful (service) life in a rational and systematic manner. Depreciation is not a process of valuation, and it is not a process that results in an accumulation of cash. Depreciation reflects an asset’s decreasing usefulness and revenueproducing ability, resulting from wear and tear and from obsolescence. The formula for straight-line depreciation is: Cost – Salvage value Useful life (in years) The expense patterns of the three depreciation methods are as follows: Method Annual Depreciation Pattern Straight-line Constant amount Declining-balance Decreasing amount Units-of-activity Varying amount Companies make revisions of periodic depreciation in the present and future periods, not retroactively. 3. Explain how to account for the disposal of plant assets. The procedure for accounting for the disposal of a plant asset through sale or retirement is (a) eliminate the book value of the plant asset at the date of disposal; (b) record cash proceeds, if any; and (c) account for the difference between the book value and the cash proceeds as a gain or a loss on disposal. 4. Identify the basic issues related to reporting intangible assets. Companies report intangible assets at their cost less any amounts amortized. If an intangible asset has a limited life, its cost should be allocated (amortized) over its useful life. Intangible assets with indefinite lives should not be amortized. 5. Discuss how long-lived assets are reported and analyzed. Companies usually show plant assets under “Property, plant, and equipment”; they show intangibles separately under “Intangible assets.” Either within the balance sheet or in the notes, companies disclose the balances of the major classes of assets, such as land, buildings, and equipment, and accumulated depreciation by major classes or in total. They describe the depreciation and amortization methods used and disclose the amount of depreciation and amortization expense for the period. In the statement of cash flows, depreciation and amortization expense are added back to net income to determine net cash provided by operating activities. The investing section reports cash paid or received to purchase or sell property, plant, and equipment. Plant assets may be analyzed using the return on assets ratio and the asset turnover ratio. The return on assets ratio consists of two components: the asset turnover ratio and the profit .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

margin ratio. *6. Compute periodic depreciation using the declining-balance method and the units-ofactivity method. The depreciation expense calculation for each of these methods is:

Declining Balance: =

Book Value at Beginning of Year

Declining-Balance Rate

Depreciation Expense

Units-of-Activity: =

Depreciation Cost per Unit

Units of Activity during the Year

Depreciation Expense

Difficulties: Easy: 158 Medium: 152 Hard: 1

Question List by Section Plant Asset Expenditures: 1, 48, 49, 53, 278 Determining the Cost of Plant Assets: 5, 233, 234, 236, 240, 241, 247, 248, 249, 277, 302, 303 Land: 2, 46, 47, 52, 54, 55, 56, 57, 58, 60, 61, 80, 279, 280, Land Improvements: 4, 59, 62, 63, 283 Buildings: 64, 65, 77, 78, 79, 81 Equipment: 3, 50, 51, 66, 67, 68, 71, 72, 73, 74, 75, 284 Expenditures During Useful Life: 7, 8, 9, 10, 69, 70, 82, 83, 84, 85, 86, 281, 282, 306 To Buy or Lease?: 6, 76 Depreciation Methods: 11, 12, 13, 14, 15, 16, 87, 88, 91, 92, 94, 95, 96, 97, 98, 99, 104, 106, 132, 285, 286, 300, 304 Factors in Computing Depreciation: 17, 93, 89, 100, 101, 102, 103, 105, 129, 287, 308 Depreciation Methods: 119 Straight-Line Method: 107, 108, 109, 110, 111, 112, 113, 114, 120, 121, 122, 123, 124, 125, 126, 127, 128, 130, 131, 133, 134, 135, 136, 137, 138, 139, 140, 235, 243, 250, 251, 252, 288 Declining-Balance Method: 18, 115, 289, 305 Units-of-Activity Method: 19, 118 Management’s Choice: Comparison of Methods: 116 Depreciation and Income Taxes: 20, 117 Revising Periodic Depreciation: 21, 22, 23, 141, 142, 143, 144, 145, 146, 147, 148, 151, 237, 238, 239, 251 Impairments: 24, 90, 149, 150, 290 Plant Asset Disposals: 25, 27, 28, 291, 155, 162 Sale of Plant Assets: 26, 153, 156, 253, 254, 255, 257, 258, 259, 293, 307 Gain on Sale: 30, 154, 159, 161, 165, 166, 167, 172, 173, 174, 292 Loss on Sale: 31, 157, 168, 169, 170, 171, 311 Retirement of Plant Assets: 29, 152, 158, 160, 163, 164, 256 Intangible Assets: 35, 36, 181, 183, 184, 185, 193,195, 242, 260, 261, 263, 264, 296, 301 Accounting for Intangible Assets: .

Reporting and Analyzing Long-Lived Assets

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Types of Intangible Assets: 192, 262 Patents: 37, 182, 186, 187, 196, 197, 294 Copyrights: 190, 191, 198 Trademarks and Trade Names:194 Franchises: 33, 38, Goodwill: 34, 39, 175, 176, 180, 188, 189, 295, 309, 310 Research and Development Costs: 32, 177, 178, 179 Statement Presentation and Analysis: Presentation: 43, 208, 209, 210, 211, 212, 214, 245, 267 Analysis: 244, 265, 266 Return on Assets: 40, 41, 199, 200, 204, 205, 213, 297 Asset Turnover: 42, 201, 202, 203, 206, 207, 298 Profit Margin Revisited: Other Depreciation Methods: 268, 270 Declining-Balance Method: 44, 45, 215, 216, 217, 218, 223, 226, 227, 228, 229, 232, 246, 269, 271, 274, 275, 276, 299 Units-of-Activity Method: 219, 220, 221, 222, 224, 225, 230, 231, , 272, 273

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

TRUE-FALSE STATEMENTS 1.

All plant assets (fixed assets) must be depreciated for accounting purposes.

Ans: F, LO: 1, Topic: Plant Asset Expenditures, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

When purchasing land, the costs for clearing, draining, filling, and grading should be charged to a Land Improvements account.

Ans: F, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Land, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

When purchasing delivery equipment, sales taxes and motor vehicle licenses should be charged to Equipment.

Ans: F, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Equipment, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Land improvements are generally charged to the Land account.

Ans: F, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Land Improvements, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Once cost is established for a plant asset, it becomes the basis of accounting for the asset unless the asset appreciates in value, in which case, market value becomes the basis for accountability.

Ans: F, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Determining the Cost of Plant Assets, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

One advantage of leasing a long-term asset is that it can reduce the risk of obsolescence.

Ans: T, LO: 1, Topic: Plant Asset Expenditures, Subtopic: To Buy or Lease?, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Additions and improvements to a plant asset that increase the asset's operating efficiency, productive capacity, or expected useful life are generally expensed in the period incurred.

Ans: F, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Expenditures During Useful Life, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Capital expenditures are expenditures that increase the company's investment in productive facilities.

Ans: T, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Expenditures During Useful Life, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Ordinary repairs should be recognized when incurred as revenue expenditures.

10.

A characteristic of capital expenditures is that the expenditures occur frequently during the period of ownership.

11.

The book value of a long-term asset is calculated by subtracting its salvage value from its cost.

Ans: F, LO: 2, Topic: Depreciation Methods, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

12.

The book value of a plant asset is always equal to its fair market value. .

Reporting and Analyzing Long-Lived Assets

9-5

Ans: F, LO: 2, Topic: Depreciation Methods, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

13.

Recording depreciation on plant assets affects both the balance sheet and the income statement.

Ans: T, LO: 2, Topic: Depreciation Methods, Subtopic: NA, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

14.

The depreciable cost of a plant asset is its original cost minus obsolescence.

Ans: F, LO: 2, Topic: Depreciation Methods, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

15.

Recording depreciation in each period is an application of the matching principle.

Ans: T, LO: 2, Topic: Depreciation Methods, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

16.

The Accumulated Depreciation account represents a cash fund available to replace plant assets.

Ans: F, LO: 2, Topic: Depreciation Methods, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

17.

In calculating depreciation, both plant asset cost and useful life are based on estimates.

Ans: F, LO: 2, Topic: Depreciation Methods, Subtopic: Factors in Computing Depreciation, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

18.

The declining-balance method of depreciation is called an accelerated depreciation method because it depreciates an asset in a shorter period of time than the asset's useful life.

Ans: F, LO: 2, Topic: Depreciation Methods, Subtopic: Declining-Balance Method, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

19.

Using the units-of-activity method of depreciating factory equipment will generally result in more depreciation expense being recorded over the life of the asset than if the straightline method had been used.

Ans: F, LO: 2, Topic: Depreciation Methods, Subtopic: Units-of-Activity Method, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

20.

The IRS does not require the taxpayer to use the same depreciation method on the tax return that is used in preparing financial statements.

Ans: T, LO: 2, Topic: Depreciation Methods, Subtopic: Depreciation and Income Taxes, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

21.

A change in the estimated useful life of a plant asset may cause a change in the amount of depreciation recognized in the current and future periods, but not in prior periods.

Ans: T, LO: 2, Topic: Depreciation Methods, Subtopic: Revising Periodic Depreciation, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

22.

A change in the estimated salvage value of a plant asset requires a restatement of prior years' depreciation.

Ans: F, LO: 2, Topic: Depreciation Methods, Subtopic: Revising Periodic Depreciation, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

23.

When a change in estimate is made, there is no correction of previously recorded .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

depreciation expense. Ans: T, LO: 2, Topic: Depreciation Methods, Subtopic: Revising Periodic Depreciation, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

24.

A permanent decline in the market value of an asset is referred to as an impairment.

Ans: T, LO: 2, Topic: Depreciation Methods, Subtopic: Impairments, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

25.

Companies only dispose of plant assets by either sale or exchange.

Ans: F, LO: 3, Topic: Plant Asset Disposals, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

26.

If the proceeds from the sale of a plant asset exceed its book value, a gain on disposal occurs.

Ans: T, LO: 3, Topic: Plant Asset Disposals, Subtopic: Sale of Plant Assets, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

27.

The book value of a plant asset is the amount originally paid for the asset, less anticipated salvage value.

Ans: F, LO: 3, Topic: Plant Asset Disposals, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

28.

A loss on disposal of a plant asset as a result of a sale or a retirement is calculated in the same way as a gain on disposal.

Ans: T, LO: 3, Topic: Plant Asset Disposals, Subtopic: Sale of Plant Assets, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

29.

A plant asset must be fully depreciated before it can be removed from the books.

Ans: F, LO: 3, Topic: Plant Asset Disposals, Subtopic: Retirement of Plant Assets, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

30.

If a plant asset is sold at a gain, the gain on disposal should reduce the cost of goods sold section of the income statement.

Ans: F, LO: 3, Topic: Plant Asset Disposals, Subtopic: Gain on Sale, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

31.

A loss on disposal of a plant asset occurs if the cash proceeds received from the asset sale are less than the asset's book value.

Ans: T, LO: 3, Topic: Plant Asset Disposals, Subtopic: Loss on Sale, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

32.

Research and development costs that result in a successful product that is patentable are charged to the Patent account.

Ans: F, LO: 4, Topic: Intangible Assets, Subtopic: Research and Development Costs, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

33.

Franchises are classified as plant assets.

Ans: F, LO: 4, Topic: Intangible Assets, Subtopic: Franchises, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

34.

Goodwill is recorded only when there is an exchange transaction that involves the purchase of an entire business.

Ans: T, LO: 4, Topic: Intangible Assets, Subtopic: Goodwill, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

35.

Intangible assets are rights, privileges, and competitive advantages that result from .

Reporting and Analyzing Long-Lived Assets

9-7

ownership of long-lived assets without physical substance. Ans: T, LO: 4, Topic: Intangible Assets, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

36.

The cost of an intangible asset must be amortized over a 20-year period.

Ans: F, LO: 4, Topic: Intangible Assets, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

37.

The cost of a patent should be amortized over its legal life or useful life, whichever is shorter.

Ans: T, LO: 4, Topic: Intangible Assets, Subtopic: Patents, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

38.

If an acquired franchise or license is for an indefinite time period, then the cost of the asset should not be amortized.

Ans: T, LO: 4, Topic: Intangible Assets, Subtopic: Franchises, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

39.

When an entire business is purchased, goodwill is the excess of cost over the book value of the net assets acquired.

Ans: F, LO: 4, Topic: Intangible Assets, Subtopic: Goodwill, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

40.

The return on assets ratio indicates how efficiently a company uses its assets.

Ans: F, LO: 5, Topic: Statement Presentation and Analysis, Subtopic: Return on Assets, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

41.

The return on assets ratio can be computed from the profit margin ratio and the asset turnover ratio.

Ans: T, LO: 5, Topic: Statement Presentation and Analysis, Subtopic: Return on Assets, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

42.

The asset turnover is calculated as net sales divided by ending total assets.

Ans: F, LO: 5, Topic: Statement Presentation and Analysis, Subtopic: Asset Turnover, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

43.

In the notes to the financial statements, the depreciation and amortization methods used should be described.

Ans: T, LO: 5, Topic: Statement Presentation and Analysis, Subtopic: Presentation, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

*44.

Salvage value is not subtracted from plant asset cost in determining depreciation expense under the declining-balance method of depreciation.

Ans: T, LO: 6, Topic: Other Deprecation Methods, Subtopic: Declining-Balance Method, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

*45.

Under the double-declining-balance method, the depreciation rate used each year remains constant.

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

MULTIPLE CHOICE QUESTIONS 46.

A company purchased land for $350,000 cash. The real estate broker's commission was $25,000 and $35,000 was spent for demolishing an old building on the land before construction of a new building could start. The cost of land is a. $385,000. b. $350,000. c. $375,000. d. $410,000.

Ans: D, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Land, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $350,000 + $25,000 + $35,000  $410,000 (Pur.pric + brok.comm. + bldg. demo.)

47.

A company purchased land for $94,000 cash. The real estate broker's commission was $5,000 and $7,000 was spent for demolishing an old building on the land before construction of a new building could start. Salvaged proceeds from the demolished building were $1,200. Under the historical cost principle, the cost of land is a. $104,800. b. $94,000. c. $99,800. d. $106,000.

Ans: A, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Land, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $94,000 + $5,000 + ($7,000  $1,200)  $104,800 (Pur.price + brok. com. + bldg. demo. – sal. proc.)

48.

Which of the following assets is not properly classified as property, plant, and equipment? a. A building used as a factory b. Land used in ordinary business operations c. A truck held for resale by an automobile dealership d. Land improvements, such as parking lots and fences

Ans: C, LO: 1, Topic: Plant Asset Expenditures, Subtopic: NA, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

49.

One characteristic of a plant asset is that it is a. intangible. b. used in the operations of a business. c. held for sale in the ordinary course of the business. d. not currently used in the business but held for future use.

Ans: B, LO: 1, Topic: Plant Asset Expenditures, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

50.

Which one of the following items is not considered a part of the cost of a truck purchased for business use? a. Sales tax b. Truck license c. Freight charges d. Cost of lettering on the side of the truck

Ans: B, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Equipment, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

51.

Which of the following would not be charged to the Equipment account? .

Reporting and Analyzing Long-Lived Assets

a. b. c. d.

9-9

Installation costs Freight costs Cost of trial runs Electricity used by the machine

Ans: D, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Equipment, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

52.

Which of the following assets does not decline in service potential over the course of its useful life? a. Equipment b. Furnishings c. Land d. Fixtures

Ans: C, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Land, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

53.

The four subdivisions of plant assets are a. land, land improvements, buildings, and equipment. b. intangibles, land, buildings, and equipment. c. furnishings and fixtures, land, buildings, and equipment. d. property, plant, equipment, and land.

Ans: A, LO: 1, Topic: Plant Asset Expenditures, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

54.

The cost of land does not include a. real estate broker's commission. b. annual property taxes. c. accrued property taxes assumed by the purchaser. d. title fees.

Ans: B, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Land, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

55.

The Land account would include all of the following costs except a. drainage costs. b. the cost of building a fence. c. commissions paid to real estate agents. d. the cost of tearing down a building.

56.

A1 Care Clinic purchases land for $420,000 cash. The clinic assumes $4,500 in property taxes due on the land. The title and attorney fees totaled $3,000. The clinic had the land graded for $6,600. What amount does A1 Care Clinic record as the cost for the land? a. $426,600 b. $420,000 c. $434,100 d. $427,500

Ans: C, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Land, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $420,000 + $4,500 + $3,000 + $6,600  $434,100 (Pur.price + taxes + attor. fees + grad. cost)

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ace Wholesale Motor Company purchases land for $180,000 cash. Ace assumes $5,000 in property taxes due on the land. The title and attorney fees totaled $2,000. Ace has the land graded for $4,400. They paid $20,000 for paving of a parking lot. What amount does Ace record as the cost for the land? a. $186,400 b. $211,400 c. $191,400 d. $180,000

Ans: C, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Land, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $180,000 + $5,000 + $2,000 + $4,400  $191,400 (Pur.price + taxes + attor. fees + grad. cost)

58.

Suppose that Target buys land for $145,000 in 2025. As of 3/31/2026, the land has appreciated in value to $151,000. On 12/31/26, the land has an appraised value of $155,400. By what amount should the Land account be increased in 2026? a. $0 b. $6,000 c. $4,400 d. $10,400

59.

Suppose that Dollar General purchased land for a new parking lot for $125,000. The paving cost $175,000, and the lights to illuminate the new parking area cost $60,000. Which of the following statements is true with respect to these expenditures? a. $300,000 should be debited to the Land account. b. $235,000 should be debited to Land Improvements. c. $360,000 should be debited to the Land account. d. $360,000 should be debited to Land Improvements.

Ans: B, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Land Improvements, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $175,000 + $60,000  $235,000 (Pav. cost + lights)

60.

Suppose that Walmart acquires land for $77,000 cash. Additional costs are as follows. Removal of shed $ 300 Filling and grading 1,500 Salvage value of lumber of shed 120 Broker commission 1,130 Paving of parking lot 10,000 Closing costs 560 Walmart will record the acquisition cost of the land as a. $77,000. b. $78,690. c. $80,610. d. $80,370.

Ans: D, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Land, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $77,000 + ($300  $120) + $1,500 + $1,130 + $560  $80,370 (Pur. price + remov. cost – sal. val. + fill. + comm. + clos. costs)

Reporting and Analyzing Long-Lived Assets

61.

9-11

A1 Wholesale Jewelry Company acquires land for $240,000 cash. Additional costs are as follows: Removal of shed $ 2,000 Filling and grading 6,000 Salvage value of lumber of shed 1,280 Broker commission 4,520 Paving of parking lot 40,000 Closing costs 3,400 A1will record the acquisition cost of the land as a. $254,640. b. $257,200. c. $255,920. d. $240,000.

Ans: A, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Land, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $240,000 + ($2,000  $1,280) + $6,000 + $4,520 + $3,400  $254,640 (Pur. price + remov. cost – sal. val. + fill. + comm. + clos. costs)

62.

Ace Discount Manufacturing Company installs a new parking lot. The paving cost $60,000 and the lights to illuminate the new parking area cost $24,000. Which of the following statements is true with respect to these expenditures? a. $60,000 should be debited to the Land account. b. $24,000 should be debited to Land Improvements. c. $84,000 should be debited to the Land account. d. $84,000 should be debited to Land Improvements.

Ans: D, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Land Improvements, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $60,000 + $24,000  $84,000 (Pav. cost + lights)

63.

Land improvements should be depreciated over the useful life of the a. land. b. buildings on the land. c. land or land improvements, whichever is longer. d. land improvements.

Ans: D, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Land Improvements, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

64.

Acme Molding Company is building a new plant that will take three years to construct. The construction will be financed in part by funds borrowed during the construction period. There are significant architect fees, excavation fees, and building permit fees. Which of the following statements is true? a. Excavation fees are capitalized but building permit fees are not. b. Architect fees are capitalized but building permit fees are not. c. Interest is capitalized during the construction as part of the cost of the building. d. The capitalized cost is equal to the contract price to build the plant less any interest on borrowed funds.

Ans: C, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Buildings, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

9-12 65.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

A company purchases a remote building site for computer operations. The building will be suitable for operations after some expenditures. The wiring must be replaced to computer specifications. The roof is leaky and must be replaced. All rooms must be repainted and carpeted, and there will also be some plumbing work done. Which of the following statements is true? a. The cost of the building will not include the plumbing. b. The cost of the building will include the cost of replacing the roof. c. The cost of the building is the purchase price of the building, while the additional expenditures are all capitalized as Building Improvements. d. The wiring is part of the computer costs, not the building cost.

Ans: B, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Buildings, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

66.

Company A purchases a new delivery truck for $45,000. The sales taxes are $2,500. The logo of the company is painted on the side of the truck for $1,200. The truck’s annual license is $120. The truck undergoes safety testing for $220. What does Company A record as the cost of the new truck? a. $49,040. b. $48,920. c. $47,500. d. $46,920.

Ans: B, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Equipment, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $45,000 + $2,500 + $1,200 + $220  $48,920 (Pur price + sal. tax + logo + test)

67.

Suppose that Verizon purchased equipment and these costs were incurred: Cash price $55,000 Sales taxes 3,600 Insurance during transit 640 Installation and testing 860 Total costs $60,100 Verizon will record the acquisition cost of the equipment as a. $55,000. b. $58,600. c. $59,240. d. $60,100.

Ans: D, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Equipment, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $55,000 + $3,600 + $640 + $860  $60,100 (Cash price + sal. tax + insur. + inst.)

68.

A1 Flowers purchased a delivery van with a $60,000 list price. The company was given a $6,000 cash discount by the dealer and paid $3,000 sales tax. Annual insurance on the van is $1,500. As a result of the purchase, by how much will A1 increase its Equipment account? a. $60,000 b. $54,000 c. $58,500 d. $57,000

Ans: D, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Equipment, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $60,000  $6,000 + $3,000  $57,000

Reporting and Analyzing Long-Lived Assets

9-13

(Pur. price – disc. + sal. tax)

69.

Ace Concrete Inc. made a $500 ordinary repair to a piece of equipment. Ace's accountant debited this amount to the asset account, Equipment, and credited Cash. Was this the correct entry and if not, why not? a. Yes, this was the correct entry. b. No, the correct entry would be a debit to Maintenance and Repairs Expense and a credit to Cash. c. No, the correct entry would be a debit to Cash and a credit to Maintenance and Repairs Expense. d. No, the correct entry would be a debit to Sales Revenue and a credit to Cash.

Ans: B, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Expenditures During Useful Life, Bloom: AN, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

70.

Acme Air, Inc. is a regional air cargo carrier. Acme made a $4,500 improvement to one of its airplanes. The amount is material. If Acme's accountant expensed this amount, which of the following statements is true? a. The entry will improperly understate net income for the year. b. The entry will improperly overstate net income for the year. c. The entry is the correct treatment. d. The entry will overstate the balance sheet for the year.

Ans: A, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Expenditures During Useful Life, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

71.

Acme Retail Company purchased equipment on January 1 at a list price of $125,000, with credit terms 2/10, n/30. Payment was made within the discount period. Acme paid $6,250 sales tax on the equipment and paid installation charges of $2,200. Prior to installation, Acme paid $5,000 to pour a concrete slab on which to place the equipment. What is the total cost of the new equipment? a. $131,250 b. $135,950 c. $138,450 d. $126,250

Ans: B, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Equipment, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($125,000  .98) + $6,250 + $2,200 + $5,000  $135,950 ([List price × (1 – .02)] + sal. tax + inst. + conc. slab)

72.

Suppose that Old Navy purchased equipment and these costs were incurred: Cash price $75,000 Sales taxes 3,500 Insurance during transit 750 Installation and testing 1,500 Total costs $80,750 What amount should be recorded as the cost of the equipment? a. $75,000 b. $78,500 c. $79,250 d. $80,750

Ans: D, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Equipment, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $75,000 + $3,500 + $750 + $1,500  $80,750 (Cash price + sal. tax + insur. + install.)

9-14 73.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

A1 Delivery Service, Inc. purchased a truck with a $48,000 list price. The company was given a $4,800 cash discount by the dealer and paid $2,400 sales tax. Annual insurance on the truck is $1,200. As a result of the purchase, by what amount will the company increase its Equipment account? a. $48,000 b. $43,200 c. $46,800 d. $45,600

Ans: D, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Equipment, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $48,000  $4,800 + $2,400  $45,600 (List price – disc. + sal. tax)

74.

Company A purchased machinery on January 1 at a list price of $300,000, with credit terms 2/10, n/30. Payment was made within the discount period. The company paid $15,000 sales tax on the machinery and paid installation charges of $5,300. Prior to installation, Company A paid $12,000 to pour a concrete slab on which to place the machinery. What is the total cost of the new machinery? a. $314,300 b. $326,300 c. $332,300 d. $309,000

Ans: B, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Equipment, Bloom: AP, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($300,000  .98) + $15,000 + $5,300 + $12,000  $326,300 ([List price × (1 – .02)] + sal. tax + inst. char. + conc. slab)

75.

Suppose that FedEx Company purchases a new delivery van for $70,000. The sales taxes are $5,250. The logo of the company is painted on the side of the van for $1,400. The van’s annual license is $140. The van undergoes safety testing for $250. What does the company record as the cost of the new van? a. $77,040 b. $76,900 c. $75,250 d. $76,650

Ans: B, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Equipment, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $70,000 + $5,250 + $1,400 + $250  $76,900 (Pur. price + sal. tax + logo + test)

76.

Which of the following is not an advantage of leasing a long-term asset? a. shared tax benefits b. no depreciation c. reduced risk of obsolescence d. lower down payment

Ans: B, LO: 1, Topic: Plant Asset Expenditures, Subtopic: To Buy or Lease?, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

77.

Interest may be included in the acquisition cost of a plant asset a. during the construction period of a self-constructed asset. b. if the asset is purchased on credit. c. if the asset acquisition is financed by a long-term note payable. d. if it is a part of a lump-sum purchase. .

Reporting and Analyzing Long-Lived Assets

9-15

Ans: A, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Buildings, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

78.

The cost of which of the following is included in the cost of constructing a building? a. paving a parking lot b. repairing vandalism damage incurred shortly after construction is complete c. incurring interest during construction d. removing the demolished building existing on the land when it was purchased

Ans: C, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Buildings, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

79.

Which of the following is included as part of property, plant, and equipment but does not decline in service potential? a. Land on which a company warehouse is built b. Fixed assets used in production c. A patent that provides a superior product compared to competitors d. Parking lots and sidewalks providing access for a company’s employees

Ans: A, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Buildings, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

80.

Ace Enterprises incurred the following costs related to the acquisition of plant assets: Purchase price of land and dilapidated building Real estate broker's commission Demolition costs of dilapidated building Architect's fees and building permits Payments to contractor for building construction Purchase of new furniture and equipment Actual interest costs during building construction Actual interest cost after completion of building construction Costs of walks, driveways, and parking lot

$260,000 17,000 22,000 24,000 870,000 74,000 135,000 120,000 55,000

At what amount should the land be recorded in Ace’s accounting records? a. $299,000 b. $277,000 c. $354,000 d. $282,000 Ans: A, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Land, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $260,000 + $17,000 + $22,000 = $299,000 (Pur. price + comm. + remov. Cost)

9-16

81.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

$260,000 17,000 22,000 24,000 870,000 74,000 135,000 120,000 55,000

At what amount should the building be recorded in Ace’s accounting records? a. $1,051,000 b. $1,029,000 c. $870,000 d. $894,000 Ans: B, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Building, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $24,000 + $870,000 + $135,000 = $1,029,000 (Arch. fee + Pmts. for constr. + Int. during const.)

82.

Expenditures that add to the utility of plant assets for more than one accounting period are a. committed expenditures. b. revenue expenditures. c. current expenditures. d. capital expenditures.

Ans: D, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Expenditures During Useful Life, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

83.

An expenditure for which of the following items would be considered a revenue expenditure? a. Plant asset b. Ordinary repair c. Addition d. Improvements

Ans: B, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Expenditures During Useful Life, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

84.

Expenditures that maintain the operating efficiency and expected productive life of a plant asset are generally a. expensed when incurred. b. capitalized as a part of the cost of the asset. c. debited to the Accumulated Depreciation account. d. not recorded until they become material in amount.

Ans: A, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Expenditures During Useful Life, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Long-Lived Assets

85.

9-17

Which of the following is not true of ordinary repairs? a. They primarily benefit the current accounting period. b. They can be referred to as revenue expenditures. c. They maintain the expected productive life of the asset. d. They increase the productive capacity of the asset.

86.

Additions and improvements a. occur frequently during the ownership of a plant asset. b. normally involve immaterial expenditures. c. increase the company’s investment in productive facilities. d. typically only benefit the current accounting period.

Ans: C, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Expenditures During Useful Life, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

87.

What does the balance of the Accumulated Depreciation account represent? a. The decline in value of plant assets b. The accumulation of funds needed to replace the assets at the end of their useful life c. The portion of the cost allocated as an expense since the asset was acquired d. The fair value of the asset that is being depreciated

Ans: C, LO: 2, Topic: Depreciation Methods, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

88.

What is the goal when a company is selecting a depreciation method? a. To select a method that best measures an asset’s contribution to revenue over its life b. To select a method that allows the least amount of income taxes to be paid c. To select the method that is required by GAAP for each particular asset d. To select a method that measures the asset in units of output

Ans: A, LO: 2, Topic: Depreciation Methods, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

89.

When an asset is depreciated, to what amount will its book value at the end of its useful life be equal? a. The cost of the asset being depreciated b. Total accumulated depreciation c. The salvage value of the asset d. The annual cost allocation amount

Ans: C, LO: 2, Topic: Depreciation Methods, Subtopic: Factors in Computing Depreciation, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

9-18

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

90. Which of the following is a true statement as it relates to impairments of plant assets? a. The assets are recorded at the book value of the asset. b. The impairment amount is capitalized and depreciated along with the cost of the original asset. c. The impairment amount is added to the plant asset account in the year the decline of value occurs. They are written down to the new fair value during the year in which the decline in value occurs. Ans: D, LO: 2, Topic: Depreciation Methods, Subtopic: Impairments, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

91.

The balance in the Accumulated Depreciation account represents the a. cash fund to be used to replace plant assets. b. amount to be deducted from the cost of the plant asset to arrive at its fair market value. c. amount charged to expense in the current period. d. amount charged to expense since the acquisition of the plant asset.

Ans: D, LO: 2, Topic: Depreciation Methods, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

92.

The term applied to the periodic expiration of a plant asset’s cost is a. amortization. b. depletion. c. depreciation. d. cost expiration.

Ans: C, LO: 2, Topic: Depreciation Methods, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

93.

Which one of the following items is not a consideration when recording periodic depreciation expense on plant assets? a. Depreciation method b. Estimated useful life. c. Cash needed to replace the plant asset. d. Cost.

Ans: C, LO: 2, Topic: Depreciation Methods, Subtopic: Factors in Computing Depreciation, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

94.

Depreciation is the process of allocating the cost of a plant asset over its useful life in a(n) a. equal and equitable manner. b. accelerated and accurate manner. c. systematic and rational manner. d. conservative market-based manner.

Ans: C, LO: 2, Topic: Depreciation Methods, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

95.

The cost of a long-term asset is expensed a. when it is paid for. b. as the asset benefits the company. c. in the period in which it is acquired. d. in the period in which it is disposed of.

Ans: B, LO: 2, Topic: Depreciation Methods, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Long-Lived Assets

96.

9-19

The book value of an asset is equal to the a. asset's fair value less its historical cost. b. blue book value relied on by secondary markets. c. replacement cost of the asset. d. asset's cost less accumulated depreciation.

Ans: D, LO: 2, Topic: Depreciation Methods, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

97.

Accountants do not attempt to measure the change in a plant asset's market value during ownership because a. the assets are not held for resale. b. plant assets cannot be sold. c. losses would have to be recognized. d. it is management's responsibility to determine fair values.

Ans: A, LO: 2, Topic: Depreciation Methods, Subtopic: NA, Bloom: K, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

98.

Depreciation is a process of a. asset devaluation. b. cost accumulation. c. cost allocation. d. asset valuation.

Ans: C, LO: 2, Topic: Depreciation Methods, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

99.

Recording depreciation each period is necessary in accordance with the a. going concern principle. b. historical cost principle. c. expense recognition principle. d. asset valuation principle.

100.

In computing depreciation, salvage value is a. the fair value of a plant asset on the date of acquisition. b. subtracted from accumulated depreciation to determine the plant asset's depreciable cost. c. an estimate of a plant asset's value at the end of its useful life. d. ignored in all the depreciation methods.

101.

When estimating the useful life of an asset, accountants do not consider a. the cost to replace the asset at the end of its useful life. b. vulnerability to obsolescence. c. expected repairs and maintenance. d. the intended use of the asset.

Ans: A, LO: 2, Topic: Depreciation Methods, Subtopic: Factors in Computing Depreciation, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

9-20

102.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

All the following are needed for the computation of depreciation except a. training costs. b. acquisition cost. c. depreciation method. d. estimated useful life.

103.

Which one of the following amounts is capitalized and depreciated? a. $7,000 paid for closing costs on the acquisition of land on which an office building will be constructed b. $4,200 mortgage payments on a warehouse built to store inventory c. $65,000 paid to construct a parking lot adjacent to the company’s building d. $40 paid for an oil change in one of the company’s delivery vehicles

104.

Which of the following statements about depreciation is true? a. Depreciation is an asset valuation process. b. Depreciation does not apply to land improvements. c. Recognizing depreciation results in the accumulation of cash for asset replacement. d. Land is not depreciated.

Ans: D, LO: 2, Topic: Depreciation Methods, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

105.

All of the following statements about the useful life factor associated with depreciation are true except a. useful life is also called service life. b. useful life is an estimate of productive life. c. past experience with similar assets is helpful in establishing useful life. d. useful life is also called expected trade-in date.

Ans: D, LO: 2, Topic: Depreciation Methods, Subtopic: Factors in Computing Depreciation, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

106.

What is the purpose of recording depreciation? a. To allocate the cost of the assets to the accounting periods in which the assets are used to produce benefits b. To reduce the value of the assets on the balance sheet to their fair values c. To pay for possible future repairs and eventual replacement of the assets d. To avoid overstating the book value of the assets

Ans: A, LO: 2, Topic: Depreciation Methods, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Long-Lived Assets

107.

9-21

Equipment was purchased for $150,000. Freight charges amounted to $7,000 and there was a cost of $20,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $30,000 salvage value at the end of its 5-year useful life. Depreciation expense each year using the straight-line method will be a. $35,400. b. $29,400. c. $24,600. d. $24,000.

Ans: B, LO: 2, Topic: Depreciation Methods, Subtopic: Straight-Line Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($150,000 + $7,000 + $20,000  $30,000)  5  $29,400 (Pur. price + freight + found. – sal. value) ÷ 5 yrs.

108.

Equipment was purchased for $85,000 on January 1, 2025. Freight charges amounted to $3,500 and there was a cost of $10,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $15,000 salvage value at the end of its 5-year useful life. What is the amount of accumulated depreciation at December 31, 2026 if the straight-line method of depreciation is used? a. $33,400. b. $16,700. c. $14,300. d. $28,600.

Ans: A, LO: 2, Topic: Depreciation Methods, Subtopic: Straight-Line Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: [($85,000 + $3,500 + $10,000  $15,000)  5]  2  $33,400 [(Pur. price + freight + found. – sal. val.) ÷ 5 yrs.] × 2

109.

Equipment with a cost of $640,000 has an estimated salvage value of $60,000 and an estimated life of 4 years or 12,000 hours. It is to be depreciated by the straight-line method. What is the amount of depreciation for the first full year, during which the equipment was used for 3,000 hours? a. $160,000. b. $175,000. c. $165,000. d. $145,000.

Ans: D, LO: 2, Topic: Depreciation Methods, Subtopic: Straight-line Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: [($640,000  $60,000)  4]  $145,000 (Cost – sal. val.) ÷ 4 yrs.

110.

Equipment with a cost of $300,000 has an estimated salvage value of $20,000 and an estimated life of 4 years or 10,000 hours. It is to be depreciated by the straight-line method. What is the amount of depreciation for the first full year, during which the equipment was used for 2,700 hours? a. $75,000. b. $70,000. c. $75,600. d. $72,500.

9-22

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

(Cost – sal. val.) ÷ 4 yr

111.

A machine was purchased for $180,000 and it was estimated to have a $12,000 salvage value at the end of its useful life. Monthly depreciation expense of $1,750 was recorded using the straight-line method. The annual depreciation rate is a. 15.0%. b. 2.5%. c. 10.0%. d. 12.5%.

Ans: D, LO: 2, Topic: Depreciation Methods, Subtopic: Straight-Line Method, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($1,750  12)  ($180,000  $12,000)  12.5% (Mon. dep. × 12)  (Cost – sal. val.)

112.

A machine was purchased for $54,000 and it was estimated to have a $9,000 salvage value at the end of its useful life. Monthly depreciation expense of $600 was recorded using the straight-line method. The annual depreciation rate is a. 20.0%. b. 1.6%. c. 12.8%. d. 16.0%.

Ans: D, LO: 2, Topic: Depreciation Methods, Subtopic: Straight-Line Method, Bloom: AN, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($600  12)  ($54,000  $9,000)  16.0% (Mon. dep. × 12)  (Cost – sal. val.)

113.

A company purchased factory equipment on April 1, 2025 for $128,000. It is estimated that the equipment will have a $16,000 salvage value at the end of its 10-year useful life. Using the straight-line method of depreciation, the amount to be recorded as depreciation expense at December 31, 2025 is a. $12,800. b. $11,200. c. $8,400. d. $9,600.

Ans: C, LO: 2, Topic: Depreciation Methods, Subtopic: Straight-Line Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: [($128,000  $16,000)  10]  9/12  $8,400 [(Cost – sal. val.) ÷ 10 yrs.] × 9/12

114.

A company purchased factory equipment on June 1, 2025 for $128,000. It is estimated that the equipment will have an $8,000 salvage value at the end of its 10-year useful life. Using the straight-line method of depreciation, the amount to be recorded as depreciation expense at December 31, 2025 is a. $12,000. b. $7,000. c. $6,000. d. $5,000.

Ans: B, LO: 2, Topic: Depreciation Methods, Subtopic: Straight-Line Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: [($128,000  $8,000)  10]  7/12  $7,000 [(Cost – sal. val.) ÷ 10 yrs.] × 7/12

Reporting and Analyzing Long-Lived Assets

115.

9-23

The declining-balance method of depreciation produces a(n) a. decreasing depreciation expense each period. b. increasing depreciation expense each period. c. declining percentage rate each period. d. constant amount of depreciation expense each period.

Ans: A, LO: 2, Topic: Depreciation Methods, Subtopic: Declining-Balance Method, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

116.

Straight-line depreciation results in a. the same amounts being reported for depreciation expense and accumulated depreciation for each year of the asset’s life. b. an equal amount being charged to depreciation expense for each full year of the asset’s life. c. a balance in depreciation expense that is equal to the salvage value of the asset at the end of its useful life. d. larger amounts charged to depreciation expense in the first full year of the asset’s life when compared to depreciation expense under the declining-balance method.

Ans: B, LO: 2, Topic: Depreciation Methods, Subtopic: Management’s Choice: Comparison of Methods, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

117.

The Modified Accelerated Cost Recovery System (MACRS) is a depreciation method that a. is used for tax purposes. b. must be used for financial statement purposes. c. is required by the SEC. d. expenses an asset in a single year.

Ans: A, LO: 2, Topic: Depreciation Methods, Subtopic: Depreciation and Income Taxes, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

118.

Which of the following methods of computing depreciation is production-based? a. Straight-line b. Declining-balance c. Units-of-activity d. None of the answer choices is correct.

Ans: C, LO: 2, Topic: Depreciation Methods, Subtopic: Units-of-Activity Method, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

119.

Management should select the depreciation method that a. is easiest to apply. b. best measures the plant asset's market value over its useful life. c. best measures the plant asset's contribution to revenue over its useful life. d. has been used most often in the past by the company.

Ans: C, LO: 2, Topic: Depreciation Methods, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

120.

The depreciation method that applies a constant percentage to depreciable cost in calculating depreciation is a. straight-line. b. units-of-activity. c. sum-of-year’s-digits. d. None of the answer choices is correct. .

9-24

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ans: A, LO: 2, Topic: Depreciation Methods, Subtopic: Straight-Line Method, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

121.

On November 1, 2024, Acme Marine places a new asset into service. The cost of the asset is $90,000 with an estimated 5-year life and $10,000 salvage value at the end of its useful life. What is the depreciation expense for 2025 if Acme Marine uses the straightline method of depreciation? a. $4,000 b. $16,000 c. $2,667 d. $9,000

Ans: B, LO: 2, Topic: Depreciation Methods, Subtopic: Straight-Line Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: [($90,000  $10,000)  5]  $16,000 [(Cost – sal. val.) ÷ 5 yrs.]

122.

On October 1, 2025, Ace Company places a new asset into service. The cost of the asset is $120,000 with an estimated 5-year life and $30,000 salvage value at the end of its useful life. What is the depreciation expense for 2025 if accompany uses the straight-line method of depreciation? a. $4,500 b. $24,000 c. $6,000 d. $12,000

Ans: A, LO: 2, Topic: Depreciation Methods, Subtopic: Straight-Line Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: [($120,000  $30,000)  5]  3/12  $4,500 [(Cost – sal. val.) ÷ 5 yrs.]  3/12

123.

On January 1, a machine with a useful life of five years and a salvage value of $25,000 was purchased for $125,000. What is the depreciation expense for year 2 under straightline depreciation? a. $15,000 b. $75,000 c. $20,000 d. $60,000

Ans: C, LO: 2, Topic: Depreciation Methods, Subtopic: Straight-Line Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($125,000  $25,000)  5  $20,000 [(Cost – sal. val.) ÷ 5 yrs.]

124.

On January 1, a machine with a useful life of four years and a salvage value of $16,000 was purchased for $80,000. What is the depreciation expense for year 2 under straightline depreciation? a. $20,000 b. $32,000 c. $16,000 d. $40,000

Ans: C, LO: 2, Topic: Depreciation Methods, Subtopic: Straight-Line Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($80,000  $16,000)  4  $16,000 [(Cost – sal. val.) ÷ 4 yrs.]

Reporting and Analyzing Long-Lived Assets

125.

9-25

On January 1, a machine with a useful life of four years and a salvage value of $15,000 was purchased for $95,000. What is the depreciation expense for year 2 under straightline depreciation? a. $10,000 b. $20,000 c. $40,000 d. $23,750

Ans: B, LO: 2, Topic: Depreciation Methods, Subtopic: Straight-Line Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($95,000  $15,000)  4  $20,000 [(Cost – sal. val.) ÷ 4 yrs.]

126.

Which depreciation method is most frequently used in businesses today? a. Straight-line b. Declining-balance c. Units-of-activity d. Double-declining-balance

127.

A plant asset was purchased on January 1 for $75,000 with an estimated salvage value of $15,000 at the end of its useful life. The current year's depreciation expense is $5,000 calculated on the straight-line basis and the balance of the Accumulated Depreciation account at the end of the year is $35,000. The remaining useful life of the plant asset is a. 15 years b. 12 years c. 7 years d. 5 years

Ans: D, LO: 2, Topic: Depreciation Methods, Subtopic: Straight-Line Method, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($75,000  $15,000)  $5,000  12; 12  ($35,000  $5,000)  5 (Cost – sal. val.) ÷ dep. exp. = use. life; Use. life – (A/D ÷ dep. exp.)

128.

A plant asset was purchased on January 1 for $55,000 with an estimated salvage value of $5,000 at the end of its useful life. The current year's depreciation expense is $5,000 calculated on the straight-line basis and the balance of the Accumulated Depreciation account at the end of the year is $25,000. The remaining useful life of the plant asset is a. 10 years. b. 11 years. c. 6 years. d. 5 years.

Ans: D, LO: 2, Topic: Depreciation Methods, Subtopic: Straight-Line Method, Bloom: AN, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($55,000  $5,000)  $5,000  10; 10  ($25,000  $5,000)  5 (Cost – sal. val.) ÷ dep. exp. = use. life; Use. life – (A/D ÷ dep. exp.)

9-26

129.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ace Motor Corporation bought equipment on January 1, 2025. The equipment cost $300,000 and had an expected salvage value of $50,000. The life of the equipment was estimated to be 6 years. The depreciable cost of the equipment is a. $300,000. b. $250,000. c. $50,000. d. $41,667.

Ans: B, LO: 2, Topic: Depreciation Methods, Subtopic: Factors in Computing Depreciation, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $300,000  $50,000  $250,000 Cost – sal. val.

130.

Ace Motor Corporation bought equipment on January 1, 2025. The equipment cost $300,000 and had an expected salvage value of $50,000. The life of the equipment was estimated to be 6 years. The 2025 depreciation expense using the straight-line method of depreciation is a. $58,333. b. $60,000. c. $41,667. d. none of the answer choices is correct.

Ans: C, LO: 2, Topic: Depreciation Methods, Subtopic: Straight-Line Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($300,000  $50,000)  6  $41,667 (Cost – sal. val.) ÷ 6 yrs.

131.

Ace Motor Corporation bought equipment on January 1, 2025. The equipment cost $300,000 and had an expected salvage value of $50,000. The life of the equipment was estimated to be 6 years. If the straight-line depreciation method is used, the book value of the equipment at the beginning of the third year would be a. $300,000. b. $250,000. c. $216,666. d. $83,333.

Ans: C, LO: 2, Topic: Depreciation Methods, Subtopic: Straight-Line Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($300,000  $50,000)  6  $41,667; $300,000  ($41,667 × 2)  $216,666 (Cost – sal. val.) ÷ 6 = ann. dep; Cost – (ann. dep. × 2)

132.

A1 Supply Company bought a machine on January 1, 2025. The machine cost $180,000 and had an expected salvage value of $30,000. The life of the machine was estimated to be 5 years. The depreciable cost of the machine is a. $180,000. b. $150,000. c. $50,000. d. $30,000.

Ans: B, LO: 2, Topic: Depreciation Methods, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $180,000  $30,000  $150,000 (Cost – sal. val.)

Reporting and Analyzing Long-Lived Assets

133.

9-27

A1 Supply Company bought a machine on January 1, 2025. The machine cost $180,000 and had an expected salvage value of $30,000. The life of the machine was estimated to be 5 years. The 2025 depreciation expense using the straight-line method of depreciation is a. $50,000. b. $36,000. c. $30,000. d. none of the answer choices is correct.

Ans: C, LO: 2, Topic: Depreciation Methods, Subtopic: Straight-Line Method, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($180,000  $30,000)  5  $30,000 (Cost – sal. val.) ÷ 5 yrs.

134.

A1 Supply Company bought a machine on January 1, 2025. The machine cost $180,000 and had an expected salvage value of $30,000. The life of the machine was estimated to be 5 years. If the straight-line method is used, the book value of the machine at the beginning of the third year would be a. $180,000. b. $150,000. c. $120,000. d. $60,000.

Ans: C, LO: 2, Topic: Depreciation Methods, Subtopic: Straight-Line Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($180,000  $30,000)  5  $30,000; $180,000  ($30,000  2)  $120,000 (Cost – sal. val.) ÷ 5 yrs. = ann. dep; Cost  (ann. dep. × 2)

135.

Acme Lighting Company purchased machinery with a list price of $96,000. They were given a 10% discount by the manufacturer. They paid $600 for shipping and sales tax of $4,500. Acme estimates that the machinery will have a useful life of 10 years and a residual value of $30,000. If Acme uses straight-line depreciation, annual depreciation will be a. $6,150. b. $6,108. c. $9,150. d. $5,640.

Ans: A, LO: 1, 2, Topic: Depreciation Methods, Subtopic: Straight-Line Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: [($96,000  .90) + $600 + $4,500  $30,000]  10  $6,150 ([List price × (1 – .10)] + ship. + sal. tax – salv. val.) ÷ 10 yrs.

136.

Company A purchased equipment on January 1, 2025 at a total invoice cost of $1,200,000. The equipment has an estimated salvage value of $30,000 and an estimated useful life of 5 years. What is the amount of accumulated depreciation at December 31, 2026 if the straight-line method of depreciation is used? a. $240,000. b. $480,000. c. $234,000. d. $468,000. .

9-28

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ans: D, LO: 2, Topic: Depreciation Methods, Subtopic: Straight-Line Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: [($1,200,000  $30,000)  5]  2  $468,000 [(Cost – sal. val.) ÷ 5 yrs.] × 2 yrs.

137.

Ace Manufacturing Company purchased a machine with a list price of $160,000. They were given a 10% discount by the manufacturer. They paid $1,000 for shipping and sales tax of $7,500. Ace estimates that the machine will have a useful life of 10 years and a salvage value of $50,000. If Ace uses straight-line depreciation, annual depreciation will be a. $10,250. b. $10,180. c. $15,250. d. $9,400.

Ans: A, LO: 1, 2, Topic: Depreciation Methods, Subtopic: Straight-Line Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: [($160,000  .90) + $1,000 + $7,500  $50,000]  10  $10,250 ([List price × (1 – .10)] + ship. + sal. tax – salv. val.) ÷ 10 yrs.

138.

Machinery was purchased for $340,000. Freight charges amounted to $14,000 and there was a cost of $40,000 for building a foundation and installing the machinery. It is estimated that the machinery will have a $60,000 salvage value at the end of its 5-year useful life. Depreciation expense each year using the straight-line method will be a. $78,800. b. $66,800. c. $57,200. d. $56,000.

Ans: B, LO: 1, 2, Topic: Depreciation Methods, Subtopic: Straight-Line Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($340,000 + $14,000 + $40,000  $60,000)  5  $66,800 (Cost + freight + found. – sal. val.) ÷ 5 yrs.

139.

Machinery was purchased for $340,000 on January 1, 2025. Freight charges amounted to $14,000 and there was a cost of $40,000 for building a foundation and installing the machinery. It is estimated that the machinery will have a $60,000 salvage value at the end of its 5-year useful life. What is the amount of accumulated depreciation at December 31, 2026 if the straight-line method of depreciation is used? a. $133,600. b. $66,800. c. $57,200. d. $114,400.

Ans: A, LO: 1, 2, Topic: Depreciation Methods, Subtopic: Straight-Line Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: [($340,000 + $14,000 + $40,000  $60,000)  5]  2  $133,600 [(Cost + freight + found. – sal. val.) ÷ 5 yrs.] × 2 yrs.

140.

A machine that was purchased on January 1 for $60,000 has an estimated salvage value of $12,000. If the machine’s depreciation rate is 20%, its annual depreciation under the straight-line depreciation method is a. $12,000. b. $48,000. c. $9,600. .

Reporting and Analyzing Long-Lived Assets

9-29

d. $14,400. Ans: C, LO: 2, Topic: Depreciation Methods, Subtopic: Straight-Line Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($60,000  $12,000)  .20  $9,600 (Pur. price – sal. val.) × 20%

141.

A change in the estimated useful life of equipment requires a. a retroactive change in the amount of periodic depreciation recognized in previous years. b. that no change be made in the periodic depreciation so that depreciation amounts are comparable over the life of the asset. c. that the amount of periodic depreciation be changed in the current year and in future years. d. that income for the current year be increased.

Ans: C, LO: 2, Topic: Depreciation Methods, Subtopic: Revising Periodic Depreciation, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

142.

Suppose that Target has decided to change the estimate of the useful life of an asset that has been in service for 2 years. Which of the following statements describes the proper way to revise a useful life estimate? a. Revisions in useful life are permitted if approved by the IRS. b. Retroactive changes must be made to correct previously recorded depreciation. c. Only future years will be affected by the revision. d. Both the current and future years will be affected by the revision.

Ans: D, LO: 2, Topic: Depreciation Methods, Subtopic: Revising Periodic Depreciation, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

143.

Jack's Copy Shop bought equipment for $240,000 on January 1, 2025. Jack estimated the useful life to be 3 years with no salvage value, and the straight-line method of depreciation will be used. On January 1, 2026, Jack decides that the business will use the equipment for a total of 5 years. What is the revised depreciation expense for 2026? a. $80,000 b. $32,000 c. $40,000 d. $60,000

Ans: C, LO: 2, Topic: Depreciation Methods, Subtopic: Revising Periodic Depreciation, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($240,000  $0)  3  $80,000; ($240,000  $80,000)  (5  1)  $40,000 (Cost – sal. val.) ÷ 3 yrs. = dep./yr.; (Cost – A/D) ÷ (5 yrs.  1 yr.)

144.

An asset was purchased for $400,000. It had an estimated salvage value of $80,000 and an estimated useful life of 10 years. After 5 years of use, the estimated salvage value is revised to $64,000 but the estimated useful life is unchanged. Assuming straight-line depreciation, depreciation expense in Year 6 would be a. $48,000. b. $35,200. c. $24,000. d. $33,600.

Ans: B, LO: 2, Topic: Depreciation Methods, Subtopic: Revising Periodic Depreciation, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

9-30

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution: ($400,000  $80,000)  5/10  $160,000; [($400,000  $160,000)  $64,000]  (10  5)  $35,200 (Cost – sal. val.) × 5/10 = A/D: (Cost – A/D  sal. val.) ÷ (10 yrs. – 5 yrs.)

Reporting and Analyzing Long-Lived Assets

145.

9-31

Equipment costing $60,000 with a salvage value of $12,000 and an estimated life of 8 years has been depreciated using the straight-line method for 2 years. Assuming a revised estimated total life of 5 years and no change in the salvage value, the depreciation expense for Year 3 would be a. $7,200. b. $16,000. c. $12,000. d. $9,600.

Ans: C, LO: 2, Topic: Depreciation Methods, Subtopic: Revising Periodic Depreciation, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($60,000  $12,000)  2/8  $12,000; [($60,000  $12,000)  $12,000]  (5  2)  $12,000 (Cost – sal. val.) × 2/8 = A/D; (Cost – A/D  sal. val.)  (5 yrs.  2 yrs.)

146.

Ron's Quik Shop bought equipment for $140,000 on January 1, 2025. Ron estimated the useful life to be 5 years with no salvage value, and the straight-line method of depreciation will be used. On January 1, 2026, Ron decides that the business will use the equipment for a total of 6 years. What is the revised depreciation expense for 2026? a. $22,400 b. $11,200 c. $18,666 d $28,000

Ans: A, LO: 2, Topic: Depreciation Methods, Subtopic: Revising Periodic Depreciation, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($140,000  $0)  5  $28,000; ($140,000  $28,000)  (6  1)  $22,400 (Cost – sal. val.)  5 yrs. = dep./yr.; (Cost – A/D) ÷ (6 yrs. −1 yr.)

147.

An asset was purchased for $140,000. It had an estimated salvage value of $35,000 and an estimated useful life of 10 years. After 5 years of use, the estimated salvage value is revised to $28,000 but the estimated useful life is unchanged. Assuming straight-line depreciation, depreciation expense in Year 6 would be a. b. c. d.

$21,000. $14,875. $11,900. $17,500.

Ans: C, LO: 2, Topic: Depreciation Methods, Subtopic: Revising Periodic Depreciation, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($140,000  $35,000)  5/10  $52,500; [($140,000  $52,500)  $28,000]  (10  5)  $11,900 [(Cost – sal. val.) × 5/10] = A/D; [(Cost – A/D) – sal. val.] ÷ (10 yrs. – 5 yrs.)

148.

Equipment costing $105,000 with a salvage value of $21,000 and an estimated life of 8 years has been depreciated using the straight-line method for 2 years. Assuming a revised estimated total life of 6 years and no change in the salvage value, the depreciation expense for Year 3 would be a. $15,750. b. $14,000. c. $21,000. d. $10,500.

Ans: A, LO: 2, Topic: Depreciation Methods, Subtopic: Revising Periodic Depreciation, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: [($105,000  $21,000)  8]  2  $21,000; [($105,000  $21,000)  $21,000]  (6  2)  $15,750 [(Cost – sal. val.) ÷ 8 yrs.] × 2 = A/D; [(Cost – A/D) – sal. val.] ÷ (6 yrs. – 2 yrs.)

9-32 149.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

All of the following statements regarding impairments are true except a. an impairment is a permanent decline in an asset's fair value. b. after an impairment write-down, depreciation is generally lower in subsequent periods. c. immediate recognition of impairment write-downs is now required. d. impairments are generally recorded when the book value falls below the fair value.

Ans: D, LO: 2, Topic: Depreciation Methods, Subtopic: Impairment, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

150.

All of the following are factors that a company should consider before an impairment writedown of an asset is recorded except a. an appraisal of the asset. b. market trends. c. company profits. d. obsolescence of the asset.

Ans: C, LO: 2, Topic: Depreciation Methods, Subtopic: Impairment, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

151.

Acme Transportation Corporation purchased a van on January 1, 2025 for $34,000 to use for its shuttle business. The van is expected to have a five-year useful life and no salvage value. During 2026, it retouched the van's paint at a cost of $1,600, replaced the transmission for $4,000 (which extended its life by an additional 2 years), and tuned-up the engine for $200. If Acme uses straight-line depreciation, what amount of annual depreciation will the company report for 2026? a. $6,800 b. $5,200 c. $5,500 d. $5,467

Ans: B, LO: 2, Topic: Depreciation Methods, Subtopic: Revising Periodic Depreciation, Bloom: AP, Difficulty: Hard, Min: 2, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $34,000 ÷ 5 = $6,800; [($34,000  $6,800) + $4,000]  (5  1+ 2)  $5,200 (Depr.cost ÷ years = orig. depr.), [(Pur. price – acc. dep.) + trans. cost] ÷ (5 yrs. – 1 yr. + 2 yrs.)

152.

In 2025, A1 Manufacturing Corporation has plant equipment that originally cost $120,000 and has accumulated depreciation of $48,000. A new processing technique has rendered the equipment obsolete, so it is retired. Which of the following entries should the company use to record the retirement of the equipment? a. Loss on Disposal of Plant Assets 72,000 Equipment 72,000 b. Accumulated Depreciation—Equipment 48,000 Loss on Disposal of Plant Assets 72,000 Equipment 120,000 c. Loss on Disposal of Plant Assets 72,000 Accumulated Depreciation—Equipment 72,000 d. Equipment 120,000 Accumulated Depreciation—Equipment 48,000 Loss on Disposal of Plant Assets 72,000

Ans: B, LO: 3, Topic: Plant Asset Disposals, Subtopic: Retirement of Plant Assets, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $120,000  $48,000  $72,000 Cost − Acc. dep.

Reporting and Analyzing Long-Lived Assets

153.

9-33

A gain or loss on disposal of a plant asset is determined by comparing the a. replacement cost of the asset with the asset's original cost. b. book value of the asset with the asset's original cost. c. original cost of the asset with the proceeds received from its sale. d. book value of the asset with the proceeds received from its sale.

Ans: D, LO: 3, Topic: Plant Asset Disposals, Subtopic: Sale of Plant Assets, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

154.

When an asset is sold, a gain is realized when the a. sale price exceeds the book value of the asset sold. b. sale price exceeds the original cost of the asset sold. c. book value exceeds the sale price of the asset sold. d. sale price exceeds the depreciable cost of the asset sold.

Ans: A, LO: 3, Topic: Plant Asset Disposals, Subtopic: Gain on Sale, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

155.

The book value of a plant asset is the difference between the a. replacement cost of the asset and its historical cost. b. cost of the asset and the amount of depreciation expense for the year. c. cost of the asset and the accumulated depreciation to date. d. proceeds received from the sale of the asset and its original cost.

Ans: C, LO: 3, Topic: Plant Asset Disposals, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

156 A company sells a plant asset that originally cost $375,000 for $125,000 on December 31, 2025. The accumulated depreciation account had a balance of $150,000 after the current year's depreciation of $37,500 had been recorded. The company should recognize a a. $250,000 loss on disposal. b. $100,000 gain on disposal. c. $100,000 loss on disposal. d. $62,500 loss on disposal. Ans: C, LO: 3, Topic: Plant Asset Disposals, Subtopic: Sale of Plant Assets, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $125,000  ($375,000  $150,000)  ($100,000) Sell. price – (cost − acc. dep.)

157.

A company sells a plant asset that originally cost $360,000 for $120,000 on December 31, 2025. The accumulated depreciation account had a balance of $180,000 after the current year's depreciation of $30,000 had been recorded. The company should recognize a a. b. c. d.

$60,000 loss on disposal. $40,000 gain on disposal. $120,000 loss on disposal. $120,000 gain on disposal.

Ans: A, LO: 3, Topic: Plant Asset Disposals, Subtopic: Loss on Sale, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $120,000  ($360,000  $180,000)  ($60,000) Sell. price – (cost – A/D)

158.

A truck costing $72,000 on which $60,000 of accumulated depreciation has been .

9-34

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

recorded was discarded. The entry to record this event would include a a. gain of $12,000. b. loss of $12,000. c. credit to Accumulated Depreciation for $60,000. d. credit to Accumulated Depreciation for $72,000. Ans: B, LO: 3, Topic: Plant Asset Disposals, Subtopic: Retirement of Plant Assets, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $0  ($72,000  $60,000)  ($12,000) Sell. price – (cost – A/D)

159.

Equipment that cost $90,000 and on which $50,000 of accumulated depreciation has been recorded was disposed of for $45,000 cash. The entry to record this event would include a a. gain of $5,000. b. loss of $5,000. c. credit to the Equipment account for $15,000. d. credit to Accumulated Depreciation for $15,000.

Ans: A, LO: 3, Topic: Plant Asset Disposals, Subtopic: Gain on Sale, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $45,000  ($90,000  $50,000)  $5,000 Sell. price – (cost – A/D)

160.

A truck costing $75,000 and on which $65,000 of accumulated depreciation has been recorded was discarded as having no value. The entry to record this event would include a a. gain of $10,000. b. loss of $10,000. c. credit to Accumulated Depreciation for $65,000. d. credit to Accumulated Depreciation for $75,000.

161.

Equipment that cost $144,000 and on which $120,000 of accumulated depreciation has been recorded was disposed of for $36,000 cash. The entry to record this event would include a a. gain of $12,000. b. loss of $12,000. c. credit to the Equipment account for $36,000. d. credit to Accumulated Depreciation for $120,000.

Ans: A, LO: 3, Topic: Plant Asset Disposals, Subtopic: Gain on Sale, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $36,000  ($144,000  $120,000)  $12,000 (Sell. price – (cost – A/D))

162.

If disposal of a plant asset occurs during the year, depreciation is a. not recorded for the year. b. recorded for the whole year. c. recorded for the fraction of the year to the date of the disposal. d. not recorded if the asset is scrapped.

Ans: C, LO: 3, Topic: Plant Asset Disposals, Subtopic: NA, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

163.

If a plant asset is retired and is fully depreciated, .

Reporting and Analyzing Long-Lived Assets

a. b. c. d.

9-35

a gain on disposal will be recorded. phantom depreciation must be taken as though the asset were still on the books. a loss on disposal will be recorded. no gain or loss on disposal will be recorded.

Ans: D, LO: 3, Topic: Plant Asset Disposals, Subtopic: Retirement of Plant Assets, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

164.

The book value of an asset will equal its fair value at the date of sale if a. a gain on disposal is recorded. b. no gain or loss on disposal is recorded. c. the plant asset is fully depreciated. d. a loss on disposal is recorded.

Ans: B, LO: 3, Topic: Plant Asset Disposals, Subtopic: Retirement of Plant Assets, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

165.

A machine costing $176,000 was destroyed when it caught fire. At the date of the fire, the accumulated depreciation on the machine was $80,000. An insurance check for $200,000 was received based on the replacement cost of the machine. The entry to record the insurance proceeds and the disposition of the machine will include a a. gain on disposal of $24,000. b. credit to the Equipment account for $120,000. c. credit to the Accumulated Depreciation account for $80,000. d. gain on disposal of $104,000.

Ans: D, LO: 3, Topic: Plant Asset Disposals, Subtopic: Gain on Sale, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $200,000  ($176,000  $80,000)  $104,000 Ins. proc. – (cost – acc. dep.)

166.

On July 1, 2025, Ace Kennels sells equipment for $110,000. The equipment originally cost $300,000, had an estimated 5-year life and an expected salvage value of $50,000. The Accumulated Depreciation account had a balance of $175,000 on January 1, 2025 using the straight-line method. The gain or loss on disposal is a. $15,000 gain. b. $10,000 loss. c. $15,000 loss. d. $10,000 gain.

Ans: D, LO: 3, Topic: Plant Asset Disposals, Subtopic: Gain on Sale, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: [($300,000 – $50,000)  5]  6/12  $25,000; $110,000  ($300,000  ($175,000 + $25,000))  $10,000 [(Cost  sal. val.) ÷ 5 yrs.] × 6/12 = 2025 dep; Sell. price – (cost – acc. dep.)

167.

A plant asset with a cost of $300,000 and accumulated depreciation of $285,000 is sold for $35,000. What is the amount of the gain or loss on disposal of the plant asset? a. $35,000 loss b. $20,000 loss c. $20,000 gain d. $35,000 gain

Ans: C, LO: 3, Topic: Plant Asset Disposals, Subtopic: Gain on Sale, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $35,000  ($300,000  $285,000)  $20,000 (Sell. price – (cost – A/D))

9-36 168.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

A loss on disposal of a plant asset is reported in the financial statements a. in the Other Revenues and Gains section of the income statement. b. in the Other Expenses and Losses section of the income statement. c. as a direct increase to the Common Stock account on the balance sheet. d. as a direct decrease to the Common Stock account on the balance sheet.

Ans: B, LO: 3, Topic: Plant Asset Disposals, Subtopic: Loss on Sale, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

169.

A1 Wholesale Jewelry Company sold equipment for $48,000. The equipment had an original cost of $144,000 and accumulated depreciation of $72,000. Ignoring the tax effect, as a result of the sale a. net income will increase $48,000. b. net income will increase $24,000. c. net income will decrease $24,000. d. net income will decrease $48,000.

Ans: C, LO: 3, Topic: Plant Asset Disposals, Subtopic: Loss on Sale, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $48,000  ($144,000  $72,000)  ($24,000) (Sell. price – (cost – A/D))

170.

Acme Corporation sold equipment for $40,000. The equipment had an original cost of $120,000 and accumulated depreciation of $60,000. Ignoring the tax effect, as a result of the sale a. net income will increase $40,000. b. net income will increase $20,000. c. net income will decrease $20,000. d. net income will decrease $40,000.

Ans: C, LO: 3, Topic: Plant Asset Disposals, Subtopic: Loss on Sale, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $40,000  ($120,000  $60,000)  ($20,000) (Sell. price – (cost – A/D))

171.

A1 Courier Service recorded a loss of $7,500 when it sold a van that originally cost $70,000 for $12,500. Accumulated depreciation on the van must have been a. $65,000. b. $20,000. c. $62,500. d. $50,000.

Ans: D, LO: 3, Topic: Plant Asset Disposals, Subtopic: Loss on Sale, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($70,000  $12,500)  $7,500  $50,000) (Cost − sell. Price) – loss

Reporting and Analyzing Long-Lived Assets

172.

9-37

Equipment costing $280,000 was destroyed when it caught on fire. At the date of the fire, the accumulated depreciation on the equipment was $112,000. An insurance check for $320,000 was received based on the replacement cost of the equipment. The entry to record the insurance proceeds and the disposition of the equipment will include a a. gain on disposal of $40,000. b. credit to the Equipment account of $168,000. c. credit to the Accumulated Depreciation account for $112,000. d. gain on disposal of $152,000.

Ans: D, LO: 3, Topic: Plant Asset Disposals, Subtopic: Gain on Sale, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $320,000  ($280,000  $112,000)  $152,000 (Ins. proc. – (cost – A/D))

173.

On July 1, 2025, Ace Production Company sells machinery for $240,000. The machinery originally cost $600,000, had an estimated 5-year life and an expected salvage value of $100,000. The Accumulated Depreciation account had a balance of $350,000 on January 1, 2025 using the straight-line method. The gain or loss on disposal is a. $40,000 gain. b. $10,000 loss. c. $20,000 loss. d. $10,000 gain.

Ans: A, LO: 3, Topic: Plant Asset Disposals, Subtopic: Gain on Sale, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: [($600,000  $100,000)  5]  6/12  $50,000; $240,000  [$600,000  ($350,000 + $50,000)]  $40,000 [(Cost – sal. val.) ÷ 5] × 6/12 = 6 mos. dep; sell. price. – (Cost – A/D)

174.

A plant asset with a cost of $600,000 and accumulated depreciation of $570,000 is sold for $70,000. What is the amount of the gain or loss on disposal of the plant asset? a. $70,000 loss b. $40,000 loss c. $40,000 gain d. $70,000 gain

Ans: C, LO: 3, Topic: Plant Asset Disposals, Subtopic: Gain on Sale, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $70,000  ($600,000  $570,000)  $40,000 (sell. price – (cost – A/D))

175.

Goodwill a. is only recorded when generated internally. b. can be subdivided and sold in parts. c. can only be identified with the business as a whole. d. can be defined as normal earnings less accumulated amortization.

Ans: C, LO: 4, Topic: Intangible Assets, Subtopic: Goodwill, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

176.

In recording the acquisition cost of an entire business, a. goodwill is recorded as the excess of cost over the fair value of identifiable net assets. b. assets are recorded at the seller's book values. c. goodwill, if it exists, is never recorded. d. goodwill is recorded as the excess of cost over the book value of identifiable net assets.

Ans: A, LO: 4, Topic: Intangible Assets, Subtopic: Goodwill, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement

9-38

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e Analysis and Interpretation, AICPA PC: None, IMA: Reporting

177.

Research and development costs a. are classified as intangible assets. b. must be expensed when incurred under generally accepted accounting principles. c. should be included in the cost of the patent they relate to. d. are capitalized and then amortized over a period not to exceed 20 years.

Ans: B, LO: 4, Topic: Intangible Assets, Subtopic: Research and Development Costs, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

178.

A computer company has $3,500,000 in research and development costs. Before accounting for these costs, the net income of the company is $2,800,000. What is the amount of net income or loss before taxes after these research and development costs are accounted for? a. $700,000 loss b. $2,800,000 net income c. $0 d. Cannot be determined from the information provided

Ans: A, LO: 4, Topic: Intangible Assets, Subtopic: Research and Development Costs, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $2,800,000  $3,500,000  ($700,000) (Net inc. – R & D costs)

179.

A computer company has $4,000,000 in research and development costs. Before accounting for these costs, the net income of the company is $4,800,000. What is the amount of net income or loss before taxes after these research and development costs are accounted for? a. $800,000 loss b. $4,000,000 net income c. $800,000 net income d. Cannot be determined from the information provided

Ans: C, LO: 4, Topic: Intangible Assets, Subtopic: Research and Development Costs, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $4,800,000  $4,000,000  $800,000 (Net inc. – R & D costs)

180.

Goodwill a. may be expensed upon purchase if desired. b. can be sold by itself to another company. c. can be purchased and charged directly to stockholders’ equity. d. is only recorded when the purchase of an entire business occurs.

Ans: D, LO: 4, Topic: Intangible Assets, Subtopic: Goodwill, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

181.

Which of the following is not classified as an intangible asset on the balance sheet? a. Goodwill b. Trademark c. Employees d. Copyrights

Ans: C, LO: 4, Topic: Intangible Assets, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Long-Lived Assets

182.

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Ace Technology Company incurred $900,000 of research and development costs in its laboratory to develop a new product. It spent $120,000 in legal fees for a patent granted on January 2, 2025. On July 31, 2025, Ace paid $90,000 for legal fees in a successful defense of the patent. What is the total amount that should be debited to Patents through July 31, 2025? a. $900,000 b. $210,000 c. $1,110,000 d. $0

Ans: B, LO: 4, Topic: Intangible Assets, Subtopic: Patents, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $120,000 + $90,000  $210,000 (Leg. fees + def. leg. fees)

183.

Given the following account balances at year-end, compute the total intangible assets on the balance sheet of Ace Electronic Enterprises. Cash $1,500,000 Accounts Receivable 1,000,000 Trademarks 1,200,000 Goodwill 2,500,000 Research & Development Costs 2,000,000 a. $9,700,000 b. $5,700,000 c. $3,700,000 d. $7,700,000

Ans: C, LO: 4, Topic: Intangible Assets, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $1,200,000 + $2,500,000  $3,700,000 (Trade. + Good.)

184.

Intangible assets are the rights and privileges that result from ownership of long-lived assets that a. must be generated internally. b. are depreciated over their useful life. c. have been exchanged at a gain. d. do not have physical substance.

Ans: D, LO: 4, Topic: Intangible Assets, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

185.

For which of the following pairs of costs will a company record no amortization expense? a. Research and development costs and goodwill b. Copyrights and licenses c. Franchises and patents d. Goodwill and trade names

Ans: A, LO: 4, Topic: Intangible Assets, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

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186.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

A patent should a. be amortized over a period of 20 years. b. not be amortized. c. be amortized over its useful life or 20 years, whichever is longer. d. be amortized over its useful life or 20 years, whichever is shorter.

Ans: D, LO: 4, Topic: Intangible Assets, Subtopic: Patents, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

187.

The cost of successfully defending a patent in an infringement suit should be a. charged to Legal Expenses. b. deducted from the book value of the patent. c. added to the patents account. d. recognized as a loss in the current period.

Ans: C, LO: 4, Topic: Intangible Assets, Subtopic: Patents, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

188.

An asset that cannot be sold individually in the marketplace is a. a patent. b. goodwill. c. a copyright. d. a trade name.

Ans: B, LO: 4, Topic: Intangible Assets, Subtopic: Goodwill, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

189.

Goodwill can be recorded only when a. customers keep returning because they are satisfied with the company's products. b. the company acquires a good location for its business. c. the company has exceptional management. d. an entire business is purchased.

Ans: D, LO: 4, Topic: Intangible Assets, Subtopic: Goodwill, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

190.

On July 1, 2025, Company A purchased the copyright to Ace Computer Tutorials for $210,000. It is estimated that the copyright will have a useful life of 5 years. The amount of amortization expense recognized for the year 2025 would be a. $42,000. b. $19,687. c. $38,850. d. $21,000.

Ans: D, LO: 4, Topic: Intangible Assets, Subtopic: Copyright, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($210,000  5)  6/12  $21,000 (Cost ÷ 5 yrs.) × 6/12

Reporting and Analyzing Long-Lived Assets

191.

9-41

On May 1, 2025, Ace Company purchased the copyright to A1 Computer Tutorials for $120,000. It is estimated that the copyright will have a useful life of 5 years. The amount of amortization expense recognized for the year 2025 would be a. $24,000. b. $16,000. c. $12,000. d. $12,800.

Ans: B, LO: 4, Topic: Intangible Assets, Subtopic: Copyright, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($120,000  5)  8/12  $16,000 (Cost ÷ 5 yrs.) × 8/12

192.

Which of the following is not an intangible asset arising from a government grant? a. Goodwill b. Patent c. Trademark d. Trade name

Ans: A, LO: 4, Topic: Intangible Assets, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

193.

Which of the following is not considered an intangible asset? a. Goodwill b. An oil well c. A franchise d. A trade name

Ans: B, LO: 4, Topic: Intangible Assets, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

194.

The cost of an intangible asset with an indefinite life, such as a trademark, should a. be amortized over 20 years. b. be amortized over the life of the creator plus 70 years. c. not be amortized. d. not be recorded.

Ans: C, LO: 4, Topic: Intangible Assets, Subtopic: Trademarks and Trade Names, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

195.

Cost allocation of an intangible asset is referred to as a. amortization. b. depreciation. c. accretion. d. capitalization.

Ans: A, LO: 4, Topic: Intangible Assets, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

196.

A patent a. has a legal life of 20 years. b. is not amortized. c. can be renewed indefinitely. d. is rarely subject to litigation because it is an exclusive right.

Ans: A, LO: 4, Topic: Intangible Assets, Subtopic: Patents, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting,

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e AICPA PC: None, IMA: Reporting

197.

If a company incurs legal costs in successfully defending its patent, these costs are recorded by debiting a. Legal Expense. b. the Intangible Loss account. c. the Patent account. d. a revenue expenditure account.

Ans: C, LO: 4, Topic: Intangible Assets, Subtopic: Patents, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

198.

Copyrights are granted by the federal government a. for the life of the creator or 70 years, whichever is longer. b. for the life of the creator plus 70 years. c. for the life of the creator or 70 years, whichever is shorter. d. and therefore cannot be amortized.

Ans: B, LO: 4, Topic: Intangible Assets, Subtopic: Copyrights, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

199.

The following information is provided for Company A and Company B. (in $ millions) Net income 2028 Net sales 2028 Total assets 12/31/26 Total assets 12/31/27 Total assets 12/31/28

Company A $165 1,650 1,000 1,050 1,150

Company B $420 4,900 2,400 3,000 4,000

What is Company A's return on assets for 2028? a. 150.0% b. 15.7% c. 15.0% d. 14.3% Ans: C, LO: 5, Topic: Statement Presentation and Analysis, Subtopic: Return on Assets, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $165  [($1,050 + $1,150) ÷ 2]  15.0% [Net inc. ÷ [(beg. tot. assets + end. tot. assets) ÷ 2]

Reporting and Analyzing Long-Lived Assets

200.

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The following information is provided for Company A and Company B. (in $ millions) Company A Company B Net income 2028 $ 165 $ 420 Net sales 2028 1,650 4,900 Total assets 12/31/26 1,000 2,400 Total assets 12/31/27 1,050 3,000 Total assets 12/31/28 1,150 4,000 What is Company B's return on assets for 2028? a. 15.6% b. 10.5% c. 14.0% d. 12.0%

Ans: D, LO: 5, Topic: Statement Presentation and Analysis, Subtopic: Return on Assets, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $420  [($3,000 + $4,000)  2]  12.0% [Net inc. ÷ [(beg. tot. assets + end. tot. assets) ÷ 2]

201.

The following information is provided for Company A and Company B. (in $ millions) Net income 2028 Net sales 2028 Total assets 12/31/26 Total assets 12/31/27 Total assets 12/31/28

Company A $ 165 1,650 1,000 1,050 1,150

Company B $ 420 4,900 2,400 3,000 4,000

What is Company A's asset turnover for 2028? a. 4.00 times b. 1.50 times c. 0.25 times d. 0.67 times Ans: B, LO: 5, Topic: Statement Presentation and Analysis, Subtopic: Asset Turnover, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $1,650  [($1,050 + $1,150)  2]  1.50 times Net sal. ÷ [(beg. tot. assets + end. tot. assets) ÷ 2]

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

The following information is provided for Company A and Company B. (in $ millions) Net income 2028 Net sales 2028 Total assets 12/31/26 Total assets 12/31/27 Total assets 12/31/28

Company A $ 165 1,650 1,000 1,050 1,150

Company B $ 420 4,900 2,400 3,000 4,000

What is Company B's asset turnover for 2028? a. 1.40 times b. 1.63 times c. 1.81 times d. 1.23 times Ans: A, LO: 5, Topic: Statement Presentation and Analysis, Subtopic: Asset Turnover, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $4,900  [($3,000 + $4,000)  2]  1.40 times Net sal. ÷ [(beg. tot. assets + end. tot. assets) ÷ 2]

203.

The following information is provided for Company A and Company B. (in $ millions) Net income 2028 Net sales 2028 Total assets 12/31/26 Total assets 12/31/27 Total assets 12/31/28

Company A $ 165 1,650 1,000 1,050 1,150

Company B $ 420 4,900 2,400 3,000 4,000

If Company A and Company B are in the same industry and the industry average for asset turnover is equal to 1.20 times, which of the following statements is true for 2028? a. Company A is operating less efficiently than the industry average. b. Company B is operating more efficiently than Company A. c. Both Company A and Company B are operating more efficiently than the average company in their industry. d. The asset turnover does not address the question of efficient operations. Ans: C, LO: 5, Topic: Statement Presentation and Analysis, Subtopic: Asset Turnover, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution: Company A: $1,650  [($1,050 + $1,150)  2]  1.50 times Company B: $4,900  [($3,000 + $4,000)  2]  1.40 times Net sal. ÷ [(beg. tot. assets + end. tot. assets) ÷ 2]

Reporting and Analyzing Long-Lived Assets

204.

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The following information is provided for Company A and Company B. (in $ millions) Net income 2028 Net sales 2028 Total assets 12/31/26 Total assets 12/31/27 Total assets 12/31/28

Company A $ 165 1,650 1,000 1,050 1,150

Company B $ 420 4,900 2,400 3,000 4,000

If Company A and Company B are in the same industry and the industry average for return on assets is equal to 30%, which of the following statements is true for 2028? a. Company A is more profitable than the average company in its industry. b. Company B is more profitable than Company A. c. Both Company A and Company B are more profitable than the average company in their industry. d. Company A is more profitable than Company B. Ans: D, LO: 5, Topic: Statement Presentation and Analysis, Subtopic: Return on Assets, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: Company A: $165  [($1,050 + $1,150)  2]  15% Company B: $420  [($3,000 + $4,000)  2]  12% Net income ÷ [(beg. tot. assets + end. tot. assets) ÷ 2]

205.

Using the following data for Acme Industries, compute the return on assets.

a. b. c. d.

Net Income Total Assets 12/31/26 Total Assets 12/3125 Net Sales 7.5% 10.4% 8.2% 11.4%

$ 180,000 2,410,000 1,980,000 250,000

Ans: C, LO: 5, Topic: Statement Presentation and Analysis, Subtopic: Return on Assets, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $180,000  [($2,410,000 + $1,980,000)  2]  0.082 or 8.2% Net inc. ÷ [(end. tot. assets + beg. tot. assets) ÷ 2]

206.

During 2025, A1 Marine Corporation reported net sales of $2,000,000, net income of $900,000, and depreciation expense of $100,000. A1 Marine also reported beginning total assets of $1,000,000, ending total assets of $1,500,000, plant assets of $800,000, and accumulated depreciation of $500,000. A1 Marine’s asset turnover is a. 2.0 times. b. 1.6 times. c. 1.33 times. d. 0.72 times.

Ans: B, LO: 5, Topic: Statement Presentation and Analysis, Subtopic: Asset Turnover, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $2,000,000  [($1,000,000 + $1,500,000)  2]  1.6 times

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Net sal. ÷ [(beg. tot. assets + end. tot. assets) ÷ 2]

207.

During 2025, Acme Service Corporation reported net sales of $2,500,000, net income of $1,320,000, and depreciation expense of $80,000. Acme also reported beginning total assets of $1,000,000, ending total assets of $1,500,000, plant assets of $800,000, and accumulated depreciation of $500,000. Acme’s asset turnover is a. 1.3 times. b. 1.1 times. c. 1.7 times. d. 2.0 times.

Ans: D, LO: 5, Topic: Statement Presentation and Analysis, Subtopic: Asset Turnover, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $2,500,000  [($1,000,000 + $1,500,000) ÷ 2]  2.0 times Net sal. ÷ [(beg. tot. assets + end. tot. assets) ÷ 2]

208.

Trademarks are generally shown on the balance sheet under a. Intangible Assets. b. Investments. c. Property, Plant, and Equipment. d. Current Assets.

Ans: A, LO: 5, Topic: Statement Presentation and Analysis, Subtopic: Presentation, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

209.

Which of the following statements concerning financial statement presentation is false? a. Intangibles are reported separately under Intangible Assets. b. The balances of major classes of assets may be disclosed in the footnotes. c. The balances of the accumulated depreciation of major classes of assets may be disclosed in the footnotes. d. The balances of all individual assets, as they appear in the subsidiary plant ledger, should be disclosed in the footnotes.

Ans: D, LO: 5, Topic: Statement Presentation and Analysis, Subtopic: Presentation, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

210.

Intangible assets a. should be reported under the heading Property, Plant, and Equipment. b. are not reported on the balance sheet because they lack physical substance. c. should be reported as Current Assets on the balance sheet. d. should be reported as a separate classification on the balance sheet.

Ans: D, LO: 5, Topic: Statement Presentation and Analysis, Subtopic: Presentation, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

211.

A company has the following assets: Buildings and Equipment, less accumulated depreciation of $5,000,000 $25,000,000 Copyrights 2,400,000 Patents 10,000,000 Land 12,000,000 The total amount reported under Property, Plant, and Equipment would be .

Reporting and Analyzing Long-Lived Assets

a. b. c. d.

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$49,400,000. $37,000,000. $47,000,000. $39,400,000.

Ans: B, LO: 5, Topic: Statement Presentation and Analysis, Subtopic: Presentation, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $25,000,000 + $12,000,000  $37,000,000 (Bldg. & Equip. + Land)

212.

Plant assets are ordinarily presented in the balance sheet a. at current market values. b. at replacement costs. c. at cost less accumulated depreciation. d. in a separate section along with intangible assets.

Ans: C, LO: 5, Topic: Statement Presentation and Analysis, Subtopic: Presentation, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

213.

Which of the following ratios indicates how efficiently a company uses its assets to generate net income? a. Profit margin b. Asset turnover c. Return on assets d. Sustainability

Ans: C, LO: 5, Topic: Statement Presentation and Analysis, Subtopic: Return on Assets, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

214.

A company has the following assets: Buildings and Equipment, less accumulated depreciation of $4,000,000 Copyrights Patents Land

$23,000,000 1,500,000 3,000,000 5,000,000

The total amount reported under Property, Plant, and Equipment would be a. $32,500,000. b. $27,000,000. c. $29,500,000. d. $28,000,000. Ans: D, LO: 5, Topic: Statement Presentation and Analysis, Subtopic: Presentation, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $23,000,000 + $5,000,000  $28,000,000 (Bldg. & Equip. + Land)

*215. A company purchased office equipment for $30,000 and estimated a salvage value of $6,000 at the end of its 8-year useful life. The constant percentage to be applied against book value each year if the double-declining-balance method is used is a. 8.0%. b. 12.5%. c. 25.0%. d. 2.5%. Ans: C, LO: 6, Topic: Other Depreciation Methods, Subtopic: Declining-Balance Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: (100%  8)  2  25% (100% ÷ use. life) × 2

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

*216. A company purchased factory equipment for $450,000. It is estimated that the equipment will have a $45,000 salvage value at the end of its estimated 5-year useful life. If the company uses the double-declining-balance method of depreciation, the amount of annual depreciation recorded for the second year after purchase would be a. $180,000. b. $108,000. c. $162,000. d. $97,200. Ans: B, LO: 6, Topic: Other Depreciation Methods, Subtopic: Declining-Balance Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($450,000  $0)  .40  $180,000; ($450,000  $180,000)  .40  $108,000 (Cost – Beg. AD) × (1/5 × 2) = end. AD; (Cost – end. A/D) × (1/5 × 2)

*217. A plant asset cost $192,000 and is estimated to have a $24,000 salvage value at the end of its 8-year useful life. The annual depreciation expense recorded for the third year using the double-declining-balance method would be a. $16,080. b. $27,000. c. $23,625. d. $18,375. Ans: B, LO: 6, Topic: Other Depreciation Methods, Subtopic: Declining-Balance Method, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($192,000  $0)  .25  $48,000; ($192,000  $48,000)  .25  $36,000; ($192,000  $84,000)  .25  $27,000 (Cost – Beg. AD) × (1/8 × 2) = end. AD; (Cost – end. A/D) × (1/8 × 2); (Cost – end. A/D) × (1/8 × 2)

*218. On January 1, a machine with a useful life of five years and a residual value of $80,000 was purchased for $240,000. What is the depreciation expense for year 2 under the double-declining-balance method of depreciation? a. $57,600. b. $96,000. c. $76,800. d. $46,080. Ans: A, LO: 6, Topic: Other Depreciation Methods, Subtopic: Declining-Balance Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($240,000  $0)  .40  $96,000; ($240,000  $96,000)  .40  $57,600 (Cost – Beg. AD) × (1/5 × 2) = end. AD; (Cost – end. A/D) × (1/5 × 2)

*219. A factory machine was purchased for $140,000 on January 1, 2025. It was estimated that it would have a $28,000 salvage value at the end of its 5-year useful life. It was also estimated that the machine would be run 40,000 hours in the 5 years. If the actual number of machine hours ran in 2025 was 4,000 hours and the company uses the units-of-activity method of depreciation, the amount of depreciation expense for 2025 would be a. $14,000. b. $22,400. c. $28,000. d. $11,200. Ans: D, LO: 6, Topic: Other Depreciation Methods, Subtopic: Units-of-Activity Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($140,000  $28,000)  40,000  $2.80, $2.80  4,000  $11,200. (Cost – sal. val.) ÷ 40,000 hrs. = dep./hr.; (dep./hr. × 4,000)

Reporting and Analyzing Long-Lived Assets

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*220. A machine with a cost of $640,000 has an estimated salvage value of $40,000 and an estimated useful life of 5 years or 15,000 hours. It is to be depreciated using the units-ofactivity method of depreciation. What is the amount of depreciation for the second full year, during which the machine was used for 5,000 hours? a. $200,000. b. $120,000. c. $173,333. d. $173,333. Ans: A, LO: 6, Topic: Other Depreciation Methods, Subtopic: Units-of-Activity Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($640,000  $40,000)  15,000  $40; $40  5,000  $200,000 (Cost – sal. val) ÷ 15,000 hrs. = dep./hr.; (dep./hr. × 5,000)

*221. Equipment with a cost of $640,000 has an estimated salvage value of $40,000 and an estimated life of 4 years or 15,000 hours. It is to be depreciated using the units-of-activity method. What is the amount of depreciation for the first full year, during which the equipment was used for 3,300 hours? a. $160,000. b. $180,800. c. $132,000. d. $150,000. Ans: C, LO: 6, Topic: Other Depreciation Methods, Subtopic: Units-of-Activity Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($640,000  $40,000)  15,000  $40; $40  3,300  $132,000 (Cost – sal. val.) ÷ 15,000 hrs. = dep./hr.; dep./hr. × 3,300 hrs.

*222. Equipment with a cost of $450,000 has an estimated salvage value of $30,000 and an estimated life of 4 years or 10,000 hours. It is to be depreciated by the units-of-activity method. What is the amount of depreciation for the first full year, during which the equipment was used for 2,700 hours? a. $112,500. b. $105,000. c. $113,400. d. $108,750. Ans: C, LO: 6, Topic: Other Depreciation Methods, Subtopic: Units-of-Activity Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($450,000  $30,000)  10,000  $42; $42  2,700  $113,400 (Cost – sal. val.) ÷ 10,000 hrs. = dep./hr.; dep./hr. × 2,700 hrs.

*223. On October 1, 2025, Company A places a new asset into service. The cost of the asset is $120,000 with an estimated 5-year life and $30,000 salvage value at the end of its useful life. What is the book value of the plant asset on the December 31, 2025 balance sheet assuming that Company A uses the double-declining-balance method of depreciation? a. $78,000. b. $90,000. c. $108,000. d. $114,000. Ans: C, LO: 6, Topic: Other Depreciation Methods, Subtopic: Declining-Balance Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: [($120,000  $0)  .40]  3/12  $12,000; $120,000  $12,000  $108,000 [(Cost  Beg. AD)  (1/5 × 2)] × 3/12 = end. A/D; (Cost  end. A/D)

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

*224. Ace Retail Supply Company uses the units-of-activity method in computing depreciation. A new plant asset is purchased for $36,000 that will produce an estimated 110,000 units over its useful life. Estimated salvage value at the end of its useful life is $3,000. What is the depreciation cost per unit? a. $3.00. b. $3.27. c. $0.30. d. $0.33. Ans: C, LO: 6, Topic: Other Depreciation Methods, Subtopic: Units-of-Activity Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($36,000  $3,000)  110,000  $0.30 (Cost – sal. val) ÷ est. tot. units)

*225. Units-of-activity is an appropriate depreciation method to use when a. it is impossible to determine the productivity of the asset. b. the asset's use will be constant over its useful life. c. the productivity of the asset varies significantly from one period to another. d. the company is a manufacturing company. Ans: C, LO: 6, Topic: Other Depreciation Methods, Subtopic: Units-of-Activity Method, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

*226. The calculation of depreciation using the declining-balance method a. ignores salvage value in determining the amount to which a constant rate is applied. b. multiplies a constant percentage times the previous year's depreciation expense. c. yields an increasing depreciation expense each period. d. multiplies a declining percentage times a constant book value. Ans: A, LO: 6, Topic: Other Depreciation Methods, Subtopic: Declining-Balance Method, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

*227. A1 Floral Company purchased a new van for floral deliveries on January 1, 2025. The van cost $56,000 with an estimated life of 5 years and $14,000 salvage value at the end of its useful life. The double-declining-balance method of depreciation will be used. What is the depreciation expense for 2025? a. $11,200. b. $8,400. c. $16,800. d. $22,400. Ans: D, LO: 6, Topic: Other Depreciation Methods, Subtopic: Declining-Balance Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($56,000  $0)  .40  $22,400 (Cost – Beg. AD)  (1/5 × 2)

Reporting and Analyzing Long-Lived Assets

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*228. A1 Floral Company purchased a new van for floral deliveries on January 1, 2025. The van cost $56,000 with an estimated life of 5 years and $14,000 salvage value at the end of its useful life. The double-declining-balance method of depreciation will be used. What is the balance of the Accumulated Depreciation account at the end of 2026? a. $8,960. b. $26,880. c. $35,840. d. $13,440. Ans: C, LO: 6, Topic: Other Depreciation Methods, Subtopic: Declining-Balance Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($56,000  $0)  .40  $22,400; [($56,000  $22,400)  .40] + $22,400  $35,840 (Cost – Beg. AD)  (1/5 × 2) = end. A/D; [(Cost – end. A/D) × .40] + 2025 dep.

*229. Suppose that adidas purchased equipment for $120,000 on January 1, 2025 and uses the double-declining-balance method of depreciation. It is estimated that the equipment will have a 5-year life and a $6,000 salvage value at the end of its useful life. The amount of depreciation expense recognized in the year 2027 will be a. $17,280. b. $27,360. c. $28,800. d. $16,416 Ans: A, LO: 6, Topic: Other Depreciation Methods, Subtopic: Declining-Balance Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($120,000  $0)  .40  $48,000; ($120,000  $48,000)  .40  $28,800; ($120,000  $76,800)  .40  $17,280 (Cost – A/D)  (1/5 × 2) = end. A/D; (Cost – end. A/D) ×.40 = depr. exp.; [(Cost – end. A/D) ×.40] = Dep. Exp

*230. Acme Trucking purchased a tractor trailer for $112,000. Acme uses the units-of-activity method for depreciating its trucks and expects to drive the truck 1,000,000 miles over its 12-year useful life. Salvage value is estimated to be $16,000. If the truck is driven 80,000 miles in its first year, how much depreciation expense should Acme record? a. $7,110 b. $8,960 c. $7,680 d. $8,296 Ans: C, LO: 6, Topic: Other Depreciation Methods, Subtopic: Units-of-Activity Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($112,000  $16,000)  1,000,000  $.096  80,000  $7,680 [(Cost – sal. val.) ÷ 1,000,000 miles] × 80,000 miles

*231. Ace Trucking purchased a tractor trailer for $147,000. Ace uses the units-of-activity method for depreciating its trucks and expects to drive the truck 1,000,000 miles over its 12-year useful life. Salvage value is estimated to be $21,000. If the truck is driven 80,000 miles in its first year, how much depreciation expense should Ace record? a. $9,333 b. $11,760 c. $10,080 d. $10,888 Ans: C, LO: 6, Topic: Other Depreciation Methods, Subtopic: Units-of-Activity Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: [($147,000  $21,000)  1,000,000]  80,000  $10,080 [(Cost – sal. val.) ÷ 1,000,000 miles] × 80,000 miles

9-52

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

*232. All of the following statements are true regarding the declining-balance method of depreciation except a. the declining-balance method ignores salvage value when calculating depreciation. b. the declining-balance method produces lower depreciation expense in the early years as opposed to the later years. c. the declining-balance method is compatible with the matching principle. d. the declining-balance method is appropriate when assets lose their usefulness rapidly. Ans: B, LO: 6, Topic: Other Depreciation Methods, Subtopic: Declining-Balance Method, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Long-Lived Assets

9-53

BRIEF EXERCISES Be. 233 Indicate whether each of the following expenditures should be classified as land (L), land improvements (LI), buildings (B), equipment (E), or none of these (X). 1. Parking lots 2. Electricity used by a machine 3. Excavation costs 4. Interest on building construction loan 5. Cost of trial runs for machinery 6. Drainage costs 7. Cost to install a machine 8. Fences 9. Unpaid (past) property taxes assumed 10. Cost of tearing down a building when land and a building on it are purchased Ans: N/A, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Determining the Cost of Plant Assets, Bloom: C, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 233 1. 2. 3. 4. 5.

LI X B B E

6. 7. 8. 9. 10.

L E LI L L

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

9-54 Be. 234

Indicate whether each of the following expenditures should be classified as land (L), land improvements (LI), buildings (B), equipment (E), or none of these (X). 1. Computer installation cost 2. Driveway cost 3. Architect’s fee 4. Surveying costs 5. Grading costs 6. Cost of lighting for the parking lot 7. Insurance while in transit and freight on a computer purchased 8. Material and labor costs incurred to construct a factory 9. Cost of tearing down a warehouse on land just purchased 10. Utility cost during the first year Ans: N/A, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Determining the Cost of Plant Assets, Bloom: C, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 234 1. 2. 3. 4. 5.

E LI B L L

6. 7. 8. 9. 10.

LI E B L X

Be. 235 A1 Manufacturing Company purchased factory equipment with an invoice price of $78,000. Other costs incurred were freight costs, $1,300; installation wiring and foundation, $2,200; material and labor costs in testing equipment, $700; oil lubricants and supplies to be used with equipment, $500; fire insurance policy covering equipment, $1,500. The equipment is estimated to have a $5,000 salvage value at the end of its 8-year useful service life. Instructions (a) Compute the acquisition cost of the equipment. Clearly identify each element of cost. (b) If the straight-line method of depreciation was used, the annual rate applied to the depreciable cost would be . Ans: N/A, LO: 1, 2, Topic: Depreciation Methods, Subtopic: Straight-Line Method, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Long-Lived Assets

9-55

Solution 235 (a)

Invoice cost Freight costs Installation wiring and foundation Material and labor costs in testing Acquisition cost

$78,000 1,300 2,200 700 $82,200

(b)

If the straight-line method of depreciation was used, the annual rate applied to the depreciable cost would be 12.5% (100% ÷ 8 years).

Be. 236 Ace Cosmetics Corporation purchased land adjacent to its plant to improve access for trucks making deliveries. Expenditures incurred in purchasing the land were as follows: purchase price, $55,000; broker’s fees, $6,000; title search and other fees, $5,000; demolition of an old building on the property, $5,700; grading, $1,200; digging foundation for the road, $3,000; laying and paving driveway, $25,000; lighting $7,500; signs, $1,500. List the items and amounts that should be included in the Land account. Ans: N/A, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Determining the Cost of Plant Assets, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 236 Purchase price Broker’s fees Title search and other fees Demolition of old building Grading Land acquisition cost

$55,000 6,000 5,000 5,700 1,200 $72,900

Be. 237 Equipment was acquired on January 1, 2024 at a cost of $75,000. The equipment was originally estimated to have a salvage value of $5,000 and an estimated life of 10 years. Depreciation has been recorded through December 31, 2027 using the straight-line method. On January 1, 2028, the estimated salvage value was revised to $7,000 and the useful life was revised to a total of 8 years. Instructions Determine the depreciation expense for 2028. Ans: N/A, LO: 2, Topic: Depreciation Methods, Subtopic: Revising Periodic Depreciation, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

9-56

Solution 237 Calculate the book value at the time of the revision: $75,000 – $5,000 10 years

= $7,000 annual depreciation expense

4 years have been depreciated: $7,000  4 = $28,000 Book value at the time of the revision: $75,000 – $28,000 = $47,000 Cost – (ann.dep. × 4 yrs.) Calculate the revised annual depreciation: $47,000 – $7,000 4 years remaining

= $10,000 revised annual depreciation (Book val. – sal. val.) ÷ (8 yrs. – 4 yrs.)

The depreciation expense for 2028 is $10,000. Be. 238 Equipment was acquired on January 1, 2025 at a cost of $170,000. The equipment was originally estimated to have a salvage value of $10,000 and an estimated life of 10 years. Depreciation has been recorded through December 31, 2027 using the straight-line method. On January 1, 2028, the estimated salvage value was revised to $16,000 and the useful life was revised to a total of 8 years. Instructions Prepare the journal entry to record depreciation expense for 2028. Ans: N/A, LO: 2, Topic: Depreciation Methods, Subtopic: Revising Periodic Depreciation, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 238 Calculate the book value at the time of the revision: $170,000 – $10,000 10 years

= $16,000 annual depreciation expense

3 years have been depreciated: $16,000  3 = $48,000 Book value at the time of the revision: $170,000 – $48,000 = $122,000 Cost – (ann.dep. × 3 yrs.) Calculate the revised annual depreciation: $122,000 – $16,000 5 years remaining

= $21,200 revised annual depreciation

Adjusting journal entry at 12/31/28: Depreciation Expense .......................................................................... Accumulated Depreciation .................................................. .

21,200 21,200

Reporting and Analyzing Long-Lived Assets

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Be. 239 A delivery truck was acquired on January 1, 2026 at a cost of $40,000. The truck was originally estimated to have a salvage value of $15,000 and an estimated life of 5 years. Depreciation has been recorded through December 31, 2027 using the straight-line method. On January 1, 2028, the truck’s engine was rebuilt at a cost of $3,000 the estimated salvage value was revised to $13,000 and the useful life was revised to a total of 6 years. Instructions Prepare the journal entry to record depreciation expense for 2028. Ans: N/A, LO: 2, Topic: Depreciation Methods, Subtopic: Revising Periodic Depreciation, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 239 Calculate the book value at the time of the revision: $40,000 – $15,000 5 years

= $5,000 annual depreciation expense

2 years have been depreciated: $5,000  2 = $10,000 Book value at the time of the revision: $40,000 – $10,000 + $3,000 = $33,000 Calculate the revised annual depreciation: $33,000 – $13,000 4 years remaining

= $5,000 revised annual depreciation

Adjusting journal entry at 12/31/28: Depreciation Expense .......................................................................... Accumulated Depreciation - Equipment ..............................

5,000 5,000

9-58

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Be. 240 Suppose that Ralph Lauren purchased a machine on January 1, 2025. In addition to the purchase price paid, the following additional costs were incurred: (a) sales tax paid on the purchase price, (b) transportation and insurance costs while the machinery was in transit from the seller, (c) personnel training costs for initial operation of the machinery, (d) installation costs necessary to secure the machinery to the building flooring, (e) major overhaul to extend the life of the machinery, (f) lubrication of the machinery gearing before the machinery was placed into service, (g) lubrication of the machinery gearing after the machinery was placed into service, and (h) annual city operating license. Instructions Indicate whether the items (a) through (h) are capital or revenue expenditures in the spaces provided: C = Capital, R = Revenue. (a)

(b)

(c)

(d)

(e)

(f)

(g)

(h)

Ans: N/A, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Determining the Cost of Plant Assets, Bloom: C, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 240 (a) Capital

(b) Capital

(d) Capital

(e) Capital

(f)

(g) Revenue

(h) Revenue

Capital

Be. 241 Identify the following expenditures as capital expenditures or revenue expenditures. (a) Replacement of worn out gears on factory machinery. (b) Construction of a new wing on an office building. (c) Painting the exterior of a building. (d) Oil change on a company truck. (e) Replacing an old computer chip with a faster chip, which increases productive capacity. No extension of useful life expected. (f) Overhaul of a truck motor. One year extension in useful life is expected. (g) Purchased a wastebasket at a cost of $10. (h) Painting and lettering of a used truck upon acquisition of the truck. Ans: N/A, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Determining the Cost of Plant Assets, Bloom: C, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Long-Lived Assets

9-59

Solution 241 (a) (b) (c) (d)

Revenue Capital Revenue Revenue

(e) (f) (g) (h)

Capital Capital Revenue Capital

Be. 242 For each item listed below, enter a code letter in the blank space to indicate the allocation terminology for the item. Use the following codes for your answer: A—Amortization

D—Depreciation

N—None of these

1. Copyrights

6. Research and Development Costs

2. Land

7. Equipment

3. Buildings

8. Franchises

4. Patents

9. Annual licensing fees

5. Trademarks

10. Land Improvements

Ans: N/A, LO: 2, 4, Topics: Intangible Assets, Subtopic: NA, Bloom: C, Difficulty: Easy, Min: 10, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 242 1. 2. 3. 4. 5.

A N D A N

6. 7. 8. 9. 10.

N D A N D

Be. 243 Mercury Service Company uses the straight-line method of depreciation. The company's fiscal year end is December 31. The following transactions occurred during 2025. Jan.

May 13 Dec. 31

Purchased equipment from the Brawley Company on account for $12,500 plus sales tax of $1,125 and shipping costs of $225. Paid for $140 routine maintenance on the equipment. Recorded 2025 depreciation on the basis of a 3-year life and estimated salvage value of $4,850.

Instructions Prepare the necessary entries. (Show computations.) Ans: N/A, LO: 1, 2, Topic: Depreciation Methods, Subtopic: Straight-Line Method, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

9-60

Solution 243 Jan.

May 13

Equipment ............................................................... Accounts Payable ...........................................

13,850

Maintenance and Repairs Expense ......................... Cash ...............................................................

140

Depreciation Expense ............................................. Accumulated Depreciation .............................. [($13,850 – $4,850) ÷ 3]

3,000

Dec. 31

13,850 140 3,000

Be. 244 Using the following data for Acme, Inc., compute its asset turnover and the return on assets ratio. Net Income 2026 $ 123,000 Total Assets 12/31/26 2,243,000 Total Assets 12/31/25 1,880,000 Net Sales 2026 2,135,000 Ans: N/A, LO: 5, Topic: Statement Presentation and Analysis, Subtopic: Analysis, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 244 Asset Turnover:

Net Sales Avg. Total Assets*

Return on Assets:

Net Income Avg. Total Assets*

$2,135,000 ($2,243,000 + $1,880,000) ÷ 2

= 1.04 times

$123,000 ($2,243,000 + $1,880,000) ÷ 2

= 6.0%

* (End tot. assets + beg. tot. assets) ÷ 2 Be. 245 Indicate in the blank spaces below, the section of the balance sheet where the following items are reported. Use the following code to identify your answer: PPE I O N/A

Property, Plant, and Equipment Intangible Assets Other Not on the balance sheet

Goodwill

Research and Development Costs

Land Improvements

Land

Buildings

Franchises

Accumulated Depreciation

Licenses

Trademarks

10. Equipment

Ans: N/A, LO: 5, Topic: Statement Presentation and Analysis, Subtopic: Presentation, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Long-Lived Assets

9-61

Solution 245 1. 2. 3. 4. 5.

I PPE PPE PPE I

Goodwill Land Improvements Buildings Accumulated Depreciation Trademarks

6. 7. 8. 9. 10.

N/A PPE I I PPE

Research and Development Costs Land Franchises Licenses Equipment

*Be 246 Suppose that Dollar Tree purchased a truck for $66,000. The company expected the truck to last four years or 100,000 miles, with an estimated residual value of $8,000 at the end of that time. During the second year, the truck was driven 27,000 miles. Compute the depreciation for the second year under each of the methods below and place your answers in the blanks provided. Units-of-activity

Double-declining-balance

Ans: N/A, LO: 6, Topic: Other Depreciation Methods, Subtopics: Declining-Balance Method, Units-of-Activity Method, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

*Solution 246 Units-of-activity [($66,000 – $8,000) ÷ 100,000] × 27,000 = $15,660) [(Cost – sal. val.) ÷ est. tot. miles] × 2nd. yr. miles

15,660

Double-declining-balance $_ (year 1—$66,000 × [(1 ÷ 4) × 2] = $33,000 (Cost × (1/4 × 2)) (year 2— ($66,000 – $33,000) × [(1 ÷ 4) × 2] = $16,500) (Cost – acc. dep.) × (1/4 × 2)

16,500

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

9-62

EXERCISES Ex. 247 For each entry below make a correcting entry if necessary. If the entry given is correct, then state "No entry required." (a)

The $70 cost of repairing a printer was charged to Equipment.

(b)

The $5,500 cost of a major engine overhaul was debited to Maintenance and Repairs Expense. The overhaul is expected to increase the operating efficiency of the truck.

(c)

The $6,000 closing costs associated with the acquisition of land were debited to Operating Expenses.

(d)

A $300 charge for transportation expenses on new equipment purchased was debited to Freight-In.

Ans: N/A, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Determining the Cost of Plant Assets, Bloom: AN, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 247 (a) (b)

(c)

(d)

Maintenance and Repairs Expense ............................................. Equipment...........................................................................

Equipment ................................................................................... Maintenance and Repairs Expense.....................................

5,500

Land ........................................................................................... Operating Expenses ...........................................................

6,000

Equipment ................................................................................... Freight-In ............................................................................

300

70 5,500

6,000 300

Reporting and Analyzing Long-Lived Assets

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Ex. 248 Acme Company was organized on January 1. During the first year of operations, the following expenditures and receipts were recorded in random order. Debits 1. Cost of real estate purchased as a plant site (land and building) 2. Accrued real estate taxes paid at the time of the purchase of the real estate 3. Cost of demolishing building to make land suitable for construction of a new building 4. Architect's fees on building plans 5. Excavation costs for new building 6. Cost of filling and grading the land 7. Insurance and taxes during construction of building 8. Cost of repairs caused by a small fire shortly after completion of building 9. Interest paid during the year, of which $45,000 pertains to the construction period 10. Full payment to building contractor 11. Cost of parking lots and driveways 12. Real estate taxes paid for the current year on the land Total Debits Credits 13. Proceeds from salvage of demolished building Total Credits

$ 130,000 4,000 10,000 14,000 30,000 5,000 6,000 7,000 74,000 955,000 36,000 4,000 $1,275,000

$3,500 $3,500

Instructions Analyze the foregoing transactions using the following tabular arrangement. Insert the number of each transaction in the Item space and insert the amounts in the appropriate columns. Item

Land

Buildings

Other

Account Title

Ans: N/A, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Determining the Cost of Plant Assets, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 248 Item 1 2 3 4 5 6 7 8 9 10 11 12 13 Totals

Land $130,000 4,000 10,000

Buildings

Other

Account Title

$ 7,000 29,000

Maintenance and Repairs Expense Interest Expense

36,000 4,000

Land Improvements Property Tax Expense

14,000 30,000

5,000 6,000

45,000 955,000 (3,500) $145,500 .

$1,050,000

$76,000

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

9-64 Ex. 249

On March 1, 2025, A1 Supply Company acquired real estate, on which it planned to construct a small office building, by paying $85,000 in cash. An old warehouse on the property was demolished at a cost of $8,200; the salvaged materials were sold for $2,200. Additional expenditures before construction began included $1,500 attorney's fee for work concerning the land purchase, $5,500 real estate broker's fee, $9,100 architect's fee, and $16,000 to put in driveways and a parking lot. Instructions (a) Determine the amount to be recorded as the cost of the land. (b) For each cost not used in part (a), indicate the account to be debited. Ans: N/A, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Determining the Cost of Plant Assets, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 249 (a)

(b)

Cost of land Cash paid ........................................................................... Net cost of removing warehouse ($8,200 – $2,200)............ Attorney's fee...................................................................... Real estate broker's fee ...................................................... Total............................................................................. (pur. price. + demo cost –salv. + attor. fee + brok. fee)

$85,000 6,000 1,500 5,500 $98,000

The architect's fee ($9,100) should be debited to the Building account. The cost of the driveways and parking lot ($16,000) should be debited to Land Improvements.

Ex. 250 A1 Repair Service uses the straight-line method of depreciation. The company's fiscal year-end is December 31. The following transactions and events occurred during the first three years. 2025

July

Nov. 3 Dec. 31

Purchased equipment from the Acme Equipment Center for $5,500 cash plus sales tax of $305, and shipping costs of $250. Paid for ordinary repairs on the equipment at a cost of $240. Recorded 2024 depreciation on the basis of a four-year life and estimated salvage value of $455.

2026

Dec. 31

Recorded 2026 depreciation.

2027

Jan.

Paid $1,800 for a major upgrade of the equipment. This expenditure is expected to increase the operating efficiency and capacity of the equipment.

Instructions Prepare the necessary entries. (Show computations.) Ans: N/A, LO: 1, 2, Topic: Plant Asset Expenditures, Subtopic: Straight-Line Method , Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Long-Lived Assets

9-65

Solution 250 2025

July

Equipment............................................................... Cash...............................................................

6,055 6,055

($5,500 + $305 + $250) (pur. price. + sal. tax + ship.) Nov.

Dec. 31

2026 2027

Dec. 31 Jan.

Maintenance and Repairs Expense......................... Cash...............................................................

240

Depreciation Expense ............................................. Accumulated Depreciation .............................. [($6,055 – $455) ÷ 4 × 1/2] (pur. price. + sal. tax + ship. − salv.) ÷ 4) × ½

700

Depreciation Expense ............................................. Accumulated Depreciation ($5,600 ÷ 4) ..........

1,400

Equipment............................................................... Cash...............................................................

1,800

240 700

1,400 1,800

Ex. 251 Joe Smith, the controller of Acme Office Supply Company, has reviewed the expected useful lives and salvage values of selected depreciable assets at the beginning of 2028. Here are his findings:

Type of Asset

Date Acquired

Cost

Accumulated Depreciation, Jan. 1, 2028

Useful Life (in Years) Old

Proposed

Salvage Value Old

Proposed

Jan.1, 40 50 $2,700,000 $120,000 $84,000 $516,000 2020 Warehouse Jan.1, 240,000 46,000 25 20 10,000 8,000 2023 All assets are depreciated by the straight-line method. Acme uses a calendar year in preparing annual financial statements. After discussion, management has agreed to accept Joe's proposed changes. (The "Proposed" useful life is total life, not remaining life.) Building

Instructions (a) Compute the revised annual depreciation on each asset in 2028. (Show computations.) (b) Prepare the entry (or entries) to record depreciation on the building in 2028. Ans: N/A, LO: 2, Topic: Depreciation Methods, Subtopic: Revising Periodic Depreciation, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

9-66

Solution 251 (a) Cost ................................................................... —Accumulated depreciation .............................. Book value, 1/1/28 .............................................. Less: Salvage value.......................................... Depreciable cost (1)........................................... Revised remaining useful life in years (2) *(50 – 8) **(20 – 5) Revised annual depreciation (1)  (2) (Dep. cost ÷ (Prop. use. life – yrs. used) (b)

Dec. 31

Depreciation Expense ................................ Accumulated Depreciation — Buildings ........................................

Building $2,700,000 – 516,000 2,184,000 84,000 $2,100,000

Warehouse $240,000 – 46,000 194,000 8,000 $186,000

42*

15**

$50,000

$12,400

50,000 50,000

Ex. 252 On January 1, 2025, A1 Transportation Company purchased and installed an intercom system at a cost of $20,000. The equipment was expected to last five years with a salvage value of $3,000. On January 1, 2026, more equipment was purchased to tie-in with the current system for $10,000. The new equipment is expected to have a useful life of four years and no salvage value. Through an error, the new equipment was debited to Utilities Expense. The company uses the straight-line method of depreciation. Instructions Prepare a schedule showing the effects of the error on Utilities Expense, Depreciation Expense, and Net Income for each year and in total beginning in 2026 through the useful life of the new equipment. Utilities Expense Depreciation Expense Net Income Overstated Overstated Overstated Year (Understated) (Understated) (Understated) —————————————————————————————————————————— 2026 2027 2028 2029 Ans: N/A, LO: 2, Topic: Depreciation Methods, Subtopic: Straight-Line Method, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Long-Lived Assets

9-67

Solution 252 Utilities Expense Depreciation Expense Net Income Overstated Overstated Overstated Year (Understated) (Understated) (Understated) —————————————————————————————————————————— 2026 $10,000 $(2,500)* $(7,500) 2027 (2,500) 2,500 2028 (2,500) 2,500 2029 (2,500) 2,500 Total $10,000 $(10,000) -0*(2026 equip. cost ÷ 4 yrs.) Ex. 253 (a)

Company A purchased equipment in 2026 for $104,000 and estimated an $8,000 salvage value at the end of the equipment's 10-year useful life. At December 31, 2027, there was $67,200 in the Accumulated Depreciation account for this equipment using the straight-line method of depreciation. On March 31, 2028, the equipment was sold for $21,000. Prepare the appropriate journal entries to remove the equipment from the books of Company A on March 31, 2028.

(b)

Company B sold equipment for $11,000. The equipment originally cost $25,000 in 2025 and $6,000 was spent on a major overhaul in 2028 (charged to the Equipment account). Accumulated Depreciation on the equipment to the date of disposal was $20,000. Prepare the appropriate journal entry to record the disposition of the equipment.

(c)

Company C sold equipment that had a book value of $13,500 for $15,000. The equipment originally cost $45,000 and it is estimated that it would cost $57,000 to replace the equipment. Prepare the appropriate journal entries to record the dispositions of the equipment.

Ans: N/A, LO: 3, Topic: Plant Asset Disposals, Subtopic: Sale of Plant Assets, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

9-68

Solution 253 (a)

(b)

(c)

Depreciation Expense.................................................................. Accumulated Depreciation—Equipment ............................. (To record depreciation expense for the first 3 months of 2028: $9,600 × 1/4 = $2,400) [(Cost – sal. val.) ÷ 10 yrs.] × 3/12 Cash ........................................................................................... Loss on Disposal of Plant Assets................................................. Accumulated Depreciation—Equipment ($67,200 + $2,400) ....... Equipment .......................................................................... (To record sale of equipment at a loss) *((Cost – acc. depr.) – sell. price)

2,400 2,400

21,000 13,400* 69,600 104,000

Cash ........................................................................................... Accumulated Depreciation—Equipment....................................... Equipment........................................................................... (To record disposition on equipment at book value)

11,000 20,000

15,000 31,500

31,000

45,000 1,500

Ex. 254 Prepare the journal entries to record the following transactions for Acme Wholesale Company, which has a calendar year end and uses the straight-line method of depreciation. (a)

On September 30, 2028, the company sold old equipment for $46,000. The equipment was purchased on January 1, 2026 for $96,000 and was estimated to have a $16,000 salvage value at the end of its 5-year life. Depreciation on the equipment has been recorded through December 31, 2027.

(b)

On June 30, 2028, the company sold old equipment for $24,000. The equipment originally cost $36,000 and had accumulated depreciation to the date of disposal of $15,000.

Reporting and Analyzing Long-Lived Assets

9-69

Solution 254 (a) September 30, 2028 Depreciation Expense ................................................................... Accumulated Depreciation—Equipment................................ (To record depreciation expense for the first 9 months of 2028. $80,000 ÷ 5 years = $16,000 × 9/12 = $12,000) [(Cost – sal. val.) ÷ 5 yrs.] × 9/12 Cash .................................................................................................. Accumulated Depreciation—Equipment ($32,000 + $12,000) ........... Loss on Disposal of Plant Assets ($52,000 – $46,000) ...................... Equipment ............................................................................ (To record sale of delivery equipment at a loss) *((Cost – acc. dep.) – sell. price) (b) June 30, 2028 Cash.............................................................................................. Accumulated Depreciation—Equipment ........................................ Equipment ............................................................................ Gain on Disposal of Plant Assets ($24,000 – $21,000) ......... (To record sale of equipment at a gain) *(sell. price – (Cost – acc. dep.)

12,000 12,000

46,000 44,000 6,000 96,000

24,000 15,000 36,000 3,000

Ex. 255 Instructions Determine the gain or loss to be recognized for each scenario below. a. A machine that cost $36,000 and on which $26,500 of depreciation had been recorded was disposed of for $10,200. Indicate whether a gain or loss should be recorded, and for what amount. b. Assume that the machine of Part a, above, was instead discarded. Indicate whether a gain or loss should be recorded, and for what amount. c. Assume that the machine of Part a, above, was instead sold for $9,400. Indicate whether a gain or loss should be recorded, and for what amount. Ans: N/A, LO: 3, Topic: Plant Asset Disposals, Subtopic: Sale of Plant Assets, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 255 a. $700 gain: ($36,000 – $26,500 = $9,500 book value; $10,200 – $9,500 = $700 gain) *(sell. price – (Cost – acc. dep.) b. $9,500 loss: ($36,000 – $26,500 = $9,500 book value, all loss) c. $100 loss: ($36,000 – $26,500 = $9,500 book value; $9,400 – $9,500 = $100 loss) *((Cost – acc. dep.) – sell price)

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

9-70 Ex. 256

Presented below are selected transactions for the A1 Transport Company for 2029. Jan.

Retired a piece of equipment that was purchased on January 1, 2019. The equipment cost $75,000 on that date and had a useful life of 10 years with no salvage value.

April 30

Sold equipment for $38,000 that was purchased on January 1, 2026. The equipment cost $105,000 and had a useful life of 5 years with no salvage value.

Dec. 31

Discarded equipment that was purchased on June 30, 2025. The equipment cost $42,000 and was depreciated on a 5-year useful life with a salvage value of $2,000.

Instructions Journalize all entries required as a result of the above transactions. A1 Transport Company uses the straight-line method of depreciation and has recorded depreciation through December 31, 2028. Ans: N/A, LO: 3, Topic: Plant Asset Disposals, Subtopic: Retirement of Plant Assets, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 256 Jan.

April 30

Dec. 31

Accumulated Depreciation—Equipment .............................. Equipment ..................................................................

75,000

Depreciation Expense ......................................................... Accumulated Depreciation—Equipment ..................... ($105,000 × 1/5 × 4/12 = $7,000) [(Cost – $0) ÷ 5] × 4/12

7,000

Cash ................................................................................... Accumulated Depreciation—Equipment ($21,000 × 3 ⅓) .... Equipment .................................................................. Gain on Disposal of Plant Assets ($38,000 – $35,000) *(sell. price – (Cost – acc. dep.)

38,000 70,000

Depreciation Expense (($42,000 – $2,000) ÷ 5) .................. Accumulated Depreciation—Equipment .....................

8,000

Accumulated Depreciation—Equipment ($8,000 × 4 ½) ..... Loss on Disposal of Plant Assets*....................................... Equipment ................................................................. *((Cost – acc. dep.) – sell price)

36,000 6,000

75,000 7,000

105,000 3,000

8,000

42,000

Reporting and Analyzing Long-Lived Assets

9-71

Ex. 257 Ace Restaurant Supply Company sold the following two pieces of equipment in 2028: Cost Purchase date Useful life Salvage value Depreciation method Date sold Sales price

Equipment A $116,000 7/1/21 8 years $4,000 Straight-line 7/1/25 $49,000

Equipment B $63,000 1/1/22 5 years $3,000 Straight-line 9/1/25 $20,000

Instructions Journalize all entries required to update depreciation and record the sales of the two assets in 2028. The company has recorded depreciation on the equipment through December 31, 2027. Ans: N/A, LO: 3, Topic: Plant Asset Disposals, Subtopic: Sale of Plant Assets, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 257 Equipment A July 1 Depreciation Expense ............................................................. 7,000 Accumulated Depreciation—Equipment A ....................... ($116,000 – $4,000) ÷ 8 years × 6/12 = $7,000 [(Cost – acc. dep.) ÷ 8 yrs.] × 6/12 Cash ....................................................................................... 49,000 Accumulated Depreciation—Equipment A* ............................. 56,000 Loss on Disposal of Plant Assets ($60,000 – $49,000) ................. 11,000* Equipment A .................................................................... *((Cost – acc. dep.) – sell. price *2024 ($116,000 – $4,000) ÷ 8 years  6/12 = $7,000 2025 ($116,000 – $4,000) ÷ 8 years = $14,000 2026 $14,000 2027 $14,000 2028 ($116,000 – $4,000) ÷ 8 years  6/12 = $7,000 Total accumulated depreciation at the date of disposal = $56,000 Equipment B Sept. 1 Depreciation Expense ............................................................. 8,000 Accumulated Depreciation—Equipment B ....................... ($63,000 – $3,000) ÷ 5 years  8/12 = $8,000 [(Cost – sal. val.) ÷ 5 yrs.] × 8/12 Cash ..................................................................................... 20,000 Accumulated Depreciation—Equipment B** ............................ 44,000 Equipment B .................................................................... Gain on Disposal of Plant Assets ($20,000 – $19,000) ... *(sell. price – (Cost – acc. dep.) **2025 ($63,000 – $3,000) ÷ 5 years = $12,000 2026 $12,000 2027 $12,000 2028 ($63,000 – $3,000) ÷ 5 years  8/12 = $8,000 Total accumulated depreciation at the date of disposal = $44,000 .

7,000

116,000

8,000

63,000 1,000*

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

9-72 Ex. 258

Suppose that Ulta, Inc. has equipment that cost $50,000 and has been depreciated $30,000. Instructions Record entries for the disposal under the following assumptions. (a) It was scrapped as having no value. (b) It was sold for $23,000. (c) It was sold for $18,000. Ans: N/A, LO: 3, Topic: Plant Asset Disposals, Subtopic: Sale of Plant Assets, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 258 (a)

(b)

(c)

Accumulated Depreciation—Equipment............................... Loss on Disposal of Plant Assets....................................... Equipment.................................................................. *(Cost – acc. dep.)

30,000 20,000*

Cash .................................................................................... Accumulated Depreciation—Equipment............................. Gain on Disposal of Plant Assets ................................ Equipment.................................................................. *(sell. price – (Cost – acc. dep.))

23,000 30,000*

Cash .................................................................................... Accumulated Depreciation—Equipment............................... Loss on Disposal of Plant Assets................. Equipment.................................................................. *((Cost – acc. dep.) – sell. price)

18,000 30,000 2,000*

50,000

3,000 50,000

50,000

Ex. 259 Here are selected 2028 transactions of Ace Car Rental Corporation. Jan.

June 30

Dec. 31

Retired a piece of equipment that was purchased on January 1, 2012. The equipment cost $55,000 and had a useful life of 10 years with no salvage value. Sold equipment that was purchased on January 1, 2026. The equipment cost $78,000 and had a useful life of 3 years with no salvage value. The equipment was sold for $9,000 cash. Sold equipment for $12,500 cash. The equipment cost $43,000 when it was purchased on January 1, 2025 and was depreciated based on a 5-year useful life with a $3,000 salvage value.

Instructions Journalize all entries required on the above dates, including entries to update depreciation on assets disposed of, where applicable. Ace Car Rental Corporation uses straight-line depreciation. Deprecation has been adjusted through December 31, 2027. Ans: N/A, LO: 3, Topic: Plant Asset Disposals, Subtopic: Sale of Plant Assets, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Long-Lived Assets

9-73

Solution 259 Jan. 1 June 30

Dec. 31

Accumulated Depreciation—Equipment .......................... Equipment...............................................................

55,000

Depreciation Expense ................................................... Accum. Depreciation—Equipment ($78,000  1/3  6/12) ...................................... [(Cost – $0) ÷ 3yrs.] × 6/12

13,000

Cash ............................................................................... Accumulated Depreciation—Equipment .......................... ($78,000  2/3 = $52,000; $52,000 + $13,000) Loss on Disposal of Plant Assets [$9,000 – ($78,000 – $65,000)] Equipment .......................................................... *((Cost – acc. dep.) – sell. price)

9,000 65,000

Depreciation Expense ...................................................... Accumulated. Depreciation—Equipment [($43,000 – $3,000)  1/5) ..................................

8,000

Cash ............................................................................. Accumulated Depreciation—Equipment** [($43,000 – $3,000)  4/5] ....................................... Gain on Disposal of Plant Assets ...................... Equipment ......................................................... **(Cost – SV)  4/5 = AD

12,500

55,000

13,000

4,000* 78,000

8,000

32,000 1,500 43,000

Ex. 260 During the current year, A1 Motor Company incurred several expenditures. Briefly explain whether the expenditures listed below should be recorded as an operating expense or as an intangible asset. If you view the expenditure as an intangible asset, indicate the number of years over which the asset should be amortized. Explain your answer. (a)

Spent $30,000 in legal costs in a patent defense suit. The patent was unsuccessfully defended.

(b)

Purchased a trademark from another company. The trademark can be renewed indefinitely. The company expected the trademark to contribute to revenue indefinitely.

(c)

The company acquires a patent for $2,000,000. The company selling the patent has spent $1,000,000 on the research and development of it. The patent has a remaining life of 15 years.

(d)

The company is spending considerable time and money in developing a different patent for another product. So far $3,000,000 has been spent this year on research and development. The company is very confident they will obtain this patent in the next few years.

Ans: N/A, LO: 4, Topic: Intangible Assets, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

9-74

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Reporting and Analyzing Long-Lived Assets

9-75

Solution 260 (a)

Operating Expense. Only successful patent defense costs can be capitalized.

(b)

Intangible Asset. Trademarks are considered to have indefinite lives, thus they are not amortized.

(c) Intangible Asset. The patent cost of $2,000,000 should be amortized over its remaining useful life of 15 years since this is shorter than the maximum allowable period of 20 years. The selling company’s costs are not relevant, or normally available, to the buyer. (d)

Operating Expense. Research and development costs are required by GAAP to be expensed.

Ex. 261 Ace Equipment Company, organized in 2025, has these transactions related to intangible assets in that year: Jan. Apr. July Sept.

2 1 1 1

Purchased a patent (5-year life) $325,000. Trademark purchased (indefinite life) $360,000. Acquired a 9-year franchise; expiration date July 1, 2034, $720,000. Research and development costs $185,000.

Instructions (a) Prepare the necessary entries to record these intangibles. All costs incurred were for cash. (b) Make the entries as of December 31, 2025, recording any necessary amortization. (c) Indicate what the balance should be on December 31, 2025. Ans: N/A, LO: 4, Topic: Intangible Assets, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

9-76

Solution 261 (a)

1/2/25

Patents ......................................................... Cash ........................................................

325,000

Trademark.................................................... Cash ........................................................

360,000

Franchise ..................................................... Cash ........................................................

720,000

Research and Development Expense .......... Cash ........................................................

185,000

Amortization Expense—Patents ($325,000  5).......... Amortization Expense—Franchise [($720,000  9)  6/12] ......................................... Patent .................................................................... Franchise ............................................................... *[(Fran. cost ÷ 9)  6/12]

65,000

4/1/25

7/1/25 9/1/25

(b)

(c)

325,000 360,000

720,000 185,000

40,000* 65,000 40,000

Ending balances, 12/31/25: Patents = $260,000 ($325,000 – $65,000) Trademark = $360,000 Franchise = $680,000 ($720,000 – $40,000)

Ex. 262 (a)

Company A purchased a patent on January 1, 2025 for $2,500,000. The patent's legal life is 20 years but the company estimates that the patent's useful life will only be 5 years from the date of acquisition. On June 30, 2025, the company paid legal costs of $162,000 in successfully defending the patent in an infringement suit. Prepare the journal entry to amortize the patent at year-end on December 31, 2025.

(b)

Company B purchased a franchise from the Tasty Food Company for $450,000 on January 1, 2025. The franchise is for an indefinite time period and gives Milner Company the exclusive rights to sell Tasty Wings in a particular territory. Prepare the journal entry to record the acquisition of the franchise and any necessary adjusting entry at year-end on December 31, 2025.

(c)

Company C incurred research and development costs of $500,000 in 2025 in developing a new product. Prepare the necessary journal entries during 2025 to record these events and any adjustments at year-end on December 31, 2025.

Ans: N/A, LO: 4, Topic: Intangible Assets, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Long-Lived Assets

9-77

Solution 262 (a)

(b)

(c)

December 31, 2025 Amortization Expense ....................................................................... 518,000 Patent ................................................................................ (To record patents amortization) $2,500,000 ÷ 5 years $500,000 $162,000 ÷ 54 months = $3,000 × 6 18,000* $518,000 *[Legal costs ÷ (60 mon. – 6 mon.)] × 6 mon. January 1, 2025 Franchise.......................................................................................... 450,000 Cash .................................................................................. (To record acquisition of Tasty Food franchise) December 31, 2025 (No amortization of the franchise is required since it has an indefinite life.) 2025 Research and Development Expense ............................................... 500,000 Cash ................................................................................... (To record research and development expense for the current year)

518,000

450,000

500,000

December 31—no entry. Ex. 263 a. A patent that was acquired for $800,000 at the beginning of the current year expires in 20 years and is expected to have a useful life of 5 years. Present the adjusting entry to amortize the patent for the current year. b. Research and development costs of $300,000 were incurred during the current fiscal year. Determine the minimum amount to be expensed for the current fiscal year. Ans: N/A, LO: 4, Topic: Intangible Assets, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 263 a. Amortization Expense ………....…………………………… Patents………………………………………………….. ($800,000 ÷ 5 = $160,000)

160,000

b. $300,000. Research and development costs are expensed when incurred.

160,000

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

9-78 Ex. 264

For each of the following unrelated transactions, (a) determine the amount of the amortization for the current year, and (b) present the adjusting entries required to record amortization at year-end. (1)

Costs of $39,000 were incurred on January 1 to obtain a patent. On January 31, $38,610 was spent in legal costs to successfully defend the patent against competitors. The patent has an estimated legal life of 12 years.

(2)

A company acquired a copyright for $160,000. The copyright has a useful life of 50 years.

Ans: N/A, LO: 4, Topic: Intangible Assets, Subtopic: NA, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 264 (1)

(a) Legal costs to successfully defend a patent are capitalized. Therefore, the legal costs will be amortized for 11 years, 11 months. (The remaining useful life of the patent.) The amortization will be ($38,610 ÷ 143 remaining months × 11 months = $2,970) + ($39,000 ÷ 12 years = $3,250) = $6,220. *(Pat. cost ÷ 12 yrs.) + [(legal costs ÷ 143 mon.) × 11 mon.] (b) Amortization Expense ......................................................... 6,220 Patents .................................................................... 6,220

(2)

(a)

Maximum allowable write-off period is life of creator plus 70 years. Thus the 50 years of useful life is used. $160,000 ÷ 50 years = $3,200 per year.

(b)

Amortization Expense ......................................................... Copyrights ...............................................................

3,200 3,200

Ex. 265 Company A reports the following information (in millions) during a recent year: net sales, $12,408.5; net income, $344.9; total assets, ending, $4,312.6; and total assets, beginning, $4,254.3. Instructions (a) Calculate the (1) return on assets, (2) asset turnover, and (3) profit margin ratios. (b) Prove mathematically how the profit margin and asset turnover ratios work together to explain return on assets, by showing the appropriate calculations. Ans: N/A, LO: 5, Topic: Statement Presentation and Analysis, Subtopic: Analysis, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Long-Lived Assets

9-79

Solution 265 (a) ($ in millions) (1) Return on assets

$344.9

= 8.1%

($4,312.6 + $4,254.3) ÷ 2 Net inc. ÷ [(end. tot. assets + beg. tot. assets) ÷ 2] (2) Asset turnover

$12,408.5 = 2.9 times ($4,312.6 + $4,254.3) ÷ 2 Net inc. ÷ [(end. tot. assets + beg. tot. assets) ÷ 2]

(3) Profit margin

$344.9 $12,408.5 (Net inc. ÷ Net sal.)

= 2.8%

(b) Profit Margin  Asset Turnover = Return on Assets = 2.8%  2.9 times = 8.1% Ex. 266 The following information is available from the annual reports of Company A and Company B. (Amounts in millions) Company A _Company B Net Income $ 965 $ 1,271 Net Sales 22,653 33,812 Total Assets (average) 21,188 36,167 Instructions (a) Based on the preceding information, compute the following values for each company: 1. Asset turnover 2. Return on assets (b) What conclusion concerning the management of assets can be drawn from these data? Ans: N/A, LO: 5, Topic: Statement Presentation and Analysis, Subtopic: Analysis, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

9-80

Solution 266 (a) 1. Asset turnover

Company A $22,653 ÷ $21,188 = 1.07 times (Net Sales ÷ ave. tot. assets)

2. Return on assets $965 ÷ $21,188 = 4.6% (Net inc. ÷ ave. tot. assets)

Company B $33,812 ÷ $36,167 = .93 times

$1,271 ÷ $36,167 = 3.5%

(b) Company A’s asset turnover is 15% higher than Company B's asset turnover. In addition, Company A’s return on assets is 31% higher than Company B’s ratio. It can be concluded that Company A is utilizing its assets more efficiently than Company B. Ex. 267 Presented below is information related to plant assets and intangible assets at year-end on December 31, 2025 for Company A: Buildings Goodwill Patents Land Accumulated Depreciation

$1,180,000 370,000 480,000 390,000 650,000

Instructions Prepare a partial balance sheet for Company A that shows how the above-listed items would be presented. Ans: N/A, LO: 5, Topic: Statement Presentation and Analysis, Subtopic: Presentation, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 267 COMPANY A Balance Sheet (Partial) December 31, 2025 Property, Plant, and Equipment Buildings Less: Accumulated Depreciation Land Total Property, Plant, and Equipment (Build. – Acc. Dep. + Land) Intangibles Assets Goodwill Patents Total Intangibles

$1,180,000 650,000

$530,000 390,000 $920,000

370,000 480,000 850,000

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*Ex. 268 Suppose that Verizon purchased a new machine on October 1, 2025 at a cost of $104,000. The company estimated that the machine has a salvage value of $8,000. The machine is expected to be used for 80,000 working hours during its 8-year life. Instructions Compute depreciation using the following methods in the year indicated. (a) Straight-line for 2025 and 2026, assuming a December 31 year-end. (b) Declining-balance using double the straight-line rate for 2025 and 2026. (c) Units-of-activity for 2025, assuming machine usage was 2,900 hours. (Round depreciation per unit to the nearest cent.) Ans: N/A, LO: 2,6, Topic: Other Depreciation Methods, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

*Solution 268 (a) Straight-line method:

$104,000 – $8,000

= $12,000 per year

8 years 2025 depreciation = $12,000  3/12 = $3,000 2026 depreciation = $12,000 (b) Declining-balance method: 2025 depreciation = $104,000  25%*  3/12 = $6,500 [(Cost × (1/8 × 2)] × 3/12 Book value January 1, 2026 = $104,000 – $6,500 = $97,500 2026 depreciation = $97,500  25% = 24,375 [(Cost – acc. dep.) × (1/8 × 2)] *(1/8)  2 = 25% (c) Units-of-activity method:

$104,000 – $8,000

= $1.20 per hour

80,000 hours 2025 depreciation = 2,900 hours  $1.20 = $3,480. [(Cost – sal. val.) ÷ tot. hrs.] × 2025 hours *Ex. 269 Company A purchased a new machine for $250,000. It is estimated that the machine will have a $25,000 salvage value at the end of its 5-year useful service life. The double-declining-balance method of depreciation will be used. Instructions Prepare a depreciation schedule that shows the annual depreciation expense on the machine for its 5-year life. Ans: N/A, LO: 2,6, Topic: Other Depreciation Methods, Subtopic: Declining-Balance Method, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

9-82

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

*Solution 269 Declining-balance rate = (1 ÷ 5) × 2 = 40% Book Value Annual End of Year Beginning Depreciation Depreciation Accumulated Year of Year × Rate = Expense Depreciation Book Value 1 $250,000 × 40% $100,000 $ 100,000 $150,000 2 150,000 × 40% 60,000 160,000 90,000 3 90,000 × 40% 36,000 196,000 54,000 4 54,000 × 40% 21,600 217,600 32,400 5 32,400 × 40% 7,400* 225,000 25,000 (1) (cost – acc. dep.) × (1/5 × 2) *Adjusted to $7,400 because ending book value should not be less than expected salvage value. *Ex. 270 Acme Bicycle Company purchased equipment on January 1, 2025 for $90,000. It is estimated that the equipment will have a $5,000 salvage value at the end of its 5-year useful life. It is also estimated that the equipment will produce 100,000 units over its 5-year life. Instructions Answer the following independent questions. 1. Compute the amount of depreciation expense for the year ended December 31, 2025 using the straight-line method of depreciation. 2. If 16,000 units of product are produced in 2025 and 24,000 units are produced in 2026, what is the book value of the equipment at December 31, 2026? The company uses the units-ofactivity depreciation method. 3. If the company uses the double-declining-balance method of depreciation, what is the balance of the Accumulated Depreciation—Equipment account at December 31, 2027? Ans: N/A, LO: 2, 6, Topic: Other Depreciation Methods, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

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*Solution 270 1. Straight-line method:

Cost – Salvage

Years 2. Units-of-activity method:

Units = = =

Cost of asset Less: Accumulated Depreciation Book value at December 31, 2026

= $17,000 per year

Cost – Salvage

16,000 units × $.85 2025 24,000 units × $.85 2026 Accumulated Depreciation

$90,000 – $5,000

= $0.85 per unit

100,000 units $13,600 [(Cost – sal. val.) ÷ tot. units] × 2025 units 20,400 $34,000 $90,000 34,000 $56,000

3. Double-declining-balance method: Book Value Beginning  of Year 2025 $90,000 2026 54,000 2027 32,400 *(Cost – acc. dep.) × (1/5 × 2)

Declining Balance Rate 40% 40% 40%

Depreciation = Expense $36,000 21,600 12,960

Accumulated Depreciation $36,000 57,600 70,560

*Ex. 271 A plant asset acquired on October 1, 2025 at a cost of $800,000 has an estimated useful life of 10 years. The salvage value is estimated to be $50,000 at the end of the asset's useful life. Instructions Determine the depreciation expense for the first two years using the: (a) straight-line method. (b) double-declining-balance method. Ans: N/A, LO: 2, 6, Topic: Other Depreciation Methods, Subtopic: Declining-Balance Method, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

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*Solution 271 (a)

Straight-line method $800,000 – $50,000

Year 1

= $75,000 × (3 ÷ 12) = $18,750*

10 years *[(Cost – sal. val.) ÷ 10 yrs.] × 3/12 Year 2 (b)

$75,000

Double-declining-balance method Constant rate — 1 ÷ 10 = 10% × 2 = 20% Year 1

$800,000 × 20% × (3 ÷ 12) = $40,000*

*[(Cost – acc. dep.) × ((1/10) × 2)] × 3/12 Year 2

$760,000 × 20% = $152,000

*Ex. 272 Tony’s, a popular pizza hang-out, has a thriving delivery business. Tony’s has a fleet of three delivery automobiles. Tony's uses the units-of-activity method of calculating depreciation. Prior to making the entry for this year's depreciation expense, the subsidiary ledger for the fleet is as follows: Accumulated Estimated Depr.—Beg. Miles Operated Car Cost Salvage Value Life in Miles of the Year During Year 1 $35,000 $5,000 75,000 $2,100 20,000 2 25,000 4,000 60,000 1,890 22,000 3 23,500 2,500 70,000 2,000 19,000 Instructions (a) Determine the depreciation rates per mile for each car. (b) Determine the depreciation expense for each car for the current year. (c) Make one compound journal entry to record the annual depreciation expense for the fleet. Ans: N/A, LO: 2, 6, Topic: Other Depreciation Methods, Subtopic: Units-of-Activity Method, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Long-Lived Assets

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*Solution 272

(a) Car 1

$35,000 – $5,000 75,000 miles

= $0.40 per mile

Car 2

$25,000 – $4,000 60,000 miles

= $0.35 per mile

Car 3

$23,500 – $2,500 70,000 miles

= $0.30 per mile

(b)

(c)

Car 1— Car 2— Car 3—

20,000 miles × $.40 = $8,000 22,000 miles × $.35 = $7,700 19,000 miles × $.30 = $5,700

(Miles/yr. × [(Cost – sal. val.) ÷ Est. miles life])

Depreciation Expense ................................................................. Accumulated Depreciation—Car 1 ...................................... Accumulated Depreciation—Car 2 ...................................... Accumulated Depreciation—Car 3 ......................................

21,400 8,000 7,700 5,700

*Ex. 273 Acme Medical Clinic purchased a new surgical laser for $84,000. The estimated salvage value is $4,000. The laser has a useful life of five years and the clinic expects to use it for 10,000 hours. It was used 1,600 hours in year 1; 2,100 hours in year 2; 2,400 hours in year 3; 1,900 hours in year 4; 2,000 hours in year 5. Instructions (a)

Compute the annual depreciation for each of the five years under each of the following methods: (1) straight-line. (2) units-of-activity.

(b)

If you were the administrator of the clinic, which method would you deem as most appropriate? Justify your answer.

(c)

Which method would result in the lower reported income in the first year? Which method would result in the lower total reported income over the five-year period?

Ans: N/A, LO: 2,6, Topic: Other Depreciation Methods, Subtopic: Units-of-Activity Method, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

9-86

*Solution 273 (a)

(1)

$84,000 – $4,000 Straight-line method: ———————— = $16,000 per year 5 years

(2)

$84,000 – $4,000 Units-of-activity method: ———————— = $8.00/hour 10,000 hours

Year 1 2 3 4 5

Year 1 Year 2 Year 3 Year 4 Year 5 Total

1,600 2,100 2,400 1,900 2,000

× × × × ×

$8.00 8.00 8.00 8.00 8.00

Straight-line $16,000 16,000 16,000 16,000 16,000 $80,000

= $ 12,800 × [(Cost – sal. val.) ÷ tot. hrs.] × ann. hrs. = 16,800 = 19,200 = 15,200 = 16,000 Units of Activity $ 12,800 16,800 19,200 15,200 16,000 $80,000

(b)

The units-of-activity method can be justified based on the variable usage the laser will receive during its useful life.

(c)

The straight-line method provides the higher depreciation expense for the first year, and therefore the lower first year income. Over the five-year period, both methods result in the same total depreciation expense ($80,000) and, therefore, the same total income.

*Ex. 274 Acme Airlines purchased a 777 aircraft on January 1, 2026 at a cost of $40,000,000. The estimated useful life of the aircraft is 20 years, with an estimated salvage value of $6,000,000. Instructions Compute the accumulated depreciation and book value at December 31, 2028, using the straightline method and the double-declining-balance method. Ans: N/A, LO: 2,6, Topic: Other Depreciation Methods, Subtopic: Declining-Balance Method, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Long-Lived Assets

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*Solution 274

Year 2026 2027 2028

Depreciable Cost $34,000,000 34,000,000 34,000,000

Straight-line Depreciation Annual × Rate = Depreciation 5% $1,700,000 5 1,700,000 5 1,700,000

Declining-balance Book Value Depreciation Annual Year Beginning Year × Rate = Depreciation* 2026 $40,000,000 10% $4,000,000 2027 36,000,000 10 3,600,000 2028 32,400,000 10 3,240,000 *(Cost – acc. dep.) × (1/20 × 2)

Accumulated Depreciation $1,700,000 3,400,000 5,100,000

Book Value $38,300,000 36,600,000 34,900,000

Accumulated Depreciation $ 4,000,000 7,600,000 10,840,000

Book Value $36,000,000 32,400,000 29,160,000

*Ex. 275 Ace Office Supply Company purchased a machine on January 1, 2025 at a cost of $72,000. The machine is expected to have an estimated salvage value of $4,000 at the end of its 5-year life. The company capitalized the machine and depreciated it in 2025 using the double-decliningbalance method of depreciation. The company has a policy of using the straight-line method to depreciate equipment but the company accountant neglected to follow company policy when he used the double-declining-balance method. Net income for the year ended December 31, 2025 was $45,000 before taxes as the result of depreciating the machine incorrectly. Instructions Using the method of depreciation that the company normally follows, prepare the correcting entry and determine the corrected net income for 2025. Assume the books have not yet been closed for 2025. (Show computations.) Ans: N/A, LO: 2,6, Topic: Other Depreciation Methods, Subtopic: Declining-Balance Method, Bloom: AN, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

*Solution 275 Depreciation taken: ($72,000 – $0) × .40 = Correct depreciation: ($72,000 – $4,000) ÷ 5 yrs. = Overstatement of depreciation =

$28,800 *(Cost – acc. dep.) × (1/5 × 2) 13,600 $15,200

Accumulated Depreciation—Equipment ......................................... Depreciation Expense .......................................................... Correct net income: Net income as reported Add: Overstatement of depreciation expense Correct net income

$45,000 15,200 $60,200

15,200 15,200

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

9-88 *Ex. 276

Ace Computer Company sold two pieces of equipment in 2028. The following information pertains to the two pieces of equipment: Purchase Useful Salvage Depreciation Sales Machine Cost Date Life Value Method Date Sold Price #1 $86,000 7/1/24 5 yrs. $6,000 Straight-line 7/1/25 $20,000 #2 $95,000 1/1/27 5 yrs. $5,000 Double-declining12/31/25 $37,000 balance Instructions (a)

Compute the depreciation on each piece of equipment to the date of disposal.

(b)

Prepare the journal entries in 2028 to record 2028 depreciation and the sale of each piece of equipment.

Ans: N/A, LO: 2, 3, 6, Topic: Other Depreciation Methods, Subtopic: Declining-Balance Method, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

*Solution 276 (a) Machine #1 Year Depreciable Cost  2024 $80,000 2025 $80,000 2026 $80,000 2027 $80,000 2028 $80,000 *One-half a year.

Depreciation Rate = 20% 20% 20% 20% 20%

Annual Depreciation $ 8,000* 16,000 16,000 16,000 8,000*

Accumulated Depreciation $ 8,000 24,000 40,000 56,000 64,000

Machine #2 Book Value Year Beginning of Year  2027 $95,000 2028 57,000 *(Cost – acc. dep.) × (1/5 × 2)

DDB Rate 40% 40%

(b) Depreciation Expense Accumulated Depr.—Equipment Cash Loss on Disposal of Plant Assets Accumulated Depreciation—Equipment Equipment Gain on Disposal of Plant Assets

Annual Depreciation* $38,000 22,800

Accumulated Depreciation $38,000 60,800

Machine 1 8,000 8,000

Machine 2 22,800 22,800

20,000 2,000* 64,000

37,000 -060,800 86,000 -0-

95,000 2,800**

*$86,000 – $64,000 = $22,000; $22,000 – $20,000 = $2,000. *(Cost – acc. dep.) – sell. price) **$95,000 – $60,800 = $34,200; $37,000 – $34,200 = $2,800. (Sell. price – (Cost – acc. dep.)

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COMPLETION STATEMENTS 277. The price is equal to the fair market value of the asset given up or the fair value of the asset received. Ans: N/A, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Determining the Cost of Plant Assets, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

278. With the exception of land, plant assets experience a potential over their useful lives.

in service

Ans: N/A, LO: 1, Topic: Plant Asset Expenditures, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

279. When vacant land is acquired, expenditures for clearing, draining, filling, and grading should be charged to the account. Ans: N/A, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Land, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

280. The cost of demolishing an old building on land that has been acquired so that a new building can be constructed should be charged to the account. Ans: N/A, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Land, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

281.

Ordinary repairs that maintain operating efficiency and expected productive life are called .

Ans: N/A, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Expenditures During Useful Life, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

282. Additions and improvements are costs incurred to increase the operating efficiency, productive capacity, or expected useful life and are referred to as . Ans: N/A, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Expenditures During Useful Life, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

283. The cost of paving, fencing, and lighting a new company parking lot is charged to a(an) account. Ans: N/A, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Land Improvements, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

284. Equipment with an invoice price of $20,000 was purchased and freight costs were $900. The cost of the equipment would be $ . Ans: N/A, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Equipment, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

285.

is the process of allocating the cost of a plant asset to expense over its service life in a rational and systematic manner.

Ans: N/A, LO: 2, Topic: Depreciation Methods, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

286. The book value of a plant asset is obtained by subtracting of the plant asset.

from the

Ans: N/A, LO: 2, Topic: Depreciation Methods, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

9-90 287.

Three factors that affect the computation of periodic depreciation expense under the straight-line method are (1) , (2) , and (3) .

Ans: N/A, LO: 2, Topic: Depreciation Methods, Subtopic: Factors in Computing Depreciation, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

288. The method of computing depreciation expense results in an equal amount of periodic depreciation throughout the useful life of the plant asset. Ans: N/A, LO: 2, Topic: Depreciation Methods, Subtopic: Straight-Line Method, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

289. The declining-balance method of computing depreciation is known as an depreciation method. Ans: N/A, LO: 2, Topic: Depreciation Methods, Subtopic: Declining-Balance Method, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

290. A

decline in the market value of an asset is referred to as an impairment.

Ans: N/A, LO: 2, Topic: Depreciation Methods, Subtopic: Impairments, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

291. If disposal of a plant asset occurs at any time during the year, the fraction of the year to the date of disposal must be recorded.

for

Ans: N/A, LO: 3, Topic: Plant Asset Disposals, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

292. If the proceeds from the sale of a plant asset exceed its disposal will occur.

, a gain on

Ans: N/A, LO: 3, Topic: Plant Asset Disposals, Subtopic: Gain on Sale, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

293. A plant asset originally cost $64,000 and was estimated to have a $4,000 salvage value at the end of its 5-year useful life. If at the end of three years, the asset was sold for $12,000, and had accumulated depreciation recorded of $36,000, the company should recognize a on disposal in the amount of $ . Ans: N/A, LO: 3, Topic: Plant Asset Disposals, Subtopic: Sale of Plant Assets, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

294. The cost of a patent should be amortized over its life, whichever is shorter.

life or its

Ans: N/A, LO: 4, Topic: Intangible Assets, Subtopic: Patents, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

295. In recording the purchase of a business, goodwill should be recorded for the excess of over the of the net assets acquired. Ans: N/A, LO: 4, Topic: Intangible Assets, Subtopic: Goodwill, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

296. The process of allocating to expense the cost of an asset over its useful life is called for tangible plant assets and for intangible assets. Ans: N/A, LO: 4, Topic: Intangible Assets, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

297. An overall measure of profitability is the

ratio.

Ans: N/A, LO: 5, Topic: Statement Presentation and Analysis, Subtopic: Return on Assets, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Long-Lived Assets

298. The

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ratio is calculated by dividing net sales by average total assets.

Ans: N/A, LO: 5, Topic: Statement Presentation and Analysis, Subtopic: Asset Turnover, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

*299. The declining-balance method of computing depreciation expense involves multiplying a book value by a percentage. Ans: N/A, LO: 6, Topic: Other Depreciation Methods, Subtopic: Declining-Balance Method, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Answers to Completion Statements 277. 278. 279. 280. 281. 282. 283. 284. 285. 286. 287. 288.

cash equivalent decline Land Land revenue expenditures capital expenditures land improvements $20,900 Depreciation accumulated depreciation, cost cost, salvage value, useful life straight-line

289. 290. 291. 292. 293. 294. 295. 296. 297. 298. *299.

accelerated permanent depreciation expense book value loss, 16,000 legal, useful (or useful, legal) cost, fair value depreciation, amortization return on assets asset turnover declining, constant

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

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MATCHING Set 1 300. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.

Plant assets Depreciation Book value Salvage value Straight-line method

F. G. H. I. J.

Units-of-activity method Double-declining-balance method MACRS Revenue expenditures Capital expenditures

1. Small expenditures which primarily benefit the current period. 2. Cost less accumulated depreciation. 3. An accelerated depreciation method used for financial statement purposes. 4. Tangible resources that are used in operations and are not intended for resale. 5. Equal amount of depreciation each period. 6. Expected cash value of the asset at the end of its useful life. 7. Process of allocating the cost of equipment over its service life. 8. Material expenditures that increase an asset's operating efficiency, productive capacity, or useful life. 9. An accelerated depreciation method used for tax purposes. 10. Useful life is expressed in terms of units of production or expected use. Ans: N/A, LO: 1, 2, Topic: Depreciation Methods, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Answers to Matching Set 1 1. 2. 3. 4. 5.

I C G A E

6. 7. 8. 9. 10.

D B J H F

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Set 2 301. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.

Gain on disposal Loss on disposal Trademark Lease Asset turnover

F. G. H. I. J.

Return on assets Goodwill Amortization Intangible asset Research and development costs

1. Process of allocating the cost of an intangible asset to expense over its useful life. 2. Is recorded if the proceeds from the sale exceed the book value of the plant asset. 3. Examples are franchises and licenses. 4. An agreement allowing the lessee to use the lessor’s asset for a period of time. 5. Can be identified only with a business as a whole. 6. A symbol that identifies a particular enterprise or product. 7. When book value of the asset is greater than the proceeds received from its sale. 8. Must be expensed when incurred. 9. Computed by dividing net income by average assets. 10. Indicates how efficiently a company is able to generate sales with a given amount of assets. Ans: N/A, LO: 3, 4, Topic: Intangibles, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Answers to Matching Set 2 1. 2. 3. 4. 5.

H A I D G

6. 7. 8. 9. 10.

C B J F E

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

SHORT-ANSWER ESSAY QUESTIONS S-A E 302 In general, how does one determine whether an expenditure should be included in the acquisition cost of property, plant, and equipment? Ans: N/A, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Determining the Cost of Plant Assets, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 302 The acquisition cost of property, plant, and equipment would include all expenditures deemed reasonable and necessary to prepare the asset for its intended purpose (use) and place. This includes getting an asset to its proper place, acquiring legal title, and getting the asset ready for its intended use. S-A E 303 How is the cost for a plant asset measured in a cash transaction? In a noncash transaction? Ans: N/A, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Determining the Cost of Plant Assets, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Communication, IMA: Reporting

Solution 303 In a cash transaction, the cost is equal to the cash paid. In a noncash transaction, the cost is equal to the cash equivalent price paid, which is the fair value of the asset given up or the fair value of the asset received, whichever is more clearly determinable. S-A E 304 Comment on the validity of the following statements: “As an asset loses its ability to provide services, cash needs to be set aside to replace it. Depreciation accomplishes this goal.” Ans: N/A, LO: 2, Topic: Depreciation Methods, Subtopic: NA, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Communication, IMA: Reporting

Solution 304 Depreciation is the process of allocating to expense the cost of a plant asset over its useful (service) life in a rational and systematic manner. Recognizing depreciation for an asset does not result in the accumulation of cash for replacement of the asset. The balance in Accumulated Depreciation represents the total amount of the asset’s cost that has been charged to expense to date; it is not a cash fund. S-A E 305 The declining-balance method is an accelerated method of depreciation. Briefly explain what is meant by an accelerated method of depreciation and justify the choice of an accelerated method. Ans: N/A, LO: 2, Topic: Depreciation Methods, Subtopic: Declining-Balance Method, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Communication, IMA: Reporting

Reporting and Analyzing Long-Lived Assets

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Solution 305 An accelerated depreciation method is a method that produces higher depreciation expense in the early years than in the later years. The choice of an accelerated method can be justified if the asset being depreciated contributes more to the revenue-earning process in the earlier years and less in the later years. An accelerated method can also be justified if the asset’s value is expected to decline very quickly. In such situations, an accelerated method would properly match expense to revenue. S-A E 306 Identify the factors that are considered in classifying an expenditure as a capital or a revenue expenditure. Are there instances where it may be difficult to classify an expenditure as one or the other (e.g., the purchase of a wastebasket that has a useful life of 5 years and cost $10)? What basis would be used in a decision? Ans: N/A, LO: 1, Topic: Plant Asset Expenditures, Subtopic: Expenditures During Useful Life, Bloom: K, Difficulty: Easy, Min: 8, AACSB: Communication, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Communication, IMA: Reporting

Solution 306 An expenditure is classified as a revenue expenditure if it maintains the operating efficiency and expected productive life of the asset and primarily benefits the current accounting period. Revenue expenditures are usually small amounts that occur frequently throughout the life of the asset and are often called ordinary repairs. An expenditure is classified as a capital expenditure if it increases (rather than maintains) operating efficiency, productive capacity, or expected useful life, and therefore benefits more than one accounting period. Capital expenditures are usually large amounts that occur infrequently during the life of the asset. Capital expenditures can be further classified as either additions or improvements. The distinction between a capital expenditure and a revenue expenditure is not always clear-cut. The purchase of an asset with a relatively insignificant cost (for example, the purchase of a $10 wastebasket with a 5-year useful life) may meet the criteria for classification as a capital expenditure, even though it is similar in many ways to a revenue expenditure (small amount, more frequent occurrence). The accounting concept of materiality would indicate that this item could be recorded as an expense (more expedient) since it is not material enough to influence the decision of a reasonably prudent creditor or investor. S-A E 307 How is a gain or a loss on the sale of a plant asset computed? Ans: N/A, LO: 3, Topic: Plant Asset Disposals, Subtopic: Sale of Plant Assets, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Communication, IMA: Reporting

Solution 307 In a sale of plant assets, the book value of the asset is compared to the proceeds received from the sale. If the proceeds of the sale exceed the book value of the plant asset, a gain on disposal occurs. If the proceeds of the sale are less than the book value of the plant asset sold, a loss on disposal occurs.

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

S-A E 308 You are comparing two companies in the same industry. You have determined that Company A depreciates its plant assets over a 40-year life while Company B depreciates its plant assets over a 20-year life. Discuss the implications this has for comparing the results of the two companies. Ans: N/A, LO: 2, Topic: Depreciation Methods, Subtopic: Factors in Computing Depreciation, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: None, AICPA AC: Reporting, AICPA PC: Communication, IMA: Reporting

Solution 308 By selecting a higher estimated useful life, Company A. is spreading the plant asset's cost over a longer period of time. The depreciation expense reported in each period is lower and net income is higher. Company B's choice of a shorter estimated useful life will result in higher depreciation expense reported in each period and lower net income. S-A E 309 Goodwill is an unusual asset in that it cannot be sold individually apart from a business as a whole. If goodwill is an intangible asset, why can't it be sold like other intangible assets such as copyrights and patents? Briefly explain what makes goodwill different. Ans: N/A, LO: 4, Topic: Intangible Assets, Subtopic: Goodwill, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: None, AICPA AC: None, AICPA PC: Communication, IMA: Reporting

Solution 309 Goodwill is the value of all favorable attributes that relate to a business enterprise. As goodwill is the product of these attributes, and would not exist apart from them, goodwill cannot be separated from the company and then sold. This is different from a copyright or patent that can exist independent of a company and can be sold apart from any other assets. S-A E 310

(Ethics)

Physician Reference Service (PRS) provides services to physicians including research assistance, diagnosis coding, and medical practice software including an advanced medical record cross-referencing system. PRS is aggressive in monitoring other firms' offerings and ensuring that its services are comparable to all others. Because of its need to stay abreast of new product offerings, PRS spends a lot of money sending professionals to trade shows. In addition, PRS has agreements with several clients whereby the client requests a presentation of a competitor's services. A PRS employee poses as an employee of the client's office and attends the presentation, obtaining as much data and sample information as possible. The cost of the travel and attending presentations is charged to Product Development and expensed during the current year. In April of this year, PRS began selling a software product substitute before the competitor's software was released. The competitor, Compu-Med, sued for copyright infringement and won. PRS had to withdraw its product from the market and pay $1.5 million in damages. PRS immediately negotiated an agreement with Compu-Med to sell Compu-Med's product (since it was prohibited from offering its own version for five years). This agreement cost an additional $1.3 million, but it allowed PRS to continue to offer a full line of services.

Reporting and Analyzing Long-Lived Assets

S-A E 310

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(Cont.)

PRS' accountant, Kelly Hall, initially recorded the cash payments as "Loss from Lawsuit" and "Product Development," respectively. However, Gilbert Brown, the controller, instructed Kelly to create an intangible asset, named "Goodwill," and charge both costs to this account. "We're protected from another lawsuit as long as this agreement is in effect," he says. "It's about as close to goodwill as we'll ever get from our competitors. We might as well amortize the cost rather than take the full hit to income, anyway." Required: 1. What are the ethical issues? 2. What should Kelly do? Ans: N/A, LO: 4, Topic: Intangible Assets, Subtopic: Goodwill, Bloom: E, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Ethical Conduct, IMA: Reporting

Solution 310 1. The following are some of the ethical issues: a. Whether PRS should continue to obtain its information by deception b. Whether PRS makes a practice of pirating software c. Whether the attempt to hide the losses from the lawsuit and software agreement is indicative of the state of the accounting system at PRS. 2. Kelly should explain to her boss that goodwill arises only when a business is purchased. It is not allowed to write off lawsuit losses or product development costs (which these clearly are) over more than one year. She cannot allow her integrity to be compromised by misrecording these economic events. She could also point out that Mr. Brown's attempt to delay recognition of the losses will undoubtedly be discovered by the auditors. All the records will then likely be subjected to much more scrutiny than would otherwise be the case. S-A E 311

(Communication)

The Old Fix-It is a company specializing in the restoration of old homes. To showcase its work, the company purchased an old Victorian home in downtown Pittsburg, Kansas on January 2, 2024. The original home was purchased for $125,000. A new heating and air-conditioning system was added for $30,000. The house was completely rewired and re-plumbed at a cost of $50,000. Custom cabinets were added, and the floors and trim were refurbished to their original condition, at a cost of $75,000. The project was such a success, that Old Fix-It decided on January 2, 2028 to purchase another very large home, this time in nearby Joplin, Missouri. On January 3, 2028, a realtor offered to purchase the home in Pittsburg for $175,000. He plans to lease it as luxury short-term apartments for visiting dignitaries. Mark Gibson, the president of Old Fix-It, decided that the $50,000 gain over purchase price was appropriate, and so he agreed to sell the showcase house. Only afterward did he learn that Old Fix-It had a loss of slightly over $30,000 on the sale. Mark does not believe that a loss is possible. "We sold that house for more than we paid for it," he said. "I know we put some money in it, but we had depreciated it for four years. How in the world can we have a loss?" Due to the commercial aspects of the property and its expected traffic flow, the life of the showcase house was established as 15 years. Old Fix-It utilized straight-line depreciation with no salvage or residual value. Old Fix-It took full years’ of depreciation in 2024 through 2027 and none in 2028 due to the sale date of January 3, 2028. .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

S-A E 311

(Cont.)

Required: Write a short memo to Mr. Gibson explaining how it would be possible to have a loss. Address cost and depreciation as general numbers rather than specific values. Ans: N/A, LO: 1, 2, 3, Topic: Plant Asset Disposals, Subtopic: Loss on Sale, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Communication, IMA: Reporting

Solution 311

MEMO TO:

Mark Gibson, President

FROM:

Martha King, Accountant

RE:

Loss on Pittsburg showcase

I understand that you are concerned about the loss on the Pittsburg showcase house. You have said that a loss is not possible since we sold the house for more than we paid for it. Ordinarily, it would not be possible for any fixed asset to generate a loss if sold for more than the original purchase price. However, the cost basis of the showcase house was acquisition cost plus the many improvements resulting in a total cost greater than the original purchase price. The total cost of the showcase house after improvements were depreciated over the four years of operations. This resulted in a book value less than cost of the house. The publicity and lessons learned were substantial and very beneficial to Old Fix-It. When the possibility of a second, better, showcase house in Joplin, MO., arose, cash flow and funding were issues. The sale of the Pittsburg showcase house allowed us to “capitalize” on our lessons learned, withdraw a large portion of our cash, attain additional exposure to our product in Pittsburg as a commercial venture as luxury apartments, and open a second, better, showcase house in Joplin. All in all, I think that the Pittsburg house was still an excellent investment—we got far more benefit from the "loss" than we would had if we spent ten times that much in advertising. To prevent this situation in the future, however, you could have the Accounting Department calculate the book value before you negotiate a sales contract. That way, you'll know the effect of the transaction on our income. Remember that accounting’s book value may not represent market value; we'll still have to rely on real estate agents for that. Let me know if you have further questions.

(signature)

Reporting and Analyzing Long-Lived Assets

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IFRS QUESTIONS 1.

As a recent graduate of State University, you are aware that IFRS requires component depreciation for plant assets. A friend has asked you to succinctly explain what component depreciation means. Which of the following correctly describes component depreciation? a. The method used to ensure that the depreciation rate remains constant from year to year. b. The method that requires that significant parts of a plant asset with different useful lives be depreciated separately. c. The method used to prorate annual depreciation on a time basis. d. The method of depreciation recommended for an asset that is expected to be significantly more productive in the first half of its useful life.

Ans: B, LO: 7, Bloom: K, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BB: Global and Industry Perspectives, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Salem Company hired Kirk Construction to construct an office building for ₤8,000,000 on land costing ₤2,000,000, which Salem Company owned. The building was complete and ready to be used on January 1, 2022 and it has a useful life of 40 years. The price of the building included land improvements costing ₤600,000 and equipment costing ₤750,000. The useful lives of the land improvements and the equipment are 10 years and 5 years, respectively. Salem Company uses component depreciation, and the company uses straight-line depreciation for other similar assets. What total amount of depreciation expense would Salem Company report on its income statement for the year ended December 31, 2022? a. ₤335,000 b. ₤200,000 c. ₤426,250 d. ₤376,250

Ans: D, LO: 7, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Global and Industry Perspectives, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Solution: (₤8,000,000  ₤600,000  ₤750,000)  40  ₤166,250; (₤600,000  10) + (₤750,000  5)  ₤166,250  ₤376,250

Salem Company hired Kirk Construction to construct an office building for ₤8,000,000 on land costing ₤2,000,000, which Salem Company owned. The building was complete and ready to be used on January 1, 2022 and it has a useful life of 40 years. The price of the building included land improvements costing ₤600,000 and equipment costing ₤750,000. The useful lives of the land improvements and the equipment are 10 years and 5 years, respectively. Salem Company uses component depreciation, and the company uses straight-line depreciation for other similar assets. What is the net amount reported for the building on Salem Company's December 31, 2022 statement of financial position? a. ₤7,665,000 b. ₤7,573,750 c. ₤6,483,750 d. ₤7,800,000

Ans: C, LO: 7, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Global and Industry Perspectives, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Solution: (₤8,000,000  ₤600,000  ₤750,000)  40  ₤166,250; ₤6,650,000  ₤166,250  ₤6,483,750

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Nicholson Company purchased equipment on January 1, 2020 for €28,000 with an estimated residual value of €7,000 and estimated useful life of 8 years. On January 1, 2022, Nicholson decided the equipment will last 12 years from the date of purchase. The residual value is still estimated at €7,000. Using the straight-line method the new annual depreciation will be: a. €1,575. b. €1,750. c. €2,100. d. €2,333.

Ans: A, LO: 7, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Global and Industry Perspectives, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Solution: (€28,000  €7,000)  28  €5,250; (€28,000  €5,250  €7,000)  10  €1,575

An asset was purchased for ¥200,000. It had an estimated residual value of ¥40,000 and an estimated useful life of 10 years. After 5 years of use, the estimated residual value is revised to ¥32,000 but the estimated useful life is unchanged. Assuming straight-line depreciation, depreciation expense in year 6 would be a. ¥24,000. b. ¥17,600. c. ¥12,000. d. ¥16,800.

Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Global and Industry Perspectives, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Solution: (¥200,000  ¥40,000) × 5/10  ¥80,000; (¥200,000  ¥80,000  ¥32,000) ÷ 5 = ¥17,600

Under U.S. GAAP, a. property, plant, and equipment may not be revalued. b. component depreciation is not required. c. research and development costs are expensed as incurred. d. All of these answer choices are correct.

Ans: D, LO: 7, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Global and Industry Perspectives, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Feedback: U.S. GAAP does not permit asset revaluation, component depreciation is not required, and research and development costs are expensed as incurred.

Which of the following statements concerning IFRS and U.S. GAAP is correct? a. IFRS permits revaluation of all intangible assets, whereas U.S. GAAP prohibits revaluation of intangible assets. b. Gains on the exchange of assets when the exchange has commercial substance are recognized under both IFRS and U.S. GAAP. c. Changes in depreciation method under IFRS are reported in current and future periods, under U.S. GAAP such changes are treated as prior period adjustments. d. All of these answer choices are correct.

Ans: B, LO: 7, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Global and Industry Perspectives, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

CHAPTER 10 REPORTING AND ANALYZING LIABILITIES CHAPTER LEARNING OBJECTIVES 1. Explain how to account for current liabilities. A current liability is a debt that a company can reasonably expect to pay (a) from existing current assets or through the creation of other current liabilities, and (b) within one year or the operating cycle, whichever is longer. The major types of current liabilities are notes payable, accounts payable, sales taxes payable, unearned revenues, and accrued liabilities such as taxes, salaries and wages, and interest payable. When a promissory note is interest-bearing, the amount of assets received upon the issuance of the note is generally equal to the face value of the note, and interest expense is accrued over the life of the note. At maturity, the amount paid is equal to the face value of the note plus accrued interest. Companies record sales taxes payable at the time the related sales occur. The company serves as a collection agent for the taxing authority. Sales taxes are not an expense to the company. Companies hold employee withholding taxes and credit them to appropriate liability accounts until they remit these taxes to the governmental taxing authorities. Unearned revenues are initially recorded in an unearned revenue account. As the company recognizes revenue, a transfer from unearned revenue to revenue occurs. Companies report the current maturities of long-term debt as a current liability in the balance sheet. 2. Describe the major characteristics of bonds. The following different types of bonds may be issued: secured and unsecured bonds, and convertible and callable bonds. 3. Explain how to account for bond transactions. When companies issue bonds, they debit Cash for the cash proceeds and credit Bonds Payable for the face value of the bonds. In addition, they use the accounts Premium on Bonds Payable and Discount on Bonds Payable to show the bond premium and bond discount, respectively. Bond discount and bond premium are amortized over the life of the bond, which increases or decreases interest expense, respectively. When companies redeem bonds at maturity, they credit Cash and debit Bonds Payable for the face value of the bonds. When companies redeem bonds before maturity, they (a) eliminate the carrying value of the bonds at the redemption date, (b) record the cash paid, and (c) recognize the gain or loss on redemption.

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

4. Discuss how liabilities are reported and analyzed. Current liabilities appear first on the balance sheet, followed by long-term liabilities. Companies should report the nature and amount of each liability in the balance sheet or in schedules in the notes accompanying the statements. They report inflows and outflows of cash related to the principal portion of longterm debt in the financing section of the statement of cash flows. The liquidity of a company may be analyzed by computing the current ratio. The long-run solvency of a company may be analyzed by computing the debt to assets ratio and the times interest earned ratio. Other factors to consider are contingent liabilities and lease obligations. *5. Apply the straight-line method of amortizing bond discount and bond premium. The straight-line method of amortization results in a constant amount of amortization and interest expense per period. *6. Apply the effective-interest method of amortizing bond discount and bond premium. The effective-interest method results in varying amounts of amortization and interest expense per period but a constant percentage rate of interest. When the difference between the straight-line and effective-interest method is material, GAAP requires the use of the effective-interest method. *7. Explain how to account for long-term notes payable. Each payment consists of (1) interest on the unpaid balance of the loan, and (2) a reduction of loan principal. The interest decreases each period, while the portion applied to the loan principal increases each period.

Reporting and Analyzing Liabilities

10-3

Difficulties: Easy: 144 Medium: 146 Hard: 29

QUESTIONS BY SECTION Accounting for Current Liabilities: 129, 264 What is a Current Liability?: 1, 3, 4, 67, 68, 69, 70, 71, 72, 73, 74, 75, 276, 294, 295 Notes Payable: 5, 6, 7, 8, 9, 10, 11, 12, 76, 77, 78, 79, 80, 81, 82, 83, 84, 85, 86, 87, 88, 89, 90, 91, 130, 265, 277, 278, 279, 296, 297 Sales Taxes Payable: 15, 16, 17, 18, 92, 94, 95, 96, 97, 98, 102, 103, 104, 105, 106, 107, 108, 109, 110, 111, 112, 126, 128, 266, 267, 280, 298 Unearned Revenues: 14, 20, 21, 93, 122, 123, 124, 125, 268 Current Maturities of Long-term Debt: 2, 13, 99, 100, 101, 117 Payroll and Payroll Taxes Payable: 19, 113, 114, 115, 116, 118, 119, 120, 121, 127, 281, 299, 311 Characteristics of Bonds: 23, 24, 28, 132 Types of Bonds: 27 Secured and Unsecured Bonds: 26, 134, 138, 141, 300, 302 Convertible and Callable Bonds: 25, 30, 139, 140, 143, 152, 154, 312 Issuing Procedure: 34, 144, 145, 146, 153, 301 Bond Trading: 133, 135, 136, 137, 142, 269 Determining the Market Price of a Bond: 22, 29, 31, 32, 33, 131, 147, 148, 149, 150, 151, 155, 156, 157, 303, 313, 315 Accounting for Bond Transactions: 270 Issuing Bonds at Face Value: 48, 166, 170, 174, 175, 271, 304 Discount or Premium on Bonds: 36, 39, 319 Issuing Bonds at a Discount: 35, 42, 43, 44, 45, 47, 158, 159, 160, 161, 165, 167, 168, 176, 179, 180, 182, 183, 184, 195, 305, 314 Issuing Bonds at a Premium: 37, 38, 40, 41, 46, 162, 163, 164, 169, 171, 172, 173, 177, 178, 181, 306 Redeeming Bonds at Maturity: 191, 196, 197, 290 Redeeming Bonds before Maturity: 49, 50, 185, 186, 187, 188, 189, 190, 192, 193, 194, 282, 316 Presentation and Analysis): 317 Presentation: 51, 209, 210, 283, 284, 307 Analysis: 198, 285 Liquidity: 204, 205, 276 Solvency: 52, 53, 200, 201, 202, 206, 207, 208, 211, 308 Contingencies: Off-Balance-Sheet Financing: 199, 203 Straight-Line Amortization: 58, 309 Amortizing Bond Discount: 55, 212, 213, 214, 221, 222, 224, 231, 232, 233, 234, 240, 241, 273, 290 Amortizing Bond Premium: 54, 56, 57, 215, 216, 217, 218, 219, 220, 223, 225, 226, 227, 228, 229, 230, 235, 236, 237, 238, 239, 272, 286, 287, 288, 289 Effective-Interest Amortization: 59, 61, 62, 242, 251, 318 Amortizing Bond Discount: 60, 243, 245, 246, 247, 248, 275 Amortizing Bond Premium: 244, 249, 250, 274, 291, 292 .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Accounting for Long-term Notes Payable:63, 64, 65, 66, 252, 253, 254, 255, 256, 257, 258, 259, 260, 261, 262, 263, 293

TRUE-FALSE STATEMENTS 1. A current liability must be paid out of current earnings. Ans: F, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: What is a Current Liability?, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

2. If any portion of a long-term debt is to be paid in the next year, the entire debt should be classified as a current liability. Ans: F, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Current Maturities of Long-term Debt, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

3. Current liabilities are expected to be paid within one year or the operating cycle, whichever is longer. Ans: T, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: What is a Current Liability?, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

4. A company whose current liabilities exceed its current assets may have a liquidity problem. Ans: T, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: What is a Current Liability?, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

5. Interest expense is reported under Other Expenses and Losses in the income statement. Ans: T, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Notes Payable, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

6. Notes payable usually require the borrower to pay interest. Ans: T, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Notes Payable, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

7. Notes payable are often used instead of accounts payable. Ans: T, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Notes Payable, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

8. A note payable must always be paid before an account payable. Ans: F, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Notes Payable, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

9. A $20,000, 8%, 9-month note payable requires an interest payment of $1,200 at maturity. Ans: T, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Notes Payable, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control Solution: $20,000 x .08 x 9/12 = $1,200 (Prin. x Int. rate x months/12)

10. Most notes are not interest-bearing. Ans: F, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Notes Payable, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

11. With an interest-bearing note, the amount of cash received upon issuance of the note generally exceeds the note's face value. Ans: F, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Notes Payable, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Liabilities

10-5

12. Interest expense on a note payable is only recorded at maturity. Ans: F, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Notes Payable, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

13. Current maturities of long-term debt refer to the amount of interest on a note payable that must be paid in the current year. Ans: F, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Current Maturities of Long-term Debt, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

14. Unearned revenues should be classified as Other Revenues and Gains on the income statement. Ans: F, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Unearned Revenues, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

15. The higher the sales tax rate, the more profit a retailer can earn. Ans: F, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Sales Taxes Payable, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

16. When a business sells an item and collects a state sales tax on it, a current liability arises. Ans: T, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Sales Taxes Payable, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

17. If a retailer sells goods for a total price of $200, which includes a 5% sales tax, the sales tax amount is $9.52. Ans: T, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Sales Taxes Payable, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $200/1.05 = $190.48; $200 - $190.48= $9.52 (Gross rec./ (1 + tax rate) – Sales rev.; Gross rec. - Sales rev.)

18. During the month, a company sells goods for a total of $106,000 which includes sales taxes of $6,000; therefore, the company should recognize $100,000 in Sales Revenue and $6,000 in Sales Tax Expense. Ans: F, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Sales Taxes Payable, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

19. Payroll taxes include the employer’s share of Social Security taxes as well as state and federal unemployment taxes. Ans: T, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Payroll and Payroll Taxes Payable, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

20. Cash is received and unearned revenues are recognized before goods are delivered or services are rendered. Ans: T, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Unearned Revenues, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

21. Metropolitan Symphony sells 200 season tickets for $40,000 that includes a five-concert season. The amount of Unearned Ticket Revenue after the third concert is $24,000. Ans: F, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Unearned Revenues, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($40,000/5 = $8,000); $8,000 x 3 = $24,000; $40,000 - $24,000 = $16,000 (Tot. unearn rev./ concerts= rev. per conc., rev. per conc. X conc. perf., Tot. unearn. rev – Earned rev.)

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

22. The contractual interest rate is always equal to the market rate of interest on the date that bonds are issued. Ans: F, LO: 2, Topic: Characteristics of Bonds, Subtopic: Determining the Market Price of a Bond, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

23. Each bondholder may vote for the board of directors in proportion to the number of bonds held. Ans: F, LO: 2, Topic: Characteristics of Bonds, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: None, AICPA PC: None, IMA: Reporting

24. Bond interest paid by a corporation is an expense while dividends paid are not an expense of the corporation. Ans: T, LO: 2, Topic: Characteristics of Bonds, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

25. Generally, convertible bonds do not pay interest. Ans: F, LO: 2, Topic: Characteristics of Bonds, Subtopic: Convertible and Callable Bonds, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

26. An unsecured bond is one that is issued against the general credit of the borrower. Ans: T, LO: 2, Topic: Characteristics of Bonds, Subtopic: Secured and Unsecured Bonds, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

27. Bonds are a form of interest-bearing notes payable. Ans: T, LO: 2, Topic: Characteristics of Bonds, Subtopic: Types of Bonds, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

28. Neither corporate bond interest nor dividends are deductible for tax purposes. Ans: F, LO: 2, Topic: Characteristics of Bonds, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

29. The face value is the amount of principal and interest due at the maturity date. Ans: F, LO: 2, Topic: Characteristics of Bonds, Subtopic: Determining the Market Price of a Bond, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

30. Convertible bonds are often called callable bonds. Ans: F, LO: 2, Topic: Characteristics of Bonds, Subtopic: Convertible and Callable Bonds, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

31. A $150,000 bond with a quoted priced of 102 ¼ is sold for $153,375. Ans: T, LO: 2, Topic: Characteristics of Bonds, Subtopic: Determining the Market Price of a Bond, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $150,000 x 1.0225 = $153,375 (Face amt. x price)

32. If a bond has a face amount of $1,000 and a contractual interest rate of 6 percent, then the interest paid annually will be $60. Ans: T, LO: 2, Topic: Characteristics of Bonds, Subtopic: Determining the Market Price of a Bond, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $1,000 x .06 = $60 (Face amt. x Int. rate)

33.

A bond's current market value is equal to the present value of all future cash payments .

Reporting and Analyzing Liabilities

10-7

promised by the bond. Ans: T, LO: 2, Topic: Characteristics of Bonds, Subtopic: Determining the Market Price of a Bond, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

34. The board of directors may authorize more bonds than are actually issued. Ans: T, LO: 2, Topic: Characteristics of Bonds, Subtopic: Issuing Procedures, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

35. The carrying value of bonds is calculated by adding the balance of the Discount on Bonds Payable account to the balance in the Bonds Payable account. Ans: F, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at a Discount, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

36. The carrying value of a bond is equal to the market price on the date of sale. Ans: T, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Discount on Premium on Bonds, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

37. Total interest cost for a bond issued at a premium equals the total of the periodic interest payments added to the premium. Ans: F, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at a Premium, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

38. Total interest cost for a bond issued at a premium equals the total of the periodic interest payments minus the premium. Ans: T, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at a Premium, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

39. The calculation of interest to be paid each interest period in connection with a bond payable is not influenced by any premium or discount upon issuance. Ans: T, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Discount on Premium on Bonds, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

40. If $150,000 face value bonds are issued at 102, the proceeds received will be $102,000. Ans: F, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at a Premium, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $150,000 x 1.02 = $153,0000 (Face x price)

41. If bonds sell at a premium, the interest expense recognized each year will be greater than the bond interest paid. Ans: F, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at a Premium, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

42. If the market rate of interest at the date of issuance of a bond is greater than the stated interest rate, the bond will be issued at a premium. Ans: F, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at a Discount, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

43. If a corporation issued bonds at an amount less than face value, it indicates that the corporation has a weak credit rating. Ans: F, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at a Discount, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

44. A corporation that issues bonds at a discount will recognize interest expense at a rate that is greater than the market rate of interest. Ans: F, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at a Discount, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

45. If bonds are issued at a discount, the issuing corporation will pay a principal amount less than the face amount of the bonds on the maturity date. Ans: F, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at a Discount, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

46. If bonds are issued at a premium, the carrying value of the bonds will be greater than the face value of the bonds for all periods prior to the bond maturity date. Ans: T, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at a Premium, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

47. If the market rate of interest is greater than the contractual rate of interest, bonds will sell at a discount. Ans: T, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at a Discount, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

48. If $180,000, 6%, bonds are issued on January 1 and pay interest annually, the amount of interest paid will be $10,800. Ans: T, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at Face Value, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $180,000 x .06 = $10,800 (Face x int. rate)

49. Material losses on bond redemption are reported as operating expenses on the income statement. Ans: F, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Redeeming Bonds before Maturity, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

50. If $500,000 par value bonds with a carrying value of $476,000 are redeemed at 97, a loss on redemption will be recorded. Ans: T, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Redeeming Bonds before Maturity, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($500,000 x .97) - $476,000 = $9,000 loss ((Face x price) – Car. Val.)

51. The classification of a liability as current or noncurrent is important because it may affect the evaluation of a company’s liquidity. Ans: T, LO: 4, Topic: Presentation and Analysis, Subtopic: Presentation, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

52. The debt to assets ratio measures the percentage of the total assets provided by creditors. Ans: T, LO: 4, Topic: Presentation and Analysis, Subtopic: Solvency, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

53. The times interest earned is computed by dividing net income by interest expense. Ans: F, LO: 4, Topic: Presentation and Analysis, Subtopic: Solvency, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

*54.

The premium on bonds payable may be amortized by the straight-line method if the results obtained by its use do not materially differ from the results obtained by use of the effective-interest method. .

Reporting and Analyzing Liabilities

10-9

Ans: T, LO: 5, Topic: Straight-line Amortization, Subtopic: Amortizing Bond Premium, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

*55. Discount on bonds payable may be amortized by the straight-line method if the results obtained by its use do not materially differ from the results obtained by use of the effective-interest method. Ans: T, LO: 5, Topic: Straight-line Amortization, Subtopic: Amortizing Bond Discount, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

*56. If the straight-line method of amortization is used, the amount of unamortized premium on bonds payable will increase as the bonds approach maturity. Ans: F, LO: 5, Topic: Straight-line Amortization, Subtopic: Amortizing Bond Premium, Bloom: C, Difficulty: Hard, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

*57. If the straight-line method of amortization is used, the amount of unamortized premium on bonds payable will decrease as the bonds approach maturity. Ans: T, LO: 5, Topic: Straight-line Amortization, Subtopic: Amortizing Bond Premium, Bloom: C, Difficulty: Hard, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

*58. If the straight-line method of amortization is used, the amount of yearly interest expense will increase as the bonds approach maturity. Ans: F, LO: 5, Topic: Straight-line Amortization, Subtopic: NA, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

*59. When the effective-interest method of amortization is used, the amount of interest expense for a given period is calculated by multiplying the stated rate of interest by the bond’s carrying value at the beginning of the given period. Ans: F, LO: 6, Topic: Effective-Interest Amortization, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

*60. Regardless of whether the straight-line method or the effective-interest method is used, the carrying value of a bond issued at a discount will decrease continually over the bond’s life. Ans: F, LO: 6, Topic: Effective-Interest Amortization, Subtopic: Amortizing Bond Discount, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

*61. The effective-interest method produces a constant dollar amount of interest expense to be reported for each interest period. Ans: F, LO: 6, Topic: Effective-Interest Amortization, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

*62. When there are material differences between the results of using the straight-line method and using the effective-interest method of amortization, the effective-interest method should be used. Ans: T, LO: 6, Topic: Effective-Interest Amortization, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

*63. In a monthly mortgage payment, the same amount of interest expense is recognized each month. Ans: F, LO: 7, Topic: Accounting for Long-term Notes Payable, Subtopic: NA, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

*64.

When a monthly mortgage payment is made and recorded, the debit to Mortgage Payable .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

represents the reduction in the principal balance. Ans: T, LO: 7, Topic: Accounting for Long-term Notes Payable, Subtopic: NA, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

*65.

An installment note calling for equal total payments each period will result in an interest portion that decreases in each successive period.

Ans: T, LO: 7, Topic: Accounting for Long-term Notes Payable, Subtopic: NA, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

*66.

An installment note calling for equal total payments each period will result in a principal portion that decreases in each successive period.

Ans: F, LO: 7, Topic: Accounting for Long-term Notes Payable, Subtopic: NA, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

MULTIPLE CHOICE QUESTIONS 67.

Liabilities are classified on the balance sheet as current or a. deferred. b. unearned. c. long-term. d. accrued.

Ans: C, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: What is a Current Liability?, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

68.

Most companies pay current liabilities a. out of current assets. b. by issuing interest-bearing notes payable. c. by issuing stock. d. by creating long-term liabilities.

Ans: A, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: What is a Current Liability?, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

69.

A current liability is a debt that can reasonably be expected to be paid a. within one year, or the operating cycle, whichever is longer. b. between 6 months and 18 months. c. out of currently recognized revenues. d. out of cash currently on hand.

70.

Which of the following most likely would be classified as a current liability? a. Dividends payable b. Bonds payable in 5 years c. Three-year notes payable d. Mortgage payable as a single payment in 10 years

Ans: A, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: What is a Current Liability?, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

71.

Failure to record a liability will probably a. result in an overstated net income. b. result in overstated total liabilities and owner’s equity. c. have no effect on net income. d. result in overstated total assets. .

Reporting and Analyzing Liabilities

10-11

Ans: A, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: What is a Current Liability?, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

72.

Very often, failure to record a liability means failure to record a(n) a. revenue. b. asset conversion. c. footnote. d. expense.

Ans: D, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: What is a Current Liability?, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

73.

Current liabilities are due a. but not receivable for more than one year. b. but not payable for more than one year. c. and receivable within one year. d. and payable within one year.

Ans: D, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: What is a Current Liability?, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

74.

Liabilities are classified as current or long-term based on their a. description. b. payment terms. c. due date. d. amount.

75.

Which of the following is not a current liability on December 31, 2025? a. A Note Payable due December 31, 2026 b. An Accounts Payable due January 31, 2026 c. A lawsuit judgment to be decided on January 10, 2026 d. Accrued salaries payable related to work performed during 2025

Ans: C, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: What is a Current Liability?, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

76.

With an interest-bearing note, the amount of assets received upon issuance of the note is generally a. equal to the note's face value. b. greater than the note's face value. c. less than the note's face value. d. equal to the note's maturity value.

Ans: A, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Notes Payable, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

77.

Jackson County Bank agrees to lend the Ace Brick Company $500,000 on January 1. Ace Brick Company signs a $500,000, 6%, 9-month note. The entry made by Ace Brick Company on January 1 to record the proceeds and issuance of the note is

a. Interest Expense ............................................................ 22,500 .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Cash. ......................................................................... 477,500 Notes Payable ............................................................... b. Cash ......................................................................... 500,000 Notes Payable ............................................................... c. Cash ......................................................................... 500,000 Interest Expense ............................................................ 22,500 Notes Payable .............................................................. d. Cash ............................................................................ 500,000 Interest Expense ............................................................ 22,500 Notes Payable ............................................................... Interest Payable ............................................................

500,000 500,000 522,500

500,000 22,500

Ans: B, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Notes Payable, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

78.

Jackson County Bank agrees to lend the Ace Brick Company $500,000 on January 1. Ace Brick Company signs a $500,000, 6%, 9-month note. What is the adjusting entry required if Ace Brick Company prepares financial statements on June 30? a. Interest Expense ............................................................ 15,000 Interest Payable ............................................................ 15,000 b. Interest Expense ............................................................ 15,000 Cash.............................................................................. 15,000 c. Interest Payable ............................................................. 15,000 Cash.............................................................................. 15,000 d. Interest Payable ............................................................. 15,000 Interest Expense ........................................................... 15,000

Ans: A, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Notes Payable, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $500,000  .06  6/12  $15,000 (Face val.  6%  6/12)

79.

Jackson County Bank agrees to lend the Ace Brick Company $500,000 on January 1. Ace Brick signs a $500,000, 6%, 9-month note. What entry will Ace Brick make to pay off the note and interest at maturity assuming that interest has been accrued to September 30? a. Notes Payable .............................................................. 522,500 Cash.............................................................................. 522,500 b. Notes Payable .............................................................. 500,000 Interest Payable ............................................................. 22,500 Cash.............................................................................. 522,500 c. Interest Expense ............................................................ 22,500 Notes Payable .............................................................. 500,000 Cash.............................................................................. 522,500 d. Interest Payable ............................................................. 15,000 Notes Payable .............................................................. 500,000 Interest Expense .............................................................. 7,500 Cash.............................................................................. 522,500

80.

Jackson County Bank agrees to lend A1 Builders Company $400,000 on January 1. A1 .

Reporting and Analyzing Liabilities

10-13

Builders signs a $400,000, 6%, 6-month note. The entry made by A1 Builders on January 1 to record the proceeds and issuance of the note is a. Interest Expense ...............................................................6,000 Cash. ............................................................................ 194,000 Notes Payable............................................................... 400,000 b. Cash ............................................................................. 400,000 Notes Payable............................................................... 400,000 c. Cash ............................................................................. 400,000 Interest Expense.............................................................12,000 Notes Payable............................................................... 412,000 d. Cash ............................................................................. 400,000 Interest Expense.............................................................12,000 Notes Payable............................................................... 400,000 Interest Payable ............................................................ 12,000 Ans: B, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Notes Payable, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

81.

Jackson County Bank agrees to lend A1 Builders Company $400,000 on January 1. A1 Builders signs a $400,000, 6%, 6-month note. What is the adjusting entry required if A1 Builders prepares financial statements on March 30? a. Interest Expense .............................................................12,000 Interest Payable ............................................................ 12,000 b. Interest Expense .............................................................12,000 Cash ............................................................................. 12,000 c. Interest Expense ...............................................................6,000 Interest Payable ............................................................ 6,000 d. Interest Payable ................................................................6,000 Interest Expense ........................................................... 6,000

Ans: C, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Notes Payable, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $400,000  .06  3/12  $6,000 (Face val.  6%  3/12)

82.

Jackson County Bank agrees to lend A1 Builders Company $400,000 on January 1. A1 Builders signs a $400,000, 6%, 6-month note. What entry will A1 Builders make to pay off the note and interest at maturity assuming that interest has been accrued to June 30? a. Notes Payable ............................................................. 412,000 Cash ............................................................................. 412,000 b. Notes Payable ............................................................. 400,000 Interest Payable ............................................................. 12,000 Cash ............................................................................. 412,000 c. Interest Expense ............................................................ 12,000 Notes Payable ............................................................. 400,000 Cash ............................................................................. 412,000 d. Interest Payable ............................................................... 6,000 Notes Payable ............................................................. 400,000 Interest Expense .............................................................. 6,000 Cash ............................................................................. 412,000

10-14

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

83.

As interest is recorded on an interest-bearing note, the Interest Expense account is a. increased; the Notes Payable account is increased. b. increased; the Notes Payable account is decreased. c. increased; the Interest Payable account is increased. d. decreased; the Interest Payable account is increased.

Ans: C, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Notes Payable, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

84.

On October 1, Acme Painting Service borrows $150,000 from Jackson County Bank on a 3-month, $150,000, 4% note. What entry must Acme Painting Service make on December 31 before financial statements are prepared? a. Interest Payable ............................................................... 1,500 Interest Expense .................................................. 1,500 b. Interest Expense .............................................................. 6,000 Interest Payable ................................................... 6,000 c. Interest Expense .............................................................. 1,500 Interest Payable ................................................... 1,500 d. Interest Expense .............................................................. 1,500 Notes Payable ...................................................... 1,500

Ans: C, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Notes Payable, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $150,000  .04  3/12  $1,500 (Amount bor.  4%  3/12)

85.

On October 1, Acme Painting Service borrows $150,000 from National Bank on a 3month, $150,000, 4% note. The entry by Acme Painting Service to record payment of the note and accrued interest on January 1 is a. Notes Payable ............................................................. 151,500 Cash................................................................. 151,500 b. Notes Payable ............................................................. 150,000 Interest Payable ............................................................... 1,500 Cash................................................................. 151,500 c. Notes Payable ............................................................. 150,000 Interest Payable ............................................................... 6,000 Cash................................................................. 156,000 d. Notes Payable ............................................................. 150,000 Interest Expense .............................................................. 1,500 Cash................................................................. 151,500

Reporting and Analyzing Liabilities

86.

10-15

The interest charged on a $300,000 note payable, at the rate of 6%, on a 90-day note would be a. $18,000. b. $9,000. c. $4,500. d. $1,500.

Ans: C, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Notes Payable, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $300,000  .06  90/360  $4,500 (Face val.  6%  90/360)

10-16 87.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

The interest charged on a $350,000 note payable, at the rate of 6%, on a 60-day note would be a. $21,000. b. $10,500. c. $5,250. d. $3,500.

Ans: D, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Notes Payable, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $350,000  .06  60/360  $3,500 (Face val.  6%  60/360)

88.

The interest charged on a $350,000 note payable at the rate of 6% for a year would be a. $21,000. b. $10,500. c. $5,250. d. $1,750.

Ans: A, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Notes Payable, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $350,000  .06  $21,000 (Face val.  6%)

89.

The interest charged on a $90,000 note payable at the rate of 6% on a 90-day note would be a. $5,400. b. $2,700. c. $1,350. d. $900.

Ans: C, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Notes Payable, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $90,000  .06  90/360  $1,350 (Face val.  6%  90/360)

90.

The interest charged on a $90,000 note payable at the rate of 6% on a 60-day note would be a. $5,400. b. $2,700. c. $1,350. d. $900.

Ans: D, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Notes Payable, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $90,000  .06  60/360  $900 (Face val.  6%  90/360)

91.

Interest expense on an interest-bearing note is a. always equal to zero. b. accrued over the life of the note. c. only recorded at the time the note is issued. d. only recorded at maturity when the note is paid.

Ans: B, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Notes Payable, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Liabilities

92.

10-17

Sales taxes collected by a retailer are recorded by a. crediting Sales Tax Revenue. b. debiting Sales Tax Expense. c. crediting Sales Taxes Payable. d. debiting Sales Taxes Payable.

Ans: C, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Sales Taxes Payable, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

93.

Unearned Rent Revenue is a. a contra account to Rent Revenue. b. a revenue account. c. reported as a current liability. d. debited when rent is received in advance.

Ans: C, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Unearned Revenue, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

94.

The amount of sales tax collected by a retail store when making sales is a. a miscellaneous revenue for the store. b. a current liability. c. not recorded because it is a tax paid by the customer. d. recorded as an operating expense.

Ans: B, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Sales Taxes Payable, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

95.

A company receives $264, of which $24 is for sales tax. The journal entry to record the sale would include a a. debit to Sales Taxes Expense for $24. b. credit to Sales Taxes Payable for $24. c. debit to Sales Revenue for $264. d. debit to Cash for $240.

Ans: B, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Sales Taxes Payable, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

96.

A company receives $348, of which $28 is for sales tax. The journal entry to record the sale would include a a debit to Sales Taxes Expense for $28. b. debit to Sales Taxes Payable for $28. c. debit to Sales Revenue for $348. d. debit to Cash for $348.

Ans: D, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Sales Taxes Payable, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

10-18 97.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

A retail store credited the Sales Revenue account for the sales price and the amount of sales tax on sales. If the sales tax rate is 5% and the balance in the Sales Revenue account amounted to $294,000, what is the amount of the sales taxes owed to the tax agency? a. $280,000 b. $294,000 c. $14,700 d. $14,000

Ans: D, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Sales Taxes Payable, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($294,000  1.05)  .05  $14,000 (Sal. rev.  1.05)  5%

98.

A retail store credited the Sales Revenue account for the sales price and the amount of sales tax on sales. If the sales tax rate is 5% and the balance in the Sales Revenue account amounted to $630,000, what is the amount of the sales taxes owed to the tax agency? a. $600,000 b. $630,000 c. $31,500 d. $30,000

Ans: D, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Sales Taxes Payable, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($630,000  1.05)  .05  $30,000 (Sal. rev.  1.05)  5%

99.

The current portion of long-term debt should a. be paid immediately. b. be reclassified as a current liability. c. be classified as a long-term liability. d. not be separated from the long-term portion of debt.

Ans: B, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Current Maturities of Long-term Debt, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

100.

On January 1, 2025, A1 Service Company, a calendar-year company, issued $2,000,000 of notes payable, of which $500,000 is due on January 1 for each of the next four years. The proper balance sheet presentation on December 31, 2025, is a. Current liabilities, $2,000,000. b. Long-term debt , $2,000,000. c. Current liabilities, $500,000; Long-term Debt, $1,000,000. d. Current liabilities, $500,000; Long-term Debt, $1,500,000.

Ans: D, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Current Maturities of Long-term Debt, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $2,000,000  $500,000  $1,500,000 (Tot. note pay.  ann. payment)

Reporting and Analyzing Liabilities

101.

10-19

On January 1, 2025, Ace Beauty Supply Company, a calendar-year company, issued $900,000 of notes payable, of which $225,000 is due on January 1 for each of the next four years. The proper balance sheet presentation on December 31, 2025 is a. Current liabilities, $900,000. b. Long-term debt, $900,000. c. Current liabilities, $225,000; Long-term Debt, $675,000. d. Current liabilities, $675,000; Long-term Debt, $225,000.

Ans: C, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Current Maturities of Long-term, Debt Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $900,000  $225,000  $675,000 (Tot. note pay. – curr. note pay.)

102.

Sales taxes collected by a retailer from a customer are expenses a. of the retailer. b. of the customers. c. of the government. d. that are not recognized by the retailer until they are submitted to the government.

Ans: B, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Sales Taxes Payable, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

103.

When Old Navy collects sales taxes, it is acting as an agent for the a. wholesaler. b. customer. c. taxing authority. d. chamber of commerce.

Ans: C, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Sales Taxes Payable, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

104.

Sales taxes collected by Target are reported as a. contingent liabilities. b. revenues. c. expenses. d. current liabilities.

Ans: D, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Sales Taxes Payable, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

105.

A cash register reading shows cash sales of $8,000 and sales taxes of $400. The journal entry to record this information is a. Cash .......................................................................................... 8,000 Sales Revenue.............................................................. 8,000 b. Cash .......................................................................................... 8,400 Sales Tax Revenue ....................................................... 400 Sales Revenue.............................................................. 8,000 c. Cash .......................................................................................... 8,000 Sales Tax Expense ....................................................................... 400 Sales Revenue.............................................................. 8,400 d. Cash .......................................................................................... 8,400 Sales Revenue.............................................................. 8,000 Sales Taxes Payable .................................................... 400

10-20

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e Reporting

106.

A1 Pharmacy has collected $900 in sales taxes during March. If sales taxes must be remitted to the state government monthly, what entry will A1 Pharmacy make to show the March remittance? a. Sales Tax Expense .................................................................... 900 Cash.............................................................................. 900 b. Sales Taxes Payable .................................................................. 900 Cash.............................................................................. 900 c. Sales Tax Expense .................................................................... 900 Sales Taxes Payable..................................................... 900 d. No entry required.

107.

A cash register reading shows cash sales of $3,000 and sales taxes of $200. The journal entry to record this information is a. Cash .......................................................................................... 3,200 Sales Revenue .............................................................. 3,200 b. Cash .......................................................................................... 3,200 Sales Tax Payable......................................................... 200 Sales Revenue .............................................................. 3,000 c. Cash .......................................................................................... 3,000 Sales Tax Expense ....................................................................... 200 Sales Revenue .............................................................. 3,200 d. Cash .......................................................................................... 3,200 Sales Revenue .............................................................. 3,000 Sales Tax Revenue ....................................................... 200

108.

Acme Bookstore has collected $950 in sales taxes during April. If sales taxes must be remitted to the state government monthly, what entry will Acme Bookstore make to show the April remittance? a. Sales Tax Expense .................................................................... 950 Cash.............................................................................. 950 b. Sales Taxes Payable .................................................................. 950 Cash.............................................................................. 950 c. Sales Tax Expense .................................................................... 950 Sales Taxes Payable..................................................... 950 d. No entry required.

Reporting and Analyzing Liabilities

109.

10-21

Ace Service Corp. does not ring up sales taxes separately on the cash register. Total receipts for February amounted to $38,160. If the sales tax rate is 6%, what amount must be remitted to the state for February's sales taxes? a. $2,290 b. $2,160 c. $2,152 d. It cannot be determined.

Ans: B, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Sales Taxes Payable, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($38,160  1.06)  .06  $2,160 (Tot. rec. ÷ 1.06) × .06

110.

Acme Dollar Store does not ring up sales taxes separately on the cash register. Total receipts for October amounted to $36,750. If the sales tax rate is 5%, what amount must be remitted to the state for October's sales taxes? a. $1,750 b. $1,838 c. $88 d. It cannot be determined.

Ans: A, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Sales Taxes Payable, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($36,750  1.05)  .05  $1,750 (Tot. rec. ÷ 1.05) × .05

111.

Katy’s Boutique has total receipts for the month of $32,340 including sales taxes. If the sales tax rate is 5%, what are Katy's sales for the month? a. $30,724 b. $30,800 c. $32,340 d. It cannot be determined.

112.

Ryan's Salon has total receipts for the month of $40,280 including sales taxes. If the sales tax rate is 6%, what are Ryan's sales for the month? a. $37,864.40 b. $42,697.60 c. $38,000.00 d. It cannot be determined.

Ans: C, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Sales Taxes Payable, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $40,280  1.06  $38,000 (Tot. rec. ÷ 106%)

10-22

113.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

The following totals for the month of April were taken from the payroll records of A1 Lawn Service Company. Salaries $120,000 FICA taxes withheld 9,180 Income taxes withheld 25,000 Medical insurance deductions 4,500 Federal unemployment taxes 320 State unemployment taxes 2,160 The journal entry to record the monthly payroll on April 30 would include a a. debit to Salaries and Wages Expense for $120,000. b. credit to Salaries and Wages Payable for $120,000. c. debit to Salaries and Wages Payable for $120,000. d. debit to Salaries and Wages Expense for $81,320.

Ans: A, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Payroll and Payroll Taxes Payable, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

114.

The following totals for the month of April were taken from the payroll records of A1 Lawn Service Company. Salaries $120,000 FICA taxes withheld 9,180 Income taxes withheld 25,000 Medical insurance deductions 4,500 Federal unemployment taxes 320 State unemployment taxes 2,160 The entry to record the payment of net payroll would include a a. debit to Salaries and Wages Payable for $79,160. b. debit to Salaries and Wages Payable for $81,320. c. debit to Salaries and Wages Payable for $72,140. d. credit to Cash for $90,500.

Ans: B, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Payroll and Payroll Taxes Payable, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $120,000  $9,180  $25,000  $4,500  $81,320 (Salar. – FICA tax. – inc. tax – ins. ded.)

115.

The following totals for the month of April were taken from the payroll records of A1 Lawn Service Company. Salaries $120,000 FICA taxes withheld 9,180 Income taxes withheld 25,000 Medical insurance deductions 4,500 Federal unemployment taxes 320 State unemployment taxes 2,160 The entry to record accrual of employer’s payroll taxes would include a a. debit to Payroll Tax Expense for $2,480. .

Reporting and Analyzing Liabilities

10-23

b. debit to Payroll Tax Expense for $11,660. c. credit to FICA Taxes Payable for $18,360. d. credit to Payroll Tax Expense for $2,480. Ans: B, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Payroll and Payroll Taxes Payable, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $9,180 + $320 + $2,160  $11,660 (FICA tax. + fed. unemp. tax. + st. unemp. tax.)

116.

The following totals for the month of April were taken from the payroll records of A1 Lawn Service Company. Salaries $120,000 FICA taxes withheld 9,180 Income taxes withheld 25,000 Medical insurance deductions 4,500 Federal unemployment taxes 320 State unemployment taxes 2,160 The entry to record the accrual of federal unemployment tax would include a a. credit to Federal Unemployment Taxes Payable for $320. b. debit to Salaries and Wages Payable for $320. c. credit to Payroll Tax Expense for $320. d. debit to Federal Unemployment Taxes Payable for $320.

117.

Suppose that Verizon issued a five-year interest-bearing note payable for $300,000 on January 1, 2024. Each January the company is required to pay $60,000 on the note. How will this note be reported on the December 31, 2025 balance sheet? a. Long-term debt, $300,000 b. Long-term debt, $240,000 c. Long-term debt, $180,000; Long-term Debt due within one year, $60,000 d. Long-term debt of $240,000; Long-term Debt due within one year, $60,000

Ans: C, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Current Maturities of Long-term Debt, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $300,000  $60,000  $60,000  $180,000 (Note face val. – (ann. pay. × 2))

118.

The following totals for the month of April were taken from the payroll records of Ace Pet Supply Company. Salaries $90,000 FICA taxes withheld 6,885 Income taxes withheld 19,800 Medical insurance deductions 3,600 Federal unemployment taxes 720 State unemployment taxes 4,500 The journal entry to record the monthly payroll on April 30 would include a a. debit to Salaries and Wages Expense for $90,000. b. credit to Salaries and Wages Payable for $90,000. c. debit to Salaries and Wages Payable for $90,000. d. debit to Salaries and Wages Expense for $59,715.

Ans: A, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Payroll and Payroll Taxes Payable, Bloom: AP, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

10-24

119.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

The following totals for the month of April were taken from the payroll records of Ace Pet Supply Company. Salaries $90,000 FICA taxes withheld 6,885 Income taxes withheld 19,800 Medical insurance deductions 3,600 Federal unemployment taxes 720 State unemployment taxes 4,500 The entry to record the payment of net payroll would include a a. debit to Salaries and Wages Payable for $54,495. b. debit to Salaries and Wages Payable for $59,715. c. debit to Salaries and Wages Payable for $55,215. d. credit to Cash for $55,215.

Ans: B, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Payroll and Payroll Taxes Payable, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $90,000  $6,885  $19,800  $3,600  $59,715 (Salar. – FICA tax. – inc. tax. – ins. ded.)

120.

The following totals for the month of April were taken from the payroll records of Ace Pet Supply Company. Salaries $90,000 FICA taxes withheld 6,885 Income taxes withheld 19,800 Medical insurance deductions 3,600 Federal unemployment taxes 720 State unemployment taxes 4,500 The entry to record accrual of employer’s payroll taxes would include a a. debit to Payroll Tax Expense for $12,105. b. credit to Payroll Tax Expense for $12,105. c. credit to FICA Taxes Payable for $5,220. d. credit to Payroll Tax Expense for $5,220.

121.

Reporting and Analyzing Liabilities

10-25

State unemployment taxes 4,500 The entry to record the accrual of federal unemployment tax would include a a. credit to Federal Unemployment Taxes Payable for $720. b. credit to Federal Unemployment Taxes Expense for $720. c. credit to Payroll Tax Expense for $720. d. debit to Federal Unemployment Taxes Payable for $720. Ans: A, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Payroll and Payroll Taxes Payable, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

122.

Two sisters operate an inn on the coast of North Carolina. As customers make reservations they are required to pay cash in advance equal to one-half of the rate for their stay. How should the sisters account for the cash received as reservations are made? a. Cash Unearned Service Revenue b. Cash Service Revenue c. Unearned Service Revenue Service Revenue d. Cash Sales Revenue

Ans: A, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Unearned Revenues, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

123.

Katy Perry has a large consulting practice. New clients are required to pay one-half of the consulting fees up front. The balance is paid at the conclusion of the consultation. How does Perry account for the cash received at the end of the engagement? a. Cash Unearned Service Revenue b. Cash Unearned Service Revenue Service Revenue c. Prepaid Service Revenue Service Revenue d. No entry is required when the engagement is concluded.

Ans: B, LO: 1, Bloom: AP, Topic: Accounting for Current Liabilities, Subtopic: Unearned Revenues, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

124.

A1 Media Company typically sells subscriptions on an annual basis and publishes six times a year. The magazine sells 90,000 subscriptions in January at $10 each. What entry is made in January to record the sale of the subscriptions? a. Subscriptions Receivable ........................................................... 900,000 Subscription Revenue ......................................................... . 900,000 b. Cash .......................................................................................... 900,000 Unearned Subscription Revenue ........................................ . 900,000 c. Subscriptions Receivable ........................................................... 150,000 Unearned Subscription Revenue ........................................ . 150,000 d. Prepaid Subscriptions ................................................................ 900,000 Cash ................................................................................... . 900,000

Ans: B, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Unearned Revenues, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA

10-26

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution: 90,000  $10  $900,000 No. subs. X sell.pr.

Reporting and Analyzing Liabilities

125.

10-27

Ace Media Company typically sells subscriptions on an annual basis and publishes eight times a year. The magazine sells 60,000 subscriptions in January at $10 each. What entry is made in January to record the sale of the subscriptions? a. Subscriptions Receivable ........................................................... 600,000 Subscription Revenue ......................................................... . 600,000 b. Cash .......................................................................................... 600,000 Unearned Subscription Revenue ........................................ . 600,000 c. Subscriptions Receivable ............................................................. 75,000 Unearned Subscription Revenue ........................................ . 75,000 d. Prepaid Subscriptions ................................................................ 600,000 Cash ................................................................................... . 600,000

Ans: B, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Unearned Revenues, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: 60,000  $10  $600,000 (Tot. subscr. × subscr. price)

126.

Ace Retailers operates in Florida and collects sales taxes from customers on all purchases. How should these sales taxes be reported when collected? a. As an expense on the income statement b. As sales revenue along with the selling price of the items sold c. As unearned revenues d. As a current liability until paid to the State of Florida

127.

Which of the following amounts are deducted from employees’ paychecks? a. FICA Taxes Payable and State Unemployment Taxes Payable b. Federal Unemployment Taxes Payable and State Unemployment Taxes Payable c. Federal Unemployment Taxes Payable and FICA Taxes Payable d. Federal Income Taxes Payable and FICA Taxes Payable

Ans: D, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Payroll and Payroll Taxes Payable, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

128.

A1 Industries has total sales of $143,000 and sales taxes collected totaling $10,010 based on a 7% tax rate during June. The company submitted $5,600 of the taxes to the State before the end of June. Which one of the following will be reported on A1’s financial statements at the end of June? a. Sales Tax Expense for $10,010 b. Sales for $153,010 c. Sales Taxes Payable for $4,410 d. Net sales for $147,410

Ans: C, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Sales Taxes Payable, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $10,010 - $5,600 = $4,410 (Sales tax coll. – sales tax remit.)

10-28 129.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Current liabilities are obligations that are reasonably expected to be paid from

a. b. c. d.

Existing Current Assets No Yes Yes No

Creation of Other Current Liabilities No Yes No Yes

Ans: B, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: N/A, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

130.

On October 31, 2025, Acme Service Company issued a $5,000, 8%, 6-month note to Jackson County Bank. Acme accrued interest at December 31, 2025. How much will Acme credit to cash to record the payment of the note at maturity? a. $5,000 b. $7,400 c. $5,200 d. $5,133

Ans: C, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Notes Payable, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $5,000 + ($5,000 x 8% x 6/12) = $5,200 (Face + (Face x int. rate x 6/12))

131. To what is the current market value of bonds equal when determining their issue price? a. The present value of the bonds future cash flows b. The sum of the future interest payments, plus the principal payment when the bonds mature c. The difference between the face value of the bonds and the contractual interest rate d. The cash that will be paid to the investor when the bonds mature Ans: A, LO: 2, Topic: Characteristics of Bonds, Subtopic: Determining the Market Price of a Bond, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

132.

From the standpoint of the issuing company, a disadvantage of using bonds as a means of long-term financing is that a. bond interest is deductible for tax purposes. b. interest must be paid on a periodic basis regardless of earnings. c. income to stockholders may increase as a result of trading on the equity. d. the bondholders do not have voting rights.

Ans: B, LO: 2, Topic: Characteristics of Bonds, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

133.

If a corporation issued $9,000,000 in bonds which pay 5% annual interest, what is the annual net cash cost of this borrowing if the income tax rate is 30%? a. $4,500,000 b. $135,000 c. $450,000 d. $315,000

Ans: D, LO: 2, Topic: Characteristics of Bonds, Subtopic: Bonds Trading, Bloom: AP, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($9,000,000  .05)  (1  .30)  $315,000 (Bond face val. × 5%) × (1 – .30)

Reporting and Analyzing Liabilities

10-29

10-30 134.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Secured bonds are bonds that a. are in the possession of a bank. b. can be converted into common stock. c. have specific assets of the issuer pledged as collateral. d. mature in installments.

Ans: C, LO: 2, Topic: Characteristics of Bonds, Subtopic: Secured and Unsecured Bonds, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

135.

A legal document that indicates the name of the issuer, the face value of the bond and other data is called a. a bond certificate. b. a bond debenture. c. trading on the equity. d. a convertible bond.

Ans: A, LO: 2, Topic: Characteristics of Bonds, Subtopic: Bonds Trading, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

136.

Stockholders of a company may be reluctant to finance expansion by issuing more equity because a. leveraging with debt is always a better idea. b. their earnings per share may decrease. c. the price of the stock will automatically increase. d. dividends must be paid on a periodic basis.

Ans: B, LO: 2, Topic: Characteristics of Bonds, Subtopic: Bonds Trading, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

137.

Which of the following is not an advantage of issuing bonds instead of common stock? a. Stockholder control is not affected b. Earnings per share on common stock may be lower c. Tax savings result d. Each of these answer choices is an advantage.

Ans: B, LO: 2, Topic: Characteristics of Bonds, Subtopic: Bonds Trading, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

138.

Bonds that are secured by real estate are termed a. mortgage bonds. b. serial bonds. c. debentures. d. convertible bonds.

Ans: A, LO: 2, Topic: Characteristics of Bonds, Subtopic: Secured and Unsecured Bonds, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

139.

Bonds that may be exchanged for common stock at the option of the bondholders are called a. options. b. stock bonds. c. convertible bonds. d. callable bonds.

Ans: C, LO: 2, Topic: Characteristics of Bonds, Subtopic: Convertible and Callable Bonds, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Liabilities

140.

10-31

Bonds that are subject to retirement at a stated dollar amount prior to maturity at the option of the issuer are called a. callable bonds. b. early retirement bonds. c. options. d. debentures.

Ans: A, LO: 2, Topic: Characteristics of Bonds, Subtopic: Convertible and Callable Bonds, , Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

141.

Bonds that are issued against the general credit of the borrower are called a. callable bonds. b. debenture bonds. c. secured bonds. d. term bonds.

Ans: B, LO: 2, Topic: Characteristics of Bonds, Subtopic: Secured and Unsecured Bonds, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

142.

Corporations are granted the power to issue bonds through a. tax laws. b. state laws. c. federal security laws. d. bond debentures.

143.

Bonds are not always categorized as a. callable or convertible. b. term or serial. c. secured or unsecured. d. secured or debenture.

144.

Which of the following statements concerning bonds is false? a. Bonds are generally sold through an investment company. b. The bond indenture is prepared after the bonds are printed. c. The bond indenture and bond certificate are separate documents. d. The trustee keeps records of each bondholder.

Ans: B, LO: 2, Topic: Characteristics of Bonds, Subtopic: Issuing Procedures, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

145.

The contractual rate of interest is usually stated as a(n) a. monthly rate. b. daily rate. c. semiannual rate. d. annual rate.

Ans: D, LO: 2, Topic: Characteristics of Bonds, Subtopic: Issuing Procedures, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

146.

When authorizing bonds to be issued, the board of directors does not specify the a. total number of bonds authorized to be sold. b. contractual interest rate. c. selling price. d. total face value of the bonds.

Ans: C, LO: 2, Topic: Characteristics of Bonds, Subtopic: Issuing Procedures, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and

10-32

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

147.

Bonds with a face value of $500,000 and a quoted price of 102¼ have a selling price of a. $601,125. b. $510,125. c. $510,013. d. $511,250.

Ans: D, LO: 2, Topic: Characteristics of Bonds, Subtopic: Determining the Market Price of a Bond, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $500,000  1.0225  $511,250 (Face val. × 102.25%)

148.

Bonds with a face value of $500,000 and a quoted price of 97¼ have a selling price of a. $486,250. b. $485,125. c. $485,013. d. $487,500.

Ans: A, LO: 2, Topic: Characteristics of Bonds, Subtopic: Determining the Market Price of a Bond, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $500,000  .9725  $486,250 (Face val. × 97.25%)

149.

Bonds with a face value of $600,000 and a quoted price of 104¼ have a selling price of a. $625,500. b. $624,150. c. $602,550. d. $624,000.

Ans: A, LO: 2, Topic: Characteristics of Bonds, Subtopic: Determining the Market Price of a Bond, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $600,000  1.0425  $625,500 (Face val. × 104.25%)

150.

Bonds with a face value of $600,000 and a quoted price of 98½ have a selling price of a. $589,500. b. $588,300. c. $588,030. d. $591,000.

151.

The present value of a bond is also known as its a. face value. b. market price. c. future value. d. deferred value.

Ans: B, LO: 2, Topic: Characteristics of Bonds, Subtopic: Determining the Market Price of a Bond, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Liabilities

152.

10-33

All of the following statements regarding convertible bonds are true except a. if the market price of common stock increases substantially, bondholders with convertible bonds benefit. b. convertible bonds can be converted into common stock at the option of the issuing company. c. bondholders with convertible bonds receive interest on the bonds until conversion. d. convertible bonds sell at a higher price and pay a lower rate of interest than those without the conversion option.

Ans: B, LO: 2, Topic: Characteristics of Bonds, Subtopic: Convertible and Callable Bonds, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

153.

The contractual interest rate on a bond is often referred to as the a. callable rate. b. the maturity rate. c. market rate. d. stated rate.

154.

Suppose that Target issued bonds that are subject to retirement at a stated dollar amount prior to maturity at the option of the issuer. What are these bonds called? a. Convertible bonds b. Early retirement bonds. c. Callable bonds d. Secured bonds

Ans: C, LO: 2, Topic: Characteristics of Bonds, Subtopic: Convertible and Callable Bonds, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

155.

If the market interest rate for a bond is higher than the stated interest rate, the bond will sell at a. a premium. b. a discount. c. par. d. either a discount or premium.

156.

A1 Pharmaceutical issued bonds at a premium. Which of the statements below is true of the premium? a. It will increase bond interest expense throughout the bond term. b. It represents a reduction in the cost of borrowing. c. It is an extra payment the bond issuer must pay to the bond investors. d. It is a reduction of the interest payments the bond issuer must pay to bond investors.

Ans: B, LO: 2, Topic: Characteristics of Bonds, Subtopic: Determining the Market Price of a Bond, Bloom: K, Difficulty: Hard, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

157.

Which one of the following is not one of the functions that impact the market value of bonds? a. The length of time until the amounts are received b. The market interest rate c. The dollar amounts to be received d. The method of amortizing the bond interest

Ans: D, LO: 2, Topic: Characteristics of Bonds, Subtopic: Determining the Market Price of a Bond, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None,

10-34

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

158.

If the market rate of interest is greater than the contractual rate of interest, bonds will sell a. at a premium. b. at face value. c. at a discount. d. only after the stated rate of interest is increased.

Ans: C, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at a Discount, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

159.

The interest expense recorded on an interest payment date is increased a. by the amortization of premium on bonds payable. b. by the amortization of discount on bonds payable. c. only if the bonds were sold at face value. d. only if the market rate of interest is less than the stated rate of interest on that date.

Ans: B, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at a Discount, Bloom: C, Difficulty: Hard, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

160.

What does the balance in the Discount on Bonds Payable account represent? a. Additional interest cost associated with the issuance of debt b. A reduction of interest cost associated with the issuance of debt c. A reduction of the maturity value of the bonds d. An increase of the maturity value of the bonds

Ans: A, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at a Discount, Bloom: C, Difficulty: Hard, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

161.

The market rate of interest is higher than the stated rate of interest on bonds issued by Acme, Inc. At what amount will the bonds be issued? a. At a premium b. More information is needed to determine the answer. c. At an amount lower than face value d. At an amount higher than face value

162.

If the market rate of interest is 10%, a $10,000, 12%, 10-year bond that pays interest annually would sell at an amount a. less than face value. b. equal to face value. c. greater than face value. d. that cannot be determined.

Ans: C, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at a Premium, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

163.

If the market rate of interest is lower than the contractual interest rate, the bonds will sell at a. face value. b. a premium. c. a discount. d. an unknown amount.

Ans: B, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at a Premium, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA:

Reporting and Analyzing Liabilities

10-35

Reporting

164.

If bonds are issued at a premium, the stated interest rate is a. higher than the market rate of interest. b. lower than the market rate of interest. c. too low to attract investors. d. adjusted to a higher rate of interest.

Ans: A, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at a Premium, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

165.

The present value of a $10,000, 5-year bond, will be less than $10,000 if the a. contractual rate of interest is less than the market rate of interest. b. contractual rate of interest is greater than the market rate of interest. c. bond is convertible. d. contractual rate of interest is equal to the market rate of interest.

Ans: A, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at a Discount, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

166.

The market value (present value) of a bond is a function of all of the following except the a. dollar amounts to be received. b. maturity date. c. market interest rate. d. type of bonds.

Ans: D, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at Face Value, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

167.

A1 Corporation issues 900, 10-year, 8%, $1,000 bonds dated January 1, 2025 at 96. The journal entry to record the issuance will include a a. debit to Cash of $900,000. b. credit to Discount on Bonds Payable for $36,000. c. credit to Bonds Payable for $864,000. d. debit to Cash for $864,000.

Ans: D, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at a Discount, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: (900  $1,000)  .96  $864,000 (Num. of bonds × $1,000) × 96%

168.

Suppose that Tesla issues 5,000, 10-year, 8%, $1,000 bonds dated January 1, 2025 at 97. The journal entry to record the issuance of the bonds will include a a. debit to Cash of $5,000,000. b. debit to Discount on Bonds Payable for $150,000. c. credit to Bonds Payable for $4,850,000. d. credit to Cash for $4,850,000.

Ans: B, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at a Discount, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: (5,000  $1,000)  (1  .97)  $150,000 (Num. of bonds × $1,000) × (1 – .97)

10-36 169.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Suppose that Verizon issues 5,000, 10-year, 8%, $1,000 bonds dated January 1, 2025 at 103. The journal entry to record the sales of the bonds will include a. debit to Cash of $5,000,000. b. debit to Premium on Bonds Payable for $150,000. c. credit to Bonds Payable for $5,000,000. d. credit to Cash for $5,150,000.

Ans: C, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at a Premium, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: 5,000  $1,000  $5,000,000 (Num. of bonds × par)

170.

The market rate of interest is often called the a. stated rate. b. effective rate. c. coupon rate. d. contractual rate.

Ans: B, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at Face Value, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

171.

If bonds are issued at a discount, it means that the a. financial strength of the issuer is suspect. b. market interest rate is higher than the contractual interest rate. c. market interest rate is lower than the contractual interest rate. d. bondholder will receive effectively less interest than the contractual rate of interest.

Ans: B, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at a Premium, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

172.

Selling the bonds at a premium has the effect of a. causing the total cost of borrowing to be higher than the bond interest paid. b. causing the total cost of borrowing to be lower than the bond interest paid. c. raising the effective interest rate above the state interest rate. d. increasing the amount of cash paid for interest every 6 months.

Ans: B, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at a Premium, Bloom: C, Difficulty: Hard, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

173.

When bonds are issued at a premium, the total interest cost of the bonds over the life of the bonds is equal to the amount of a. interest paid over the life of the bond. b. interest paid over the life of the bond plus the amount of premium at sale point. c. interest paid over the life of the bond minus the amount of premium at sale point. d. premium at the sale point.

Ans: C, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at a Premium, Bloom: C, Difficulty: Hard, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

174.

The statement "Bond prices vary inversely with changes in the market rate of interest" means that if the a. market rate of interest increases, the contractual interest rate will decrease. b. contractual interest rate increases, then bond prices will go down. c. market rate of interest decreases, then bond prices will go up. d. contractual interest rate increases, the market rate of interest will decrease.

Ans: C, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at Face Value, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Liabilities

10-37

10-38 175.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

The carrying value of bonds will equal the market price a. at the close of every trading day. b. at the end of the fiscal period. c. on the date of issuance. d. every six months on the date interest is paid.

Ans: C, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at Face Value, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

176.

Over the term of the bonds, the balance in the Discount on Bonds Payable account will a. fluctuate up and down if the market is volatile. b. decrease. c. increase. d. be unaffected until the bonds mature.

Ans: B, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at a Discount, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

177.

The sale of bonds above face value a. is a rare occurrence. b. will cause the total cost of borrowing to be less than the bond interest paid. c. will cause the total cost of borrowing to be more than the bond interest paid. d. will have no net effect on interest expense by the time the bonds mature.

178.

In the balance sheet, the account Premium on Bonds Payable is a. added to bonds payable. b. deducted from bonds payable. c. classified as a stockholders' equity account. d. classified as a revenue account.

Ans: A, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at a Premium, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

179.

In the balance sheet, the account Discount on Bonds Payable is a. added to bonds payable. b. deducted from bonds payable. c. classified as a stockholders' equity account. d. classified as a revenue account.

Ans: B, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at a Discount, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

180.

Bond discount should be amortized to comply with a. the historical cost principle. b. the expense recognition principle. c. the revenue recognition principle. d. conservatism.

Reporting and Analyzing Liabilities

181.

10-39

Five thousand bonds with a face value of $1,000 each, are sold at 102. The entry to record the issuance is a. Cash .......................................................................................... 5,100,000 Bonds Payable.................................................................... . 5,100,000 b. Cash .......................................................................................... 5,000,000 Premium on Bonds Payable ......................................................... 100,000 Bonds Payable.................................................................... . 5,100,000 c. Cash .......................................................................................... 5,100,000 Premium on Bonds Payable................................................ . 100,000 Bonds Payable.................................................................... . 5,000,000 d. Cash .......................................................................................... 5,100,000 Discount on Bonds Payable ................................................ . 100,000 Bonds Payable.................................................................... . 5,000,000

Ans: C, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at a Premium, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: (5,000  $1,000)  1.02  $5,100,000 (Num. of bonds × $1,000) × 1.02

182.

Five thousand bonds with a face value of $1,000 each, are sold at 97. The entry to record the issuance is a. Cash .......................................................................................... 4,850,000 Bonds Payable.................................................................... . 4,850,000 b. Cash .......................................................................................... 4,850,000 Discount on Bonds Payable .......................................................... 150,000 Bonds Payable.................................................................... . 5,000,000 c. Cash .......................................................................................... 4,850,000 Premium on Bonds Payable................................................ . 150,000 Bonds Payable.................................................................... . 5,000,000 d. Cash .......................................................................................... 5,000,000 Discount on Bonds Payable ................................................ . 150,000 Bonds Payable.................................................................... . 4,850,000

Ans: B, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at a Discount, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: (5,000  $1,000)  .97  $4,850,000 (Num. of bonds × $1,000) × 97%

183.

The journal entry to record the issuance of bonds at a discount will include a a. debit to Cash for the face amount of the bonds. b. debit to Cash for the face amount of the bonds plus the amount of the discount. c. debit to Cash for the face amount of the bonds minus the amount of the discount. d. credit to Cash for the face amount of the bonds.

Ans: C, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at a Discount, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

184.

If bonds have been issued at a discount, then over the life of the bonds the a. carrying value of the bonds will decrease. b. carrying value of the bonds will increase. c. interest expense will increase if the discount is being amortized on a straight-line basis. d. unamortized discount will increase. .

10-40

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ans: B, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at a Discount, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

185.

A1 Service Company has $2,000,000 of bonds outstanding. The unamortized premium is $28,800. If the company redeemed the bonds at 101, what would be the gain or loss on the redemption? a. $8,800 gain b. $8,800 loss c. $20,000 gain d. $20,000 loss

Ans: A, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Redeeming Bonds Before Maturity, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($2,000,000 + $28,800)  ($2,000,000  1.01)  $8,800 (Face val. + unamor. prem.) – (face val. × 101%)

186.

The current carrying value of Ace Auto Supply Company’s $800,000 face value bonds is $797,000. If the bonds are retired at 102, what would be the amount Ace would pay its bondholders? a. $797,000 b. $800,000 c. $804,000 d. $816,000

Ans: D, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Redeeming Bonds Before Maturity, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $800,000  1.02  $816,000 (Carry. val. × 102%)

187.

Acme Marine has $3,500,000 of bonds outstanding. The unamortized premium is $50,400. If the company redeemed the bonds at 101, what would be the gain or loss on the redemption? a. $15,400 gain b. $15,400 loss c. $35,000 gain d. $35,000 loss

Ans: A, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Redeeming Bonds Before Maturity, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($3,500,000  1.01)  ($3,500,000 + $50,400)  $15,400 (Face val. × 101%) – (Face val. + unamor. prem.)

188.

Suppose that the current carrying value of Old Navy’s $1,800,000 face value bonds is $1,793,200. If the bonds are retired at 102, what would be the amount Old Navy would pay its bondholders? a. $1,793,200 b. $1,800,000 c. $1,804,000 d. $1,836,000

Ans: D, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Redeeming Bonds Before Maturity, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $1,800,000  1.02  $1,836,000 (Carry. val. × 102%)

Reporting and Analyzing Liabilities

189.

10-41

Suppose that Ford Motor Corporation retires its $800,000 face value bonds at 105 on January 1, following the payment of annual interest. The carrying value of the bonds at the redemption date is $829,960. The entry to record the redemption will include a a. credit of $29,960 to Loss on Bond Redemption. b. debit of $29,960 to Premium on Bonds Payable. c. credit of $10,040 to Gain on Bond Redemption. d. debit of $40,000 to Premium on Bonds Payable.

Ans: B, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Redeeming Bonds Before Maturity, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $829,960  $800,000  $29,960 (Carry. val. – Face val.)

190.

When bonds are retired before maturity, a. only a loss on redemption can be recorded. b. only a gain on redemption can be recorded. c. either a gain or a loss on redemption can be recorded. d. neither a gain nor a loss on redemption can be recorded.

Ans: C, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Redeeming Bonds Before Maturity, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

191.

When bonds are retired at maturity, a. only a loss on redemption can be recorded. b. only a gain on redemption can be recorded. c. either a gain or a loss on redemption can be recorded. d. neither a gain nor a loss on redemption can be recorded.

Ans: D, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Redeeming Bonds at Maturity, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

192.

A $1,000,000 bond was retired at 98 when the carrying value of the bond was $985,000. The entry to record the retirement would include a a. gain on bond redemption of $15,000. b. loss on bond redemption of $5,000. c. loss on bond redemption of $15,000. d. gain on bond redemption of $5,000.

Ans: D, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Redeeming Bonds Before Maturity, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $985,000  ($1,000,000  .98)  $5,000 (Carry. val. – (face val. × 98%))

193.

A $900,000 bond was retired at 103 when the carrying value of the bond was $933,000. The entry to record the retirement would include a a. gain on bond redemption of $27,000. b. loss on bond redemption of $6,000. c. loss on bond redemption of $27,000. d. gain on bond redemption of $6,000.

Ans: D, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Redeeming Bonds Before Maturity, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $933,000  ($900,000  1.03)  $6,000 (Carry. val. – (Face val. × 103%))

10-42 194.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

An $800,000 bond was retired at 98 when the carrying value of the bond was $824,000. The entry to record the retirement would include a a. gain on bond redemption of $24,000. b. loss on bond redemption of $24,000. c. loss on bond redemption of $40,000. d. gain on bond redemption of $40,000.

195.

Suppose that Patagonia issued bonds that had the following data associated with them: Interest to be paid is $40,000. Interest expense to be recorded is $45,000. Which of the following characteristics is true? a. The bonds are sold at a premium. b. When recording the interest expense, the amortization will decrease the bond carrying value. c. The difference between the interest expense and the interest to be paid is the bond's par value. d. When recording the interest expense, the amortization will increase the bond carrying value.

Ans: D, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at a Discount, Bloom: C, Difficulty: Hard, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

196.

A $1,000,000 bond was issued at 98 and repaid at maturity. The entry to record the retirement would include a a. a credit to Cash for $980,000. b. a debit to Bonds Payable for $1,000,000. c. a debit to Interest Expense for $20,000. d. a debit to Discount on Bonds Payable for $20,000.

Ans: B, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Redeeming Bonds at Maturity, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

197.

Acme Company retired at maturity a $1,000,000 bond that was originally issued at 102. The entry to record the retirement would include a a. a credit to Cash for $1,000,000. b. a debit to Bonds Payable for $1,020,000. c. a credit to Interest Expense for $20,000. d. a debit to Premium on Bonds Payable for $20,000.

Ans: A, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Redeeming Bonds at Maturity, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

198.

All of the following are true regarding financial statement analysis ratios associated with liabilities except: a. A high times interest earned ratio indicates that a company is more likely to meet interest payments as scheduled. b. High liquidity ratios mean that lines of credit should be high to compensate. c. If a company's current ratio is lower than the industry average, it may lack liquidity. d. The debt to assets ratio shows the degree to which the company has financed with debt versus equity. .

Reporting and Analyzing Liabilities

10-43

Ans: B, LO: 4, Topic: Presentation and Analysis Subtopic: Analysis, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

199.

From an accounting standpoint, all of the following are contingencies that must be evaluated for reporting purposes except a. product warranties. b. general business risks. c. money-back guarantees for products. d. environmental cleanup obligations.

Ans: B, LO: 4, Topic: Presentation and Analysis Subtopic: Off-Balance-Sheet Financing, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

200.

A measure of a company’s solvency is the a. acid-test ratio. b. current ratio. c. times interest earned. d. asset turnover ratio.

Ans: C, LO: 4, Topic: Presentation and Analysis Subtopic: Solvency, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

201.

The times interest earned is computed by dividing a. net income by interest expense. b. income before income taxes by interest expense. c. income before interest expense by interest expense. d. income before interest expense and income taxes by interest expense.

Ans: D, LO: 4, Topic: Presentation and Analysis Subtopic: Solvency, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

202.

In a recent year, Acme Discount Retail Corporation had net income of $120,000, interest expense of $20,000, and income tax expense of $30,000. What was Acme’s times interest earned for the year? a. 6.00 b. 7.00 c. 7.50 d. 8.50

Ans: D, LO: 4, Topic: Presentation and Analysis Subtopic: Solvency, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($120,000 + $20,000 + $30,000)  $20,000  8.50 (Net inc. + int. exp. + inc. tax exp.) ÷ int. exp.

203.

Which statement is true concerning off-balance sheet financing? a. It allows a company to overstate its debt to assets ratio. b. It is an intentional effort by a company to structure its financing arrangements to avoid showing liabilities on its balance sheet. c. It is a violation of GAAP and causes total liabilities to be understated. d. It occurs when companies report liabilities on the income statement as expenses rather than liabilities on the balance sheet.

204.

Liquidity ratios measure a company's a. operating cycle. b. revenue-producing ability. c. short-term debt paying ability. d. long-range solvency. .

10-44

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ans: C, LO: 4, Topic: Presentation and Analysis Subtopic: Liquidity, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

205.

The relationship between current assets and current liabilities is a. useful in determining income. b. useful in evaluating a company's liquidity. c. called the matching principle. d. useful in determining the amount of a company's long-term debt.

Ans: B, LO: 4, Topic: Presentation and Analysis Subtopic: Liquidity, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

206.

In 2025, A1 Lawn Service had net income of $155,000, interest expense of $30,000, and income tax expense of $40,000. What was A1’s times interest earned for the year? a. 7.50 b. 5.17 c. 6.17 d. 6.50

Ans: A, LO: 4, Topic: Presentation and Analysis Subtopic: Solvency, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($155,000 + $30,000 + $40,000)  $30,000  7.50 (Net inc. + int. exp. + inc. tax exp.) ÷ int. exp.

207.

Failure to record a liability will probably a. understate net income. b. result in overstated total liabilities and owner’s equity. c. understate the debt to assets ratio. d. make a company appear to be less solvent.

208.

In 2025, Acme Pet Supply Company had net income of $150,000, interest expense of $30,000, and a times interest earned ratio of 7. What was Acme’s income before taxes for the year? a. $240,000 b. $210,000 c. $180,000 d. None of these answer choices are correct.

Ans: C, LO: 4, Topic: Presentation and Analysis Subtopic: Solvency, Bloom: AN, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: (x + $30,000)  $30,000  7; x + $30,000  $210,000; x  $180,000 (IBT + int. exp.) ÷ int. exp. = tim. int. earn.; (IBT + int. exp.) = (int. exp. × tim. int. earn.)

Reporting and Analyzing Liabilities

209.

10-45

The adjusted trial balance for A1 Corp. at the end of the current year contained the following accounts: 5-year Bonds Payable 8% Bond Interest Payable Premium on Bonds Payable Notes Payable (3 mo.) Notes Payable (5 yr.) Mortgage Payable ($15,000 due currently) Salaries and Wages Payable Taxes Payable (due 3/15 of next yr)

$1,600,000 50,000 100,000 40,000 165,000 200,000 18,000 25,000

The total long-term liabilities reported on the balance sheet are a. $1,965,000 b. $1,950,000 c. $2,065,000 d. $2,050,000 Ans: D, LO: 4, Topic: Presentation and Analysis Subtopic: Presentation, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $1,600,000 + $100,000 + $165,000 + ($200,000  $15,000)  $2,050,000 (B/P + prem. on B/P + Notes pay. (5 yr.) + (Mort. pay. – cur. por.))

210.

The adjusted trial balance for Acme Corp. at the end of the current year contained the following accounts: 5-year Bonds Payable 4% Bond Interest Payable Discount on Bonds Payable Accounts Payable Notes Payable (6 mo.) Notes Payable (3 yr.) Mortgage Payable ($30,000 due currently) Salaries and Wages Payable

$1,500,000 50,000 50,000 32,000 50,000 175,000 600,000 20,000

Acme’s total long-term liabilities reported on the balance sheet are a. $2,195,000 b. $2,065,000 c. $2,075,000 d. $2,095,000 Ans: A, LO: 4, Topic: Presentation and Analysis Subtopic: Presentation, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $1,500,000 - $50,000 + $175,000 + ($600,000  $30,000)  $2,195,000 (B/P – disc. on B/P + Notes pay. (3 yr.) + (Mort. pay. – cur. por.))

10-46 211.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

The 2025 financial statements of A2 Co. contain the following selected data (in millions): Current assets $ 90 Total assets 160 Current liabilities 45 Total liabilities 72 Cash 8 Interest expense 5 Income taxes 10 Net income 16 The company’s debt to assets ratio is a. 45.0%. b. 50.0%. c. 2.22%. d. 6.2 times.

Ans: A, LO: 4, Topic: Presentation and Analysis Subtopic: Solvency, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $72  $160  45.0% (Tot. liab. ÷ tot. assets)

*212. Suppose that Patagonia issued $2,000,000 of 6%, 5-year bonds at 98. Assuming straightline amortization and annual interest payments, how much bond interest expense is recorded on the next interest date? a. $120,000 b. $60,000 c. $124,000 d. $128,000 Ans: D, LO: 5, Topic: Straight-Line Amortization, Subtopic: Amortizing Bond Discount, Bloom: AP, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($2,000,000  .06) + [($2,000,000  .02)  5]  $128,000 (Face val. × 6%) + [(Face val. × (1 – .98)] ÷ 5

*213. A1 Dental Supply Company issued $2,000,000 of 6%, 5-year bonds at 98, which pay interest annually. Assuming straight-line amortization, what is the total interest cost of the bonds? a. $600,000 b. $640,000 c. $560,000 d. $580,000 Ans: B, LO: 5, Topic: Straight-Line Amortization, Subtopic: Amortizing Bond Discount, Bloom: AP, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($2,000,000  .06  5) + ($2,000,000  .02)  $640,000 (Face val. × 6% × 5) + (Face val. × (1 – .98))

*214. Acme Marine issued $2,000,000 of 6%, 5-year bonds at 98, which pay interest annually. Assuming straight-line amortization, what is the carrying value of the bonds after one year? a. $1,960,000 b. $1,964,000 c. $1,968,000 d. $1,976,000 Ans: C, LO: 5, Topic: Straight-Line Amortization, Subtopic: Amortizing Bond Discount, Bloom: AP, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($2,000,000  .98) + [($2,000,000  .02)  5]  $1,968,000

Reporting and Analyzing Liabilities

10-47

(Face val. × 98%) + [(face val. × (1 – .98)) ÷ 5

*215. Ace Beauty Supply Company issued $800,000 of 8%, 5-year bonds at 106. Assuming straight-line amortization and annual interest payments, how much bond interest expense is recorded on the next interest date? a. $64,000 b. $73,600 c. $54,400 d. $9,600 Ans: C, LO: 5, Topic: Straight-Line Amortization, Subtopic: Amortizing Bond Premium, Bloom: AP, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($800,000  .08)  [($800,000  .06)  5]  $54,400 (Face val. × 8%) – [(Face val. × (1.06 – 1) ÷ 5]

*216. On January 1, 2025, $4,000,000, 5-year, 10% bonds, were issued for $4,240,000. Interest is paid annually on January 1. If the issuing corporation uses the straight-line method to amortize premium on bonds payable, the monthly amortization amount is a. $35,332. b. $48,000. c. $4,800. d. $4,000. Ans: D, LO: 5, Topic: Straight-Line Amortization, Subtopic: Amortizing Bond Premium, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: [($4,240,000  $4,000,000)  5]  12  $4,000 [(Iss. pr. – Face val.) ÷ 5] ÷ 12

*217. A corporation issues $300,000, 8%, 5-year bonds on January 1, 2025 for $312,600. Interest is paid annually on January 1. If the corporation uses the straight-line method of amortization of bond premium, the amount of bond interest expense to be recognized in December 31, 2025’s adjusting entry is a. $21,480. b. $24,000. c. $26,520. d. $2,520. Ans: A, LO: 5, Topic: Straight-Line Amortization, Subtopic: Amortizing Bond Premium, Bloom: AP, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($300,000  .08)  [($312,600  $300,000)  5]  $21,480 (Face val. × 8%) – [(Iss. pr. – face val.) ÷ 5]

*218. A1 Nail Bar issued $800,000 of 8%, 5-year bonds at 106. The bonds pay interest annually. Assuming straight-line amortization, what is the total interest cost of the bonds? a. $368,000 b. $272,000 c. $224,000 d. $320,000 Ans: B, LO: 5, Topic: Straight-Line Amortization, Subtopic: Amortizing Bond Premium, Bloom: AP, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($800,000  .08  5)  ($800,000  .06)  $272,000 (Face val. × 8% × 5) – [(Face val. × (1.06 – 1)]

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

*219. Acme Home Health Company issued $800,000 of 8%, 5-year bonds at 106. The bonds pay interest annually. Assuming straight-line amortization, what is the carrying value of the bonds after one year? a. $848,000 b. $843,200 c. $838,400 d. $852,800 Ans: C, LO: 5, Topic: Straight-Line Amortization, Subtopic: Amortizing Bond Premium, Bloom: AP, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($800,000  1.06)  [($800,000  .06)  5]  $838,400 (Face val. × 106%) – [(Face val. × (1.06 – 1) ÷ 5]

*220. Suppose that Best Buy issued $1,000,000 of 8%, 5-year bonds at 106. Assuming straightline amortization and annual interest payments, what is the amount of the amortization at each interest payment date? a. $6,000 b. $12,000 c. $80,000 d. $68,000 Ans: B, LO: 5, Topic: Straight-Line Amortization, Subtopic: Amortizing Bond Premium, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: [$1,000,000  (1.06  1.00)]  5  $12,000 [(Face val. × (1.06 – 1)] ÷5

*221. A1 Home Supply Company received proceeds of $754,000 on 10-year, 8% bonds issued on January 1, 2025. The bonds had a face value of $800,000, pay interest annually on December 31, and have a call price of 101. A1 Home Supply uses the straight-line method of amortization. What is the amount of interest A1 Home Supply will pay bondholders in 2025? a. $60,320 b. $64,000 c. $68,600 d. $59,400 Ans: B, LO: 5, Topic: Straight-Line Amortization, Subtopic: Amortizing Bond Discount, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $800,000  .08  $64,000 (Bonds face val. × 8%)

*222. A1 Home Supply Company received proceeds of $754,000 on 10-year, 8% bonds issued on January 1, 2025. The bonds had a face value of $800,000, pay interest annually on December 31, and have a call price of 101. A1 Home Supply uses the straight-line method of amortization. What amount of interest expense will A1 Home Supply report for these bonds for the year ended December 31, 2025? a. $64,000 b. $60,320 c. $68,600 d. $59,400 Ans: C, LO: 5, Topic: Straight-Line Amortization, Subtopic: Amortizing Bond Discount, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($800,000  $754,000)  10  $4,600; ($800,000  .08) + $4,600  $68,600 (Face val. – proc.) ÷ 10 = ann. amort.; (Face val. × 8%) + ann. amort.

Reporting and Analyzing Liabilities

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

*223. A1 Supply Company received proceeds of $754,000 on 10-year, 8% bonds issued on January 1, 2025. The bonds had a face value of $800,000, pay interest annually on December 31, and have a call price of 101. A1 uses the straight-line method of amortization. What is the carrying value of the bonds on January 1, 2027? a. $800,000 b. $763,200 c. $790,800 d. $758,600 Ans: B, LO: 5, Topic: Straight-Line Amortization, Subtopic: Amortizing Bond Premium, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: [($800,000  $754,000)  10]  2  $9,200; $754,000 + $9,200  $763,200 [(Face val. – proc.) ÷ 10] × 2 = dis. amort.; (proc. + dis. amort.)

*224. A1 Supply Company received proceeds of $754,000 on 10-year, 8% bonds issued on January 1, 2025. The bonds had a face value of $800,000, pay interest annually on December 31, and have a call price of 101. A1 uses the straight-line method of amortization. The company decided to redeem the bonds on January 1, 2027. What amount of gain or loss would A1 report on its 2027 income statement? a. $36,800 gain b. $44,800 gain c. $44,800 loss d. $36,800 loss Ans: C, LO: 3, 5, Topic: Straight-Line Amortization, Subtopics: Amortizing Bond Discount, Redeeming Bonds Before Maturity, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($800,000  $754,000)  10  $4,600; ($800,000  1.01)  [$754,000 + ($4,600  2)]  $44,800 (Face val. – proc.) ÷10 = ann. amort.; (Face val. × 101%) – [proc. + (ann. amort. × 2)]

*225. Acme Company received proceeds of $634,500 on 10-year, 8% bonds issued on January 1, 2025. The bonds had a face value of $600,000, pay interest annually on December 31, and have a call price of 102. Acme uses the straight-line method of amortization. What amount of interest will Acme pay bondholders in 2025? a. $50,760 b. $48,000 c. $48,960 d. $5,076 Ans: B, LO: 5, Topic: Straight-Line Amortization, Subtopic: Amortizing Bond Premium, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control Solution: $600,000  .08  $48,000 (Face val. × 8%)

*226. Acme Company received proceeds of $634,500 on 10-year, 8% bonds issued on January 1, 2025. The bonds had a face value of $600,000, pay interest annually on December 31, and have a call price of 102. Acme uses the straight-line method of amortization. What is the amount of interest expense Acme will report for these bonds for the year ended December 31, 2025? a. $48,000 b. $50,760 c. $44,550 d. $37,650 Ans: C, LO: 5, Topic: Straight-Line Amortization, Subtopic: Amortizing Bond Premium, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Liabilities

10-51

Solution: ($634,500  $600,000)  10  $3,450; ($600,000  .08)  $3,450  $44,550 (Proc. – face val.) ÷ 10 = ann. amort.; (Face val. × 8%) – ann. amort.)

*227. Acme Company received proceeds of $634,500 on 10-year, 8% bonds issued on January 1, 2025. The bonds had a face value of $600,000, pay interest annually on December 31, and have a call price of 102. Acme uses the straight-line method of amortization. What is the carrying value of the bonds on January 1, 2027? a. $600,000 b. $627,600 c. $572,400 d. $631,050 Ans: B, LO: 5, Topic: Straight-Line Amortization, Subtopic: Amortizing Bond Premium, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($634,500  $600,000)  10  $3,450; $634,500 – ($3,450 × 2) = $627,600 (Proc. – face val.) ÷ 10 = ann. amort.; proc. – (ann. amort. × 2)

*228. Acme Company received proceeds of $634,500 on 10-year, 8% bonds issued on January 1, 2025. The bonds had a face value of $600,000, pay interest annually on December 31, and have a call price of 102. Acme uses the straight-line method of amortization. Acme decided to redeem the bonds on January 1, 2027. What amount of gain or loss would the company report on their 2027 income statement? a. $27,600 gain b. $15,600 gain c. $15,600 loss d. $27,600 loss Ans: B, LO: 3, 5, Topic: Straight-Line Amortization, Subtopic: Amortizing Bond Premium, Redeeming Bonds Before Maturity, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($634,500  $600,000)  10  $3,450; ($600,000  1.02)  [$634,500  ($3,450  2)]  $15,600 (Proc. – Face val.) ÷ 10 = ann. amort.; (Face val. × 102%) – [(Proc. – (ann. amort. × 2)]

*229. A1 Discount Supply Company issued ten-year, 9%, bonds payable in 2025 at a premium. During 2025, the company’s accountant failed to amortize any of the bond premium. The omission of the premium amortization will a. not affect net income for 2025. b. cause retained earnings at the end of 2025 to be overstated. c. cause net income for 2025 to be overstated. d. cause net income for 2025 to be understated. Ans: D, LO: 5, Topic: Straight-Line Amortization, Subtopic: Amortizing Bond Premium, Bloom: AN, Difficulty: Hard, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

*230. When the straight-line method of amortization is used for a bond premium, the amount of interest expense for an interest period is calculated by a. adding the amount of premium amortized for that period to the amount of cash paid for interest during the period. b. subtracting the amount of premium amortized for that period from the amount of cash paid for interest during the period. c. multiplying the face value of the bonds by the stated interest rate. d. multiplying the face value of the bonds by the market interest rate. Ans: B, LO: 5, Topic: Straight-Line Amortization, Subtopic: Amortizing Bond Premium, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

*231. When the straight-line method of amortization is used for a bond discount, the amount of interest expense for an interest period is calculated by a. adding the amount of discount amortized for that period to the amount of cash paid for interest during the period. b. subtracting the amount of discount amortized for that period from the amount of cash paid for interest during the period. c. multiplying the face value of the bonds by the stated interest rate. d. multiplying the face value of the bonds by the market interest rate. Ans: A, LO: 5, Topic: Straight-Line Amortization, Subtopic: Amortizing Bond Discount, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

*232. Suppose that on January 1, adidas® issues $3,000,000, 5-year, 12% bonds at 96 with interest payable on January 1. The entry on December 31 to record accrued bond interest and the amortization of bond discount using the straight-line method will include a a. debit to Interest Expense, $180,000. b. debit to Interest Expense, $360,000. c. credit to Discount on Bonds Payable, $24,000. d. credit to Discount on Bonds Payable, $12,000. Ans: C, LO: 5, Topic: Straight-Line Amortization, Subtopic: Amortizing Bond Discount, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: [$3,000,000  (1.00  .96)]  5  $24,000 [(Bond face val. × (1 – .96)] ÷ 5

*233. Suppose that on January 1, adidas® issues $3,000,000, 5-year, 12% bonds at 96 with interest payable on January 1. What is the carrying value of the bonds at the end of the third interest period? a. $2,952,000 b. $2,928,000 c. $2,832,000 d. $2,784,000 Ans: A, LO: 5, Topic: Straight-Line Amortization, Subtopic: Amortizing Bond Discount, Bloom: AP, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($3,000,000  .96) + [($3,000,000  .04)  3/5]  $2,952,000 (Bond face val. × 96%) + [face val. × (1 – .96) × 3/5]

*234. If bonds are originally sold at a discount using the straight-line amortization method, a. interest expense in the earlier years of the bond's life will be less than the interest to be paid. b. interest expense in the earlier years of the bond's life will be the same as interest to be paid. c. unamortized discount is subtracted from the face value of the bond to determine its carrying value. d. unamortized discount is added to the face value of the bond to determine its carrying value. Ans: C, LO: 5, Topic: Straight-Line Amortization, Subtopic: Amortizing Bond Discount, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

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*235. The following partial amortization schedule is available for Acme Company which sold $750,000, five-year, 10% bonds on January 1, 2025 for $780,000 and uses annual straight-line amortization: BOND AMORTIZATION SCHEDULE Interest Interest Premium Unamortized to be paid expense Amortization Premium $30,000 (i) (ii) (iii) (iv)

Interest Periods January 1, 2025 January 1, 2026

Bond Carrying Value $780,000 (v)

Which of the following amounts should be shown in cell (i)? a. $78,000 b. $81,000 c. $75,000 d. $15,000 Ans: C, LO: 5, Topic: Straight-Line Amortization, Subtopic: Amortizing Bond Premium, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $750,000  .10  $75,000 (Face val. × 10%)

*236. The following partial amortization schedule is available for Acme Company which sold $750,000, five-year, 10% bonds on January 1, 2025 for $780,000 and uses annual straight-line amortization: BOND AMORTIZATION SCHEDULE Interest Interest Premium Unamortized to be paid expense Amortization Premium $30,000 (i) (ii) (iii) (iv)

Interest Periods January 1, 2025 January 1, 2026

Bond Carrying Value $780,000 (v)

Which of the following amounts should be shown in cell (ii)? a. $81,000 b. $69,000 c. $78,000 d. $60,000 Ans: B, LO: 5, Topic: Straight-Line Amortization, Subtopic: Amortizing Bond Premium, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($750,000  .10)  ($30,000  5)  $69,000 (Face val. × 10%) – (Unamor. prem. ÷ 5)

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

*237. The following partial amortization schedule is available for Acme Company which sold $750,000, five-year, 10% bonds on January 1, 2025 for $780,000 and uses annual straight-line amortization: BOND AMORTIZATION SCHEDULE Interest Interest Premium Unamortized to be paid expense Amortization Premium $30,000 (i) (ii) (iii) (iv)

Interest Periods January 1, 2025 January 1, 2026

Bond Carrying Value $780,000 (v)

Which of the following amounts should be shown in cell (iii)? a. $15,000 b. $30,000 c. $6,000 d. $3,000 Ans: C, LO: 5, Topic: Straight-Line Amortization, Subtopic: Amortizing Bond Premium, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $30,000  5  $6,000 (Unamort. prem. ÷ 5)

*238. The following partial amortization schedule is available for Acme Company which sold $750,000, five-year, 10% bonds on January 1, 2025 for $780,000 and uses annual straight-line amortization: BOND AMORTIZATION SCHEDULE Interest Interest Premium Unamortized to be paid expense Amortization Premium

Interest Periods January 1, 2025 January 1, 2026

(i)

(ii)

(iii)

Bond Carrying Value

$30,000

$780,000

(iv)

(v)

Which of the following amounts should be shown in cell (iv)? a. $33,000 b. $27,000 c. $36,000 d. $24,000 Ans: D, LO: 5, Topic: Straight-Line Amortization, Subtopic: Amortizing Bond Premium, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $30,000  ($30,000  5)  $24,000 (Unamor. prem. – (Unamor. prem. ÷ 5))

Reporting and Analyzing Liabilities

10-55

*239. The following partial amortization schedule is available for Acme Company which sold $750,000, five-year, 10% bonds on January 1, 2025 for $780,000 and uses annual straight-line amortization: BOND AMORTIZATION SCHEDULE Interest Interest Premium Unamortized to be paid expense Amortization Premium $30,000 (i) (ii) (iii) (iv)

Interest Periods January 1, 2025 January 1, 2026

Bond Carrying Value $780,000 (v)

Which of the following amounts should be shown in cell (v)? a. $786,000 b. $783,000 c. $774,000 d. $777,000 Ans: C, LO: 5, Topic: Straight-Line Amortization, Subtopic: Amortizing Bond Premium, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $780,000  ($30,000  5)  $774,000 (Sell. price – (Unamor. prem. ÷ 5))

*240. On January 1, 2025, $3,000,000, 10-year, 10% bonds, were issued for $2,910,000. Interest is paid annually on January 1. If the issuing corporation uses the straight-line method to amortize discount on bonds payable, the monthly amortization amount is a. $29,100. b. $9,000. c. $2,424. d. $750. Ans: D, LO: 5, Topic: Straight-Line Amortization, Subtopic: Amortizing Bond Discount, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: [($3,000,000  $2,910,000)  10]  12  $750 [(Bond face val. – sell. pr.) ÷ 10] ÷ 12

*241. A corporation issues $300,000, 10%, 5-year bonds on January 1, 2025, for $287,400. Interest is paid annually on January 1. If the corporation uses the straight-line method of amortization of bond discount, the amount of bond interest expense to be recognized in December 31, 2025’s adjusting entry is a. $32,520. b. $30,000. c. $27,480. d. $2,520. Ans: A, LO: 5, Topic: Straight-Line Amortization, Subtopic: Amortizing Bond Discount, Bloom: AP, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: [($300,000  $287,400)  5] + ($300,000  .10)  $32,520 [(Face val. – iss. pr.) ÷ 5] + (Face val. × 10%)

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

*242. Which of the following statements regarding the effective interest method of accounting for bonds is false? a. GAAP requires the use of the effective interest method. b. The amount of periodic interest expense decreases over the life of a discounted bond issue when the effective interest method is used. c. Over the life of the bond, the carrying value increases for discounted bonds when using the effective interest method. d. The effective interest method applies a constant percentage to the bond carrying value to compute interest expense. Ans: B, LO: 6, Topic: Effective-Interest Amortization, Subtopic: NA, Bloom: K, Difficulty: Hard, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

*243. On January 1, Ace Service Inc. issued $5,000,000, 9% bonds for $4,695,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Ace Service uses the effective-interest method of amortizing bond discount. At the end of the first year, Ace Service should report unamortized bond discount of a. $274,500. b. $285,500. c. $258,050. d. $255,000. Ans: B, LO: 6, Topic: Effective-Interest Amortization, Subtopic: Amortizing Bond Discount, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($4,695,000  .10)  ($5,000,000  .09)  $19,500; [($5,000,000  $4,695,000)  $19,500]  $285,500 (Sell. price × 10%) – (Face val. × 9%) = dis. amort.; (Face val. – sell. price) – dis. amort.

*244. On January 1, Acme Corporation issued $4,000,000, 14%, 5-year bonds with interest payable on December 31. The bonds sold for $4,288,384. The market rate of interest for these bonds was 12%. On the first interest date, using the effective-interest method, the debit entry to Interest Expense is for a. $480,000. b. $502,324. c. $514,606. d. $560,000. Ans: C, LO: 6, Topic: Effective-Interest Amortization, Subtopic: Amortizing Bond Premium, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $4,288,384  .12  $514,606 (Sell. price × 12%)

*245. Acme Service Company issued $5,000,000 of 6%, 10-year bonds on one of its interest dates for $4,318,500 to yield an effective annual rate of 8%. The effective-interest method of amortization is to be used. What amount of discount (to the nearest dollar) should be amortized for the first interest period? a. $140,888 b. $68,150 c. $90,960 d. $45,480 Ans: D, LO: 6, Topic: Effective-Interest Amortization, Subtopic: Amortizing Bond Discount, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($4,318,500  .08)  ($5,000,000  .06)  $45,480 (Sell. price × 8%) – (face val. × 6%)

Reporting and Analyzing Liabilities

10-57

*246. Acme Service Company issued $5,000,000 of 6%, 10-year bonds on one of its interest dates for $4,318,500 to yield an effective annual rate of 8%. The effective-interest method of amortization is to be used. The journal entry on the first interest payment date, to record the payment of interest and amortization of discount will include a a. debit to Bond Interest Expense for $300,000. b. credit to Cash for $345,481. c. credit to Discount on Bonds Payable for $45,480. d. debit to Bond Interest Expense for $400,000. Ans: C, LO: 6, Topic: Effective-Interest Amortization, Subtopic: Amortizing Bond Discount, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($4,318,500  .08)  ($5,000,000  .06)  $45,480 (Sell. price × 8%) – (face val. × 6%)

*247. Acme Service Company issued $5,000,000 of 6%, 10-year bonds on one of its interest dates for $4,318,500 to yield an effective annual rate of 8%. The effective-interest method of amortization is to be used. How much bond interest expense (to the nearest dollar) should be reported on the income statement for the end of the first year? a. $346,388 b. $345,480 c. $344,569 d. $300,000 Ans: B, LO: 6, Topic: Effective-Interest Amortization, Subtopic: Amortizing Bond Discount, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $4,318,500  .08  $345,480 (Bond iss. pr. × 8%)

*248. Acme Service Company issued $5,000,000 of 6%, 10-year bonds on one of its interest dates for $4,318,500 to yield an effective annual rate of 8%. The effective-interest method of amortization is to be used. The journal entry to be recorded at the end of the second year for the payment of interest and the amortization of discount will include a a. debit to Bond Interest Expense for $300,000. b. credit to Cash for $349,118. c. credit to Discount on Bonds Payable for $45,480. d. credit to Discount on Bonds Payable for $49,118. Ans: D, LO: 6, Topic: Effective-Interest Amortization, Subtopic: Amortizing Bond Discount, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($4,318,500  .08)  ($5,000,000  .06)  $45,480; [($4,318,500 + $45,480)  .08]  $300,000  $49,118 (Bond iss. pr. × 8%) – (Face val. × 6%) = dis. amort; [(Bond. iss. pr. + dis. amort.) × 8%] – (Face val. × 6%)

*249. When the effective-interest method of amortization is used for a bond premium, the amount of interest expense for an interest period is calculated by multiplying the a. face value of the bonds at the beginning of the period by the contractual interest rate. b. face value of the bonds at the beginning of the period by the effective interest rate. c. carrying value of the bonds at the beginning of the period by the contractual interest rate. d. carrying value of the bonds at the beginning of the period by the effective interest rate. Ans: D, LO: 6, Topic: Effective-Interest Amortization, Subtopic: Amortizing Bond Premium, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

10-58

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

*250. The amortization of a bond premium will result in reporting an amount of interest expense for an interest period that a. is less than the amount of cash to be paid for interest for the period. b. exceeds the amount of cash to be paid for interest for the period. c. equals the amount of cash to be paid for interest for the period. d. has no predictable relationship with the amount of cash to be paid for interest for the period. Ans: A, LO: 6, Topic: Effective-Interest Amortization, Subtopic: Amortizing Bond Premium, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

*251. The effective-interest method of amortization of bond premiums and discounts is considered superior to the straight-line method because it results in a(n) a. interest rate that is close to the market interest rate throughout the term of the bond. b. uniform rate of interest. c. more variable interest rate. d. interest rate that increases or decreases slightly over time. Ans: B, LO: 6, Topic: Effective-Interest Amortization, Subtopic: NA, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

*252. Which of the following statements best describes the behavior over time of the components of equal mortgage payments? a. The proportion of interest expense to the payment of principal remains the same. b. Interest expense increases and payment of principal decreases. c. Payment of principal increases and interest expense decreases. d. Both payment of principal and interest expense decrease. Ans: C, LO: 7, Topic: Accounting for Long-term Notes Payable, Subtopic: NA, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

*253. Suppose that Nike® purchased a building on January 2 by signing a long-term $3,360,000 mortgage with monthly payments of $30,800. The mortgage carries an interest rate of 10 percent. The entry to record the mortgage will include a a. debit to the Cash account for $3,360,000. b. credit to the Cash account for $3,360,000. c. debit to the Mortgage Payable account for $3,360,000. d. credit to the Mortgage Payable account for $3,360,000. Ans: D, LO: 7, Topic: Accounting for Long-term Notes Payable, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control Solution: $3,360,000 face value

*254. Suppose that Nike® purchased a building on January 2 by signing a long-term $3,360,000 mortgage with monthly payments of $30,800. The mortgage carries an interest rate of 10 percent. The entry to record the first monthly payment will include a a. debit to the Cash account for $30,800. b. credit to the Cash account for $28,000. c. debit to the Interest Expense account for $28,000. d. credit to the Mortgage Payable account for $30,800. Ans: C, LO: 7, Topic: Accounting for Long-term Notes Payable, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Reporting and Analyzing Liabilities

10-59

Solution: [($3,360,000  .10)  12]  $28,000 ([(Mort. bal. × 10%) ÷ 12]

*255. Suppose that Nike® purchased a building on January 2 by signing a long-term $3,360,000 mortgage with monthly payments of $30,800. The mortgage carries an interest rate of 10 percent. The amount owed on the mortgage after the first payment will be a. $3,360,000. b. $3,357,200. c. $3,332,000. d. $3,329,200. Ans: B, LO: 7, Topic: Accounting for Long-term Notes Payable, Subtopic: NA, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $3,360,000  [$30,800  ($3,360,000  .10  1/12)]  $3,357,200 Mort. bal. – [mon. pay. – (mort. bal. × 10% × 1/12)]

*256. Ace Service Company borrowed $1,250,000 from Jackson County Bank on January 1, 2024 in order to expand its data mining capabilities. The five-year note required annual payments of $325,545 and carried an annual interest rate of 9.5%. What is the amount of expense Ace must recognize on its 2025 income statement? a. $118,750. b. $99,104. c. $87,821. d. $77,591. Ans: B, LO: 7, Topic: Accounting for Long-term Notes Payable, Subtopic: NA, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $1,250,000  .095  $118,750; [$1,250,000  ($325,545  $118,750)]  .095  $99,104 Amount bor. × 9.5% = int. exp.; [Amount bor. – (ann. pay. – int. exp.)] × 9.5%

*257. Ace Service Company borrowed $1,250,000 from Jackson County Bank on January 1, 2024 in order to expand its data mining capabilities. The five-year note required annual payments of $325,545 and carried an annual interest rate of 9.5%. What is the balance in the notes payable account at December 31, 2025 after the annual payment? a. $1,250,000 b. $816,764 c. $1,043,205 d. $1,012,500 Ans: B, LO: 7, Topic: Accounting for Long-term Notes Payable, Subtopic: NA, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $1,250,000  .095  $118,750; $1,250,000  ($325,545  $118,750)  $1,043,205; $1,043,205  ($325,545  $99,104)  $816,764 (Amount bor. × 9.5%) = int. exp.; [Amount bor. – (ann. pay. – int. exp.)] – (ann. pay. – int. exp.)

*258. A1 Discount Retail Corporation borrowed $800,000 from Jackson County Bank on May 31, 2024. The three-year, 7% note required annual payments of $304,840 beginning May 31, 2025. Interest expense for the year ended December 31, 2024 was a. $32,667. b. $37,333. c. $56,000. d. $0. Ans: A, LO: 7, Topic: Accounting for Long-term Notes Payable, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $800,000  .07  7/12  $32,667 (Amount bor. × 7% × 7/12)

10-60

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

*259. A1 Discount Retail Corporation borrowed $800,000 from Jackson County Bank on May 31, 2024. The three-year, 7% note required annual payments of $304,840 beginning May 31, 2025. The total amount of interest to be paid over the life of the loan is a. $56,000. b. $114,520. c. $223,470. d. $168,000. Ans: B, LO: 7, Topic: Accounting for Long-term Notes Payable, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($304,840  3)  $800,000  $114,520 (Ann. pay. × 3) – amount bor.

*260. Suppose that Poshmark, Inc. borrowed $2,000,000 from Jackson County Bank on January 1, 2024. The five-year note required annual payments of $520,872 and carried an annual interest rate of 9.5%. What is the amount of expense Poshmark must recognize on its 2025 income statement? a. $190,000 b. $158,567 c. $140,518 d. $124,146 Ans: B, LO: 7, Topic: Accounting for Long-term Notes Payable, Subtopic: NA, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $2,000,000  .095  $190,000; [$2,000,000  ($520,872  $190,000)]  .095  $158,567 (Amount bor. × 9.5% = int. exp.; [Amount bor. [(ann. pay. – int. exp.)] × 9.5%

*261. Poshmark, Inc. borrowed $2,000,000 from Jackson County Bank on January 1, 2024. The five-year note required annual payments of $520,872 and carried an annual interest rate of 9.5%. What is the balance in the notes payable account at January 1, 2026 after the annual payment? a. $2,000,000 b. $1,306,823 c. $1,669,128 d. $1,620,000 Ans: B, LO: 7, Topic: Accounting for Long-term Notes Payable, Subtopic: NA, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $2,000,000  .095  $190,000; [$2,000,000  ($520,872  $190,000)]  .095  $158,567*, $2,000,000  .095  $190,000; $2,000,000  ($520,872  $190,000)  ($520,872  $158,657*)  $1,306,823 (Amount bor. × 9.5%); (Amount bor. – (ann. pay. – int.))

*262. A1 Corporation borrowed $1,500,000 from Jackson County Bank on May 31, 2024. The three-year, 7% note required annual payments of $571,575 beginning May 31, 2025. Interest expense for the year ended December 31, 2024 was a. $61,250. b. $70,000. c. $105,000. d. $0. Ans: A, LO: 7, Topic: Accounting for Long-term Notes Payable, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Liabilities

10-61

Solution: $1,500,000  .07  7/12  $61,250 (Amount bor. × 7% × 7/12)

*263. A1 Corporation borrowed $1,500,000 from Jackson County Bank on May 31, 2024. The three-year, 7% note required annual payments of $571,575 beginning May 31, 2025. The total amount of interest to be paid over the life of the loan is a. $105,000. b. $214,725. c. $419,005. d. $315,000. Ans: B, LO: 7, Topic: Accounting for Long-term Notes Payable, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($571,575  3)  $1,500,000  $214,725 ((Ann. pay. × 3) – amount bor.)

10-62

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

BRIEF EXERCISES Be. 264 A1 Sales Company has the following selected accounts after posting adjusting entries: Accounts Payable $ 65,000 Notes Payable, 3-month 50,000 Accumulated Depreciation—Equipment 14,000 Notes Payable, 5-year, 6% 80,000 Payroll Tax Expense 4,000 Interest Payable 3,000 Mortgage Payable 120,000 Sales Taxes Payable 38,000 Instructions Prepare the current liability section of A1 Sales Company's balance sheet, assuming $15,000 of the mortgage is payable next year. Ans: N/A, LO: 1, Topic: What is a Current Liability? Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 264 A1 SALES COMPANY Current Liabilities Current portion of long-term debt Notes payable, 3-month Accounts payable Sales taxes payable Interest payable Total current liabilities

$ 15,000 50,000 65,000 38,000 3,000 $171,000

Be. 265 On April 1, A1 Company borrows $100,000 from Jackson County Bank by signing a 6-month, 6%, interest-bearing note. Instructions Prepare the necessary entries below associated with the note payable on the books of A1 Company. (a) Prepare the entry on April 1 when the note was issued. (b) Prepare any adjusting entries necessary on June 30 in order to prepare the semiannual financial statements. Assume no other interest accrual entries have been made. Ans: N/A, LO: 1, Topic: What is a Current Liability? Subtopic: Notes Payable, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Reporting and Analyzing Liabilities

10-63

Solution 265 (a)

(b)

April

Cash .......................................................................... Notes Payable ...................................................

100,000

Interest Expense ........................................................ Interest Payable ................................................ ($100,000 × 6% × 3/12) (Face val. × 6% × 3/12

1,500

June 30

100,000 1,500

Be. 266 Ace Pet Supply Company billed its customers a total of $840,000 for the month of November. The total includes a 5% state sales tax. Instructions (a) Determine the proper amount of revenue to report for the month. (b) Prepare the general journal entry to record the revenue and related liabilities for the month. Ans: N/A, LO: 1, Topic: What is a Current Liability? Subtopic: Sales Taxes Payable, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 266 (a)

$840,000 ÷ 1.05 = $800,000 is the total sales revenue.

(b)

$800,000  .05 = $40,000 is the state sales tax liability. (Tot. billed ÷ 1.05) × 5% Journal Entry: Accounts Receivable ................................................................... Sales Revenue ................................................................... Sales Taxes Payable ..........................................................

840,000 800,000 40,000

Be. 267 A1 Discount Supply Company had cash sales of $86,800 (including taxes) for the month of June. Sales are subject to 8.5% sales tax. Prepare the entry to record the sale. Ans: N/A, LO: 1, Topic: What is a Current Liability? Subtopic: Sales Taxes Payable, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 267 Cash ........................................................................................... Sales Revenue ................................................................... Sales Taxes Payable .......................................................... *(Cash sales ÷ 1.085) × 8.5%

86,800 80,000 6,800

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

10-64 Be. 268

Ace Publications publishes a golf magazine for women. The magazine sells for $4.00 a copy on the newsstand. Yearly subscriptions to the magazine cost $36 per year (12 issues). During December 2024, Ace Publications sells 4,000 copies of the golf magazine at newsstands and receives payment for 6,000 subscriptions for 2025. Financial statements are prepared monthly. Instructions (a) Prepare the December 2024 journal entries to record the newsstand sales and subscriptions received. (b)

Prepare the necessary adjusting entry on January 31, 2025. The January 2025 issue has been mailed to subscribers.

Ans: N/A, LO: 1, Topic: What is a Current Liability? Subtopic: Unearned Revenues, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 268 (a)

(b)

Cash (4,000 × $4) ....................................................................... Sales Revenue....................................................................

16,000

Cash (6,000  $36) ...................................................................... Unearned Subscription Revenue ........................................

216,000

16,000 216,000

$216,000 ÷ 12 months = $18,000 Unearned Subscription Revenue ................................................. Subscription Revenue ......................................................... (*Num. of subscr. × subscr. pr./yr.) ÷ 12

18,000 18,000

Be. 269 The board of directors of A1 Health Supply Corporation is considering two plans for financing the purchase of new plant equipment. Plan #1 would require the issuance of $5,000,000, 6%, 20-year bonds at face value. Plan #2 would require the issuance of 200,000 shares of $5 par value common stock that is selling for $25 per share on the open market. A1 currently has 100,000 shares of common stock outstanding and the income tax rate is expected to be 30%. Assume that income before interest and income taxes is expected to be $500,000 if the new factory equipment is purchased. Instructions Prepare a schedule that shows the expected net income after taxes and the earnings per share on common stock under each of the plans that the board of directors is considering. Ans: N/A, LO: 2, Topic: Characteristics of Bonds, Subtopic: Bond Trading, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Liabilities

10-65

Solution 269 Plan #1 Issue Bonds $500,000 300,000 200,000 60,000 $140,000

Plan #2 Issue Stock $500,000 — 500,000 150,000 $350,000

Outstanding shares

100,000

300,000

Earnings per share

$1.40

$1.17

Income before interest and taxes Interest expense ($5,000,000 × 6%) Income before taxes Income taxes (30%) Net income

*(Inc. bef. int. + tax – (Face val. × 6%) = IBT; (IBT × (1 – .30))

Be. 270 On January 1, 2025, Hannigan Company issued bonds with a face value of $600,000. The bonds carry a stated interest of 7% payable each January 1. a. Prepare the journal entry for the issuance assuming the bonds are issued at 97. b. Prepare the journal entry for the issuance assuming the bonds are issued at 102. Ans: N/A, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 270 (a)

Cash ........................................................................................... Discount on Bonds Payable ........................................................ Bonds Payable ...................................................................

582,000 18,000* 600,000

*(Face val. – (Face val. × 97%))

(b)

Cash ........................................................................................... Bonds Payable ................................................................... Premium on Bonds Payable. ..............................................

612,000 600,000 12,000*

*(Face val. × 102%) – Face val.

Be. 271 On January 1, 2025, Acme Corporation issued $900,000, 6%, 10-year bonds at face value. Interest is payable annually on January 1. Acme Corporation has a calendar year-end. Instructions Prepare all entries related to the bond issue for 2025. Ans: N/A, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at Face Value, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

Solution 271 2025 Jan.

Dec. 31

Cash .................................................................................. Bonds Payable...........................................................

900,000

Interest Expense.................................................................

54,000*

900,000

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

10-66

Interest Payable .........................................................

54,000

*(face val. × 6%)

*Be. 272 Ace Services, Inc. issued $400,000, 10%, 10-year bonds on January 1, 2025, at 105. Interest is payable annually on December 31. Ace uses the straight-line method of amortization and has a calendar year-end. Instructions Prepare all journal entries made in 2025 related to the bond issue. Ans: N/A, LO: 5, Topic: Straight-line Amortization, Subtopic: Amortizing Bond Premium, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

*Solution 272 2025 Jan. 1

Cash ................................................................................... Bonds Payable ........................................................... Premium on Bonds Payable .......................................

420,000

Interest Expense ................................................................. Premium on Bonds Payable ................................................ Cash........................................................................... ($400,000 × 10% = $40,000) ($20,000 × 1/10 = $2,000)

38,000* 2,000

400,000 20,000*

*(Face val. × 105%) – face val.

Dec. 31

40,000

*(Face val. × 10%) – (bond prem. ÷ 10)

Be. 273 Suppose that Sony sold $1,000,000, five-year, 5% bonds on January 1, 2025 for $980,000. The company uses straight-line amortization. Complete the following bond amortization schedule for 2025 and 2026: BOND AMORTIZATION SCHEDULE Interest Interest Discount Unamortized to be paid expense Amortization Discount

Interest Periods

Bond Carrying Value

January 1, 2025 January 1, 2026 Ans: N/A, LO: 5, Topic: Straight-line Amortization, Subtopic: Amortizing Bond Discount, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 273 BOND AMORTIZATION SCHEDULE Interest Interest Discount Unamortized to be paid expense Amortization Discount 20,000 50,000(1) 54,000 (3) 4,000 (2) 16,000 (4)

Interest Periods January 1, 2025 January 1, 2026 (1) (2)

$1,000,000*0.05 = $50,000 $20,000/5 = $4,000

Bond Carrying Value 980,000 984,000 (5)

Reporting and Analyzing Liabilities (3) (4) (5)

10-67

$50,000 + $4,000 = $54,000 $20,000 - $4,000 = $16,000 $980,000 + $4,000 = $984,000

*Be. 274 A1 Discount Supply Company issued $700,000, 10%, 10-year bonds on January 1, 2025 at 105. Interest is payable annually on December 31. A1 uses the effective-interest method of amortization and has a calendar year-end and the bonds were issued for an effective interest rate of 8%. Instructions Prepare all journal entries made in 2025 related to the bond issue. Ans: N/A, LO: 6, Topic: Effective-Interest Amortization, Subtopic: Amortizing Bond Premium, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

*Solution 274 2025 Jan. 1

Dec. 31

Cash .................................................................................. Bonds Payable........................................................... Premium on Bonds Payable ....................................... *(Face val. × 105%) – face val.

735,000

Interest Expense................................................................. Premium on Bonds Payable ............................................... Cash .......................................................................... ($735,000 × 8% = $58,800) ($700,000 × 10% = $70,000) ($70,000 – $58,800 = $11,200) *(Face val. × 105%) × 8%

58,800* 11,200

700,000 35,000*

70,000

*Be. 275 Suppose that Lowes issued $5,000,000 of 6%, 10-year bonds on January 1, 2025 for $4,318,500 to yield an effective annual rate of 8%. The effective-interest method of amortization is to be used. Complete the bond amortization schedule for 2025 and 2026: BOND AMORTIZATION SCHEDULE Interest to be paid

Interest Periods

Interest expense

Discount Amortization

Unamortized Discount

Bond Carrying Value

January 1, 2025 January 1, 2026 Ans: N/A, LO: 6, Topic: Effective-Interest Amortization, Subtopic: Amortizing Bond Discount, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

10-68

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

*Solution 275 BOND AMORTIZATION SCHEDULE Interest to be paid

Interest Periods

Interest expense

Discount Amortization

January 1, 2025 300,000 (1)

January 1, 2026 (1) (2) (3) (4) (5)

$5,000,000 *.06 = $300,000 $4,318,500 *. 08 = $345,480 $345,480 -$300,000 = $45,480 $681,500 - $45,480 = $636,020 $4,318,500 + $45,480 = $4,363,980

345,480 (2)

45,480 (3)

Unamortized Discount

Bond Carrying Value

681,500

4,318,500

636,020 (4)

4,363,980 (5)

Reporting and Analyzing Liabilities

10-69

EXERCISES Ex. 276 Acme Company has the following selected accounts after posting adjusting entries: Accounts Payable $ 55,000 Notes Payable, 3-month 90,000 Accumulated Depreciation—Equipment 14,000 Notes Payable, 5-year, 3% 75,000 Payroll Taxes Expense 6,000 Interest Payable 5,000 Mortgage Payable 180,000 Sales Taxes Payable 23,000 Instructions (a) Prepare the current liability section of Acme Company's balance sheet, assuming $12,000 of the mortgage is payable next year. (b) Comment on Acme’s liquidity, assuming total current assets are $450,000. Ans: N/A, LO: 1, 4, Topics: Accounting for Current Liabilities, Presentation and Analysis, Subtopic: What is a Current Liability?, Liquidity, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 276 (a)

ACME COMPANY Current Liabilities Current portion of mortgage Notes payable, 3-month Accounts payable Sales taxes payable Interest payable Total current liabilities

(b)

$ 12,000 90,000 55,000 23,000 5,000 $185,000

The liquidity position looks favorable. If all current liabilities are paid out of current assets, there would still be $265,000 of current assets (working capital). The current ratio is 2.43: 1 (450,000/185,000) and it appears as though Acme has sufficient current resources to meet current obligations when due.

Ex. 277 On March 1, A1 Health Services Company borrows $80,000 from Jackson County Bank by signing a 6-month, 6%, interest-bearing note. Instructions Prepare the necessary entries below associated with the note payable on the books of A1. (a)

Prepare the entry on March 1 when the note was issued.

(b)

Prepare any adjusting entries necessary on June 30 in order to prepare the semiannual financial statements. Assume no other interest accrual entries have been made.

(c)

Prepare the entry to record payment of the note at maturity.

Ans: N/A, LO: 1, Topic: What is a Current Liability?, Subtopic: Notes Payable, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

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Solution 277 a)

(b)

March 1

June 30

Cash .......................................................................... Notes Payable ...................................................

80,000

Interest Expense ........................................................ Interest Payable................................................. ($80,000 × 6% × 4/12)

1,600

80,000

1,600

(

(c)

Sept. 1

Notes Payable ............................................................ Interest Payable ......................................................... Interest Expense ........................................................ Cash ..................................................................

80,000 1,600 800 82,400

Ex. 278 On June 1, Ace Company borrows $50,000 from the bank by signing a 60-day, 6%, interestbearing note. Instructions Prepare the necessary entries below associated with the note payable on the books of Ace. (a)

Prepare the entry on June 1 when the note was issued.

(b)

Prepare any adjusting entries necessary on June 30 in order to prepare the monthly financial statements. Assume no other interest accrual entries have been made.

(c)

Prepare the entry to record payment of the note at maturity.

Solution 278 (a)

(b)

(c)

June

June 30

July 31

Cash .......................................................................... Notes Payable ...................................................

50,000

Interest Expense ........................................................ Interest Payable................................................. ($50,000 × 6% ÷ 12)

250

50,000 250 250

50,000

250

50,500

Reporting and Analyzing Liabilities

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Ex. 279 On May 15, A1 Company borrowed money on a 4-month note to provide cash during the slow season of the year. The interest rate on the note was 8%. At the time the note was due, the amount of interest owed was $1,200. Instructions (a) Determine the amount borrowed by A1 (round to the nearest thousand). (b) Assume the amount borrowed was $54,000. What was the interest rate if the amount of interest owed was $900? (c) Prepare the entry for the initial borrowing and the repayment for the facts in part (a) Assume that interest has not been accrued. Ans: N/A, LO: 1, Topic: What is a Current Liability?, Subtopic: Notes Payable, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 279 (a)

Principal  .08  4/12 = $1,200 Principal = $1,200  (.08  4/12) Principal = $45,000

(b)

$54,000  Interest rate  4/12 = $900 Interest Rate = $900  ($54,000  4/12) Interest Rate = 5 percent

(c)

Initial Borrowing: May 15 Cash ………………………………… Notes Payable………….. Repayment: Sept. 15

Notes Payable …………………..… Interest Expense (45,000 × .08 × 4/12)…….. Cash …………………….

45,000 45,000 45,000 1,200 46,200

Ex. 280 In providing accounting services to small business, you encounter the following situations pertaining to cash sales: (1) Company A rings up sales and sales taxes separately on its cash register. On April 10 the register totals are sales $40,000 and sales taxes $2,800. (2) Company B does not segregate sales and sales taxes. Its register total for April 15 is $22,260, which includes a 6% sales tax. Instructions Prepare the entries to record the sales transactions and related taxes for (a) Company A and (b) Company B. Ans: N/A, LO: 1, Topic: What is a Current Liability?, Subtopic: Sales Taxes Payable, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

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Solution 280 Apr. 10

COMPANY A Cash ........................................................... 42,800 Sales Revenue ................................ Sales Taxes Payable ....................... COMPANY B Cash ........................................................... 22,260 Sales Revenue ($22,260  1.06) ..... Sales Taxes Payable ....................... ($22,260 – $21,000) .....................

40,000 2,800

21,000 1,260*

*(Regis. tot. ÷ 1.06) × 6%

Ex. 281 During the month of March, Ace Company's employees earned wages of $90,000. Withholdings related to these wages were $6,885 for Social Security (FICA), $14,200 for federal income tax, $6,200 for state income tax, and $600 for union dues. The company incurred no cost related to these earnings for federal unemployment tax, but incurred $1,300 for state unemployment tax. Instructions (a) Prepare the necessary March 31 journal entry to record wages expense and wages payable. Assume that wages earned during March will be paid during April. (b) Prepare the entry to record the company's payroll tax expense. Ans: N/A, LO: 1, Topic: Accounting for Current Liabilities Subtopic: Payroll and Payroll Taxes Payable, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 281 (a)

Mar. 31

Salaries and Wages Expense............................... FICA Taxes Payable ....................................... Federal Income Taxes Payable .................... State Income Taxes Payable .......................... Union Dues Payable ....................................... Salaries and Wages Payable ..........................

90,000 6,885 14,200 6,200 600 62,115*

*(Wages – FICA tax – fed. inc. tax – st. inc. tax – un. dues)

(b)

Mar. 31

Payroll Tax Expense.............................................. FICA Taxes Payable ....................................... State Unemployment Taxes Payable ............

8,185 6,885 1,300

Reporting and Analyzing Liabilities

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Ex. 282 Presented below are two independent situations: (a)

Company A redeemed $480,000 of its bonds on June 30, 2025, at 102 and immediately retired them. The carrying value of the bonds on the retirement date was $431,100. The bonds pay annual interest and the interest payment due on June 30, 2025 has been made and recorded.

(b)

Company B redeemed $330,000 of its bonds at 96 on June 30, 2025, and immediately retired them. The carrying value of the bonds on the retirement date was $321,000. The bonds pay annual interest and the interest payment due on June 30, 2025 has been made and recorded.

Instructions For each of the independent situations, prepare the journal entry to record the retirement or conversion of the bonds. Ans: N/A, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Redeeming Bonds Before Maturity, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 282 (a) June 30

Bonds Payable ........................................................... Loss on Bond Redemption ......................................... Discount on Bonds Payable .............................. Cash ................................................................. ($480,000 – $431,100 = $48,900) ($480,000 × 1.02 = $489,600)

480,000 58,500*

Bonds Payable ........................................................... Discount on Bonds Payable .............................. Gain on Bond Redemption ............................... Cash ................................................................. ($330,000 – $321,000 = $9,000) ($330,000 × 96% = $316,800)

330,000

48,900 489,600

(*Carry. val. – (face val. × 102%))

(b) June 30

9,000 4,200* 316,800

*(Carry. val. – (face val. × 96%))

Ex. 283 The adjusted trial balance for A1 Service Corporation at the end of 2025 contained the following accounts: Bonds payable, 10%........................................................... $500,000 Interest payable .................................................................. 20,000 Discount on bonds payable ................................................ 30,000 Notes payable, 9%, due 2027............................................. 70,000 Accounts payable ............................................................... 120,000 Instructions (a)

Prepare the long-term liabilities section of the balance sheet.

(b)

Indicate the proper balance sheet classification for the accounts listed above that do not belong in the long-term liabilities section.

Ans: N/A, LO: 4, Topic: Presentation and Analysis, Subtopic: Presentation, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 283 (a)

(b)

Long-term liabilities Bonds payable 10% Less: Unamortized bond discount Notes payable, 9% Total long-term liabilities

$500,000 30,000

$470,000 70,000 $540,000

Interest payable and accounts payable should be classified as current liabilities.

Ex. 284 Ace Industries, Inc. reports the following liabilities (in thousands) on its January 31, 2025 balance sheet and notes to the financial statements. Accounts payable Accrued pension liability-long-term Property taxes payable Bonds payable Current portion of long-term debt Income taxes payable Notes payable—long-term

$3,463.9 1,215.2 1,158.1 1,961.2 1,992.2 235.2 9,246.7

Mortgage payable Federal income taxes payable Salaries and wages payable Unused operating line of credit Warranty liability— current

435.6 558.1 2,563.6 3,337.6 1,617.3

Instructions Prepare the liabilities section of Ace's balance sheet at January 31, 2025. Ans: N/A, LO: 4, Topic: Presentation and Analysis, Subtopic: Presentation, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 284 ACE INDUSTRIES, INC. (Partial) Balance Sheet January 31, 2025 (in thousands) Current liabilities Accounts payable .............................................. Salaries and wages payable .............................. Current portion of long-term debt ....................... Warranty liability ................................................ Property taxes payable ...................................... Federal income taxes payable ........................... Income taxes payable ........................................ Total current liabilities .................................

$3,463.9 2,563.6 1,992.2 1,617.3 1,158.1 558.1 235.2 $11,588.4

Reporting and Analyzing Liabilities

Solution 284

10-75

(Cont.)

Long-term liabilities Notes payable, long-term.................................... Bonds payable.................................................... Accrued pension liability ..................................... Mortgage payable............................................... Total long-term liabilities ............................. Total liabilities ................................................................

$9,246.7 1,961.2 1,215.2 435.6 12,858.7 $24,447.1

Ex. 285 McDonald's financial statements contained the following selected data (in millions). Current assets Total assets Current liabilities Total liabilities

$ 3,881.9 29,391.7 4,498.5 13,611.9

Interest expense Income taxe expense Net income

410.1 1,237.1 2,395.1

Instructions Compute the following values and provide a brief interpretation of each. (a) Current Ratio (b) Debt to assets ratio. (c) Times interest earned. Ans: N/A, LO: 4, Topic: Presentation and Analysis, Subtopic: Analysis, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 285 (a) (b) (c)

Current ratio = $3,881.9  $4,498.5 = .86:1 (cur. assets/cur. liab.) Debt to assets ratio = $13,611.9  $29,391.7 = 46% (Tot. liab./tot. assets) Times interest earned = ($2,395.1 + $1,237.1 + $410.1)  $410.1 = 9.86 times (Net inc. + inc. tax + int. exp.) ÷ int. exp.

A current ratio that is less than 1.00 indicates lower liquidity. The debt to assets ratio indicates that $.46 of each dollar of asset have been financed by creditors. The times interest earned of almost 10 times indicated that McDonald's income is large enough to make required interest payments as they come due. *Ex. 286 Ace Pet Supply Company issued $300,000 of 8%, 10-year bonds at 102. Interest is paid annually, and the straight-line method is used for amortization. Assume that the market rate for similar investments is 7%. The bonds are issued on the date of the bonds. a. What amount was received for the bonds? b. How much interest is paid each interest period? c. What is the premium amortization for the first interest period? d. How much interest expense is recorded on the first interest date? e. What is the carrying value of the bonds after the first interest date? Ans: N/A, LO: 5, Topic: Straight-Line Amortization, Subtopic: Amortizing Bond Premium, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

10-76

BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

*Solution 286 a. b. c. d. e.

$306,000 $24,000 $600 $23,400 $305,400

($300,000 × 1.02) (Face val. × 102%) ($300,000 × .08) [($306,000 – $300,000) /10] [(Face val. × 102%) – face val.] ÷ 10 ($24,000 – $600) ($306,000 – $600) (Face val. × 102%) – [(face val. × 102%) – face val.) ÷ 10]

*Ex. 287 On January 1, 2025, Acme Corporation issued $600,000, 5%, 5-year bonds dated January 1, 2025 at 95. The bonds pay annual interest on January 1. The company uses the straight-line method of amortization and has a calendar year-end. Instructions Prepare all the journal entries that Acme Corporation would make related to this bond issue through January 1, 2026. Be sure to indicate the date on which the entries would be made. Ans: N/A, LO: 5, Topic: Straight-Line Amortization, Subtopic: Amortizing Bond Premium, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

*Solution 287 January 1, 2025 Cash ($600,000 × 95) ...................................................................... 570,000 Discount on Bonds Payable ......................................................... 30,000* Bonds Payable.................................................................... (To record sale of bonds)

600,000

*(Face val. – (Face val. × 95%))

December 31, 2025 Interest Expense ($600,000 × .05) + ($30,000 ÷ 5)...................... Discount on Bonds Payable ................................................ Interest Payable .................................................................. (To accrue annual interest)

36,000* 6,000 30,000

*(Face val. × 5%) + [(Face val. × (1 – .95)) ÷ 5]

January 1, 2026 Interest Payable .......................................................................... Cash .................................................................................. (To record payment of bond interest liability)

30,000 30,000

Reporting and Analyzing Liabilities

10-77

*Ex. 288 A1 Company issued $800,000, 10%, 20-year bonds on January 1, 2025 at 104. Interest is payable annually on January 1. A1 uses the straight-line method of amortization and has a calendar year-end. Instructions Prepare all journal entries made in 2025 related to the bond issue. Ans: N/A, LO: 5, Topic: Straight-Line Amortization, Subtopic: Amortizing Bond Premium, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

*Solution 288 2025 Jan. 1

832,000 800,000 32,000*

*(Face val. × 104%) – face val.

Dec. 31

Interest Expense................................................................. Premium on Bonds Payable ............................................... Interest Payable ......................................................... ($800,000 × 10% = $80,000) ($32,000 × 1/20 = $1,600)

78,400* 1,600 80,000

*(Face val. × 10%) – [(Face val. × 104%) – face val.) ÷ 20]

*Ex. 289 Suppose that Walmart issued $2,000,000, 7%, 20-year bonds on January 1, 2025 at 105. Interest is payable annually on January 1. Walmart uses straight-line amortization for bond premium or discount. Instructions Prepare the journal entries to record the following events. (a) The issuance of the bonds. (b) The accrual of interest and the premium amortization on December 31, 2025. (c) The payment of interest on January 1, 2024. (d) The redemption of the bonds at maturity, assuming interest for the last interest period has been paid and recorded. Ans: N/A, LO: 3, 5, Topic: Straight-Line Amortization, Subtopic: Amortizing Bond Premium, Redeeming Bonds Before Maturity, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

*Solution 289 (a)

2025 Jan.

Cash ($2,000,000  105%)........................ Bonds Payable .................................. Premium on Bonds Payable ...............

2,100,000 2,000,000 100,000*

*(Face val. × 105%) – face val.

(b)

Dec. 31

Interest Expense ........................................ Premium on Bonds Payable ($100,000  1/20) ...................................... Interest Payable ($2,000,000  7%) ........................... .

135,000* 5,000 140,000

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e *(Face val. × 7%) – [(Face val. × 105%) – face val.) ÷ 20]

Reporting and Analyzing Liabilities

*Solution 289 (c)

(d)

2024 Jan.

2040 Jan.

10-79

(Cont.) 1

Interest Payable ........................................... Cash .....................................................

140,000

Bonds Payable ............................................. Cash .....................................................

2,000,000

140,000

2,000,000

*Ex. 290 Suppose that Patagonia issued $1,000,000, 8%, 10-year bonds on December 31, 2024 for $960,000. Interest is payable annually on December 31. Patagonia uses the straight-line method to amortize bond premium or discount. Instructions Prepare the journal entries to record the following events. (a) The issuance of the bonds. (b) The payment of interest and the discount amortization on December 31, 2025. (c) The redemption of the bonds at maturity, assuming interest for the last interest period, has been paid and recorded. Ans: N/A, LO: 3, 5, Topic: Accounting for Bond Transactions, Straight-Line Amortization, Subtopic: Redeeming Bonds At Maturity, Amortizing Bond Discount, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

*Solution 290 (a)

2024 Dec. 31

(b)

2025 Dec. 31

Cash............................................................. Discounts of Bonds Payable .......................... Bonds Payable ..................................

960,000 40,000

Interest Expense ......................................... Discount on Bonds Payable ($40,000  1/10) ................................ Cash ($1,000,000  8%) ........................

84,000*

1,000,000

4,000 80,000

*(Face val. × 8%) + [(face val. – sell. price) ÷ 10]

(c)

2034 Dec. 31

Bond Payable .............................................. Cash ....................................................

1,000,000 1,000,000

*Ex. 291 Ace Restaurant Supply Company issued $900,000 of 10%, 5-year bonds at 108. Interest is paid annually, and the effective interest method is used for amortization. Assume that the market rate for similar investments is 8%. The bonds are issued on the date of the bonds. a. b. c. d. e.

What amount was received for the bonds? How much interest is paid each interest period? What is the premium amortization for the first interest period? How much interest expense is recorded on the first interest date? What is the carrying value of the bonds after the first interest date?

Ans: N/A, LO: 6, Topic: Effective-Interest Amortization, Subtopic: Amortizing Bond Premium, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA:

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Reporting and Analyzing Liabilities

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*Solution 291 a. b. c. d. e.

$972,000 ($900,000 × 1.08) (Face val. × 108%) $90,000 ($900,000 × .10) $12,240 [$90,000 – ($972,000 × .08)] (Face val. × 10%) – [(face val. × 108% × 8%)] $77,760 ($972,000 × .08) $959,760 ($972,000 – $12,240) (Face val. × 108%) – [(face val. × 10%) – (face val. × 108% × 8%)]

*Ex. 292 A1 Outfitters issued $500,000, 10%, 5-year bonds on January 1, 2025, at 106. Interest is payable annually on January 1. A1 uses the effective-interest method of amortization and has a calendar year-end and the bonds were issued for an effective interest rate of 8%. Instructions Prepare all journal entries made in 2025 related to the bond issue. Ans: N/A, LO: 6, Topic: Effective-Interest Amortization, Subtopic: Amortizing Bond Premium. Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

*Solution 292 2025 Jan. 1

Cash (500,000 × 1.06) ............................................................. 530,000 Bonds Payable........................................................... Premium on Bonds Payable .......................................

500,000 30,000*

*(Face val. × 106%) – face val.

Dec. 31

Interest Expense................................................................. 42,400 Premium on Bonds Payable ............................................... 7,600 Interest Payable ......................................................... ($530,000 × 8% = $42,400) (face val. × 106% × 8%) ($500,000 × 10% = $50,000) ($50,000 – $42,400 = $7,600) (face val. × 10%) – (face val. × 1.06 × 8%)

50,000

*Ex. 293 Suppose that adidas receives $2,200,000 when it issues a $2,200,000, 8%, mortgage note payable to finance the construction of a building at December 31, 2025. The terms provide for annual installment payments of $257,000 on December 31. Instructions Prepare the journal entries to record the mortgage loan and the first two installment payments. Ans: N/A, LO: 7, Topic: Accounting for Long-term Notes Payable, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

*Solution 293 2025

2026

Dec.

Issuance of Note Cash.................................................. Mortgage Payable ........................

First Installment Payment Interest Expense ($2,200,000  8%) ........................... Mortgage Payable .................................

2,200,000 2,200,000

176,000 81,000*

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Cash .............................................. *(Ann. Pay. – (Mort. loan × 8%))

257,000

Reporting and Analyzing Liabilities

*Solution 293 2027

Dec.

10-83

(Cont.) Second Installment Payment Interest Expense [($2,200,000 – $81,000)  8%] ........ Mortgage Payable ................................. Cash ...............................................

*(Mort. loan – [ann. pay. – (mort. loan × 8%)]

169,520* 87,480 257,000

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

COMPLETION STATEMENTS 294. A current liability is a debt that can be expected to be paid within or the , whichever is longer.

year(s)

Ans: N/A, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: What is a Current Liability?, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

295. Liabilities are classified on the balance sheet as being liabilities.

liabilities or

296. Obligations in written form are called to pay interest.

and usually require the borrower

Ans: N/A, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Notes Payable, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

297. With an interest-bearing note, a borrower must pay the plus at maturity.

of the note

Ans: N/A, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Notes Payable, loom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

298. Sales taxes collected from customers are a are remitted to the taxing agency.

of the business until they

Ans: N/A, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Sales Taxes Payable, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

299. Payroll taxes include the employer’s share of and federal taxes.

taxes and both state

Ans: N/A, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Payroll and Payroll Taxes Payable, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

300. A bond secured by real estate is called a

bond.

Ans: N/A, LO: 2, Topic: Characteristics of Bonds, Subtopic: Secured and Unsecured Bonds, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

301. The terms of a bond issue are set forth in a formal legal document called a bond . Ans: N/A, LO: 2, Topic: Characteristics of Bonds, Subtopic: Issuing Procedure, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

302. Unsecured bonds that are issued against the general credit of the borrower are called bonds. Ans: N/A, LO: 2, Topic: Characteristics of Bonds, Subtopic: Secured and Unsecured Bonds, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Liabilities

10-85

303. The market price of bonds is obtained by computing the present value of the paid at maturity, and all payments to be made over the term of the bond. Ans: N/A, LO: 2, Topic: Characteristics of Bonds, Subtopic: Determining the Market Price of a Bond, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

304. If bonds are issued at face value (par), it indicates that the interest must be equal to the rate of interest.

rate of

Ans: N/A, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at Face Value, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

305. If a $1 million, 10%, 10-year bond issue was sold at 97, the cash proceeds from the issuance of the bonds amounted to $ . Ans: N/A, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at a Discount, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control

306. If bonds were issued at a premium, then the contractual rate of interest was than the market rate of interest. Ans: N/A, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at a Premium, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

307. Discount on Bonds Payable is (“deducted from” or “added to”) bonds payable on the balance sheet. Premium on Bonds Payable is (“deducted from” or “added to”) bonds payable on the balance sheet. Ans: N/A, LO: 4, Topic: Presentation and Analysis, Subtopic: Presentation, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

308. The ratio provides an indication of a company’s ability to meet interest payments as they come due. Ans: N/A, LO: 4, Topic: Presentation and Analysis, Subtopic: Solvency, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

*309. A method of amortizing bond discount or premium that allocates an equal amount each period is the method. Ans: N/A, LO: 5, Topic: Straight-Line Amortization, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Answers to Completion Statements 294. 295. 296. 297. 298. 299. 300. 301.

one, operating cycle current, long-term notes payable face value, interest current liability FICA, unemployment mortgage indenture

302. 303. 304. 305. 306. 307. 308. *309.

debenture principal, interest stated (contractual), market (effective) 970,000 greater deducted from, added to times interest earned straight-line

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

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MATCHING 310. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.

Serial bonds Debenture bonds Bond indenture Market interest rate Discount on bonds payable

F. G. H. I. J.

Current ratio Straight-line method of amortization Times interest earned Callable bonds Maturity date

1. Bonds subject to retirement at a stated dollar amount prior to maturity. 2. A legal document that sets forth the terms of a bond issue. 3. Bonds that mature in installments. 4. A measure of a company’s short-term liquidity. 5. The time that the final payment on a bond is due from the bond issuer. 6. A measure of a company’s solvency. 7. The rate investors demand for loaning funds to a corporation. 8. Unsecured bonds issued against the general credit of the borrower. 9. Occurs when the contractual rate of interest is less than the market rate of interest. 10. Produces a periodic interest expense that is the same amount each interest period. Ans: N/A, LO: 2,3,4,5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Answers to Matching 1. 2. 3. 4. 5.

I C A F J

6. 7. 8. 9. 10.

H D B E G

Reporting and Analyzing Liabilities

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SHORT-ANSWER ESSAY QUESTIONS S-A E 311 (a) (b)

Identify three taxes commonly paid by employers on employees' salaries and wages. Where in the financial statements does the employer report taxes withheld from employees' pay?

Ans: N/A, LO: 1, Topic: Accounting for Current Liabilities, Subtopic: Payroll and Payroll Taxes Payable, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Communications, IMA: Reporting

Solution 311 (a)

(b)

Three taxes commonly paid by employers on employees' salaries and wages are (1) Social Security & Medicare (FICA) taxes, (2) state unemployment taxes, and (3) federal unemployment taxes. Taxes withheld from employees' gross pay and not yet remitted to the appropriate government agency are reported in the balance sheet as current liabilities.

S-A E 312 (a) (b)

What is a convertible bond? Discuss the advantages of a convertible bond from the standpoint of the bondholders and of the issuing corporation.

Ans: N/A, LO: 2, Topic: Characteristics of Bonds, Subtopic: Convertible and Callable Bonds, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Communications, IMA: Reporting

Solution 312 (a) (b)

A convertible bond permits bondholders to convert it into common stock at the option of the bondholders. For bondholders, the conversion option gives an opportunity to benefit if the market price of the common stock increases substantially. For the issuer, convertible bonds usually have: (1) a lower rate of interest than other debt securities, (2) a higher selling price.

S-A E 313 When determining the value of a bond using present value, what are the two components used in the calculation? Ans: N/A, LO: 2, Topic: Characteristic of Bonds, Subtopic: Determining the Market Price of a Bond, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Communications, IMA: Reporting

Solution 313 One component is the periodic interest payments over the life of the bonds discounted using the market interest rate to calculate its present value. The other component is the present value of the single payment at maturity also based on the market interest rate. S-A E 314 When a bond sells at a discount, what is probably true about the market interest rate versus the stated interest rate? Discuss. Ans: N/A, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Issuing Bonds at a Discount, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Communications, IMA: Reporting

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 314 For an investor to purchase a bond at a discount, the stated interest rate normally must be below the market interest rate for similar bonds. Investors will need to make up the difference by paying less than the face value for the bonds. S-A E 315 Bonds are frequently issued at amounts greater or less than face value. Describe how the market rate of interest, relative to the contractual rate of interest, affects the selling price of bonds. Ans: N/A, LO: 2, Topic: Accounting for Bond Transactions, Subtopic: Determining the Market Price of a Bond, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Communications, IMA: Reporting

Solution 315 The market rate of interest often is different from the contractual rate of interest; therefore, bonds are frequently issued at amounts greater or less than face value. When the market rate of interest is higher than the contractual rate, investors can find better investments elsewhere. Consequently, there is less demand for the bonds. To make the bonds more attractive, the issue price will be lowered and the bonds will be issued at a discount. Conversely, if the market rate of interest is less than the contractual rate, there will be greater demand for the bonds because of the higher rate of interest. Thus, the issue price will be greater than face value and the bonds will be issued at a premium. S-A E 316 Bonds may be redeemed (retired) before maturity by the issuing corporation. Explain why a company would decide to retire bonds before maturity and the necessary steps to record the redemption. Ans: N/A, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Redeeming Bonds Before Maturity, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Communications, IMA: Reporting

Solution 316 A company may decide to retire bonds before maturity to reduce interest costs and remove debt from its balance sheet. A company will retire debt early only if it has sufficient cash resources. When bonds are retired before maturity, it is necessary to eliminate the carrying value of the bonds at the redemption date and recognize a gain or loss on redemption. The gain or loss is the difference between the cash paid and the carrying value of the bonds. S-A E 317 (a) (b)

In general, what are the requirements for the financial statement presentation of long-term liabilities? What ratios may be computed to evaluate a company's liquidity and solvency?

Ans: N/A, LO: 4, Topic: Presentation and Analysis, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 317 (a)

(b)

The nature and the amount of each long-term liability should be presented in the balance sheet or in schedules in the accompanying notes to the financial statements. The notes should also indicate the interest rates, maturity dates, conversion privileges, and assets pledged as collateral. To evaluate liquidity a company may compute the current ratio. To evaluate long-run solvency a company may compute the debt to total assets and times interest earned ratios. .

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S-A E 318 Katy Perry is discussing the advantages of the effective-interest method of bond premium/discount amortization with her accounting staff. What do you think Katy is saying? Ans: N/A, LO: 6, Topic: Effective-Interest Amortization, Subtopic: NA, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Communications, IMA: Reporting

Solution 318 Katy is probably indicating that since the borrower has the use of the bond proceeds over the term of the bonds, the borrowing rate in each period should be the same. The effective-interest method results in a varying amount of interest expense but a constant rate of interest on the balance outstanding. Accordingly, it results in a better matching of expenses with revenues than the straight-line method. S-A E 319

(Communication)

Hannah Pressley works for Trend Press, a fairly large book publishing firm. Her best friend and rival, Kiera Nilson, works for Lifeline Books, a smaller publisher. Both companies issue $1,000,000 in bonds on July 1. Trend's bonds were issued at a discount, while Lifeline's were issued at a premium. Kiera sent Hannah a text the next day. She told Hannah that it was obvious who the better publisher was and the market had shown its preference! She reminded Hannah again of her recent increase in salary as further proof of the superiority of Lifeline Books. Required: Draft a short email for Hannah to send to Kiera. Explain how such a result could occur. Ans: N/A, LO: 3, Topic: Accounting for Bond Transactions, Subtopic: Discount or Premium on Bonds, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Communications, IMA: Reporting

Solution 319 Many answers are possible. The format should be fairly informal, and the point that a discount or premium is not necessarily a judgment on the strength or weakness of a company should be addressed. A suggested note follows:

Kiera — I can't believe that Lifeline can survive with people like you handling their money! I also can't believe their lack of judgment in giving you a raise! Just kidding! Seriously, though, you can't prove that Trend is a bad company just by the bond price. Our bonds were issued at a discount not because of the market's evaluation of our company, but because we underestimated interest rates. Lifeline got a premium because it overestimated interest rates. You'll have to find some other evidence to prove your company is better, (which you can't, because it isn't.) Seriously (again), congratulations on your raise. Shall we still meet for lunch on Wednesday? Your treat. How about trying our luck with chopsticks at the Chinese Panda? Let me know if your plans change. (signed)

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

IFRS QUESTIONS 1.

Wittebury Corporation retires its £3,000,000 face value bonds at 105 on January 1, following the payment of annual interest. The carrying value of the bonds at the redemption date is £3,112,350. The entry to record the redemption will include a. a credit of £37,650 to Gain on Bond Redemption. b. a debit of £37,650 to Loss on Bond Redemption. c. a credit of £15,000 to Bonds Payable. d. a credit of £37,650 to Bonds Payable.

Ans: b, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Global and Industry Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: FSA Solution: (£3,112,250 – (£3,000,000 X 1.05)) = £37,650 Loss (Carrying value – (Face value x 1.05))

Chang Company retired bonds with a face amount of ¥60,000,000 at 98 when the carrying value of the bond was ¥59,780,000. The entry to record the retirement would include a a. gain on bond redemption of ¥980,000. b. loss on bond redemption of ¥980,000. c. loss on bond redemption of ¥1,200,000. d. gain on bond redemption of ¥1,420,000.

Ans: a, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Global and Industry Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: FSA Solution: ¥59,780,000 - (¥60,000,000 x .98) = ¥980,000 Carryiing value – (Face amount x .98) = Gain on Bond Redemption

Herman Company received proceeds of ₤471,250 on 10-year, 8% bonds issued on January 1, 2018. The bonds had a face value of ₤500,000, pay interest semi-annually on June 30 and December 31, and have a call price of 101. Herman uses the straight-line method of amortization. Herman Company decided to redeem the bonds on January 1, 2020. What amount of gain or loss would Herman report on its 2020 income statement? a. ₤23,000 gain b. ₤28,000 gain c. ₤28,000 loss d. ₤23,000 loss

Ans: c, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Finney Company borrowed €1,600,000 from BankTwo on January 1, 2019, in order to expand its mining capabilities. The five-year note required annual payments of €416,698 and carried an annual interest rate of 9.5%. What is the balance in the notes payable account at December 31, 2020, after the annual payment? a. €1,600,000 b. €1,045,458 c. €1,335,302 d. €1,296,000

Ans: b, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

On January 1, 2020, Michelin Company, a calendar-year company, issued €9,000,000 of mortgage notes payable, of which €3,000,000 is due on January 1 for each of the next three years. The proper statement of financial position presentation on December 31, 2020, is .

Reporting and Analyzing Liabilities

a. b. c. d.

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Current liabilities, €9,000,000. Long-term Debt, €9,000,000. Current liabilities, €4,500,000; Long-term Debt, €4,500,000. Current liabilities, €3,000,000; Long-term Debt, €6,000,000.

Ans: d, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Whitmore Corporation Issues a £1,800,000, 10%, 10-year mortgage on December 31, 2020. The terms call for semi-annual installment payments of £144,435. The entry to record the first installment payment will include a. a debit to Interest Payment of £144,435. b. a debit to Mortgage Notes Payable of £54,435. c. a debit to Interest Expense of £180,000. d. a debit to Cash of £144,435.

Ans: b, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

The adjusted trial balance for Beneteau Corporation at the end of the 2020 included the following accounts: 5-year Bonds Payable 8% €6,620,000 Bond Interest Payable 240,000 Notes Payable (3 mo.) 50,000 Notes Payable (5 yr.) 1,650,000 Mortgage Payable (€150,000 due currently) 2,000,000 Salaries and Wages Payable 68,000 Taxes Payable (due 3/15 of next year) 85,000 The total non-current liabilities reported on the statement of financial position at December 31, 2020 are a. €9,880,000 b. €10,030,000 c. €10,120,000 d. €10,360,000

Ans: c, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: €6,620,000 + €1,650,000 + (€2,000,000 - €150,000) = €10,120,000 (5 year bonds + Notes payable (5 yr.) + (Mortgage payable – current portion) = Total non-current liabilities)

Selected data from 2020 financial statements of Xi Corporation include the following (amount in millions): Current assets Total assets Current liabilities Total liabilities Cash Interest expense income taxes Net income The debt to assets ratio is a. 62.5%. b. 52.7%. .

¥ 759 1,200 400 750 80 50 100 160

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

c. 1.60%. d. 6.2 times. Ans: a, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: 750/1,200 = .625 or 62.5% (Total liabilities/Total assets = debt to assets ratio) a

¥2 billion, 8%, 10-year bonds are issued at face value. Interest will be paid semi-annually. When calculating the market price of the bond, the present value of a. ¥160,000,000 received for 10 periods must be calculated. b. ¥2 billion received in 10 periods must be calculated. c. ¥2 billion received in 20 periods must be calculated. d. ¥80,000,000 received for 10 periods must be calculated.

Ans: c, LO: 8, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Global and Industry Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: FSA a

10. On January 1, 2020, Asianic Inc. issued 10-year bonds with a face amount of ¥25,000,000 and a contract rate of 8% payable annually on January 1. The effective-interest rate on the bonds is 10%. Present value factors are as follows: At 8% At 10% PV of 1 for 10 periods 0.463 0.386 PV of an ordinary annuity if 1 for 10 periods 6.710 6.145 Total issue price of the bonds was a. ¥25,000,000. b. ¥24,500,000. c. ¥23,000,000. d. ¥21,940,000.

Ans: d, LO: 8, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Global and Industry Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: FSA

Reporting and Analyzing Liabilities

10-93

CHAPTER 11 REPORTING AND ANALYZING STOCKHOLDERS’ EQUITY CHAPTER LEARNING OBJECTIVES 1. Discuss the major characteristics of a corporation. The major characteristics of a corporation are separate legal existence, limited liability of stockholders, transferable ownership rights, ability to acquire capital, continuous life, corporation management, government regulations, and additional taxes. 2. Explain how to account for the issuance of common, preferred, and treasury stock. When a company records issuance of common stock for cash, it credits the par value of the shares to Common Stock. It records in a separate paid-in capital account the portion of the proceeds that is above par value. When no-par common stock has a stated value, the entries are similar to those for par value stock. When no-par common stock does not have a stated value, the entire proceeds from the issue are credited to Common Stock. Companies generally use the cost method in accounting for treasury stock. Under this approach, a company debits Treasury Stock at the price paid to reacquire the shares. 3. Explain how to account for cash dividends, stock dividends, and stock splits. Companies make entries for dividends at the declaration date and the payment date. At the declaration date, the entries for a cash dividend are debit Cash Dividends and credit Dividends Payable. Preferred stock has contractual provisions that give it priority over common stock in certain areas. Typically, preferred stockholders have a preference as to (1) dividends and (2) assets in the event of liquidation. However, they sometimes do not have voting rights. The effects of stock dividends and splits are as follows. Small stock dividends transfer an amount equal to the fair value of the shares issued from retained earnings to the paid-in capital accounts. Stock splits reduce the par value per share of the common stock while increasing the number of shares so that the balance in the Common Stock account remains the same. 4. Discuss how stockholders’ equity is reported and analyzed. Additions to retained earnings consist of net income. Deductions consist of net loss and cash and stock dividends. In some instances, portions of retained earnings are restricted, making that portion unavailable for the payment of dividends. In the stockholders’ equity section of the balance sheet, companies report paid-in capital and retained earnings and identify specific sources of paid-in capital. Within paid-in capital, companies show two classifications: capital stock and additional paid-in capital. If a corporation has treasury stock, it deducts the cost of treasury stock from total paid-in capital and retained earnings to determine total stockholders’ equity. A company’s dividend record can be evaluated by looking at what percentage of net income it chooses to pay out in dividends, as measured by the dividend payout ratio (dividends divided by net income). Earnings performance is measured with the return on common stockholders’ equity (income available to common stockholders divided by average common stockholders’ equity.) *5. Prepare entries for stock dividends. To record the declaration of a small stock dividend (less than 20%), debit Stock Dividends for an amount equal to the fair value of the shares issued. Record a credit to a temporary stockholders’ equity account—Common Stock Dividends Distributable—for the par value of the shares, and credit the balance to Paid-in .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Capital in Excess of Par. When the shares are issued, debit Common Stock Dividends Distributable and credit Common Stock. Difficulties: Easy: 150 Medium: 120 Hard: 19

Question List by Section Corporate Form of Organization: 5, 56, 57 Characteristics of a Corporation: 231, 232, 267 Separate Legal Existence: 1, 6, 266 Limited Liability of Stockholders: 2, 60, 66, 72 Transferable Ownership Rights: 3, 58, 61 Ability to Acquire Capital: 64, 70 Continuous Life: 51, 69 Corporation Management: 53, 54, 59, 268, 269 Government Regulations: 55, 71 Additional Taxes: 4, 7, 65, 67, 68 Other Forms of Business Organization: 85, 86 Forming a Corporation: 8 Stockholder Rights: 9, 52, 62, 63, 73, 75, 76, 270, 281 Stock Issue Considerations: 246, 247 Authorized Stock: 10, 83, 84 Issuance of Stock: 77, 78 Par and No-Par Value Stocks: 11, 74, 79, 80, 81, 82, 271, 280 Accounting for Common, Preferred, and Treasury Stock: 234, 235, 236, 237, 238, 248 Accounting for Common Stock: 12, 14, 15, 16, 96, 97, 99, 100, 101, 102, 104 Issuing Par Value Common Stock for Cash: 87, 88, 89, 90, 91, 92, 93, 94, 98, 103 Accounting for Preferred Stock: 115, 121, 122, 123, 124, 239 Accounting for Treasury Stock: 18, 19, 20, 21, 23, 95, 105, 106, 107, 111, 116, 117, 118, 119, 120, 232, 272, 282 Purchase of Treasury Stock: 17, 22 Accounting for Dividends and Stock Splits: 27, 125, 249, 255, 256 Cash Dividends: 28, 29, 132, 133, 134, 135, 136, 140, 142, 147, 149, 150, 151, 152, 153, 154, 285, 288 Entries for Cash Dividends: 137, 138, 139, 141, 143, 241 Dividend Preferences: 24, 25, 129, 130, 155, 273 Cumulative Dividend: 26, 126, 127, 128, 131, 156, 157, 160, 161, 162, 163, 164, 195, 199, 283 Stock Dividends: 30, 31, 32, 144, 165, 166, 167, 168, 169, 171, 172 Effects of Stock Dividends: 145, 146, 158, 173, 174, 257, 275, 286 Stock Splits: 33, 159, 170, 175, 176, 177, 178, 284 Presentation and Analysis: 35 Retained Earnings: 34, 36, 37, 180, 182, 187, 189, 190, 277 Retained Earnings Restrictions: 38, 39, 179, 181, 185, 186, 188 Balance Sheet Presentation of Stockholders’ Equity: 40, 41, 185, 191, 192, 193, 194, 196, 197, 198, 200, 201, 202, 203, 204, 205, 206, 207, 240, 242, 244, 250, 251, 252, 253, 259, 260, 261, 262, 278, 289 Analysis of Stockholders’ Equity: 221, 245, 263, 264 Dividend Record: 43, 208, 211, 213, 214, 215, 217, 287 .

Reporting and Analyzing Stockholders’ Equity

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Earnings Performance: 42, 183, 209, 210, 216, 218, 220 Debt versus Equity Decision: Entries for Stock Dividends: 44, 45, 46, 47, 48, 49, 50, 221, 222, 223, 224, 225, 226, 227, 228, 229, 230, 265

TRUE-FALSE STATEMENTS 1.

A corporation is not an entity that is separate and distinct from its owners.

Ans: F, LO: 1, Topic: Corporate Form of Organization, Subtopic: Separate Legal Existence, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

The liability of a stockholder is usually limited to the stockholder’s investment in the corporation.

Ans: T, LO: 1, Topic: Corporate Form of Organization, Subtopic: Limited Liability of Stockholders, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Risk Assessment, Analysis, and Management, AICPA PC: None, IMA: Reporting

The sale of shares in a corporation by one stockholder to another affects the total capital of the corporation.

Ans: F, LO: 1, Topic: Corporate Form of Organization: Subtopic: Transferable Ownership Rights, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

The tax laws can be a significant disadvantage of the corporate form of business.

Ans: T, LO: 1, Topic: Corporate Form of Organization, Subtopic: Additional Taxes, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

A corporation can be organized for the purpose of making a profit or it may be nonprofit.

Ans: T, LO: 1, Topic: Corporate Form of Organization, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

A corporation acts under its own name rather than in the name of its stockholders.

Ans: T, LO: 1, Topic: Corporate Form of Organization, Subtopic: Separate Legal Existence, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Risk Assessment, Analysis, and Management, AICPA PC: None, IMA: Reporting

If a corporation pays taxes on its income, then stockholders will not have to pay taxes on the dividends received from that corporation.

Ans: F, LO: 1, Topic: Corporate Form of Organization, Subtopic: Additional Taxes, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

A corporation must be incorporated in each state in which it does business.

Ans: F, LO: 1, Topic: Corporate Form of Organization, Subtopic: Forming a Corporation, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

A stockholder has the right to vote in the election of the board of directors.

Ans: T, LO: 1, Topic: Corporate Form of Organization, Subtopic: Stockholder Rights, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: None, AICPA PC: None, IMA: Reporting

10.

As soon as a corporation is authorized to sell stock, an accounting journal entry should be made recording the total value of the shares authorized.

Ans: F, LO: 1, Topic: Corporate Form of Organization, Subtopic: Authorized Stock, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

11.

When no-par value stock does not have a stated value, the entire proceeds from the issuance of the stock become legal capital.

Ans: T, LO: 1, Topic: Corporate Form of Organization, Subtopic: Par and No-Par Value Stock, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

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12.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

When no-par common stock with a stated value is issued for cash, the Common Stock account is credited for an amount equal to the cash proceeds.

Ans: F, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Accounting for Common Stock, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

13.

The par value of common stock must always be equal to its market value on the date the stock is issued.

Ans: F, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Issuing Par Value Stock for Cash, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

14.

For accounting purposes, stated value is treated the same way as par value.

Ans: T, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Accounting for Common Stock, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

15.

Paid-in capital is the amount paid into the corporation by stockholders in exchange for shares of ownership.

16.

The issuance of common stock affects both paid-in capital and retained earnings.

Ans: F, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Accounting for Common Stock, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

17.

The acquisition of treasury stock by a corporation increases total assets and total stockholders’ equity.

Ans: F, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Purchase of Treasury Stock, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

18.

Treasury stock should not be classified as a current asset.

Ans: T, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Accounting for Treasury Stock, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

19.

Treasury stock is reported as an asset on the balance sheet because treasury stock may later be resold.

Ans: F, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Accounting for Treasury Stock, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

20.

Treasury Stock is a contra stockholders’ equity account.

21.

The cost of treasury stock is deducted from total paid-in capital and retained earnings in determining total stockholders’ equity.

22.

The journal entry to record the purchase of treasury stock will cause total stockholders’ equity to decrease by the amount of the cost of the treasury stock.

Ans: T, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Purchase of Treasury Stock, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: REPORTING

Reporting and Analyzing Stockholders’ Equity

23.

11-5

The number of common shares outstanding can never be greater than the number of shares issued.

24.

Preferred stock has contractual preference over common stock in certain areas.

Ans: T, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Dividend Preferences, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

25.

Preferred stockholders generally do not have the right to vote for the board of directors.

26.

When preferred stock is cumulative, preferred dividends not declared in a given period are called dividends in arrears.

Ans: T, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Cumulative Dividend, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

27.

Dividends may be declared and paid in cash or stock.

Ans: T, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

28.

Cash dividends are not a liability until they are declared by the board of directors.

Ans: T, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Cash Dividends, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

29.

The amount of a cash dividend liability is recorded on the date of record because it is on that date that the persons or entities who will receive the dividend are identified.

Ans: F, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Cash Dividends, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

30.

A 10% stock dividend will increase the number of shares outstanding but the par value per share will decrease.

Ans: T, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Stock Dividends, Bloom: C, Difficulty: Hard, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

31.

A stock dividend does not affect the total amount of stockholders’ equity.

Ans: T, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Stock Dividends, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

32.

A stock split results in a transfer at market value from retained earnings to paid-in capital.

Ans: F, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Stock Dividends, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

33.

A 3-for-1 common stock split will increase total stockholders’ equity but reduce the par or stated value per share of common stock.

Ans: F, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Stock Splits, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

34.

Retained earnings represents the amount of cash available for dividends.

Ans: F, LO: 4, Topic: Presentation and Analysis, Subtopic: Retained Earnings, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

11-6 35.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Dividends in arrears are liabilities of the corporation.

Ans: F, LO: 4, Topic: Presentation and Analysis, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

36.

Net income of a corporation should be closed to retained earnings and net losses should be closed to paid-in capital accounts.

37.

A debit balance in the Retained Earnings account is identified as a deficit.

Ans: T, LO: 4, Topic: Presentation and Analysis, Subtopic: Retained Earnings, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

38.

Retained earnings that are restricted are unavailable for dividends.

Ans: T, LO: 4, Topic: Presentation and Analysis, Subtopic: Retained Earnings Restrictions, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

39.

Restricted retained earnings are available for preferred stock dividends but unavailable for common stock dividends.

Ans: F, LO: 4, Topic: Presentation and Analysis, Subtopic: Retained Earnings Restrictions, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

40.

A detailed stockholders’ equity section in the balance sheet will list the names of individuals who are eligible to receive dividends on the date of record.

Ans: F, LO: 4, Topic: Presentation and Analysis, Subtopic: Balance Sheet Presentation of Stockholders’ Equity, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

41.

The Common Stock Dividends Distributable account is classified as a current liability.

42.

Return on common stockholders’ equity is computed by dividing net income by ending stockholders’ equity.

Ans: F, LO: 4, Topic: Presentation and Analysis, Subtopic: Earnings Performance, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

43.

The payout ratio is computed by dividing total cash dividends paid on common stock by retained earnings.

Ans: F, LO: 4, Topic: Presentation and Analysis, Subtopic: Dividend Record, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

*44.

A liability arises when the board of directors declares a stock dividend.

Ans: F, LO: 5, Topic: Entries for Stock Dividends, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

*45.

A stock dividend is a pro rata distribution of cash to a corporation’s stockholders.

*46.

A stock dividend will cause an increase in total contributed capital at the date the dividend is declared.

Ans: T, LO: 5, Topic: Entries for Stock Dividends, Subtopic: NA, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

*47.

Both large and small stock dividends will cause an increase in total stockholders’ equity at the date the dividend is declared. .

Reporting and Analyzing Stockholders’ Equity

11-7

Ans: F, LO: 5, Topic: Entries for Stock Dividends, Subtopic: NA, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

*48.

Large stock dividends will cause a decrease in retained earnings for the par value of the shares issued.

*49.

Both large and small stock dividends will cause a decrease in retained earnings for the market value of the shares issued at the date the dividend is declared.

*50.

The declaration of a stock dividend increases liabilities and decreases equity.

MULTIPLE CHOICE QUESTIONS 51.

Under the corporate form of business organization, a. a stockholder is personally liable for the debts of the corporation. b. stockholders’ acts can bind the corporation even though the stockholders have not been appointed as agents of the corporation. c. the corporation’s life is assumed to be unlimited unless stipulated in the charter. d. stockholders wishing to sell their corporation shares must get the approval of other stockholders.

Ans: C, LO: 1, Topic: Corporate Form of Organization, Subtopic: Continuous Life, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Risk Assessment, Analysis, and Management, AICPA PC: None, IMA: Reporting

52.

Stockholders of a corporation directly elect a. the president of the corporation. b. the board of directors. c. the treasurer of the corporation. d. all of the employees of the corporation.

Ans: B, LO: 1, Topic: Corporate Form of Organization, Subtopic: Stockholder Rights, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: None, AICPA PC: None, IMA: Reporting

53.

Those most responsible for the major policy decisions of a corporation are the a. stockholders. b. board of directors. c. management. d. employees.

Ans: B, LO: 1, Topic: Corporate Form of Organization, Subtopic: Corporation Management, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: None, AICPA PC: None, IMA: Reporting

54.

The chief accounting officer in a company is known as the a. controller. b. treasurer. c. vice-president. d. president.

Ans: A, LO: 1, Topic: Corporate Form of Organization, Subtopic: Corporation Management, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC:

11-8

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e Process and Resource Management Perspectives, AICPA AC: None, AICPA PC: None, IMA: Reporting

55.

Which one of the following would not be considered an advantage of the corporate form of organization? a. Limited liability of stockholders b. Separate legal existence c. Continuous life d. Government regulation

Ans: D, LO: 1, Topic: Corporate Form of Organization, Subtopic: Government Regulation, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

56.

The two ways that a corporation can be classified by purpose are a. general and limited. b. profit and not-for-profit. c. state and federal. d. publicly held and privately held.

Ans: B, LO: 1, Topic: Corporate Form of Organization, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

57.

The two ways that a corporation can be classified by ownership are a. publicly held and privately held. b. stock and non-stock. c. inside and outside. d. majority and minority.

Ans: A, LO: 1, Topic: Corporate Form of Organization, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

58.

Which of the following would not be true of a privately held corporation? a. It is sometimes called a closely held corporation. b. Its shares are regularly traded on the New York Stock Exchange. c. It does not offer its shares for sale to the general public. d. It is usually smaller than a publicly held company.

Ans: B, LO: 1, Topic: Corporate Form of Organization, Subtopic: Transferable Ownership Rights, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

59.

Which of the following is not true of a corporation? a. It may buy, own, and sell property. b. It may sue and be sued. c. The acts of its owners bind the corporation. d. It may enter into binding legal contracts in its own name.

Ans: C, LO: 1, Topic: Corporate Form of Organization, Subtopic: Corporation Management, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

60.

Ryan Seacrest has invested $600,000 in a privately held family corporation. The corporation does not do well and must declare bankruptcy. What amount does Seacrest stand to lose? a. Up to his total investment of $600,000 b. Zero c. The $600,000 plus any personal assets the creditors demand d. $400,000 .

Reporting and Analyzing Stockholders’ Equity

11-9

Ans: A, LO: 1, Topic: Corporate Form of Organization, Subtopic: Limited Liability of Stockholders, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Risk Assessment, Analysis, and Management, AICPA PC: None, IMA: Reporting

61.

Which of the following statements reflects the transferability of ownership rights in a corporation? a. If a stockholder decides to transfer ownership, he must transfer all of his shares. b. A stockholder may dispose of part or all of his shares. c. A stockholder must obtain permission from the board of directors before selling shares. d. A stockholder must obtain permission from at least three other stockholders before selling shares.

Ans: B, LO: 1, Topic: Corporate Form of Organization, Subtopic: Transferable Ownership Rights, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: None, AICPA PC: None, IMA: Reporting

62.

A corporate board of directors does not generally a. select officers. b. formulate operating policies. c. declare dividends. d. execute policy.

Ans: D, LO: 1, Topic: Corporate Form of Organization, Subtopic: Stockholder Rights, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: None, AICPA PC: None, IMA: Reporting

63.

The officer that is generally responsible for maintaining the cash position of the corporation is the a. controller. b. treasurer. c. cashier. d. internal auditor.

64.

The ability of a corporation to obtain capital is a. enhanced because of limited liability and ease of share transferability. b. less than a partnership. c. restricted because of the limited life of the corporation. d. about the same as a partnership.

Ans: A, LO: 1, Topic: Corporate Form of Organization, Subtopic: Ability to Acquire Capital, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

65.

Which of the following statements concerning taxation is accurate? a. Partnerships pay state income taxes but not federal income taxes. b. Corporations pay federal income taxes but not state income taxes. c. Corporations pay federal and state income taxes. d. Only the owners must pay taxes on corporate income.

Ans: C, LO: 1, Topic: Corporate Form of Organization, Subtopic: Additional Taxes, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

66.

Which of the following statements is not considered a disadvantage of the corporate form of organization? a. Additional taxes. .

11-10

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

b. Government regulations. c. Limited liability of stockholders. d. Separation of ownership and management. Ans: C, LO: 1, Topic: Corporate Form of Organization, Subtopic: Limited Liability of Stockholders, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

67.

A disadvantage of the corporate form of organization is a. professional management. b. tax treatment. c. ease of transfer of ownership. d. lack of mutual agency.

Ans: B, LO: 1, Topic: Corporate Form of Organization, Subtopic: Additional Taxes, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

68.

Which of the following is a disadvantage of the corporate form of business entity? a. Unlimited liability of stockholders b. Continuous life c. Lack of government regulation d. Additional taxes

Ans: D, LO: 1, Topic: Corporate Form of Organization, Subtopic: Additional Taxes, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

69.

Which one of the following is considered an advantage of the corporate form of organization? a. Unlimited liability of stockholders b. Separation of ownership and management c. Continuous life d. Government regulation

70. Which one of the following is an advantage of the corporate form of business? a. Limited life b. Government regulation c. Ownership rights are restricted to the same shareholders d. Ability to acquire capital Ans: D, LO: 1, Topic: Corporate Form of Organization, Subtopic: Ability to Acquire Capital, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

71.

A disadvantage of the corporate form of business is a. its status as a separate legal entity. b. continuous existence. c. government regulation. d. ease of transfer of ownership.

Ans: C, LO: 1, Topic: Corporate Form of Organization, Subtopic: Government Regulation, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

72.

Which of the following phrases is not descriptive of the corporate form of business? a. Professional management. b. Double taxation on distributed earnings. c. Unlimited liability. d. Continuous existence. .

Reporting and Analyzing Stockholders’ Equity

11-11

Ans: C, LO: 1, Topic: Corporate Form of Organization, Subtopic: Limited Liability of Stockholders, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

73.

Which one of the following is not an ownership right of a stockholder in a corporation? a. To vote in the election of directors. b. To declare dividends on the common stock. c. To share in assets upon liquidation. d. To share in corporate earnings.

74.

If no-par stock is issued without a stated value, then a. the par value is automatically $1 per share. b. the entire proceeds are considered to be legal capital. c. there is no legal capital. d. the corporation is automatically in violation of its state charter.

Ans: B, LO: 1, Topic: Corporate Form of Organization, Subtopic: Par and No-Par Value Stocks, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

75.

If a stockholder cannot attend a stockholders’ meeting, he may delegate his voting rights by means of a(n) a. absentee ballot. b. proxy. c. certified letter. d. telegram.

76.

The term residual claim refers to a stockholders’ right to a. receive dividends. b. share in assets upon liquidation. c. acquire additional shares when offered. d. exercise a proxy vote.

77.

Which of the following factors does not affect the initial market price of a stock? a. The company’s anticipated future earnings. b. The par value of the stock. c. The current state of the economy. d. The expected dividend rate per share.

Ans: B, LO: 1, Topic: Corporate Form of Organization, Subtopic: Issuance of Stock, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Risk Assessment, Analysis, and Management, AICPA PC: None, IMA: Reporting

78.

If an investment firm underwrites a stock issue, the a. risk of being unable to sell the shares stays with the issuing corporation. b. corporation obtains cash immediately from the investment firm. c. investment firm has guaranteed profits on the sale of the stock. .

11-12

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

d. issuance of stock is likely to be directly to creditors. Ans: B, LO: 1, Topic: Corporate Form of Organization, Subtopic: Issuance of Stock, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Risk Assessment, Analysis, and Management, AICPA PC: None, IMA: Reporting

79.

The par value of a stock a. is legally significant. b. reflects the most recent market price. c. is selected by the SEC. d. is indicative of the worth of the stock.

Ans: A, LO: 1, Topic: Corporate Form of Organization, Subtopic: Par and No-Par Value Stocks, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: REPORTING

80.

Par value a. represents what a share of stock is worth. b. represents the original selling price for a share of stock. c. is established for a share of stock after it is issued. d. is the value assigned per share in the corporate charter.

Ans: D, LO: 1, Topic: Corporate Form of Organization, Subtopic: Par and No-Par Value Stocks, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

81.

The term legal capital is a descriptive term for a. stockholders’ equity. b. par value. c. residual equity. d. market value.

82.

A corporation has the following account balances: Common Stock, $1 par value, $80,000; Paid-in Capital in Excess of Par Value, $2,700,000. Based on this information, the a. legal capital is $2,780,000. b. number of shares issued is 80,000. c. number of shares outstanding is 2,780,000. d. average price per share issued is $3.48.

Ans: B, LO: 1, Topic: Corporate Form of Organization, Subtopic: Par and No-Par Value Stocks, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $80,000  $1  80,000 (Com. Stock bal./ par)

83.

The authorized stock of a corporation a. only reflects the initial capital needs of the company. b. is indicated in its by-laws. c. is indicated in its charter. d. must be recorded in a formal accounting entry.

Ans: C, LO: 1, Topic: Corporate Form of Organization, Subtopic: Authorized Stock, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: None, AICPA PC: None, IMA: Reporting

84.

The amount of stock that may be issued according to the corporation’s charter is referred to as the a. authorized stock. .

Reporting and Analyzing Stockholders’ Equity

11-13

b. issued stock. c. unissued stock. d. outstanding stock. Ans: A, LO: 1, Bloom: K, Topic: Corporate Form of Organization, Subtopic: Authorized Stock, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: None, AICPA PC: None, IMA: Reporting

85.

In addition to the corporate form, other forms of business organization include all of the following except a. S-Corporations. b. Limited Liability Proprietorships. c. Limited Liability Partnerships. d. Limited Liability Companies.

Ans: B, LO: 1, Bloom: K, Topic: Corporate Form of Organization, Subtopic: Other Forms of Business Organization, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: None, AICPA PC: None, IMA: Reporting

86.

Other forms of business organizations have evolved as hybrids of a. corporations and partnerships. b. corporations and sole proprietorships. c. sole proprietorships and partnerships. d. corporations, partnerships, and sole proprietorships.

Ans: A, LO: 1, Bloom: K, Topic: Corporate Form of Organization, Subtopic: Other Forms of Business Organization, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: None, AICPA PC: None, IMA: Reporting

87.

If Acme Company issues 6,000 shares of $5 par value common stock for $210,000, the account a. Common Stock will be credited for $210,000. b. Paid-in Capital in Excess of Par will be credited for $30,000. c. Paid-in Capital in Excess of Par will be credited for $180,000. d. Cash will be debited for $180,000.

Ans: C, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Issuing Par Value Common Stock for Cash, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $210,000  (6,000  $5)  $180,000 (Iss. pr. – (sh. iss. × PV/sh.)

88.

A1 Corp. issues 5,000 shares of $10 par value common stock at $14 per share. When the transaction is recorded, credits are made to a. Common Stock $50,000 and Paid-in Capital in Excess of Stated Value $20,000. b. Common Stock $70,000. c. Common Stock $50,000 and Paid-in Capital in Excess of Par $20,000. d. Common Stock $50,000 and Retained Earnings $20,000.

Ans: C, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Issuing Par Value Common Stock for Cash, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: 5,000  $10  $50,000; ($14  $10)  5,000  $20,000 (Sh. iss. × PV/sh.); (Iss. pr. – PV/sh.) × sh. iss.

89.

If Ace Company issues 10,000 shares of $5 par value common stock for $210,000, the account a. Common Stock will be credited for $50,000. b. Paid-in Capital in Excess of Par will be credited for $50,000. c. Paid-in Capital in Excess of Par will be credited for $210,000. d. Cash will be debited for $160,000. .

11-14

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ans: A, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Issuing Par Value Common Stock for Cash, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: 10,000  $5  $50,000 (Sh. iss. × PV/sh.)

90.

If Acme Supply Company issues 5,000 shares of $5 par value common stock for $210,000, the account a. Common Stock will be credited for $185,000. b. Paid-in Capital in Excess of Par will be credited for $210,000. c. Paid-in Capital in Excess of Par will be credited for $235,000. d. Cash will be debited for $210,000.

Ans: D, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Issuing Par Value Common Stock for Cash, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $210,000 selling price

91.

A1 Food Store issued common stock with a par value of $1 per share. What is par value? a. The anticipated selling price of each share of stock b. The market value of the shares at the date of issuance. c. The amount assigned to each share of stock by the board of directors. d. The amount to be credited to Common Stock for each share of stock issued.

92.

If common stock is issued for an amount greater than par value, the excess should be credited to a. Cash. b. Retained Earnings. c. Paid-in Capital in Excess of Par. d. Legal Capital.

Ans: C, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Issuing Par Value Common Stock for Cash, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

93.

Paid-in Capital in Excess of Par a. is credited when no-par stock does not have a stated value. b. is reported as part of paid-in capital on the balance sheet. c. represents the amount of legal capital. d. normally has a debit balance.

Ans: B, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Issuing Par Value Common Stock for Cash, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

94.

The Paid-in Capital in Excess of Par is increased in the accounting records when a. the number of shares issued exceeds par value. b. the stated value of capital stock is greater than the par value. c. the market value of the stock rises above par value. d. capital stock is issued at an amount greater than par value.

Ans: D, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Issuing Par Value Common Stock for Cash, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Stockholders’ Equity

95.

11-15

Which of the following represents the largest number of common shares? a. Treasury shares b. Issued shares c. Outstanding shares d. Authorized shares

Ans: D, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Accounting for Treasury Stock, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

96.

Ace Packaging Corporation began business in 2025 by issuing 50,000 shares of $5 par common stock for $8 per share and 5,000 shares of 6%, $10 par preferred stock for par. At year-end, the common stock had a market value of $10. On its December 31, 2025 balance sheet, Ace Packaging would report a. Common Stock of $500,000. b. Common Stock of $250,000. c. Common Stock of $400,000. d. Paid-in Capital of $330,000.

Ans: B, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Accounting for Common Stock, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: 50,000  $5  $250,000 (Sh. iss. × PV/sh.)

97.

A1 Supply Corporation began business in 2025 by issuing 90,000 shares of $5 par common stock for $8 per share and 20,000 shares of 6%, $10 par preferred stock for par. At year-end, the common stock had a market value of $10. On its December 31, 2025 balance sheet, A1 Supply would report a. Common Stock of $900,000. b. Common Stock of $450,000. c. Common Stock of $720,000. d. Paid-In Capital of $675,000.

98.

Acme, Inc. issued 10,000 shares of common stock at a stated value of $10 per share. The total issue of stock sold for $15 per share. The journal entry to record this transaction would include a a. debit to Cash for $100,000. b. credit to Common Stock for $100,000. c. credit to Paid-in Capital in Excess of Par for $50,000. d. credit to Common Stock for $150,000.

Ans: B, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Issuing Par Value Common Stock for Cash, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: 10,000  $10  $100,000 (Sh. iss. × SV/sh.)

99.

When stock is issued in exchange for a noncash asset, the value recorded for the shares issued is best determined by a. the book value of the noncash asset. b. the market value of the shares. c. the par value of the shares. .

11-16

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

d. the contributed capital of the shares. Ans: B, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Accounting for Common Stock, Bloom: K, Difficulty: Hard, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

100.

K. Perry, Attorney at Law performed legal services for I. Corp. Due to a cash shortage, an agreement was reached whereby I. Corp. would compensate K. Perry for a legal fee of approximately $20,000 by issuing 8,000 shares of its common stock (par $1). The stock trades on a daily basis and the market price of the stock on the day the debt was settled is $2.40 per share. Given this information, the best journal entry for I. Corp. to record for this transaction is a. Legal Expense 19,200 Common Stock 19,200 b. Legal Expense 20,000 Common Stock 20,000 c. Legal Expense 20,000 Common Stock 8,000 Paid-in Capital in Excess of Par - Common 13,000 d. Legal Expense 19,200 Common Stock 8,000 Paid-in Capital in Excess of Par - Common 11,200

Ans: D, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Accounting for Common Stock, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: 8,000  ($2.40  $1.00)  $11,200 (Sh. iss. × (MP/sh.  PV/sh.)

101.

Which of the following should be used to value noncash assets or services received in exchange for common stock? a. Market value of the stock b. Market value of the assets c. Par value of the stock d. Either the market value of the stock or the market value of the assets, whichever is more readily determinable

Ans: D, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Accounting for Common Stock, Bloom: C, Difficulty: Hard, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

102.

A1 Merchandising Company issued 900 shares of no-par common stock for $17,100. Which of the following journal entries would be made if the stock has no stated value? a. Cash 17,100 Common Stock 17,100 b. Cash 17,100 Common Stock 900 Paid-in Capital in Excess of Par 16,200 c. Cash 17,100 Common Stock 900 Paid-in Capital in Excess of Stated Value 16,200 d. Common Stock 17,100 .

Reporting and Analyzing Stockholders’ Equity

Cash

11-17

17,100

Ans: A, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Accounting for Common Stock, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

103.

Ace Discount Retail Company issued 800 shares of no-par common stock for $7,200. Which of the following journal entries would be made if the stock has stated value of $2 per share? a. Cash 7,200 Common Stock 7,200 b. Cash 7,200 Common Stock 1,600 Paid-in Capital in Excess of Par 5,600 c. Cash 7,200 Common Stock 1,600 Paid-in Capital in Excess of Stated Value 5,600 d. Common Stock 7,200 Cash 7,200

Ans: C, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Issuing Par Value Common Stock for Cash, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: 800  $2  $1,600; $7,200  (800  $2)  $5,600 (Sh. iss.  SV/sh.); [Iss. pr.  (sh. iss.  SV/sh.)]

104.

Acme Company is authorized to issue 10,000 shares of 8%, $100 par value preferred stock and 500,000 shares of no-par common stock with a stated value of $1 per share. If Acme issues 10,000 shares of common stock to pay its recent attorney's bill of $50,000 for legal services on a land access dispute, which of the following would be the best journal entry for Acme to record? a. Legal Expense 10,000 Common Stock 10,000 b. Legal Expense 50,000 Common Stock 50,000 c. Legal Expense 50,000 Common Stock 10,000 Paid-in Capital in Excess of Stated Value - Common 40,000 d. Legal Expense 50,000 Common Stock 10,000 Paid-in Capital in Excess of Par - Common 40,000

Ans: C, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Accounting for Common Stock, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $50,000  (10,000  $1)  $40,000 (Attor. bill  (sh. iss.  SV/sh.))

105.

Which of the following statements about treasury stock is true? a. Few corporations have treasury stock. b. Purchasing treasury stock is a means of eliminating hostile shareholder buyouts. c. Companies acquire treasury stock to increase the number of shares outstanding. .

11-18

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

d. Companies acquire treasury stock to decrease earnings per share. Ans: B, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Accounting for Treasury Stock, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

106.

The following data is available for A1 Corporation at December 31, 2025: Common stock, par $10 (authorized 30,000 shares) $270,000 Treasury stock (at cost $15 per share) $ 1,200 Based on the data, how many shares of common stock are outstanding? a. 30,000 b. 27,000 c. 29,920 d. 26,920

Ans: D, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Accounting for Treasury Stock, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($270,000  $10)  ($1,200  $15)  26,920 (Com. st.  PV/sh.)  (Trea. st.  cost/sh.)

107.

Ans: B, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Accounting for Treasury Stock, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $270,000  $10  27,000 (Com. st.  PV/sh.)

108.

A1 Storage Products purchased 11,000 shares of its own $0.75 par value common stock at a cost of $8 per share. The stock was originally issued at $7 per share. Which of the following is part of the journal entry to record the purchase? a. Credit Common Stock for $88,000 b. Debit Treasury Stock for $88,000 c. Credit Common Stock for $8,250 d. Debit Treasury Stock for $8,250

Ans: B, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Purchases of Treasury Stock, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $8 x 11,000 = $88,000 (Cost x sh. pur.)

109.

Ace Manufacturing Corporation purchased 2,500 shares of its own previously issued $10 par common stock for $62,500. As a result of this event, a. the Common Stock account decreased $25,000. b. total stockholders’ equity decreased $62,500. .

Reporting and Analyzing Stockholders’ Equity

11-19

c. the Paid-in Capital in Excess of Par account decreased $37,500. d. All of these answer choices are correct. Ans: B, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Purchases of Treasury Stock, Bloom: AP, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $62,500 cost of stock

110.

A1 Manufacturing Corporation purchased 5,000 shares of its own previously issued $10 par common stock for $125,000. As a result of this event, a. A1’s Common Stock account decreased $50,000. b. A1’s total stockholders’ equity decreased $125,000. c. A1’s Paid-in Capital in Excess of Par account decreased $75,000. d. All of these answer choices are correct.

Ans: B, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Purchases of Treasury Stock, Bloom: AP, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $125,000 cost of stock

111.

Treasury stock is a. stock issued by the U.S. Treasury Department. b. stock purchased by a corporation and held as an investment in its treasury. c. corporate stock issued by the treasurer of a company. d. a corporation’s own stock, which has been reacquired and held for future use.

112.

The acquisition of treasury stock by a corporation a. increases its total assets and total stockholders’ equity. b. decreases its total assets and total stockholders’ equity. c. has no effect on total assets and total stockholders’ equity. d. requires that a gain or loss be recognized on the income statement.

Ans: B, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Purchases of Treasury Stock, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

113.

A corporation purchases 20,000 shares of its own $20 par common stock for $35 per share, recording it at cost. What will be the effect on total stockholders’ equity? a. Increase by $700,000 b. Decrease by $400,000 c. Decrease by $700,000 d. Decrease by $300,000

Ans: C, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Purchases of Treasury Stock, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: 20,000  $35  $700,000 (sh. purch.  cost/sh.)

114.

A corporation purchases 30,000 shares of its own $10 par common stock for $25 per share, recording it at cost. What will be the effect on total stockholders’ equity? a. Increase by $300,000. b. Decrease by $750,000. c. Increase by $750,000. .

11-20

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

d. Decrease by $300,000. Ans: B, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Purchases of Treasury Stock, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: 30,000  $25  $750,000 (sh. purch.  cost/sh.)

115.

All of the following statements about preferred stock are true except a. preferred stock will have a paid-in capital account that is separate from other stock. b. preferred stock is presented first on the stockholder's equity section. c. preferred stock can be either par value or no-par value. d. there can be only one class of preferred stock.

Ans: D, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Accounting for Preferred Stock, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

116.

Treasury stock should be reported in the financial statements of a corporation as a(n) a. investment. b. liability. c. deduction from total paid-in capital. d. deduction from total paid-in capital and retained earnings.

117.

A company would not acquire treasury stock a. in order to reissue shares to officers. b. as an asset investment. c. in order to increase trading of the company’s stock. d. to have additional shares available to use in acquisitions of other companies.

Ans: B, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Accounting for Treasury Stock, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: None, AICPA PC: None, IMA: Reporting

118.

Treasury Stock is a(n) a. contra asset account. b. retained earnings account. c. asset account. d. contra stockholders’ equity account.

119.

The number of shares of issued stock equals a. unissued shares minus outstanding shares. b. outstanding shares plus treasury shares. c. authorized shares minus treasury shares. d. outstanding shares plus authorized shares.

Ans: B, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Accounting for Treasury Stock, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

120.

Treasury shares plus outstanding shares equal a. authorized shares. b. issued shares. c. unissued shares. d. distributable shares.

Reporting and Analyzing Stockholders’ Equity

121.

11-21

Acme Corporation issues 70,000 shares of $50 par value preferred stock for cash at $60 per share. The entry to record the transaction will consist of a debit to Cash for $4,200,000 and a credit or credits to a. Preferred Stock for $4,200,000. b. Preferred Stock for $3,500,000 and Paid-in Capital in Excess of Par-Preferred Stock for $700,000. c. Preferred Stock for $3,500,000 and Retained Earnings for $700,000. d. Paid-in Capital from Preferred Stock for $4,200,000.

Ans: B, LO: 2, Accounting for Common, Preferred, and Treasury Stock, Subtopic: Accounting for Preferred Stock, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: REPORTING Solution: 70,000  $50  $3,500,000; ($60  $50)  70,000  $700,000 (Sh. iss.  PV/sh.); (Iss. pr.  PV/sh.)  sh. iss.

122.

A1 Appliance Company is authorized to issue 10,000 shares of 8%, $100 par value preferred stock and 500,000 shares of no-par common stock with a stated value of $1 per share. If the company issues 7,000 shares of preferred stock for land with an asking price of $875,000 and a market value of $770,000, which of the following journal entries should A1 record? a. Land 700,000 Preferred Stock 700,000 b. Land 770,000 Preferred Stock 770,000 c. Land 875,000 Preferred Stock 700,000 Paid-in Capital in Excess of Par - Preferred 175,000 d. Land 770,000 Preferred Stock 700,000 Paid-in Capital in Excess of Par - Preferred 70,000

Ans: D, LO: 2, Accounting for Common, Preferred, and Treasury Stock, Subtopic: Accounting for Preferred Stock, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: REPORTING Solution: 7,000  $100  $700,000; $770,000  $700,000  $70,000 (Sh. iss.  PV/sh.); (Mar. val.  (Sh. iss.  PV/sh.))

123.

Acme Corporation issues 40,000 shares of $50 par value preferred stock for cash at $60 per share. In the stockholders’ equity section, the effects of the transaction above will be reported a. entirely within the capital stock section. b. entirely within the additional paid-in capital section. c. under both the capital stock and additional paid-in capital sections. d. entirely under the retained earnings section.

Ans: C, LO: 2, Accounting for Common, Preferred, and Treasury Stock, Subtopic: Accounting for Preferred Stock, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

124.

Ace Marine Corporation issues 40,000 shares of $100 par value preferred stock for cash at $110 per share. The entry to record the transaction will consist of a debit to Cash for $4,400,000 and a credit or credits to a. Preferred Stock for $4,400,000. b. Preferred Stock for $4,000,000 and Paid-in Capital in Excess of Par-Preferred Stock for $400,000. c. Preferred Stock for $4,000,000 and Retained Earnings for $300,000. d. Paid-in Capital from Preferred Stock for $4,400,000. .

11-22

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ans: B, LO: 2, Accounting for Common, Preferred, and Treasury Stock, Subtopic: Accounting for Preferred Stock, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: REPORTING Solution: 40,000  $100  $4,000,000; ($110  $100)  40,000  $400,000 (Sh. iss.  PV/sh.); (Iss. pr.  PV/sh.)  sh. iss.

125.

Which of the following is not a right or preference associated with preferred stock? a. The right to vote b. First claim to dividends c. Preference to corporate assets in case of liquidation d. To receive dividends in arrears before common stockholders receive dividends

Ans: A, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: NA, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: None, AICPA PC: None, IMA: Reporting

126.

Dividends in arrears on cumulative preferred stock a. never have to be paid, even if common dividends are paid. b. must be paid before common stockholders can receive a dividend. c. should be recorded as a current liability until they are paid. d. enable the preferred stockholders to share equally in corporate earnings with the common stockholders.

Ans: B, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Cumulative Dividend, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

127.

Dividends in arrears on cumulative preferred stock a. are considered to be a non-current liability. b. are considered to be a current liability. c. only occur when preferred dividends have been declared. d. should be disclosed in the notes to the financial statements.

Ans: D, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Cumulative Dividend, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

128.

Dividends in arrears are dividends on a. cumulative preferred stock that have been declared but have not been paid. b. non-cumulative preferred stock that have not been declared for a given period of time. c. cumulative preferred stock that have not been declared for a given period of time. d. common dividends that have been declared but have not yet been paid.

Ans: C, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Cumulative Dividend, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

129.

Outstanding stock of the Ace Corporation included 40,000 shares of $5 par common stock and 10,000 shares of 5%, $10 par non-cumulative preferred stock. In 2024, the company’s board of directors declared and paid dividends of $4,000. In 2025, the board of directors declared and paid dividends of $20,000. How much of the 2025 dividend was distributed to preferred shareholders? a. $9,000. b. $15,000. c. $5,000. d. None of these answer choices are correct.

Ans: C, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Dividend Preferences, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: (10,000  $10)  .05  $5,000 (Pref. sh.  Pref. PV)  div. rate

Reporting and Analyzing Stockholders’ Equity

130.

11-23

Outstanding stock of the A1 Service Corporation included 40,000 shares of $5 par common stock and 20,000 shares of 5%, $10 par non-cumulative preferred stock. In 2024, A1’s board of directors declared and paid dividends of $8,000. In 2025, the company’s board of directors declared and paid dividends of $24,000. How much of the 2025 dividend was distributed to preferred shareholders? a. $14,000. b. $18,000. c. $10,000. d. None of these answer choices are correct.

Ans: C, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Dividend Preferences, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: (20,000  $10)  .05  $10,000 (Pref. sh.  Pref. PV/sh.)  div. rate

131.

Ace Discount Retail Company has $20,000 of dividends in arrears. Based on this information, which of the following statements is false? a. Dividends in arrears are not considered to be liabilities. b. An obligation for dividends in arrears exists only after the board of directors declares payment. c. The investment community looks favorably on companies with dividends in arrears since the money is redirected toward more important growth opportunities. d. The amount of dividends in arrears should be disclosed in the notes to the financial statements.

Ans: C, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Cumulative Dividend, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

132.

Which one of the following is not necessary in order for a corporation to pay a cash dividend? a. Adequate cash. b. Approval of stockholders. c. Declared dividends. d. Retained earnings.

Ans: B, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Cash Dividends, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: None, AICPA PC: None, IMA: Reporting

133.

The date on which a cash dividend becomes a binding legal obligation is on the a. declaration date. b. date of record. c. payment date. d. last day of the fiscal year-end.

Ans: A, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Cash Dividends, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

134.

The cumulative effect of the declaration and payment of a cash dividend on a company’s financial statements is to a. decrease total liabilities and stockholders’ equity. b. increase total expenses and total liabilities. c. increase total assets and stockholders’ equity. d. decrease total assets and stockholders’ equity.

Ans: D, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Cash Dividends, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

11-24 135.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Suppose that the board of directors of Target declared a cash dividend on November 15, 2025 to be paid on December 15, 2025 to stockholders owning the stock on November 30, 2025. Given these facts, the date of November 30, 2025 is referred to as the a. declaration date. b. record date. c. payment date. d. ex-dividend date.

136.

The effect of the declaration of a cash dividend by the board of directors is to Increase Decrease a. Stockholders’ equity Assets b. Assets Liabilities c. Liabilities Stockholders’ equity d. Liabilities Assets

Ans: C, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Cash Dividends, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

137.

Which of the following is the appropriate general journal entry to record the declaration of cash dividends? a. Cash Dividends Cash b. Dividends Payable Cash c. Paid-in Capital Dividends Payable d. Cash Dividends Dividends Payable

Ans: D, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Entries for Cash Dividends, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

138.

Suppose that the board of directors of Old Navy declared a cash dividend of $1.50 per share on 42,000 shares of common stock on July 15, 2025. The dividend is to be paid on August 15, 2025 to stockholders of record on July 31, 2025. The journal entry to record the declaration of the dividends on July 15, 2025 will include a a. debit to Dividends Payable. b. debit to Cash Dividends. c. credit to Cash. d. credit to Cash Dividends.

Ans: B, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Entries for Cash Dividends, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

139.

Suppose that the board of directors of Old Navy declared a cash dividend of $1.50 per share on 42,000 shares of common stock on July 15, 2025. The dividend is to be paid on August 15, 2025 to stockholders of record on July 31, 2025. The effects of the journal entry to record the declaration of the dividend on July 15, 2025 are to .

Reporting and Analyzing Stockholders’ Equity

a. b. c. d.

11-25

decrease stockholders’ equity and increase liabilities. decrease stockholders’ equity and decrease assets. increase stockholders’ equity and increase liabilities. increase stockholders’ equity and decrease assets.

Ans: A, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Entries for Cash Dividends, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

140.

The net effects of the declaration and payment of a cash dividend are to a. decrease liabilities and decrease stockholders’ equity. b. increase stockholders’ equity and decrease liabilities. c. decrease assets and decrease stockholders’ equity. d. increase assets and increase stockholders’ equity.

141.

The board of directors of Ace Supply Company declared a cash dividend of $1.50 per share on 42,000 shares of common stock on July 15, 2025. The dividend is to be paid on August 15, 2025 to stockholders of record on July 31, 2025. The journal entry to be recorded on August 15, 2025 will include a a. debit to Cash Dividends. b. credit to Cash Dividends. c. credit to Dividends Payable. d. debit to Dividends Payable.

142.

The board of directors of Ace Supply Company declared a cash dividend of $1.50 per share on 42,000 shares of common stock on July 15, 2025. The dividend is to be paid on August 15, 2025, to stockholders of record on July 31, 2025. The effects of the journal entry to record the payment of the dividend on August 15, 2025 are to a. decrease stockholders’ equity and decrease liabilities. b. decrease liabilities and decrease assets. c. increase stockholders’ equity and increase liabilities. d. increase stockholders’ equity and decrease assets.

Ans: B, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Cash Dividends, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

143.

A corporation records a dividend-related liability a. on the record date. b. on the payment date. c. when dividends are in arrears. d. on the declaration date.

Ans: D, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Entries for Cash Dividends, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

144.

Common Stock Dividends Distributable is classified as a(n) a. asset account. b. stockholders’ equity account. c. expense account. d. liability account.

Ans: B, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Stock Dividends, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

11-26 145.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

The effect of a stock dividend is to a. decrease total assets and stockholders’ equity. b. change the composition of stockholders’ equity. c. decrease total assets and total liabilities. d. increase the book value per share of common stock.

Ans: B, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Effects of Stock Dividends, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

146.

Stock dividends and stock splits have the following effects on retained earnings: Stock Splits Stock Dividends a. Increase No change b. No change Decrease c. Decrease Decrease d. No change No change

Ans: B, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Effects of Stock Dividends, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

147.

Dividends are predominantly paid in a. scrip. b. property. c. cash. d. stock.

Ans: C, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Cash Dividends, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

148.

Of the four dividend types, the two most common types in practice are a. cash and scrip. b. cash and property. c. cash and stock. d. property and stock.

Ans: C, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopics: Cash Dividends, Stock Dividends, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: None, AICPA PC: None, IMA: Reporting

149.

Regular dividends are declared out of a. paid-in capital in excess of par. b. treasury stock. c. common stock. d. retained earnings.

Ans: D, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Cash Dividends, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

150.

Which of the following is not a significant date with respect to dividends? a. The declaration date. b. The incorporation date. c. The record date. d. The payment date. .

Reporting and Analyzing Stockholders’ Equity

11-27

151.

On the dividend record date, a. a dividend becomes a current obligation. b. no entry is required. c. an entry may be required if it is a stock dividend. d. Dividends Payable is debited.

152.

Which of the following statements regarding the date of a cash dividend declaration is not accurate? a. The dividend can be rescinded once it has been declared. b. The corporation is committed to a legal, binding obligation. c. The board of directors formally authorizes the cash dividend. d. A liability account must be increased.

Ans: A, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Cash Dividends, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

153.

Indicate the respective effects of the declaration of a cash dividend on the following balance sheet sections: Total Assets Total Liabilities Total Stockholders’ Equity a. Increase Decrease No change b. No change Increase Decrease c. Decrease Increase Decrease d. Decrease No change Increase

Ans: B, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Cash Dividends, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

154.

Which of the following statements about dividends is not accurate? a. Dividends are generally reported quarterly as a dollar amount per share. b. Low dividends may mean high stock returns. c. The board of directors is obligated to declare dividends. d. Payment of dividends from legal capital is illegal in many states.

Ans: C, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Cash Dividends, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

155.

Ace Inc. has 10,000 shares of 4%, $100 par value, cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 2025. What is the annual dividend on the preferred stock? a. $40 per share b. $40,000 in total c. $4,000 in total d. $0.40 per share

Ans: B, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Dividend Preferences, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: 10,000  $100  .04  $40,000

11-28

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

(Pref. sh.  PV/sh.  div. %)

156.

A1 Transport Company has the following stock outstanding at December 31, 2024: 5% Cumulative preferred stock, $12 Par $39,600 Common stock, $0.10 Par 12,000 A1 paid no dividends during 2023. During 2024, it declares $13,000 of dividends. How much of the $13,000 will preferred stockholders receive? a. $1,980 b. $3,960 c. $1,083 d. None of the answer choices are correct.

Ans: B, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Cumulative Dividends, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: 5% x $12 = $.60; $39,600/$12= 3,300; 3,300 x $.60 x 2 = $3,960 (Pref. sh.  PV/sh.  div. %)

157.

Acme Marine Supply Inc. has 1,000 shares of 5%, $100 par value, cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 2025. What is the annual dividend on the preferred stock? a. $50 per share. b. $5,000 in total. c. $500 in total. d. $0.50 per share.

Ans: B, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Cumulative Dividends, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: 1,000  $100  .05  $5,000 (Pref. sh.  PV/sh.  div. %)

158.

What are the effects on total stockholders’ equity of a stock dividend and a stock split, respectively? Stock Dividend Stock Split a. Increase No effect b. No effect No effect c. Decrease No effect d. Decrease Decrease

Ans: B, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Effects of Stock Dividends, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

159.

Which of the following statements is not true about a 2-for-1 split? a. Par value per share is reduced to half of what it was before the split. b. Total contributed capital increases. c. The market price probably will decrease. d. A stockholder with ten shares before the split owns twenty shares after the split.

Ans: B, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Stock Splits, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

160.

Acme Transport Inc. has 10,000 shares of 4%, $100 par value, cumulative preferred stock and 100,000 shares of $1 par value common stock outstanding at December 31, 2025. If the board of directors declares a $25,000 dividend, the a. preferred stockholders will receive 1/10th of what the common stockholders will receive. .

Reporting and Analyzing Stockholders’ Equity

11-29

b. preferred stockholders will receive the entire $25,000. c. $25,000 will be held as restricted retained earnings and paid out at some future date. d. preferred stockholders will receive $12,500 and the common stockholders will receive $12,500. Ans: B, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Cumulative Dividends, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: 10,000  $100  .04  $40,000; $40,000 > $25,000 (Pref. sh.  PV/sh.  div. %) > div. decl.

161.

A1 Service Corp. has 10,000 shares of 5%, $100 par value, non-cumulative preferred stock and 40,000 shares of $1 par value common stock outstanding at December 31, 2025. There were no dividends declared in 2024. The board of directors declares and pays a $120,000 dividend in 2025. What is the amount of dividends received by the common stockholders in 2025? a. $0. b. $50,000. c. $120,000. d. $70,000.

Ans: D, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Cumulative Dividends, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $120,000  (10,000  $100  .05)  $70,000 Div. decl.  (Pref. sh.  PV/sh.  div. rate)

162.

Ace Appliance Company has 5,000 shares of 6%, $50 par value, cumulative preferred stock and 100,000 shares of $1 par value common stock outstanding at December 31, 2025, and December 31, 2024. The board of directors declared and paid a $12,000 dividend in 2024. In 2025, a total of $60,000 in dividends are declared and paid. What are the dividends received by the preferred stockholders in 2025? a. $42,000. b. $30,000. c. $18,000. d. $15,000.

Ans: C, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Cumulative Dividends, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: 5,000  $50  .06  $15,000; $15,000 + ($15,000  $12,000)  $18,000 (Pref. sh.  PV/sh.  div. rate  ann. div.; ann. div. + div. in arr.)

163.

A1 Restaurant Supply Company has 10,000 shares of 5%, $100 par value, cumulative preferred stock and 20,000 shares of $1 par value common stock outstanding at December 31, 2023, December 31, 2024 and December 31, 2025. There were no dividends declared in 2023. The board of directors declares and pays a $90,000 dividend in 2024 and in 2025. What is the amount of dividends received by the common stockholders in 2025? a. $30,000. .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

b. $40,000. c. $50,000. d. $0. Ans: A, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Cumulative Dividends, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $90,000  (10,000  $100  .05)  [($50,000  2)  $90,000]  $30,000 Div. decl.  (Pref. sh.  PV/sh.  div. rate)  [(ann. div.  2)  div. decl.]

164.

Ace Legal Services has 6,000 shares of 6%, $50 par value, cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 2024, and December 31, 2025. The board of directors declared and paid a $12,000 dividend in 2024. In 2025, $72,000 of dividends are declared and paid. What are the dividends received by the common stockholders in 2025? a. $48,000. b. $42,000. c. $54,000. d. $18,000.

Ans: A, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Cumulative Dividends, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: 6,000  $50  .06  $18,000; $72,000  ($18,000  $12,000)  $18,000  $48,000 (Pref. sh.  PV/sh.  div. rate  ann. div.; Div. decl.  div. in arr.  ann. div.

165.

The board of directors must assign a per share value to a stock dividend declared that is a. greater than the par or stated value. b. less than the par or stated value. c. equal to the par or stated value. d. at least equal to the par or stated value.

Ans: D, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Stock Dividends, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

166.

One reason corporations issue stock dividends is to a. increase the market price per share. b. exceed stockholders’ dividend expectations. c. increase the marketability of the stock. d. decrease the amount of capital in the corporation.

Ans: C, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Stock Dividends, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

167.

A stockholder who receives a stock dividend would a. expect the market price per share to increase. b. own more shares of stock. c. expect retained earnings to increase. d. expect the par value of the stock to change. .

Reporting and Analyzing Stockholders’ Equity

11-31

168.

When stock dividends are distributed, a. Common Stock Dividends Distributable is decreased. b. Retained earnings is decreased. c. Paid-in Capital in Excess of Par is debited if it is a small stock dividend. d. No entry is necessary if it is a large stock dividend.

Ans: A, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Stock Dividends, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

169.

A small stock dividend is defined as a. less than 30% but greater than 25% of the corporation’s outstanding stock. b. between 50% and 100% of the corporation’s outstanding stock. c. more than 30% of the corporation’s outstanding stock. d. less than 20-25% of the corporation’s outstanding stock.

170.

What effect occurs when a stock split is declared? a. Total assets and total stockholders' equity increase. b. Part of retained earnings is transferred to paid-in capital. c. The par value decreases and the number of shares increase. d. Ownership interests of each stockholder are increased.

Ans: C, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Stock Splits, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

171.

The per share amount normally assigned to a large stock dividend is a. the market value of the stock on the date of declaration. b. the average price paid by stockholders on outstanding shares. c. the par or stated value of the stock. d. zero.

172.

The per share amount normally assigned to a small stock dividend is a. the market value of the stock on the date of declaration. b. the average price paid by stockholders on outstanding shares. c. the par or stated value of the stock. d. zero.

Ans: A, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Stock Dividends, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

173.

Identify the effect the declaration of a stock dividend has on the par value per share and book value per share. Par Value per Share Total Paid-in-Capital a. Increase Decrease b. No effect Decrease c. Decrease Decrease d. No effect Increase

Ans: D, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Effects of Stock Dividends, Bloom: C, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

174.

Which of the following shows the proper effects of a stock split and a stock dividend? .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

a. b. c. d.

Item Total paid-in capital Total retained earnings Total par value (common) Par value per share

Stock Split Increase Decrease Decrease Decrease

Stock Dividend Increase Decrease Increase No change

Ans: D, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Effects of Stock Dividends, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

175.

A stock split will a. have no effect on retained earnings. b. increase total paid-in capital. c. increase the total par value of the stock. d. have no effect on the par value per share of stock.

Ans: A, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Stock Splits, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

176.

Which of the following statements is not true about a 2-for-1 stock split? a. The market value of the stock will probably decrease. b. A stockholder with 5 shares before the split owns 10 shares after the split. c. Par value per share is reduced to half of what it was before the split. d. Total paid-in capital increases.

Ans: D, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Stock Splits, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

177.

A1 Transport Co. had 200,000 shares of common stock outstanding before a stock split occurred and 600,000 shares outstanding after the stock split. The stock split was a. 2-for-6. b. 6-for-1. c. 1-for-6. d. 3-for-1.

Ans: D, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Stock Splits, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: 600,000  200,000  3:1 (Sh. out. aft.  sh. out. bef.)

178.

Which one of the following events would not require a journal entry on a corporation’s books? a. 2-for-1 stock split b. 100% stock dividend c. 2% stock dividend d. $1 per share cash dividend

Ans: A, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Stock Splits, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

179.

If the board of directors authorizes a $100,000 restriction of retained earnings for a future plant expansion, the effect of this action is to a. decrease total assets and total stockholders’ equity. b. increase stockholders’ equity and to decrease total liabilities. c. decrease total retained earnings and increase total liabilities. d. reduce the amount of retained earnings available for dividend declarations. .

Reporting and Analyzing Stockholders’ Equity

11-33

Ans: D, LO: 4, Topic: Presentation and Analysis, Subtopic: Retained Earnings Restrictions, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

180.

A net loss a. occurs if operating expenses exceed cost of goods sold. b. is not closed to Retained Earnings if it would result in a debit balance. c. is closed to Retained Earnings even if it would result in a debit balance. d. is closed to the Paid-in Capital account of the stockholders’ equity section of the balance sheet.

Ans: C, LO: 4, Topic: Presentation and Analysis, Subtopic: Retained Earnings, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

181.

Retained earnings are occasionally restricted a. to set aside cash for dividends. b. to keep the legal capital associated with paid-in capital intact. c. due to contractual loan restrictions. d. if preferred dividends are in arrears.

Ans: C, LO: 4, Topic: Presentation and Analysis, Subtopic: Retained Earnings Restrictions, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

182.

What occurs to stockholders’ equity when a company incurs a net loss for the current period? a. Total retained earnings is reduced before reporting the ending balance on the balance sheet. b. Paid-in capital is reduced with a debit amount. c. A deficit is reported for retained earnings on the balance sheet. d. Total retained earnings becomes restricted and dividends may not be distributed.

Ans: A, LO: 4, Topic: Presentation and Analysis, Subtopic: Retained Earnings, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: REPORTING

183.

How may a company increase its return on common stockholders’ equity? a. Increase its reliance on debt b. Reduce its return on assets c. Reduce net income d. Issue more stock

Ans: A, LO: 4, Topic: Presentation and Analysis, Subtopic: Earnings Performance, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

184.

Which of the following is a correct statement concerning the reporting of stockholders’ equity on the balance sheet? a. Three classifications are reported in paid-in capital: capital stock, additional paid-in capital, and treasury stock. b. Additional paid-in capital represents the total amounts received from the issuance of stock since the company began. c. The paid-in capital section includes capital stock and additional paid-in capital. d. Common stock is presented before preferred stock.

Ans: C, LO: 4, Topic: Presentation and Analysis, Subtopic: Balance Sheet Presentation of Stockholders’ Equity; Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

185.

When retained earnings are restricted, total retained earnings a. are unaffected. b. increase. c. decrease. d. may increase or decrease. .

11-34

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ans: A, LO: 4, Topic: Presentation and Analysis, Subtopic: Retained Earnings Restrictions, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

186.

Placing a restriction on retained earnings will a. assure that a company has sufficient cash for a specific purpose. b. increase total stockholders’ equity. c. communicate to readers a portion of retained earnings is unavailable for dividends. d. decrease total stockholders’ equity.

187.

The following selected amounts are available for A1 Company. Retained earnings (beginning) $3,500 Net loss 200 Cash dividends declared 200 Stock dividends declared 200 What is its ending Retained Earnings balance? a. $3,200. b. $3,300. c. $2,900. d. $3,100.

Ans: C, LO: 4, Topic: Presentation and Analysis, Subtopic: Retained Earnings, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $3,500  $200  ($200 + $200)  $2,900 (Beg. R/E  Net loss  Cash div.  st. div.)

188.

Ace Supply Company had retained earnings of $18,000 on the balance sheet but disclosed in the footnotes that $2,000 of retained earnings was restricted for plant expansion and $1,000 was restricted for bond repayments. Cash of $2,000 had been set aside for the plant expansion. How much of retained earnings is available for dividends? a. $15,000. b. $16,000. c. $18,000. d. $13,000.

Ans: A, LO: 4, Topic: Presentation and Analysis, Subtopic: Retained Earnings Restrictions, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $18,000  $2,000  $1,000  $15,000 (Tot. R/E  R/E rest. for pl. exp,  R/E rest. for bond repay.)

189.

Which of the following transactions affects the Retained Earnings account? a. Declare a cash dividend b. Acquire treasury stock c. Pay a cash dividend d. Declare a stock split .

Reporting and Analyzing Stockholders’ Equity

11-35

Ans: A, LO: 4, Topic: Presentation and Analysis, Subtopic: Retained Earnings, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

190.

All of the following statements regarding retained earnings are true except a. retained earnings represents a claim on cash. b. a debit balance in Retained Earnings indicates a deficit. c. some companies may restrict the availability of retained earnings for dividends. d. retained earnings is net income that a company retains in a business.

191.

What is total stockholders’ equity based on the following account balances? Common Stock $2,300,000 Paid-In Capital in Excess of Par 120,000 Retained Earnings 570,000 Treasury Stock 60,000 a. $2,690,000. b. $2,930,000. c. $3,050,000. d. $2,180,000.

Ans: B, LO: 4, Topic: Presentation and Analysis, Subtopic: Balance Sheet Presentation of Stockholders’ Equity, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $2,300,000 + $120,000 + $570,000  $60,000  $2,930,000 (Com. st. + PIC + R/E  Treas. st.)

192.

What is total stockholders’ equity based on the following account balances? Common Stock $950,000 Paid-In Capital in Excess of Par 50,000 Retained Earnings 175,000 Treasury Stock 25,000 a. $1,000,000. b. $975,000. c. $1,150,000. d. $800,000.

Ans: C, LO: 4, Topic: Presentation and Analysis, Subtopic: Balance Sheet Presentation of Stockholders’ Equity, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $950,000 + $50,000 + $175,000  $25,000  $1,150,000 (Com. st. + PIC + R/E  Treas. st.)

193.

What is total stockholders’ equity based on the following account balances? Common Stock $1,800,000 Paid-In Capital in Excess of Par 100,000 Retained Earnings 360,000 Treasury Stock 60,000 a. $1,900,000. .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

b. $2,320,000. c. $2,260,000. d. $2,200,000. Ans: D, LO: 4, Topic: Presentation and Analysis, Subtopic: Balance Sheet Presentation of Stockholders’ Equity, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $1,800,000 + $100,000 + $360,000  $60,000  $2,200,000 (Com. st. + PIC + R/E  Treas. st.)

194.

Acme Corporation’s December 31, 2025 balance sheet reported the following: 6% preferred stock, $20 par value, cumulative, 30,000 shares authorized; 20,000 shares issued $ 400,000 Common stock, $10 par value, 3,000,000 shares authorized; 1,950,000 shares issued, 1,920,000 shares outstanding 19,500,000 Paid-in capital in excess of par – preferred stock 60,000 Paid-in capital in excess of par – common stock 28,000,000 Retained earnings 9,650,000 Treasury stock (30,000 shares) 630,000 Acme’s total paid-in capital was a. $47,960,000. b. $48,590,000. c. $47,330,000. d. $28,060,000.

Ans: A, LO: 4, Topic: Presentation and Analysis, Subtopic: Balance Sheet Presentation of Stockholders’ Equity, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $400,000 + $19,500,000 + $60,000 + $28,000,000  $47,960,000 (Pref. st. + Com. st. + Pref. PIC + Com. PIC

195.

Acme Corporation’s December 31, 2025 balance sheet reported the following: 6% preferred stock, $20 par value, cumulative, 30,000 shares authorized; 20,000 shares issued $ 400,000 Common stock, $10 par value, 3,000,000 shares authorized; 1,950,000 shares issued, 1,920,000 shares outstanding 19,500,000 Paid-in capital in excess of par – preferred stock 60,000 Paid-in capital in excess of par – common stock 28,000,000 Retained earnings 9,650,000 Treasury stock (30,000 shares) 630,000 Acme declared and paid a $85,000 cash dividend on December 15, 2025. If the company’s dividends in arrears prior to that date were $24,000, Acme’s common stockholders received .

Reporting and Analyzing Stockholders’ Equity

a. b. c. d.

11-37

$61,000. $48,000. $37,000. no dividend.

Ans: C, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Cumulative Dividends, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $85,000  $24,000  ($400,000  .06)  $37,000 (Div. decl.  div. in arr.  (Pref. PV x div. rate))

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

196.

Acme Corporation’s December 31, 2025 balance sheet reported the following: 6% preferred stock, $20 par value, cumulative, 30,000 shares authorized; 20,000 shares issued $ 400,000 Common stock, $10 par value, 3,000,000 shares authorized; 1,950,000 shares issued, 1,920,000 shares outstanding 19,500,000 Paid-in capital in excess of par – preferred stock 60,000 Paid-in capital in excess of par – common stock 28,000,000 Retained earnings 9,650,000 Treasury stock (30,000 shares) 630,000 Acme’s total stockholders’ equity was a. $58,240,000. b. $47,330,000. c. $57,610,000. d. $56,980,000.

Ans: D, LO: 4, Topic: Presentation and Analysis, Subtopic: Balance Sheet Presentation of Stockholders’ Equity, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $400,000 + $19,500,000 + $60,000 + $28,000,000 + $9,650,000  $630,000  $56,980,000 (Pref. PV + Com. PV + Pref. PIC + Com. PIC + R/E  Treas. st.)

197.

Ace Supply Corporation began business by issuing 200,000 shares of $5 par value common stock for $24 per share. During its first year, the corporation sustained a net loss of $40,000. The year-end balance sheet would report a. Common Stock of $1,000,000. b. Common Stock of $4,800,000. c. total paid-in capital of $4,760,000. d. total paid-in capital of $3,800,000.

Ans: A, LO: 4, Topic: Presentation and Analysis, Subtopic: Balance Sheet Presentation of Stockholders’ Equity, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: 200,000  $5  $1,000,000 (Sh. iss.  PV/sh.)

198.

Acme Corporation’s December 31, 2025 balance sheet reported the following: 6% preferred stock, $20 par value, cumulative, 40,000 shares authorized; 25,000 shares issued $ 500,000 Common stock, $10 par value, 4,000,000 shares authorized; 2,600,000 shares issued, 2,560,000 shares outstanding 26,000,000 Paid-in capital in excess of par – preferred stock 80,000 Paid-in capital in excess of par – common stock 37,000,000 Retained earnings 12,200,000 Treasury stock (40,000 shares) 840,000 Acme’s total paid-in capital was a. $63,580,000. b. $64,420,000. c. $62,740,000. d. $36,080,000.

Ans: A, LO: 4, Topic: Presentation and Analysis, Subtopic: Balance Sheet Presentation of Stockholders’ Equity, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $500,000 + $26,000,000 + $80,000 + $37,000,000  $63,580,000 (Pref. PV + Com. PV + Pref. PIC + Com. PIC)

Reporting and Analyzing Stockholders’ Equity

199.

11-39

Acme Corporation’s December 31, 2025 balance sheet reported the following: 6% preferred stock, $20 par value, cumulative, 40,000 shares authorized; 25,000 shares issued $ 500,000 Common stock, $10 par value, 4,000,000 shares authorized; 2,600,000 shares issued, 2,560,000 shares outstanding 26,000,000 Paid-in capital in excess of par – preferred stock 80,000 Paid-in capital in excess of par – common stock 37,000,000 Retained earnings 12,200,000 Treasury stock (40,000 shares) 840,000 Acme declared and paid a $100,000 cash dividend on December 15, 2025. If the company’s dividends in arrears prior to that date were $30,000, Acme’s common stockholders received a. $70,000. b. $60,000. c. $40,000. d. no dividend.

Ans: C, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Cumulative Dividends, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $100,000  $30,000  ($500,000  .06)  $40,000 Div. decl. - div. in arr.  (Pref. PV  div. rate)

200.

Acme Corporation’s December 31, 2025 balance sheet reported the following: 6% preferred stock, $20 par value, cumulative, 40,000 shares authorized; 25,000 shares issued $ 500,000 Common stock, $10 par value, 4,000,000 shares authorized; 2,600,000 shares issued, 2,560,000 shares outstanding 26,000,000 Paid-in capital in excess of par – preferred stock 80,000 Paid-in capital in excess of par – common stock 37,000,000 Retained earnings 12,200,000 Treasury stock (40,000 shares) 840,000 Acme’s total stockholders’ equity was a. $76,620,000. b. $63,580,000. c. $75,780,000. d. $74,940,000.

Ans: D, LO: 4, Topic: Presentation and Analysis, Subtopic: Balance Sheet Presentation of Stockholders’ Equity, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $500,000 + $26,000,000 + $80,000 + $37,000,000 + $12,200,000  $840,000  $74,940,000 Pref. stk + Com. stk.+ PIC – PS + PIC- CS + RE – Treas. Stk.

201.

A1 Corporation began business by issuing 300,000 shares of $5 par value common stock for $24 per share. During its first year, the corporation sustained a net loss of $50,000. The year-end balance sheet would report a. Common Stock of $1,500,000. b. Common Stock of $7,200,000. c. total paid-in capital of $7,140,000. d. total paid-in capital of $5,700,000.

Ans: A, LO: 4, Topic: Presentation and Analysis, Subtopic: Balance Sheet Presentation of Stockholders’ Equity, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: 300,000  $5  $1,500,000

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

(Sh. iss.  PV/sh.)

Reporting and Analyzing Stockholders’ Equity

202.

11-41

In the stockholders’ equity section of the balance sheet, a. Common Stock Dividends Distributable is classified as part of additional paid-in capital. b. Common Stock Dividends Distributable is reported in its own subsection of the stockholders’ equity. c. Paid-in Capital in Excess of Par is reported in the sub-section for paid-in capital. d. Dividends in Arrears is reported as a restriction of retained earnings.

Ans: C, LO: 4, Topic: Presentation and Analysis, Subtopic: Balance Sheet Presentation of Stockholders’ Equity, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

203.

Paid-in capital in excess of stated value would be reported on a balance sheet under the category a. capital stock. b. retained earnings. c. paid-in capital. d. contra to stockholders’ equity.

204.

Two classifications reported in the paid-in capital section of the balance sheet are a. preferred stock and common stock. b. paid-in capital and retained earnings. c. capital stock and additional paid-in capital. d. capital stock and treasury stock.

205.

All of the following are normally reported in a corporation’s stockholders’ equity section except a. dividends in arrears. b. common stock. c. paid-in capital. d. retained earnings.

Ans: A, LO: 4, Topic: Presentation and Analysis, Subtopic: Balance Sheet Presentation of Stockholders’ Equity, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

206.

Information that is not generally reported for each class of stock on the balance sheet is a. the market value. b. the par value. c. shares authorized. d. shares issued.

207.

In published annual reports, a. subclassifications within the stockholders’ equity section are routinely reported in detail. b. capital surplus is used in place of retained earnings. c. the individual sources of paid-in capital in excess of par are often combined. d. retained earnings is often not reported separately.

Ans: A, LO: 4, Topic: Presentation and Analysis, Subtopic: Balance Sheet Presentation of Stockholders’ Equity, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

11-42 208.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

The payout ratio is computed by dividing a. total cash dividends paid to common stockholders by retained earnings. b. dividends paid per share by net income. c. total cash dividends paid to common stockholders by net income. d. dividends paid per share by year-end stock price.

Ans: C, LO: 4, Topic: Presentation and Analysis, Subtopic: Dividend Record, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

209.

The return on common stockholders’ equity is computed by dividing net income a. by ending common stockholders’ equity. b. by average common stockholders’ equity. c. less preferred dividends by ending common stockholders’ equity. d. less preferred dividends by average common stockholders’ equity.

Ans: D, LO: 4, Topic: Presentation and Analysis, Subtopic: Earnings Performance, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

210.

A1 Service Corporation had net income of $140,000 and paid dividends of $40,000 to common stockholders and $20,000 to preferred stockholders in 2025. A1’s common stockholders’ equity at the beginning and end of 2025 was $870,000 and $1,130,000, respectively. The company’s return on common stockholders’ equity was a. 14%. b. 12%. c. 9%. d. 8%.

Ans: B, LO: 4, Topic: Presentation and Analysis, Subtopic: Earnings Performance, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($140,000  $20,000)  [($870,000 + $1,130,000)  2]  12% (Net inc.  Pref. div.)  [(beg. st. eq. + end. st. eq.)  2]

211.

A1 Service Corporation had net income of $140,000 and paid dividends of $40,000 to common stockholders and $20,000 to preferred stockholders in 2025. A1’s common stockholders’ equity at the beginning and end of 2025 was $870,000 and $1,130,000, respectively. The company’s payout ratio for 2025 was a. 4.0%. b. 42.9%. c. 28.6%. d. 14.3%.

Ans: C, LO: 4, Topic: Presentation and Analysis, Subtopic: Dividend Record, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $40,000  $140,000  28.6% (Com. div.  Net inc.)

212.

Ace Corporation had net income of $100,000 and paid dividends of $25,000 to common stockholders and $20,000 to preferred stockholders in 2025. Ace Corporation’s common stockholders’ equity at the beginning and end of 2025 was $450,000 and $550,000, respectively. Ace Corporation’s return on common stockholders’ equity is a. 20.0%. b. 16.0%. c. 15.0%. d. 11.0%.

Ans: B, LO: 4, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($100,000  $20,000)  [($450,000 + $550,000)  2]  16.0% (Net inc.  Pref. div.)  [(beg. st. eq. + end. st. eq.)  2]

Reporting and Analyzing Stockholders’ Equity

213.

11-43

Ace Corporation had net income of $100,000 and paid dividends of $25,000 to common stockholders and $20,000 to preferred stockholders in 2025. Ace Corporation’s common stockholders’ equity at the beginning and end of 2025 was $450,000 and $550,000, respectively. Ace Corporation’s payout ratio for 2025 is a. 45%. b. 25%. c. 20%. d. 5%.

Ans: B, LO: 4, Topic: Presentation and Analysis, Subtopic: Dividend Record, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $25,000  $100,000  25% (Com. div.  Net inc.)

214.

From the information below, compute the payout ratio for Ace’s Trailers. Net Income $250 Cash Dividends (common) 40 Retained Earnings 500 Stock Dividends (common) 10 a. 20% b. 16% c. 8% d. 4%

Ans: B, LO: 4, Topic: Presentation and Analysis, Subtopic: Dividend Record, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $40  $250  16% (Com. div.  Net inc.)

215.

The following information pertains to Acme Service Company. Assume that all balance sheet amounts represent average balance figures. Total assets $300,000 Stockholders’ equity—common 150,000 Total stockholders’ equity 200,000 Sales revenue 100,000 Net income 25,000 Number of shares of common stock 6,000 Common dividends 5,000 Preferred dividends 7,000 What is the payout ratio for Acme Service? a. 48% b. 20% c. 28% d. 5%

11-44 216.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

The following information pertains to Acme Service Company. Assume that all balance sheet amounts represent average balance figures. Total assets $300,000 Stockholders’ equity—common 150,000 Total stockholders’ equity 200,000 Sales revenue 100,000 Net income 25,000 Number of shares of common stock 6,000 Common dividends 5,000 Preferred dividends 7,000 What is the return on common stockholders’ equity for Acme Service? a. 16.7% b. 12.0% c. 13.3% d. 9.0%

Ans: B, LO: 4, Topic: Presentation and Analysis, Subtopic: Earnings Performance, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($25,000  $7,000)  $150,000  12% (Net inc.  Pref. div.)  Com. st. eq.

217.

The following information pertains to A1 Supply Company. Assume that all balance sheet amounts represent average balance figures. Total asset $400,000 Stockholders’ equity—common 200,000 Total stockholders’ equity 280,000 Sales revenue 120,000 Net income 30,000 Number of shares of common stock 8,000 Common dividends 6,000 Preferred dividends 4,000 What is A1 Supply’s payout ratio? a. 33.3%. b. 20.0%. c. 13.3%. d. 5.0%.

Ans: B, LO: 4, Topic: Presentation and Analysis, Subtopic: Dividend Record, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $6,000  $30,000  20% (Com. div.  Net inc.)

Reporting and Analyzing Stockholders’ Equity

218.

11-45

The following information pertains to A1 Supply Company. Assume that all balance sheet amounts represent average balance figures. Total asset $400,000 Stockholders’ equity—common 200,000 Total stockholders’ equity 280,000 Sales 120,000 Net income 30,000 Number of shares of common stock 8,000 Common dividends 6,000 Preferred dividends 4,000 What is A1 Supply’s return on common stockholders’ equity? a. 15%. b. 13.0%. c. 10.0%. d. 9.3%.

Ans: B, LO: 4, Topic: Presentation and Analysis, Subtopic: Earnings Performance, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($30,000  $4,000)  $200,000  13% (Net inc.  Pref. div.)  com. st. eq.

219.

Which of the following statements is true regarding corporate performance ratios? a. A high payout ratio may indicate that a company is retaining earnings for future growth investments. b. As a company grows larger, it is easy to sustain a high return on common stockholders’ equity. c. Return on common stockholders’ equity is often higher under bond financing rather than common stock financing. d. Low growth rates are characterized by low payout ratios.

Ans: C, LO: 4, Topic: Presentation and Analysis, Subtopic: Analysis of Stockholders’ Equity, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

220.

Which of the following would not affect the balance of the Retained Earnings account? a. Net income b. Stock dividend c. Stock split d. Gains and losses of a company

Ans: C, LO: 4, Topic: Presentation and Analysis, Subtopic: Earnings Performance, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

*221. A1 Restaurant Supply Company has 20,000 shares of $100 par value common stock. Assuming that the proper journal entry was made to record a 5% common stock dividend on the declaration date when the market value of the stock was $135, which of the following accounts would be debited when the stock dividend is distributed? a. Retained Earnings b. Dividends Payable c. Common Stock Dividends Distributable d. Paid-in Capital in Excess of Par Ans: C, LO: 5, Topic: Entries for Stock Dividends, Subtopic: NA, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

11-46

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

*222. On January 1, Ace Beauty Supply Corporation had 120,000 shares of $10 par value common stock outstanding. On March 17, the company declared a 10% stock dividend to stockholders of record on March 20. The market value of the stock was $13 on March 17. The entry to record the transaction of March 17 would include a a. credit to Stock Dividends for $36,000. b. credit to Cash for $156,000. c. credit to Common Stock Dividends Distributable for $120,000. d. debit to Common Stock Dividends Distributable for $120,000. Ans: C, LO: 5, Topic: Entries for Stock Dividends, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: (120,000  .10)  $10  $120,000 (Sh. out.  div.%  PV/sh.)

*223. On January 1, Acme Marine Supply Corporation had 800,000 shares of $10 par value common stock outstanding. On March 31, the company declared a 10% stock dividend. The market value of the stock was $15/share. As a result of this event, a. Paid-in Capital in Excess of Par account increased $400,000. b. total stockholders’ equity was unaffected. c. the Stock Dividends account increased $1,200,000. d. All of these answer choices are correct. Ans: D, LO: 5, Topic: Entries for Stock Dividends, Subtopic: NA, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: (800,000  .10)  $15  $1,200,000; 80,000  ($15  $10)  $400,000 (Sh. out.  div. %  MV/sh.); (Sh. out.  div. %) x (MV/sh.  PV/sh.)

*224. On January 1, A1 Plumbing Supply Corporation had 2,000,000 shares of $10 par value common stock outstanding. On March 31, the company declared a 10% stock dividend. The market value of the stock was $15/share. As a result of this event, a. Paid-in Capital in Excess of Par account increased $1,000,000. b. total stockholders’ equity was unaffected. c. Stock Dividends account increased $3,000,000. d. All of these answer choices are correct. Ans: D, LO: 5, Topic: Entries for Stock Dividends, Subtopic: NA, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: (2,000,000  .10)  $15  $3,000,000; 200,000  ($15  $10)  $1,000,000 (Sh. out.  div. %  MV/sh.); (Sh. out.  div. %) x (MV/sh.  PV/sh.)

*225. On January 1, A1 Equipment Rental Corporation had 120,000 shares of $10 par value common stock outstanding. On March 17, the company declared a 10% stock dividend to stockholders of record on March 20. The market value of the stock was $13 on March 17. The stock was distributed on March 30. The entry to record the transaction of March 30 would include a a. credit to Cash for $120,000. b. debit to Common Stock Dividends Distributable for $120,000. c. credit to Paid-in Capital in Excess of Par for $36,000. d. debit to Stock Dividends for $36,000. Ans: B, LO: 5, Topic: Entries for Stock Dividends, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: 120,000  .10  $10  $120,000 (Sh. out.  div.%  PV/sh.)

Reporting and Analyzing Stockholders’ Equity

11-47

*226. On January 1, Ace Corporation had 80,000 shares of $10 par value common stock outstanding. On May 7, the company declared a 10% stock dividend to stockholders of record on May 21. The market value of the stock was $13 on May 7. The entry to record the transaction of May 7 would include a a. debit to Stock Dividends for $104,000. b. credit to Cash for $104,000. c. credit to Common Stock Dividends Distributable for $104,000. d. credit to Common Stock Dividends Distributable for $24,000. Ans: A, LO: 5, Topic: Entries for Stock Dividends, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: REPORTING Solution: 80,000  .10  $13  $104,000 (Sh. out.  div.%  MV/sh.)

*227. On January 1, Ace Corporation had 80,000 shares of $10 par value common stock outstanding. On May 7, the company declared a 10% stock dividend to stockholders of record on May 21. The market value of the stock was $13 on May 7. The stock was distributed on May 24. The entry to record the transaction of May 24 would include a a. credit to Common Stock for $80,000. b. debit to Common Stock Dividends Distributable for $104,000. c. credit to Paid-in Capital in Excess of Par for $24,000. d. debit to Stock Dividends for $24,000. Ans: A, LO: 5, Topic: Entries for Stock Dividends, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: 80,000  .10  $10  $80,000 (Sh. out.  div.%  PV/sh.)

*228. If a corporation declares a 10% stock dividend on its common stock, the account to be debited on the date of declaration is a. Common Stock Dividends Distributable. b. Common Stock. c. Paid-in Capital in Excess of Par. d. Stock Dividends. Ans: D, LO: 5, Topic: Entries for Stock Dividends, Subtopic: NA, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: REPORTING

*229. The declaration and distribution of a stock dividend will a. increase total stockholders’ equity. b. increase total assets. c. decrease total assets. d. have no effect on total assets. Ans: D, LO: 5, Topic: Entries for Stock Dividends, Subtopic: NA, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

*230. The declaration of a small stock dividend will a. increase paid-in capital. b. change the total of stockholders’ equity. c. increase total liabilities. d. increase total assets. Ans: A, LO: 5, Topic: Entries for Stock Dividends, Subtopic: NA, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

11-48

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

BRIEF EXERCISES Be. 231 Name at least three advantages of a corporation. Ans: N/A, LO: 1, Topic: Corporate Form of Organization, Subtopic: Characteristics of a Corporation, Bloom: K, Difficulty: Easy, Min: 9, AACSB: Communications, AICPA BC: Process and Resource Management Perspectives, AICPA AC: None, AICPA PC: Communications, IMA: Reporting

Solution 231 Advantages of a corporation include: (1) Separate legal existence (2) Limited liability of stockholders (3) Transferable ownership rights (4) Continuous life (5) Ability to acquire capital Be. 232 Corporations acquire treasury stock for a variety of purposes. Name three reasons why a corporation may acquire treasury stock. Ans: N/A, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Accounting for Treasury Stock, Bloom: K, Difficulty: Easy, Min: 9, AACSB: Communications, AICPA BC: Process and Resource Management Perspectives, AICPA AC: None, AICPA PC: Communications, IMA: Reporting

Solution 232 Reasons why a company may acquire treasury stock include: (a) To reissue the shares to officers and employees under bonus and stock compensation plans (b) To increase trading of the company’s stock in the securities market in the hopes of enhancing its market value (c) To have additional shares available for use in the acquisition of other companies (d) To reduce the number of shares outstanding and, thereby, increase earnings per share (e) To prevent a hostile takeover.

Reporting and Analyzing Stockholders’ Equity

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Be. 233 Identify (by letter) each of the following characteristics as being an advantage or a disadvantage of the corporate form of business or not applicable to the corporate form of business organization. A = Advantage D = Disadvantage N = Not Applicable Characteristics 1. Separate legal entity 2. Taxable entity resulting in additional taxes 3. Continuous life 4. Unlimited liability of owners 5. Government regulation 6. Separation of ownership and management 7. Ability to acquire capital 8. Ease of transfer of ownership Ans: N/A, LO: 1, Topic: Corporate Form of Organization, Subtopic: Characteristics of a Corporation, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: None, AICPA PC: None, IMA: Reporting

Solution 233 1. 2. 3. 4.

A D A N

5. 6. 7. 8.

D A and D A A

Be. 234 A1 Corporation is authorized to issue 1,000,000 shares of $1 par value common stock. During 2025, the company has the following stock transactions. Jan. 15

Issued 700,000 shares of stock at $7 per share

Sept. 5

Purchased 20,000 shares of common stock for the treasury at $8 per share

Dec.

Declared a $0.50 per share dividend to stockholders of record on December 20, 2025, payable January 3, 2026

Instructions Journalize the transactions for A1 Corporation. Ans: N/A, LO: 2, 3, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

11-50

Solution 234 Jan. 15

Cash ................................................................................... 4,900,000 Common Stock........................................................... Paid-in Capital in Excess of Par—Common Stock ......

700,000 4,200,000*

*(Sell. pr./sh. – par val.) × 700,000 sh.

Sept. 5 Dec.

Treasury Stock ($8 x 20,000) .............................................. Cash...........................................................................

160,000

Cash Dividends ($.50 x (700,000 – 20,000) ........................ Dividends Payable...................................................... (700,000 – 20,000) × $.50 (sh. iss. – trea. sh.) × div./sh.

340,000

160,000 340,000

Be. 235 An inexperienced accountant for Acme Corporation made the following entries: July 1

Sept. 1

Cash ....................................................................................... 170,000 Common Stock........................................................... (Issued 20,000 shares of no-par common stock, stated value $5 per share) Common Stock ................................................................... Retained Earnings .............................................................. Cash........................................................................... (Purchased 4,000 shares issued on July 1 for the treasury at $15 per share)

170,000

36,000 24,000 60,000

Instructions On the basis of the explanation for each entry, prepare the entry that should have been made for the transactions. (Omit explanations.) Ans: N/A, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 235 July 1

Cash ......................................................................................... 170,000 Common Stock........................................................... Paid-in Capital in Excess of Stated Value—Common Stock

100,000 70,000*

*[Sell. pr. – (20,000 × par val./sh.)]

Sept. 1

Treasury Stock ..................................................................... Cash...........................................................................

60,000 60,000

Reporting and Analyzing Stockholders’ Equity

11-51

Be. 236 On January 1, 2025, Ace Supply Company issued 16,000 shares of $2 par value common stock for $120,000. On March 1, 2025, the company purchased 2,000 shares of its common stock for $15 per share for the treasury. Instructions Journalize the stock transactions of Ace Supply Company in 2025. Ans: N/A, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 236 Jan.

Cash .................................................................................. Common Stock .......................................................... Paid-in Capital in Excess of Par—Common Stock .....

120,000 32,000 88,000*

*[Sell. pr. – (16,000 × par val./sh.)]

March 1

Treasury Stock (2,000 x $15).............................................. Cash ..........................................................................

30,000 30,000

Be. 237 A1 Service Corporation’s December 31, 2025 balance sheet reported the following: 3% preferred stock, $200 par value $ 400,000 Common stock, $1 par value 500,000 Paid-in capital in excess of par – preferred stock 60,000 Paid-in capital in excess of par – common stock 8,000,000 Retained earnings 10,650,000 Treasury stock 130,000 The average cost of the treasury shares was $13 per share. Instructions Answer the following questions: (a) How many shares of common stock have been issued as of December 31, 2025? (b) What was the average per share price at which the common stock was issued? (c) How many shares of common stock are outstanding at December 31, 2025? Ans: N/A, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 237 (a) There are 500,000 common shares issued ($500,000/$1 par). (b) The average issue price of the common shares was $17 [($500,000 + $8,000,000)/ 500,000 shares]. (c) The number of treasury shares at 12/31/2025 is 10,000 ($130,000/average cost of $13). Therefore, the number of common shares outstanding is 490,000 (500,000 common shares issued – 10,000 treasury shares).

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

11-52 Be. 238

Ace Restaurant Supply Company had the following transactions: 1. Issued 5,000 shares of $100 par preferred stock at $107 per share for cash. 2. Issued 8,000 shares of common stock with a par value of $10 per share for $120,000. 3. Purchased 500 shares of treasury common stock for a total of $12,000. Instructions Prepare the journal entries to record the above stock transactions. Ans: N/A, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 238 1.

Cash .............................................................................................. Preferred Stock ...................................................................... Paid-in Capital in Excess of Par—Preferred Stock .................

535,000

Cash .............................................................................................. Common Stock ...................................................................... Paid-in Capital in Excess of Par—Common Stock .................

120,000

Treasury Stock ............................................................................... Cash ......................................................................................

12,000

500,000 35,000*

*(Sell. pr./sh. – par val./sh.) × 5,000

80,000 40,000*

*[Sell. pr. – (8,000 × par val./sh.)]

12,000

Be. 239 In its first year of operations, Acme Marine Corporation had the following transactions pertaining to its $10 par value preferred stock: Feb. 1 July 1

Issued 8,000 shares for cash at $24 per share. Issued 6,000 shares for cash at $25 per share.

Instructions (a)

Journalize the transactions.

(b)

Indicate the amount to be reported for (1) preferred stock, and (2) paid-in capital in excess of par —preferred stock at the end of the year.

Ans: N/A, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Accounting for Preferred Stock, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Stockholders’ Equity

11-53

Solution 239 (a) Feb. 1

Cash .................................................................................... 192,000 Preferred Stock ................................................... Paid-in Capital in Excess of Par—Preferred Stock ................................................................ (Issued 8,000 shares at $24 per share)

80,000 112,000*

*(Sell. pr./sh. – par val./sh.) × 8,000

July 1

Cash .................................................................................... 150,000 Preferred Stock ................................................... Paid-in Capital in Excess of Par—Preferred Stock ................................................................ (Issued 6,000 shares at $25 per share)

60,000 90,000*

*(Sell. pr./sh. – par val./sh.) × 6,000

(b) (1)

Preferred stock—$80,000 + $60,000 = $140,000.

(2)

Paid-in Capital in Excess of Par—Preferred Stock—$112,000 + $90,000 = $202,000.

Be. 240 Suppose that Target has the following stockholders’ equity accounts: Preferred Stock Paid-in Capital in Excess of Par - Preferred Stock Common Stock Paid-in Capital in Excess of Stated Value - Common Stock Retained Earnings Treasury Stock - Common Instructions Classify each account using the following tabular alignment. Paid-in Capital Capital Stock Additional

Account

Retained Earnings

Other

Ans: N/A, LO: 4, Topic: Presentation and Analysis, Subtopic: Balance Sheet Presentation of Stockholders’ Equity, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 240 Paid-in Capital Capital Stock Additional X

Account Preferred Stock Paid-in Capital in Excess of Par - Preferred Stock Common Stock

Retained Earnings

Other

X X

Paid-in Capital in Excess of Stated Value - Common Stock Retained Earnings

X X

Treasury Stock - Common .

11-54

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Be. 241 Ace Service Corporation has 1,000,000 authorized shares of $20 par value common stock. As of June 30, 2025, there were 600,000 shares issued and outstanding. On June 30, 2025, the board of directors declared a $0.50 per share cash dividend to be paid on August 1, 2025. Instructions Prepare the necessary journal entries to be recorded on (a) the date of declaration, (b) the date of record, and (c) the date of payment. Ans: N/A, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Entries for Cash Dividends, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 241 (a)

Cash Dividends ................................................................................ 300,000 Dividends Payable .............................................................. 600,000 × $.50 = $300,000 (sh. out. × div./sh.)

(b)

No entry

(c)

Dividends Payable ........................................................................... 300,000 Cash ...................................................................................

300,000

Be. 242 On November 1, 2025, Ace Office Supply Corporation’s stockholders’ equity section is as follows: Common stock, $10 par value $600,000 Paid-in capital in excess of par - common stock 180,000 Retained earnings 200,000 Total stockholders’ equity $980,000 On November 1, Ace declares and distributes a 15% stock dividend when the fair value of the stock is $16 per share. Instructions Indicate the balances in the stockholders’ equity accounts after the stock dividend has been distributed. Ans: N/A, LO: 3, 4, Topic: Presentation and Analysis, Subtopic: Balance Sheet Presentation of Stockholders’ Equity, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 242 Common Stock Paid-in Capital in Excess of Par - Common Stock Retained Earnings Total Stockholders’ Equity

$690,000* 234,000** 56,000*** $980,000

*$600,000 + (60,000 × .15 × $10) [Tot. PV + ((Tot. PV ÷ PV/sh.) × div.% × PV/sh.)] **$180,000 + (60,000 × .15 × $6) ***$200,000 – (60,000 × .15 × $16) [Beg. R/E + ((Tot. PV ÷ PV/sh.) × div.% × FV/sh.)]

Reporting and Analyzing Stockholders’ Equity

11-55

Be. 243 On December 1, 2025, A1 Corporation’s stockholders’ equity section is as follows: Common stock, $1 par value $125,000 Paid-in capital in excess of par - Common Stock 525,000 Retained earnings 200,000 Total stockholders’ equity $850,000 A1’s board of directors is deliberating declaring either (a) a 100% stock dividend or (b) a 2-for-1 stock split. Prepare the journal entries that would be required for each option. Assume that the fair value of the stock on the declaration date is $8 per share. Instructions Prepare the journal entries that would be required for each option. Assume that the fair value of the stock on the declaration date is $8 per share. Ans: N/A, LO: 3, 5, Topic: Accounting for Dividends and Stock Splits, Subtopics: Stock Splits, Entries for Stock Dividends, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 243 (a) Declaration date: Stock Dividends (125,000*  $1)........................................ Common Stock Dividends Distributable (125,000  $1) .......................................................... Distribution date: Common Stock Dividends Distributable ............................. Common Stock ......................................................... (b)

125,000 125,000

No journal entries are needed to record a stock split. A memo entry would be made noting the stock split and the resulting new par value of $.50 and shares issued and outstanding of 250,000.

11-56

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Be. 244 Listed below are items typically found in the stockholders' equity section of the balance sheet. Common stock, $10 stated value Retained earnings 8% Preferred stock, $100 par value Paid-in capital in excess of par - preferred stock Paid-in capital in excess of stated value - common stock Treasury stock - common Stockholders’ equity Paid-in capital Capital stock Additional paid-in capital Total additional paid-in capital Total paid-in capital Retained earnings Total paid-in capital and retained earnings Total stockholders’ equity Instructions Place each of the items listed below in the appropriate subdivision of the stockholders’ equity section of a balance sheet. Ans: N/A, LO: 4, Topic: Presentation and Analysis, Subtopic: Balance Sheet Presentation of Stockholders’ Equity, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 244 Stockholders’ equity Paid-in capital Capital stock 8% Preferred stock, $100 par value Common stock, $10 stated value Additional paid-in capital Paid-in capital in excess of par - preferred stock Paid-in capital in excess of stated value - common stock Total additional paid-in capital Total paid-in capital Retained earnings Total paid-in capital and retained earnings Less: Treasury stock—common Total stockholders’ equity Be. 245 The following information is available for A1 Corporation Average common stockholders’ equity Average total stockholders’ equity Common dividends declared and paid Preferred dividends declared and paid Net income .

2025 $1,500,000 2,000,000 72,000 30,000 180,000

2024 $1,000,000 1,500,000 50,000 30,000 150,000

Reporting and Analyzing Stockholders’ Equity

11-57

Be. 245 (Cont.) Instructions Compute the payout ratio and return on common stockholders’ equity for each year. Briefly comment on your findings. Ans: N/A, LO: 4, Presentation and Analysis, Subtopic: Analysis of Stockholders’ Equity, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 245 Payout ratio: (Com. div./Net inc.)

Return on common stockholders’ equity : (Net inc. – Pref. div.) Ave. com. st. eq.

2024

2025

$50,000 ———— = 33% $150,000

$72,000 ———— = 40% $180,000

$150,000 – $30,000 ————————— = 12% $1,000,000

$180,000 – $30,000 ————————— = 10% $1,500,000

A1’s payout ratio increased 21% (.40 – .33)/.33 during 2025 while its return on common stockholders’ equity decreased approximately 17% (.10 – .12)/.12. A1’s earnings performance declined during 2025 which should have resulted in less dividends being paid out to common stockholders instead of 44% [($72,000 - $50,000)/$50,000 more being paid to them.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

11-58

EXERCISES Ex. 246 The corporate charter of Ace Corporation allows the issuance of a maximum of 4,000,000 shares of $1 par value common stock. During its first three years of operation, Ace issued 2,080,000 shares at $15 per share. It later acquired 80,000 of these shares as treasury stock for $25 per share. Instructions Based on the above information, answer the following questions: (a) How many shares were authorized? (b) How many shares were issued? (c) How many shares are outstanding? (d) What is the balance of the Common Stock account? (e) What is the balance of the Treasury Stock account? Ans: N/A, LO: 1, 2, Topic: Corporate Form of Organization, Subtopic: Stock Issue Considerations, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 246 (a) 4,000,000 shares were authorized. (b) 2,080,000 shares were issued. (c) 2,000,000 shares are outstanding (2,080,000 issued less 80,000 in treasury). (d) The balance of the Common Stock account is $2,080,000; ($1 × 2,080,000 shares = $2,080,000). (e) The balance of the Treasury Stock account is $2,000,000; ($25 × 80,000 shares = $2,000,000). Ex. 247 The following items were shown on the balance sheet of A1 Pet Supply Corporation on 12/31/2025: Stockholders’ Equity Paid-In Capital Capital Stock Common stock, $5 par value, 750,000 shares authorized; shares issued and outstanding ....................... $3,000,000 Additional paid-in capital In excess of par ..................................................................................... Total paid-in capital .........................................................................

180,000 3,180,000

Retained Earnings ............................................................................................ 500,000 Total paid-in capital and retained earnings ............................................ 3,680,000 Less: Treasury stock (20,000 shares) .............................................................. 280,000 Total stockholders’ equity ...................................................................... $3,400,000

Reporting and Analyzing Stockholders’ Equity

11-59

Ex. 247 (Cont.) Instructions Complete the following statements and show your computations. (a) The number of shares of common stock issued was (b) The number of shares of common stock outstanding was

. .

(d) How much did the treasury stock cost per share? $ (e) What was the average issue price of the common stock? $ Ans: N/A, LO: 1, 2, Topic: Corporate Form of Organization, Subtopic: Stock Issue Considerations, Accounting for Treasury Stock, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 247 (a)

The number of shares of common stock issued was 600,000. (Com. st. amount/PV/sh.) $3,000,000 ÷ $5 par value = 600,000 shares issued.

(b)

The number of shares of common stock outstanding was 580,000. (Sh. iss. – Trea. sh.) 600,000 issued less 20,000 in treasury = 580,000 shares outstanding

(c)

The total sales price of the common stock when issued was $3,180,000. Common stock $3,000,000 Plus: In excess of par value 180,000 Total $3,180,000 (Tot. paid-in cap.)

(d)

How much did the treasury stock cost per share? $14 $280,000 ÷ 20,000 = $14 per share. (Trea. st. amount/Trea. sh.)

(e)

What was the average issue price of the common stock? $5.30 (Tot. paid-in cap ÷ sh. iss.) $3,180,000 ÷ 600,000 shares = $5.30 per share.

Ex. 248 Ace Co. had these transactions during the current period. June July Nov.

12 11 28

Issued 50,000 shares of $3 stated value common stock for cash of $250,000. Issued 2,000 shares of $100 par value preferred stock for cash at $108 per share. Purchased 2,000 shares of treasury stock for $10,000.

Instructions Prepare the journal entries for the preceding transactions. Ans: N/A, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

11-60

Solution 248 June 12

July 11

Nov. 28

Cash ............................................................................. Common Stock (50,000  $3) ............................... Paid-in Capital in Excess of Stated Value—Common Stock ..................................... *(Sell. pr. – (sh. iss.  SV/sh.))

250,000

Cash (2,000 x $108)_...................................................... Preferred Stock (2,000  $100)............................. Paid-in Capital in Excess of Par —Preferred Stock (2,000 x $8) .......................... *(Sell. pr./sh. – PV/sh.)  sh. iss.

216,000

Treasury Stock .............................................................. Cash .....................................................................

10,000

150,000 100,000*

200,000 16,000*

10,000

Ex. 249 On January 1, 2025, Acme Corporation had 75,000 shares of $1 par value common stock issued and outstanding. During the year, the following transactions occurred: Mar.

Issued 90,000 shares of common stock for $675,000.

June 1 June 30 Dec. 1

Declared a cash dividend of $2.00 per share to stockholders of record on June 15. Paid the $2.00 cash dividend. Purchased 5,000 shares of common stock for the treasury for $18 per share.

Dec. 15

Declared a cash dividend on outstanding shares of $2.50 per share to stockholders of record on December 31.

Net income for 2025 totaled $951,000. Instructions Prepare journal entries to record the above transactions. Ans: N/A, LO: 2, 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 249 Mar.

June

June 30 Dec. Dec.

1 15

Cash .......................................................................... Common Stock .................................................. Paid-in Capital in Excess of Par —Common Stock...........................................

675,000

Cash Dividends ((90,000 + 75,000) * $2).................... Dividends Payable .............................................

330,000

Dividends Payable ..................................................... Cash .................................................................

330,000

Treasury Stock ........................................................... Cash (5,000*18) ................................................

90,000

Cash Dividends ($2.50 * (75,000 + 90,000 - 5,000))... Dividends Payable ............................................

400,000

90,000 585,000 330,000 330,000 90,000 400,000

Reporting and Analyzing Stockholders’ Equity

11-61

Ex. 250 The stockholders’ equity section of A1 Corporation’s balance sheet at December 31, 2024, appears below: Stockholders’ equity Paid-in capital Common stock, $10 par value, 400,000 shares authorized; 300,000 issued and outstanding $3,000,000 Paid-in capital in excess of par 1,200,000 Total paid-in capital 4,200,000 Retained earnings 900,000 Total stockholders’ equity $5,100,000 During 2025, the following stock transactions occurred: Jan. 18 Aug. 20

Issued 80,000 shares of common stock at $23 per share. Purchased 20,000 shares of A1 Corporation’s common stock at $25 per share to be held in the treasury. Instructions (a) Prepare the journal entries to record the above stock transactions (omit explanations). (b) Prepare the stockholders’ equity section of the balance sheet for A1 Corporation at December 31, 2025. Assume that net income for the year was $150,000 and that no dividends were declared. Ans: N/A, LO: 2,4, Topic: Presentation and Analysis, Subtopic: Balance Sheet Presentation of Stockholders’ Equity, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 250 (a) Jan. 18

Cash ............................................................................... 1,840,000 Common Stock..................................................... Paid-in Capital in Excess of Par—Common Stock *((Sell. pr./sh. – PV/sh.)  sh. iss.)

Aug. 20

800,000 1,040,000*

Treasury Stock (20,000 x $25) ........................................... 500,000 Cash .................................................................... 500,000 (b) Stockholders’ equity Paid-in capital Capital stock Common stock, $10 par value, 400,000 shares authorized, 380,000 shares issued, 360,000 shares outstanding $3,800,000 Additional paid-in capital In excess of par 2,240,000 Total paid-in capital 6,040,000* Retained earnings 1,050,000 Total paid-in capital and retained earnings 7,090,000** Less: Treasury stock (20,000 shares) 500,000 Total stockholders’ equity $6,590,000 *[Beg. com. st. + (sh. iss.  PV/sh.)] + [Beg. PIC in exc. + ((Sell. pr./sh. – PV/sh.)  sh. iss.)] **Tot. paid-in cap. + (beg. R/E + Net inc.)

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

11-62 Ex. 251

The stockholders' equity section of Ace Corporation's balance sheet at December 31 is presented here: ACE CORPORATION Balance Sheet (partial) Stockholders' equity Paid-in capital Preferred stock, cumulative, 10,000 shares authorized, 6,000 shares issued and outstanding $ 600,000 Common stock, no par, 750,000 shares authorized, 600,000 shares issued 6,000,000 Total paid-in capital 6,600,000 Retained earnings 1,358,000 Total paid-in capital and retained earnings 7,958,000 Less: Treasury stock (4,000 common shares) 32,000 Total stockholders' equity $7,926,000 Instructions From a review of the stockholders' equity section, answer the following questions. (a) How many shares of common stock are outstanding? (b) Assuming there is a stated value, what is the stated value of the common stock? (c) What is the par value of the preferred stock? (d) If the annual dividend on the preferred stock is $30,000, what is the dividend rate on preferred stock? (e) If dividends of $60,000 were in arrears on preferred stock, what would be the balance reported for retained earnings? Ans: N/A, LO: 2,3,4, Topic: Presentation and Analysis, Subtopic: Balance Sheet Presentation of Stockholders’ Equity, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 251 (a) Common stock outstanding is 596,000 shares. (Issued shares 600,000 less treasury shares 4,000) (Com. sh. iss. – treas. sh.) (b) The stated value of the common stock is $10 per share. (Common stock issued $6,000,000  600,000 shares.) (Com. st. amount  com. sh. iss.) (c)

The par value of the preferred stock is $100 per share. (Preferred stock $600,000  6,000 shares.) (Pref. st. amount  Pref. sh. iss.)

(d) The dividend rate is 5% ($30,000  $600,000). (Ann. div.  pref. st. amount) (e) The Retained Earnings balance is still $1,358,000. Cumulative dividends in arrears are only disclosed in the notes to the financial statements.

Reporting and Analyzing Stockholders’ Equity

11-63

Ex. 252 Acme Resource Corporation has the following capital stock outstanding at December 31, 2025: 9% Preferred stock, $100 par value, cumulative 12,000 shares issued and outstanding ...................................................

$1,200,000

Common stock, no par, $10 stated value, 500,000 shares authorized, 300,000 shares issued and outstanding .................................................

3,000,000

The preferred stock was issued at $125 per share. The common stock was issued at an average per share price of $14. Instructions Prepare the paid-in capital section of the balance sheet at December 31, 2025. Ans: N/A, LO: 4, Topic: Presentation and Analysis, Subtopic: Balance Sheet Presentation of Stockholders’ Equity, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 252 Stockholders’ equity Paid-in capital Capital stock 9% Preferred stock, $100 par value, cumulative 12,000 shares issued and outstanding Common stock, no par, $10 stated value, 500,000 shares authorized, 300,000 shares issued and outstanding Total capital stock Additional paid-in capital Paid-in capital in excess of par—preferred stock Paid-in capital in excess of stated value—common stock Total additional paid-in capital Total paid-in capital *12,000 shares × $25 = $300,000. (Pref. sh. iss. × (iss. pr. – PV/sh.)) **300,000 shares × $4 = $1,200,000. (Com. sh. iss. × (iss. pr. – SV/sh.))

$1,200,000

3,000,000 4,200,000 $

300,000* 1,200,000** 1,500,000 $5,700,000

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

11-64 Ex. 253

Suppose that Verizon had the following transactions and events: 1. Issued par value preferred stock for cash at par value. 2. Issued par value common stock for cash at an amount greater than par value. 3. Completed a 2-for-1 stock split in which the $10 par value common stock was changed to $5 par value stock. *4. Declared a small stock dividend when the market value was greater than the par value. 5. Declared a cash dividend. *6. Issued the shares of common stock required by the stock dividend declaration in 4. above. 7. Issued par value common stock for cash at par value. 8. Paid the cash dividend. Instructions Indicate the effect(s) of each of the foregoing items on the subdivisions of stockholders’ equity. Present your answers in tabular form with the following columns. Use (I) for increase, (D) for decrease, and (NE) for no effect. Capital Stock

Item

Paid-in Capital Additional Paid-in Capital

Retained Earnings

Ans: N/A, LO: 2, 3, 4, Topic: Presentation and Analysis, Subtopic: Balance Sheet Presentation of Stockholders’ Equity, Bloom: AN, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 253 Paid-in Capital Additional Paid-in Capital

Item

Capital Stock

1. 2.

I I

NE I

NE NE

3. *4.

NE I

NE D

5. *6.

NE NE

D NE

7. 8.

I NE

NE NE

Retained Earnings

Reporting and Analyzing Stockholders’ Equity

11-65

*Ex. 254 On January 1, 2025, A1 Supply Corporation had $2,000,000 of $10 par value common stock outstanding that was issued at par and Retained Earnings of $1,000,000. The company issued 140,000 shares of common stock at $15 per share on July 1. On December 15, the board of directors declared a 10% stock dividend to stockholders of record on December 31, 2025, payable on January 15, 2026. The market value of A1 Supply Corporation stock was $17 per share on December 15 and $16 per share on December 31. Net income for 2025 was $500,000. Instructions (1)

Journalize the issuance of stock on July 1 and the declaration of the stock dividend on December 15.

(2)

Prepare the stockholders’ equity section of the balance sheet for A1 Supply Corporation at December 31, 2025.

Ans: N/A, LO: 2, 4, 5, Topic: Presentation and Analysis, Subtopics: Balance Sheet Presentation of Stockholders’ Equity, Entries for Stock Dividends, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 254 (1) July

1 Cash ............................................................................... 2,100,000 Common Stock ................................................. Paid-in Capital in Excess of Par—Common Stock

1,400,000 700,000*

*((Iss. pr./sh. – PV/sh.)  sh. iss.)

Dec. 15 Stock Dividends (34,000 × $17/sh.) .................................... 578,000* Common Stock Dividends Distributable............. Paid-in Capital in Excess of Par ........................

340,000 238,000

($2,000,000 ÷ $10 = 200,000 + 140,000 = 340,000 shares × .10 = 34,000 shares) *[(Tot. PV ÷ PV/sh) + sh. iss.] × div.% × MV/sh.

(2) Stockholders’ equity Paid-in capital Capital stock Common stock, $10 par value, 340,000 shares issued and outstanding Common stock dividends distributable Total capital stock Additional paid-in capital in excess of par Total paid-in capital Retained earnings Total stockholders’ equity *[((Iss. pr./sh. – PV/sh.)  sh. iss.] + [(beg. sh. + sh. iss.)  div.%)  (MV/sh. – PV/sh.)] **(Beg. R/E + Net inc.) – [(beg. sh. + sh. iss.)  div.%  MV/sh.]

$3,400,000 340,000 3,740,000 938,000* 4,678,000 922,000** $5,600,000

11-66

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ex. 255 The stockholders’ equity section of Ace Supply Corporation at December 31, 2024, included the following: 4% preferred stock, $100 par value, cumulative, 15,000 shares authorized, 10,000 shares issued and outstanding ........... $1,000,000 Common stock, $10 par value, 250,000 shares authorized, 200,000 shares issued and outstanding .................................................. $2,000,000 Dividends were not declared on the preferred stock in 2024 and are in arrears. On September 15, 2025, the board of directors of Ace Supply Corporation declared dividends on the preferred stock to stockholders of record on October 1, 2025, payable on October 15, 2025. On November 1, 2025, the board of directors declared a $1 per share dividend on the common stock, payable November 30, 2025, to stockholders of record on November 15, 2025. Instructions Prepare the journal entries that should be made by Ace Supply Corporation on the dates indicated below: September 15, 2025 November 1, 2025 October 1, 2025 November 15, 2025 October 15, 2025 November 30, 2025 Ans: N/A, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 255 9/15/25

Cash Dividends .................................................................. Dividends Payable...................................................... (To record declaration of dividends in arrears and the current year’s preferred dividend)

80,000* 80,000

(*Pref. par val.  div. %  2 yrs.)

10/1/25 10/15/25

11/1/25

(No entry required) Dividends Payable .............................................................. Cash .......................................................................... (To record payment of cash preferred dividend)

80,000

Cash Dividends ................................................................... Dividends Payable...................................................... (To record declaration of cash dividend on common stock)

200,000*

80,000

200,000

*(Com. sh. out.  div./sh.)

11/15/25 11/30/25

200,000 200,000

Reporting and Analyzing Stockholders’ Equity

11-67

Ex. 256 On January 1, A1 Corporation had 60,000 shares of no-par common stock issued and outstanding. The stock has a stated value of $5 per share. During the year, the following transactions occurred: Apr.

Issued 10,000 additional shares of common stock for $10 per share.

June 15

Declared a cash dividend of $1.00 per share to stockholders of record on June 30.

July 10

Paid the $1.00 cash dividend.

Dec.

Issued 4,000 additional shares of common stock for $12 per share.

Declared a cash dividend on outstanding shares of $1.00 per share to stockholders of record on December 31.

Instructions (a) Prepare the entries, if any, on each of the three dates that involved dividends. (b) How are dividends and dividends payable reported in the financial statements prepared at December 31? Ans: N/A, LO: 3, 4, Topic: Accounting for Dividends and Stock Splits, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 256 (a) June 15

Cash Dividends .................................................................. 70,000a (70,000*  $1.00) Dividends Payable................................................

70,000

*60,000 shares + 10,000 shares a (Beg. sh. out. + sh. iss.)  div./sh.

July 10 Dec. 15

Dividends Payable ........................................................ Cash .................................................................... Cash Dividends............................................................. (74,000**  $1.00) Dividends Payable................................................

70,000 70,000 74,000b 74,000

**70,000 shares + 4,000 shares (Beg. sh. + Apr. sh. iss. + Dec. sh. iss.)  div./sh.

(b) In the retained earnings statement, dividends of $144,000 will be deducted. In the balance sheet, Dividends Payable of $74,000 will be reported as a current liability.

11-68

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ex. 257 On October 31, the stockholders' equity section of Acme Company's balance sheet consists of common stock $600,000 and retained earnings $400,000. Eaton is considering the following two courses of action: (1) declaring and distributing a 10% stock dividend on the 60,000 $10 par value shares outstanding or (2) affecting a 2-for-1 stock split that will reduce par value to $5 per share. The current market price is $15 per share. Instructions Prepare a tabular summary of the effects of the alternative actions on the company's stockholders' equity and outstanding shares. Use these column headings: Before Action, After Stock Dividend, and After Stock Split. Ans: N/A, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Effects of Stock Dividends, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 257 Before Action

After Stock Dividend

After Stock Split

$ 600,000 0 600,000 400,000

$ 660,000 30,000 690,000 310,000

$ 600,000 0 600,000 400,000

$1,000,000

Outstanding shares

60,000

66,000

120,000

Book value per share

$16.67

$15.15*

$8.33

Stockholders' equity Paid-in capital Common stock In excess of par Total paid-in capital Retained earnings Total stockholders' equity

*((Beg. com. st. × 1.10) + [(beg. sh. × .10 × ($15 − $10)] + [beg. R/E − (beg. sh. × .10 × $15)])/(beg. sh. × 1.10)

Ex. 258 Acme Corporation’s stockholders’ equity section at December 31, 2024 appears below: Stockholders’ equity Paid-in capital Common stock, $10 par, 60,000 outstanding Paid-in capital in excess of par Total paid-in capital Retained earnings Total stockholders’ equity

$600,000 162,500 $762,500 150,000 $912,500

On June 30, 2025, the board of directors of Acme declared a 15% stock dividend, distributable on July 31, 2025, to stockholders of record on July 15, 2025. The fair value of the company’s stock on June 30, 2025 was $16. On December 1, 2025, the board of directors declared a 2 for 1 stock split effective December 15, 2025. Acme Corporation’s stock was selling for $18 on December 1, 2025, before the stock split was declared. Par value of the stock was adjusted. Net income for 2025 was $230,000 and there were no cash dividends declared. .

Reporting and Analyzing Stockholders’ Equity

11-69

Ex. 258 (Cont.) Instructions (a) Prepare the journal entries on the appropriate dates to record the stock dividend and the stock split. (b) Fill in the amount that would appear in the stockholders’ equity section for Acme Corporation at December 31, 2025 for the following items: 1. Common stock

2. Number of shares outstanding 3. Par value per share

4. Paid-in capital in excess of par

5. Retained earnings

6. Total stockholders’ equity

Ans: N/A, LO: 3, 4, 5, Topic: Accounting for Dividends and Stock Splits, Subtopics: Stock Splits, Entries for Stock Dividends, Balance Sheet Presentation of Stockholders’ Equity Accounts, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

*Solution 258 (a) 6/30/25

Stock Dividends ........................................................... Common Stock Dividends Distributable ............... Paid-in Capital in Excess of Par - Common Stock (To record declaration of 15% stock dividend,

144,000 90,000 54,000

60,000 × 15% = 9,000 × $16 = $144,000) *(Beg. sh. × div.% × (FV/sh. − PV/sh.)

7/15/25

(No entry required)

7/31/25

Common Stock Dividends Distributable ....................... Common Stock .................................................... (To record issuance of 9,000 shares in a stock dividend)

12/1/25

90,000 90,000

(No entry required)

12/15/25 Memo: 138,000 common shares outstanding $5 par value (b)

1. Common stock [Beg. com. st. × (1 + div.%)] 2. Number of shares outstanding 3. Par value per share (PV/sh. ÷ 2) 4. Paid-in capital in excess of par—common stock 5. Retained earnings (Beg. R/E + Net inc. − [(Beg. sh. × div.% × FV/sh.)] 6. Total stockholders’ equity *(Beg. st. eq. + Net inc.)

$ 690,000 138,000 $ 5 $ 216,500 $ 236,000 $1,142,500*

11-70

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ex. 259 On January 1, 2025, Ace Corporation had Retained Earnings of $625,000. During the year, Mather had the following selected transactions: 1. Declared stock dividends of $40,000. 2. Declared cash dividends of $50,000. 3. A 2-for-1 stock split involving the issue of 200,000 shares of $5 par value common stock for 100,000 shares of $10 par value common stock. 4. Suffered a net loss of $80,000. Instructions Prepare a Retained Earnings Statement for the year. Ans: N/A, LO: 4, Topic: Presentation and Analysis, Subtopic: Balance Sheet Presentation of Stockholders’ Equity, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 259 ACE CORPORATION Retained Earnings Statement For the Year Ended December 31, 2025 Balance, January 1............................................................................. Less: Net loss .................................................................................. Cash dividends ....................................................................... Stock dividends....................................................................... Balance, December 31 .......................................................................

$625,000 $80,000 50,000 40,000

(170,000) $455,000*

*(Beg R/E − Net loss − cash div. − st. div.)

Ex. 260 The following accounts appear in the ledger of Acme Discount Retail, Inc. after the books are closed at December 31, 2025. Common Stock, $1 par value, 800,000 shares authorized, 550,000 shares issued Common Stock Dividends Distributable Paid-in Capital in Excess of Par—Common Stock Preferred Stock, $100 par value, 8%, 10,000 shares authorized; 4,000 shares issued Retained Earnings Treasury Stock (10,000 common shares) Paid-in Capital in Excess of Par—Preferred Stock

$550,000 80,000 950,000 400,000 680,000 40,000 75,000

Instructions Prepare the stockholders’ equity section at December 31, 2025, assuming that part of retained earnings is restricted for plant expansion in the amount of $200,000. Ans: N/A, LO: 4, Topic: Presentation and Analysis, Subtopic: Balance Sheet Presentation of Stockholders’ Equity, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Stockholders’ Equity

11-71

Solution 260 ACME DISCOUNT RETAIL, INC. Balance Sheet (Partial) December 31, 2025 Stockholders’ equity Paid-in capital Capital stock 8% preferred stock, $100 par value, 10,000 shares authorized, 4,000 shares issued Common stock, $1 par value, 800,000 shares authorized, 550,000 shares issued, 540,000 shares outstanding Common stock dividends distributable Total capital stock Additional paid-in capital In excess of par—preferred In excess of par—common Total additional paid-in capital Total paid-in capital Retained earnings (See note) Total paid-in capital and retained earnings Less: Treasury stock Total stockholders’ equity

$ 400,000 $550,000 80,000

630,000 1,030,000

75,000 950,000 1,025,000 2,055,000 680,000 2,735,000 40,000 $2,695,000*

*(Pref. tot. PV + Com. tot. PV + Pref. PIC + Com. PIC + R/E – Treas. st.)

Note: Retained earnings is restricted in the amount of $200,000 for plant expansion. Ex. 261 The following are selected accounts and balances from the records of A1 Service Corporation on June 30, 2025 after the books are closed: Common Stock, $10 par value, 75,000 shares authorized, 54,000 shares issued $540,000 Paid-in Capital in Excess of Par—Common Stock 150,000 Preferred Stock, $100 par value, 8%, 3,000 shares authorized and issued 300,000 Retained Earnings 280,000 Treasury Stock (10,000 common shares) 150,000 Paid-in Capital in Excess of Par—Preferred Stock 30,000 Instructions Prepare in proper form the stockholders’ equity section of the balance sheet. Ans: N/A, LO: 4, Topic: Presentation and Analysis, Subtopic: Balance Sheet Presentation of Stockholders’ Equity, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

11-72

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 261 A1 SERVICE CORPORATION Balance Sheet (Partial) June 30, 2025 Stockholders’ equity Paid-in capital Capital stock 8% preferred stock, $100 par value, 3,000 shares authorized and issued Common stock, $10 par value, 75,000 shares authorized, 54,000 shares issued, 44,000 shares outstanding Total capital stock Additional paid-in capital In excess of par—preferred $ 30,000 In excess of par—common 150,000 Total additional paid-in capital Total paid-in capital Retained earnings Total paid-in capital and retained earnings Less: Treasury stock (10,000 shares) Total stockholders’ equity

300,000 540,000 840,000

180,000 1,020,000 280,000 1,300,000 150,000 $1,150,000*

*(Tot. Pref. PV + Tot. Com. PV + Pref. PIC + Com. PIC + R/E – Treas. st.)

Ex. 262 The following stockholders' equity accounts, arranged alphabetically, are in the ledger of Ace Office Supply Corporation at December 31, 2025 after the books are closed: Common Stock ($5 stated value) $2,800,000 Paid-in Capital in Excess of Par—Preferred Stock 45,000 Paid-in Capital in Excess of Stated Value—Common Stock 1,050,000 Preferred Stock (8%, $100 par, noncumulative) 1,000,000 Retained Earnings 1,684,000 Treasury Stock (10,000 shares) 98,000 Instructions Prepare the stockholders’ equity section of the balance sheet at December 31, 2025. Ans: N/A, LO: 4, Topic: Presentation and Analysis, Subtopic: Balance Sheet Presentation of Stockholders’ Equity, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Stockholders’ Equity

11-73

Solution 262 ACE OFFICE SUPPLY CORPORATION Partial Balance Sheet December 31, 2025 Stockholders’ equity Paid-in capital Capital stock 8% Preferred stock, $100 par value, noncumulative, 10,000 shares issued ......................................................... $ 1,000,000 Common stock, no par, $5 stated value, 560,000 shares issued, and 550,000 shares outstanding ................................................................... 2,800,000 Total capital stock.......................................... Additional paid-in capital In excess of par value— preferred stock ..................................................... 45,000 In excess of stated value— common stock .......................................................... 1,050,000 Total additional paid-in capital ...................... Total paid-in capital ....................................... Retained earnings........................................................... Total paid-in capital and retained earnings......................................... Less: Treasury stock (10,000 common shares)...................................... Total stockholders’ equity ..............................

$3,800,000

1,095,000 4,895,000 1,684,000 6,579,000 98,000 $6,481,000*

*(Tot. Pref. PV + Tot. Com. SV + Pref. PIC + Com. PIC + R/E – Treas. st.)

Ex. 263 A1 Corporation decided to issue common stock and used the $120,000 proceeds to retire all of its outstanding bonds on January 1, 2025. The following information is available for the company for 2024 and 2025: 2025 2024 Net income $ 120,000 $ 100,000 Average common 1,000,000 800,000 stockholders' equity Total assets 1,200,000 1,200,000 Current liabilities 100,000 100,000 Total liabilities 360,000 480,000 Instructions (a) Compute the return on common stockholders' equity for both years. (b) Explain how it is possible that net income increased, but the return on common stockholders' equity decreased. (c) Compute the debt to assets ratio for both years, and comment on the implications of this change in the company's solvency. Ans: N/A, LO: 4, Topic: Presentation and Analysis, Subtopic: Analysis of Stockholders’ Equity, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 263 (a) 2025:

$120,000

= 12.0%

$1,000,000 2024:

$100,000

= 12.5%

$800,000 (Net inc. / Ave. common st. eq.)

(b) A1 Corporation's net income increased in part because it retired bonds and eliminated the interest expense associated with the bonds. Such an increase in income would produce an increase in return on common stockholders’ equity if common stockholders’ equity had remained constant. In this example, common stockholders’ equity increased by 25% [($1,000,000 – $800,000)  $800,000] while income increased by only 20%. (c)

2025:

$360,000

= 30%

$1,200,000 2024:

$480,000

= 40%

$1,200,000 (Tot. Liab / Tot. Assets)

A1 Corporation retired all its long-term debt on January 1, 2025. This decreased its debt to assets ratio from .40 to .30. A1 Corporation would be considered to be extremely solvent. Ex. 264 On January 1, 2025, Acme Pet Supply Corporation had $1,000,000 of common stock outstanding that was issued at par and retained earnings of $750,000. The company issued 60,000 shares of common stock at par on July 1 and earned net income of $400,000 for the year. Instructions Journalize the declaration of a 15% stock dividend on December 10, 2025, for the following two independent assumptions. (a) Par value is $10 and market value is $16. (b) Par value is $5 and market value is $8. Ans: N/A, LO: 5, Topic: Entries for Stock Dividends, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Reporting and Analyzing Stockholders’ Equity

Solution 264 (a) Stock Dividends (24,000*  $16)........................................ Common Stock Dividends Distributable (24,000  $10) .......................................................... Paid-in Capital in Excess of Par—Common Stock (24,000  $6) ............................................................

384,000 240,000 144,000a

*[($1,000,000  $10) + 60,000]  15% [((Beg. com. st. ÷ PV/sh.) + sh. iss.)  div.%]  (MV/sh. − PV/sh.)

(b) Stock Dividends (39,000*  $8).......................................... Common Stock Dividends Distributable (39,000  $5) ............................................................ Paid-in Capital in Excess of Par—Common Stock (39,000  $3) ............................................................ *[($1,000,000  $5) + 60,000]  15% [((Beg. com. st. ÷ PV/sh.) + sh. iss.)  div.%]  (MV/sh. − PV/sh.)

312,000 195,000 117,000b

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

COMPLETION STATEMENTS 265. A corporation has a separate

distinct from its owners.

Ans: N/A, LO: 1, Topic: Corporate Form of Organization, Subtopic: Separate Legal Existence, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

266. The major advantages of the corporate form of organization include (1) limited of stockholders, (2) continuous and (3) ease of transferring . Ans: N/A, LO: 1, Topic: Corporate Form of Organization, Subtopic: Characteristics of the Corporate Form, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

267. The the business.

is the chief executive officer with direct responsibility for managing

Ans: N/A, LO: 1, Topic: Corporate Form of Organization, Subtopic: Corporation Management, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: None, AICPA PC: None, IMA: Reporting

268. Most publicly held corporations are required to make extensive disclosure of their financial affairs to the . Ans: N/A, LO: 1, Topic: Corporate Form of Organization, Subtopic: Corporation Management, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

269. Stockholders generally have the right to share in corporate upon liquidation.

and in

Ans: N/A, LO: 1, Topic: Corporate Form of Organization, Subtopic: Stockholder Rights, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

270. Par value of stock represents the in the business for the protection of corporate

per share that must be retained .

Ans: N/A, LO: 2, Topic: Corporate Form of Organization, Subtopic: Par and No Par Value Stock, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

271. A corporation’s own stock that has been reacquired by the corporation and held for future use is called and is deducted from total on the balance sheet. Ans: N/A, LO: 2, Topic: Accounting for Common, Preferred, and Treasury Stock, Subtopic: Accounting for Treasury Stock, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

272. The feature of preferred stock gives the preferred stockholders the right to receive current-year dividends and unpaid prior-year dividends before common stockholders receive any dividends. Ans: N/A, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Dividend Preferences, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

273. Three important dates associated with dividends are the: (1) (2) , and (3) .

Ans: N/A, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Accounting for Cash Dividends, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

274. The entry to record the declaration of a stock dividend increases and decreases .

Ans: N/A, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Effects of Stock Dividends, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

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275. Both a stock split and a stock dividend will the number of shares outstanding and have on total stockholders’ equity. Ans: N/A, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopics: Effects of Stock Dividends, Stock Splits, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

276. A debit balance in retained earnings is identified as a

Ans: N/A, LO: 4, Topic: Presentation and Analysis, Subtopic: Retained Earnings, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

277. The paid-in capital section of the balance sheet consists of two classifications: and . Ans: N/A, LO: 4, Topic: Presentation and Analysis, Subtopic: Balance Sheet Presentation of Stockholders’ Equity, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Answers to Completion Statements 265. legal existence 266. liability, life, ownership rights 267. president 268. Securities and Exchange Commission 269. earnings, assets 270. legal capital, creditors 271. treasury stock, paid-in capital and retained earnings

272. cumulative 273. declaration date, record date, payment date 274. Paid-in Capital, Retained Earnings 275. increase, no effect 276. deficit 277. capital stock, additional paid-in capital

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

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MATCHING 278. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.

Controller Deficit Payout ratio Stock dividend Declaration date

F. G. H. I. J.

Preemptive right Par value Legal capital Treasury stock Cumulative feature

1. The date the board of directors formally declares a dividend 2. The amount that must be retained in the business for the protection of creditors 3. The right of preferred shareholders to receive current and unpaid prior-year dividends before common stockholders receive any dividends 4. The chief accounting officer 5. Measures the percentage of earnings distributed in the form of dividends to common stockholders 6. The amount assigned to each share of stock in the corporate charter 7. A debit balance in retained earnings 8. Enables stockholders to maintain their same percentage ownership when new shares are issued 9. Corporation’s own stock that has been reacquired by the corporation but not retired 10. A pro rata distribution of the corporation’s own stock to stockholders Ans: N/A, LO: 1,2,3,4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Answers to Matching 1. 2. 3. 4. 5.

E H J A C

6. 7. 8. 9. 10.

G B F I D

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SHORT-ANSWER ESSAY QUESTIONS S-A E 279 Define par value and discuss its significance in accounting. Ans: N/A, LO: 1, Topic: Corporate Form of Organization, Subtopic: Par and No Par Value Stock, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 279 Par value is an arbitrary amount established for a share of stock and printed on each stock certificate. It represents the legal capital of the corporation and constitutes a minimum cushion that must remain for the protection of the corporate creditors. Par value is also used for the calculation of preferred dividends. S-A E 280 Companies frequently issue both preferred stock and common stock. What are the major differences in the rights of stockholders between these two classes of stock? Ans: N/A, LO: 1, Topic: Corporate Form of Organization, Subtopic: Stockholder Rights, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 280 Common stockholders have the right to vote on corporate actions that require stockholders’ approval while preferred stockholders generally do not have voting rights. However, preferred stockholders will receive (1) dividends and (2) assets in the event of liquidation prior to common stockholders. Preferred stockholders may also have a cumulative dividend feature that increases the amount of dividends paid to the preferred stockholders. S-A E 281 For what reasons might a company like Tesla repurchase some of its stock (treasury stock)? Ans: N/A, LO: 2, Topic: Accounting for Common, Preferred and Treasury Stock, Subtopic: Accounting for Treasury Stock, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BC: Process and Resource Management Perspectives, AICPA AC: None, AICPA PC: Communications, IMA: Reporting

Solution 281 A corporation may acquire treasury stock (1) to reissue the shares to officers and employees under bonus and stock compensation plans, (2) to increase trading of the company's stock in the securities market in the hopes of enhancing its market value, (3) to have additional shares available for use in the acquisition of other companies, (4) to reduce the number of shares outstanding and, thereby, increase earnings per share, or (5) to avoid a takeover of the company by investors that are hostile to management. S-A E 282 (a) (b)

Preferred stock may be cumulative. Discuss this feature. How are dividends in arrears presented in the financial statements?

Ans: N/A, LO: 2, 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Cumulative Dividends, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 282 (a) Some preferred stocks possess the additional feature of being cumulative. Cumulative preferred stock means that preferred stockholders must be paid both current year dividends and unpaid prior year dividends before common stockholders receive any dividends. (b) Dividends in arrears are disclosed in the notes to the financial statements. S-A E 283 A large stock dividend and stock split can frequently have the same effect on the market price of a corporation’s stock. Explain how stock dividends and stock splits affect the market price of a corporation’s stock. Ans: N/A, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Stock Splits, Effects of Stock Dividends, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 283 Stock dividends and stock splits both involve the issuance of additional shares of stock to the stockholders. The market price of a corporation’s stock is affected because of an increase in the supply of the stock which tends to lower the market price of the stock. The reduced price then makes the stock more marketable. A small stock dividend does not result in a large increase in the number of shares outstanding and therefore will not increase the stock’s marketability. Thus, a small stock dividend will have little effect on the market price per share. However, both a large stock dividend and a stock split will cause a large increase in the number of shares outstanding. This increase in the number of shares outstanding makes the stock marketable to a larger number of individuals. Consequently, the market price per share will decrease. S-A E 284 Why must a corporation have sufficient retained earnings before it may declare cash dividends? Ans: N/A, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Cash Dividends, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Communications, IMA: Reporting

Solution 284 By definition, a dividend is the distribution of profits to the corporate owners. Accordingly, to pay a dividend that exceeds existing retained earnings is, in substance, to return a portion of the stockholders’ investment and in many states illegal. In addition, companies are frequently constrained by agreements with their lenders to pay dividends only from retained earnings. S-A E 285 Kim Kardashian asks, "Since stock dividends don't change anything, why declare them?" What is your answer to Kim? Ans: N/A, LO: 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Effects of Stock Dividends, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Communications, IMA: Reporting

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Solution 285 A corporation generally issues stock dividends for one of the following reasons: (1) To satisfy stockholders' dividend expectations without spending cash. (2) To increase the marketability of its stock by increasing the number of shares outstanding and thereby decreasing the market price per share. Decreasing the market price of the stock makes it easier for small investors to purchase shares. (3) To emphasize that a portion of stockholders' equity that had been reported as retained earnings has been permanently reinvested in the business and therefore is unavailable for cash dividends. S-A E 286 What is the formula for the payout ratio? What does it indicate? Ans: N/A, LO: 4, Topic: Presentation and Analysis, Subtopic: Dividend Record, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Communications, IMA: Reporting

Solution 286 The payout ratio is computed by dividing cash dividends declared on common stock by net income. The payout ratio indicates the percentage of earnings distributed as cash dividends to common stockholders. S-A E 287

(Ethics)

Mark Remington, the president and CEO of Earth Systems, Inc., a waste management firm, was recently hospitalized, suffering from exhaustion and a heart ailment. Immediately prior to his hospitalization, Earth Systems had experienced a sharp decline in its stock price, and trading activity became almost nonexistent. The primary reason for this was concern expressed in the media over a new untested waste management system implemented by the company. Mr. Remington had been unwilling to submit the procedure to testing before implementation, but he reluctantly agreed to limited tests after the system was operational. No problems have been identified by the tests to date. The other members of management called a meeting to determine what they should do. Terry Jackson, the marketing manager, suggested that the company purchase a large number of shares of treasury stock. In that way, investors might notice that activity had picked up, and might decide to buy some more shares. This plan would use up most of the company’s available cash so that there will be no money available for a cash dividend. Earth Systems has paid cash dividends every quarter for over ten years. Required: 1. Is Mr. Jackson’s suggestion ethical? Explain. 2. Is it ethical to discontinue the cash dividend? Explain. Ans: N/A, LO: 2, 3, Topic: Accounting for Dividends and Stock Splits, Subtopic: Cash Dividends, Bloom: E, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 287 1. There is no definite answer as to whether Mr. Jackson’s suggestion is ethical. There are several points that might be made, supporting either premise. First, it is a large transaction being made in the absence of the CEO and made entirely to boost the stock price. It is not clear what the long-term benefit to the company will be, even if it is successful. Thus, a student might argue that the large purchase of treasury stock, using up most of the available cash, might be unethical because of the potential damage done to the company, without a large enough potential reward. On the other hand, the company might benefit by keeping its stock price high (assuming that this purchase will enhance the stock price) by being able to issue additional shares of stock to finance future expansion. It is hoped that the students can articulate the concept that the legality of an action is not the only determinate of whether an action is ethical. 2. A company may discontinue its dividend at will. Common stockholders should know that they are not entitled to a dividend, even when one has been declared and paid every year. There is no express or implied contract to pay a dividend to common stockholders, and so the discontinuance of the dividend is ethical. However, the company may lose more in share price by discontinuing a long-standing dividend than it gains by its large purchase of treasury stock. S-A E 288

(Communication)

As part of a Careers in Accounting program sponsored by accounting organizations and supported by your company, you will be taking a group of high-school students through the accounting department of your company. You will also provide them with various materials to explain the work of an accountant. One of the materials you will provide is the Stockholders’ Equity section of a recent balance sheet. Required: Prepare a short response explaining each major section: Common Stock, Additional Paid-in Capital, and Retained Earnings. You should try to be brief but clear. Ans: N/A, LO: 4, Topic: Presentation and Analysis, Subtopic: Balance Sheet Presentation of Stockholders’ Equity, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 288 Common Stock: When investors invest in our company, they purchase common stock. Part of the purchase price is shown in this section and is called "par" value. Par value is a legal term, denoting the amount of money that the company must retain in order to satisfy creditors’ claims if the company should become insolvent. Additional Paid-in Capital: The remainder of the amount paid by investors who purchase shares of stock in our company is shown in this section. Thus, the Common Stock section and the Additional Paid-in Capital section together show the amount paid by investors to purchase shares of our stock. Retained Earnings: This shows the earnings that have been retained in the firm to finance future growth. The other earnings were paid to our stockholders as dividends.

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IFRS QUESTIONS 1.

Jahnke Corporation issued 8,000 shares of €2 par value ordinary shares for €11 per share. The journal entry to record the sale will include a. a debit to Cash for €16,000. b. a credit to Share Premium–Ordinary for €72,000. c. a credit to Share Capital–Ordinary for €88,000. d. a debit to Retained Earnings for €72,000.

Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: (€11  €2)  8,000  €72,000

La Vida Corporation issued 24,000 shares of no-par value ordinary shares for €29.50 per share. Which of the following statements is true? a. Share Premium–Ordinary account will increase by €276,000. b. The Cash account will increase by €24,000. c. Retained Earnings account will increase by €684,000. d. Share Capital–Ordinary account will increase by €708,000.

Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: None, , AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: 24,000  €29.50  €708,000

Freidrichs Company has issued and outstanding 11,000 shares of cumulative, 6%, €50 par value preference shares which it sold for €54 per share at the beginning of 2018. The company has never paid preference dividends. As of December 31, 2020, dividends in arrears are a. €66,000. b. €99,000. c. €121,500. d. €106,920.

Ans: b, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, , AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: (11,000  €50  .06)  3  €99,000

Looper, Inc. has 30,000 shares of 6%, ₤100 par value, noncumulative preference shares and 50,000 ordinary shares with a ₤1 par value outstanding at December 31, 2020. There were no dividends declared in 2019. The board of directors declares and pays a ₤250,000 dividend in 2020. What is the amount of dividends received by the common shareholders in 2020? a. ₤0 b. ₤180,000 c. ₤250,000 d. ₤70,000

Ans: d, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, , AICPA BB: Global and Industry Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: FSA Solution: ₤250,000  (30,000  ₤100  .06)  ₤70,000

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Crapsky, Inc. has 10,000 shares of 5%, ₤100 par value, noncumulative preference shares and 20,000 ordinary shares with a ₤1 par value outstanding at December 31, 2020. There were no dividends declared in 2019. The board of directors declares and pays a ₤90,000 dividend in 2020. What is the amount of dividends received by the ordinary shareholders in 2020? a. ₤0 b. ₤50,000 c. ₤90,000 d. ₤40,000

Ans: d, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, , AICPA BB: Global and Industry Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: FSA Solution: ₤90,000  (10,000  ₤100  .05)  ₤40,000

Anders, Inc has 10,000 shares of 5%, €100 par value, cumulative preference shares and 20,000 ordinary shares with a $1 par value outstanding at December 31, 2020. There were no dividends declared in 2018. The board of directors declares and pays a €90,000 dividend in 2019 and in 2020. What is the amount of dividends received by the ordinary shareholders in 2020? a. €30,000 b. €50,000 c. €90,000 d. €0

Ans: a, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, , AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: 10,000  €100  .05  €50,000; (€90,000  2)  (€50,000  3)  €30,000

On January 1, Swanson Corporation had 80,000 ordinary shares with a €10 par value outstanding. On March 17, the company declared a 15% share dividend to shareholders of record on March 20. The market value of the shares was €13 on March 17. The entry to record the transaction of March 17 would include a a. credit to Cash Dividends for €36,000. b. credit to Cash for €156,000. c. credit to Ordinary Share Dividends Distributable for €120,000. d. debit to Ordinary Share Dividends Distributable for €120,000.

Ans: c, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, , AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: 80,000  €10  .15  €120,000

On January 1, Swanson Corporation had 80,000 ordinary shares with a €10 par value outstanding. On March 17, the company declared a 15% share dividend to shareholders of record on March 20. The market value of the shares was €13 on March 17. The shares were distributed on March 30. The entry to record the transaction of March 30 would include a a. credit to Cash for €120,000. b. debit to Ordinary Share Dividends Distributable for €120,000. c. credit to Share Premium–Ordinary for €36,000. d. debit to Cash Dividends for €36,000.

Ans: b, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, , AICPA BB: Global and Industry Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: FSA Solution: 80,000  €10  .15  €120,000

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Oxford Inc. was authorized to issue 100,000 £10 par value ordinary shares. As of December 31, 2020, the company had issued 44,000 shares at an average price of £22 per share. During 2020, the company felt that the shares were undervalued so it purchased 10,000 treasury shares at £18 per share. When the share price rebounded later in the year, the company sold 4,000 of the treasury shares for £25 per share. Retained earnings was £1,658,000 at December 31, 2020. Total equity at December 31, 2020 is a. £2,446,000. b. £2,518,000. c. £2,546,000. d. £2,762,000.

Ans: c, LO: 4, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, , AICPA BB: Global and Industry Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: FSA Solution: (44,000  ₤22)  (10,000  ₤18) + (4,000  ₤25) + ₤1,658,000  ₤2,546,000

CHAPTER 12 STATEMENT OF CASH FLOWS CHAPTER LEARNING OBJECTIVES 1. Discuss the usefulness and format of the statement of cash flows. The statement of cash flows provides information about the cash receipts, cash payments, and net change in cash resulting from the operating, investing, and financing activities of a company during the period. Operating activities include the cash effects of transactions that enter into the determination of net income. Investing activities involve cash flows resulting from changes in investments and long-term asset items. Financing activities involve cash flows resulting from changes in longterm liability and stockholders' equity items. 2. Prepare a statement of cash flows using the indirect method. The preparation of the statement of cash flows involves three major steps: (1) Determine net cash provided/used by operating activities by converting net income from an accrual basis to a cash basis. (2) Analyze changes in noncurrent asset, liability and stockholders’ equity accounts and record as investing and financing activities, or disclose as noncash transactions. (3) Compare the net change in cash on the statement of cash flows with the change in the Cash account reported on the balance sheet to make sure the amounts agree. 3. Analyze the statement of cash flows. During the introductory stage, cash provided by operating activities and cash from investing activities are negative, and cash from financing activities is positive. During the growth stage, cash provided by operating activities becomes positive but is still not sufficient to meet investing needs. During the maturity stage, cash provided by operating activities exceeds investing needs, so the company begins to retire debt. During the decline stage, cash provided by operating activities is reduced, cash from investing becomes positive (from selling off assets), and cash from financing becomes more negative. Free cash flow indicates the amount of cash a company generated during the current year that is available for the payment of dividends or for expansion. *4. Prepare a statement of cash flows using the direct method. The preparation of the statement of cash flows involves three major steps: (1) Determine net cash provided/used by operating activities by converting net income from an accrual basis to a cash basis. (2) Analyze changes in noncurrent asset and liability accounts and stockholders' equity accounts and record as investing and financing activities, or disclose as noncash transactions. (3) Compare the net change in cash on the statement of cash flows with the change in the cash account reported on the balance sheet to make sure the amounts agree. The direct method reports cash receipts less cash payments to arrive at net cash provided by operating activities. *5.Use a worksheet to prepare the statement of cash flows using the indirect method. When there are numerous account adjustments, a worksheet can be a helpful tool in preparing a statement of cash flows. Key guidelines for using a worksheet are as follows. (1) List accounts with debit balances separately from those with credit balances. (2) In the reconciling columns in the bottom portion of the worksheet, show cash inflows as debits and cash outflows as credits. (3) Do not enter reconciling items in any journal or account but use them only to help prepare the statement of cash flows. The steps in preparing the worksheet are: (1) Enter the beginning and ending balances of .

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

12-2

balance sheet accounts. (2) Enter debits and credits in reconciling columns. (3) Enter the increase or decrease in cash in two places as a balancing amount. *6. Use the T-account approach to prepare a statement of cash flows. To use T-accounts to prepare the statement of cash flows: (1) prepare a large Cash T-account with sections for operating, investing, and financing activities; (2) prepare smaller T-accounts for all other noncash accounts; (3) insert beginning and ending balances for all accounts; and (4) following the steps in Illustration 12C.1, enter debit and credit amounts as needed. Difficulties: Easy: 129 Medium: 113 Hard: 11

Question List by Section Usefulness and Format of the Statement of Cash Flows: 1, 2, 48, 49, 50 Usefulness of the Statement of Cash Flows: 3, 4 ,5, 6, 45, 46, 47, 57, 83, 84, 86, 88, 246, 255 Classification of Cash Flows: 7, 8, 9, 10, 13, 14, 15, 16, 17, 18, 19, 53, 54, 55, 58, 59, 60, 61, 62, 63, 64, 65, 66, 67, 68, 69, 70, 72, 73, 74, 75, 77, 78, 80, 201, 202, 232, 247 Significant Noncash Activities: 11, 12, 51, 56, 71, 76, 81, 82, 85, 87, 203 Format of the Statement of Cash Flows: 20, 52, 79, 231 Preparing the Statement of Cash Flows—Indirect Method: 25, 27, 90, 91, 100, 140, 248, 251, 254 Indirect and Direct Methods: 115, 132, 139, 156, 233, 245, 250 Indirect Method: 112, 116, 117, 118, 120, 121, 123, 126, 127, 128, 129, 130, 131, 206, 217, 218, 221, 222, 223, 224, 244 Step 1: Operating Activities: 89, 92, 204, 205, 207, 215, 216, 219, 220, 234 Determine Net Cash Provided/Used by Operating Activities by Converting Net Income from an Accrual Basis to a Cash Basis Depreciation Expense: 114, 125, 147, 155, 249 Loss (Gain) on Disposal of Plant Assets: 23, 24, 119, 124, 136, 137, 148 Changes to Noncash Current Asset and Current Liability Accounts: 108, 109, 110, 111 Changes in Noncash Current Assets: 26, 101, 102, 103, 104, 113, 235 Changes in Current Liabilities: 21, 105, 106, 107 Summary of Conversion to Net Cash Provided by Operating Activities—Indirect Method: 149, 150, 151, 152, 154 Step 2: Investing and Financing Activities: 93, 94, 95, 96, 97, 99, 122 Analyze Changes in Noncurrent Asset and Liability Accounts and Stockholders’ Equity Accounts and Report as Investing and Financing Activities, or as Noncash Investing and Financing Activities Increase (Decrease) in Land: 146 Increase (Decrease) in Buildings: 142, 143, 144 Increase (Decrease) in Equipment: 98, 141, 145, 153, 236 Increase (Decrease) in Bonds Payable: 133, 134 Increase in Common Stock: 22 Increase (Decrease) in Retained Earnings: 135 Step 3: Net Change in Cash: 138 Compare the Net Change in Cash on the Statement of Cash Flows with the Change in the Cash Account Reported on the Balance Sheet to Make Sure the Amounts Agree .

Statement of Cash Flows

12-3

Analyzing the Statement of Cash Flows: The Corporate Life Cycle: 28, 29, 31, 32, 33, 157, 158, 159, 160, 161, 162, 163, 164, 165, 166, 167, 237, 238, 252 Free Cash Flow: 30, 34, 168, 169, 170, 171, 172, 225, 239 Statement of Cash Flows—Direct Method: 226, 228 Step 1: Operating Activities: 187, 188, 208, 209, 210, 211, 212, 227, 229, 230, 240, 243 Determine Net Cash Provided/Used by Operating Activities by Converting Net Income Components from an Accrual Basis to a Cash Basis: 37 Cash Receipts from Customers: 177, 178, 179, 181, 253 Cash Payments to Suppliers: 35, 38, 173, 174, 175, 176, 182, 183, 189 Cash Payments for Operating Expenses: 39, 185, 241 Adjustments for Prepaid Expenses: 180 Adjustments for Accrued Expenses: 190, 192, 194 Depreciation Expense and Loss (Gain) on Disposal of Plant Assets: 184 Cash Payments for Interest: 191, 193 Cash Payments for Income Taxes: 36, 186, 242 Step 2: Investing and Financing Activities: 40 *Worksheet for the Indirect Method: Preparing the Worksheet: 41, 42, 198, 213 Determining the Reconciling Items Accounts Receivable: 196 Prepaid Expenses: 197 Accounts Payable: 195 *Statement of Cash Flows—T-Account Approach: 43, 44, 199, 200, 214

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

TRUE-FALSE STATEMENTS 1.

The statement of cash flows is a required statement that must be prepared along with an income statement, balance sheet, and retained earnings statement.

Ans: T, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

For external reporting, a company must prepare either an income statement or a statement of cash flows, but not both.

Ans: F, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

A primary objective of the statement of cash flows is to show the income or loss on investing and financing transactions.

Ans: F, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Usefulness of the Statement of Cash Flows, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

The primary purpose of the statement of cash flows is to provide information about a company’s cash receipts and cash payments during an accounting period.

Ans: T, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Usefulness of the Statement of Cash Flows, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

A statement of cash flows indicates the sources and uses of cash during a period.

The statement of cash flows shows the effects on net income of a company’s operating, investing, and financing activities for an accounting period.

Operating activities include the cash effects of transactions that create revenues and expenses.

Ans: T, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Classification of Cash Flows, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

The activity from the balance sheet to be presented in the financing activities section of the statement of cash flows is based on an analysis of stockholders’ equity only.

Ans: F, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Classification of Cash Flows, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

The statement of cash flows (indirect method) explains the difference between net income, as shown on the income statement, and the net cash flows generated from operations.

Ans: T, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Classification of Cash Flows, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

10.

In preparing a statement of cash flows, the issuance of debt should be reported separately from the retirement of debt.

11.

Noncash investing and financing activities must be reported in the body of a statement of cash flows.

Ans: F, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Significant Noncash Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Statement of Cash Flows

12.

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Noncash investing and financing transactions, such as the exchange of common stock to purchase assets, represent significant investing and financing activities and are reflected either in a schedule separate from the statement of cash flows or in a separate note to the financial statements.

Ans: T, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Significant Noncash Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

13.

The statement of cash flows classifies cash receipts and payments as operating, nonoperating, financial, and extraordinary activities.

Ans: F, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Classification of Cash Flows, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

14.

The sale of land for cash would be classified as a cash inflow from an investing activity.

15.

Cash flows from investing activities is considered the most important category on the statement of cash flows because it is considered the best measure of expected income.

Ans: F, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Classification of Cash Flows, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

16.

The receipt of dividends from long-term investments in stock is classified as a cash inflow from investing activities.

17.

The payment of interest on bonds payable is classified as a cash outflow from operating activities.

18.

Any item that appears on the income statement would be considered as either a cash inflow or cash outflow from operating activities.

19.

The acquisition of a building by issuing bonds would be considered an investing and financing activity that did not affect cash.

Ans: T, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Classification of Cash Flows, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

20.

Restricted cash should be excluded from the beginning and ending balances of cash in preparing a statement of cash flows.

Ans: F, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Format of the Statement of Cash Flows, Bloom: K, Difficulty: Hard, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

21.

Using the indirect method, an increase in accounts payable during a period is deducted from net income in calculating cash provided by operations.

Ans: F, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Changes in Current Liabilities, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

22.

In preparing a statement of cash flows, an increase in the Common Stock account during a period would be an investing activity.

Ans: F, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Increase in Common Stock, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

23.

A loss on the sale of equipment is added to net income in determining cash provided by operations under the indirect method.

Ans: T, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Loss (Gain) on Disposal of Plant Assets, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

24.

Under the indirect method, gains and losses from the sale of equipment used in operations would be included in the cash flows from operating activities section on the statement of cash flows.

25.

Cash provided by operations is generally equal to operating income.

Ans: F, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

26.

Using the indirect method, an increase in accounts receivable during a period is deducted from net income in calculating cash provided by operations.

Ans: T, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Changes in Noncash Current Assets, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

27.

A major disadvantage of the indirect method of reporting cash flows from operating activities is that the difference between the net amount of cash flows from operating activities and net income is not emphasized.

Ans: F, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: NA, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

28.

The growth phase of the corporate life cycle occurs when the company is purchasing plant assets and beginning to produce and sell.

Ans: F, LO: 3, Topic: Analyzing the Statement of Cash Flows, Subtopic: The Corporate Life Cycle, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA AC: None, AICPA PC: None, IMA: Reporting

29.

During the maturity phase of the corporate life cycle, cash from operations and net income are approximately the same.

Ans: T, LO: 3, Topic: Analyzing the Statement of Cash Flows, Subtopic: The Corporate Life Cycle, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA AC: None, AICPA PC: None, IMA: Reporting

30.

Free cash flow is cash from operating activities less dividends.

Ans: F, LO: 3, Topic: Analyzing the Statement of Cash Flows, Subtopic: Free Cash Flow, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

31.

Cash used in operations will exceed cash generated by operations in the maturity phase of the corporate lifecycle.

Ans: F, LO: 3, Topic: Analyzing the Statement of Cash Flows, Subtopic: The Corporate Life Cycle, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

32.

During the introductory phase of the corporate life cycle, cash from operations and cash from investing activities are expected to be negative.

Ans: T, LO: 3, Topic: Analyzing the Statement of Cash Flows, Subtopic: The Corporate Life Cycle, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

33.

During the decline phase of the corporate life cycle, cash from investing activities may be negative while cash from financing activities may be positive as the company issues new stock or debt. .

Statement of Cash Flows

12-7

34.

The measurement of free cash flow provides additional insight regarding a company's cashgenerating ability.

Ans: T, LO: 3, Topic: Analyzing the Statement of Cash Flows, Subtopic: Free Cash Flow, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

35.

During a period, cost of goods sold plus an increase in inventory plus an increase in accounts payable equals cash paid to suppliers.

Ans: F, LO: 4, Topic: Statement of Cash Flows—Direct Method, Subtopic: Cash Payments to Suppliers, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

36.

During the year, Income Tax Expense amounted to $12,500 and Income Taxes Payable increased by $1,500; therefore, the cash paid for income taxes was $11,000.

Ans: T, LO: 4, Topic: Statement of Cash Flows—Direct Method, Subtopic: Cash Payments for Income Taxes, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $12,500 – $1,500 = $11,000 (Income Tax Expense – Income Taxes Payable inc. = Cash paid for income taxes)

37.

In computing net cash flow from operating activities using the direct method, each item in the income statement is adjusted from the accrual basis to the cash basis.

Ans: T, LO: 4, Topic: Statement of Cash Flows—Direct Method, Subtopic: Determine Net Cash Provided/Used by Operating Activities by Converting Net Income Components from an Accrual Basis to a Cash Basis, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

38.

An increase in inventory would be added to cost of goods sold to determine net purchases for the period.

Ans: T, LO: 4, Topic: Statement of Cash Flows—Direct Method, Subtopic: Cash Payments to Suppliers, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

39.

As an adjustment to operating expenses per the income statement, an increase in accrued liabilities would be added to operating expenses to determine cash payments for operating expenses.

Ans: F, LO: 4, Topic: Statement of Cash Flows—Direct Method, Subtopic: Cash Payments for Operating Expenses, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

40.

Using the direct method, major classes of investing and financing activities are listed in the operating activities section.

Ans: F, LO: 4, Topic: Statement of Cash Flows—Direct Method, Subtopic: Investing and Financing Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

*41.

A worksheet can be prepared in place of the statement of cash flows.

Ans: F, LO: 5, Topic: Worksheet for the Indirect Method, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

*42.

The first step in preparing the worksheet is to enter the beginning and ending balances of balance sheet accounts.

Ans: T, LO: 5, Topic: Worksheet for the Indirect Method, Subtopic: Preparing the Worksheet, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

*43.

When using the T-account approach, the change in cash is equal to the change in liabilities less the change in equity plus the change in noncash assets.

Ans: F, LO: 6, Topic: Statement of Cash Flows—T-Account Approach, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

12-8

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

*44.

When the T-account approach is used, an analysis of the changes in all of the noncash balance sheet accounts will explain the change in the Cash account.

Ans: T, LO: 6, Topic: Statement of Cash Flows—T-Account Approach, Subtopic: NA, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

MULTIPLE CHOICE QUESTIONS 45.

The statement of cash flows a. must be prepared on a daily basis. b. summarizes the cash provided by or used by the operating, financing, and investing activities of an entity. c. is another name for the income statement. d. is a special section of the income statement.

Ans: b, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Usefulness of the Statement of Cash Flows, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

46.

The primary purpose of the statement of cash flows is to a. provide information about the investing and financing activities during a period. b. prove that revenues exceed expenses if there is a net income. c. provide information about the cash receipts and cash payments during a period. d. facilitate banking relationships.

Ans: c, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Usefulness of the Statement of Cash Flows, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

47.

If a company reports a net loss, it a. may still have a net increase in cash. b. will not be able to pay cash dividends. c. will not be able to get a loan. d. will not be able to make capital expenditures.

Ans: a, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Usefulness of the Statement of Cash Flows, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

48.

In addition to the three basic financial statements, which of the following is also a required financial statement? a. Cash Budget b. Statement of Cash Flows c. Statement of Cash Inflows and Outflows d. Cash Reconciliation

Ans: b, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

49.

The statement of cash flows will not report the a. amount of checks outstanding at the end of the period. b. sources of cash in the current period. c. uses of cash in the current period. d. change in the cash balance for the current period.

Ans: a, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Statement of Cash Flows

50.

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All of the following statements are true regarding cash flow presentations except: a. The balance sheet provides only limited information about a company's cash flows. b. The balance sheet provides information about how property, plant, and equipment were financed. c. The income statement does not show how much cash was generated by operating activities. d. If cash from operations is compared to net income, information about the quality of reported net income is revealed.

Ans: b, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: NA, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

51.

The acquisition of land by issuing common stock is a. a noncash transaction that is not reported in the body of a statement of cash flows. b. a cash transaction and would be reported in the body of a statement of cash flows. c. a noncash transaction and would be reported in the body of a statement of cash flows. d. only reported if the statement of cash flows is prepared using the direct method.

Ans: a, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Significant Noncash Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

52.

The order of presentation of activities on the statement of cash flows is a. operating, investing, and financing. b. operating, financing, and investing. c. financing, operating, and investing. d. financing, investing, and operating.

Ans: a, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Format of the Statement of Cash Flows, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

53.

Financing activities involve a. lending money. b. acquiring investments. c. issuing debt. d. acquiring long-lived assets.

Ans: c, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Classification of Cash Flows, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

54.

Investing activities include a. collecting cash on loans made. b. obtaining cash from creditors. c. obtaining capital from owners. d. repaying money previously borrowed.

Ans: a, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Classification of Cash Flows, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

55.

Generally, the most important category on the statement of cash flows is cash flows from a. operating activities. b. investing activities. c. financing activities. d. significant noncash activities. .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

56.

Which one of the following transactions does not affect cash? a. Retirement of bonds payable b. Declaring stock dividends c. Acquisition of treasury stock d. Issuance of common stock

Ans: b, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Significant Noncash Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

57.

What information does the statement of cash flows not help investors and creditors assess? a. The entity’s ability to generate future cash flows b. The entity’s ability to pay dividends c. The reason that net income differs from cash provided or used by operating activities d. The entity’s ability to generate future profits

Ans: d, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Usefulness of the Statement of Cash Flows, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

58.

The category that is generally considered to be the best measure of a company's ability to continue as a going concern is a. cash flows from operating activities. b. cash flows from investing activities. c. cash flows from financing activities. d. usually different from year to year.

59.

Cash receipts from interest and dividends are classified as a. financing activities. b. investing activities. c. operating activities. d. either financing or investing activities.

Ans: c, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Classification of Cash Flows, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

60.

Cash flows from operating activities, as reported on the statement of cash flows under the indirect method, would include a. receipts from the sale of investments. b. net income. c. payments for dividends. d. receipts from the issuance of capital stock.

Ans: b, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Classification of Cash Flows, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

61.

The issuance of debt to purchase assets would be classified as a(n) a. operating activity. b. investing activity. c. financing activity. d. non-cash investing and financing activity.

Ans: d, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Classification of Cash Flows, Bloom: K, Difficulty: Easy, Min: 1,

Statement of Cash Flows

12-11

AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

62.

The payment of a cash dividend would be classified as a(n) a. operating activity. b. investing activity. c. financing activity. d. significant noncash activity.

63.

Which of the following activities would be classified as an investing activity? a. Cash received from interest revenue b. Cash paid (loaned) to a borrower as a loan c. Cash received from dividend revenue d. Cash paid to reacquire capital stock

64.

A1 Corporation uses the indirect method to convert net income from an accrual to a cash basis. Indicate where, if at all, a stock dividend declared and issued would be classified on the statement of cash flows. a. Operating activities section b. Investing activities section c. Financing activities section d. Does not represent a cash flow

Ans: d, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Classification of Cash Flows, Bloom: C, Difficulty: Hard, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

65.

A1 Corporation uses the indirect method to convert net income from an accrual to a cash basis. Indicate where, if at all, an accounts receivable decrease would be classified on the statement of cash flows. a. Operating activities section b. Investing activities section c. Financing activities section d. Does not represent a cash flow

Ans: a, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Classification of Cash Flows, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

66.

A1 Corporation uses the indirect method to convert net income from an accrual to a cash basis. Indicate where, if at all, an inventory increase would be classified on the statement of cash flows. a. Operating activities section b. Investing activities section c. Financing activities section d. Does not represent a cash flow

12-12

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

67.

A1 Corporation uses the indirect method to convert net income from an accrual to a cash basis. Indicate where, if at all, long-term debt retired with cash would be reported on the statement of cash flows. a. Operating activities section b. Investing activities section c. Financing activities section d. Does not represent a cash flow

68.

A1 Corporation uses the indirect method to convert net income from an accrual to a cash basis. Indicate where, if at all, a decrease in Income Taxes Payable would be reported on the statement of cash flows. a. Operating activities section b. Investing activities section c. Financing activities section d. Does not represent a cash flow

69.

A1 Corporation uses the indirect method to convert net income from an accrual to a cash basis. Indicate where, if at all, stock issued for equipment would be classified on the statement of cash flows. a. Operating activities section b. Investing activities section c. Financing activities section d. Does not represent a cash flow

Ans: d, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Classification of Cash Flows, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

70.

Acme Supply Company purchased a building by issuing long-term notes payable. How will Acme report this transaction in the statement of cash flows? a. As a cash outflow in the financing section and a cash inflow in the investing activities section of the statement of cash flows b. As a cash outflow in the investing section of the statement of cash flows c. As a cash outflow in the operating section of the statement of cash flows d. As a significant noncash activity

71.

What type of transaction is the acquisition of equipment by the issuance of a note payable? a. A cash flow from financing activities b. A cash flow from operating activities c. A cash outflow from investing activities d. A noncash investing and financing activity

Ans: d, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Significant Noncash Activities, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Statement of Cash Flows

72.

12-13

A1 Corporation uses the direct method to prepare the statement of cash flows. Indicate where, if at all, dividends received on securities held would be reported on the statement of cash flows. a. Operating activities section b. Investing activities section c. Financing activities section d. Does not represent a cash flow

73.

A1 Corporation uses the indirect method to convert net income from an accrual to a cash basis. Indicate where, if at all, income taxes paid would be reported on the statement of cash flows. a. Operating activities section b. Investing activities section c. Financing activities section d. Does not represent a cash flow

74.

A1 Corporation uses the indirect method to convert net income from an accrual to a cash basis. Indicate where, if at all, common stock issued for cash would be classified. a. Operating activities section b. Investing activities section c. Financing activities section d. Does not represent a cash flow

75.

A1 Corporation uses the indirect method to convert net income from an accrual to a cash basis. Indicate where, if at all, land purchased for cash would be classified on the statement of cash flows. a. Operating activities section b. Investing activities section c. Financing activities section d. Does not represent a cash flow

Ans: b, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Classification of Cash Flows, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

76.

A1 Corporation uses the indirect method to convert net income from an accrual to a cash basis. Indicate where, if at all, land and building purchased with a mortgage would be classified on the statement of cash flows. a. Operating activities section b. Investing activities section c. Financing activities section d. Does not represent a cash flow

12-14

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

77.

A1 Corporation uses the indirect method to convert net income from an accrual to a cash basis. Indicate where, if at all, treasury stock purchased with cash would be classified on the statement of cash flows. a. Operating activities section b. Investing activities section c. Financing activities section d. Does not represent a cash flow

Ans: c, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Classification of Cash Flows, Bloom: C, Difficulty: Hard, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

78.

Which of the following is not an operating activity? a. Cash paid for interest on loans b. Cash received from customers on account c. Cash paid to suppliers for purchases made during prior months d. Cash paid for dividends

Ans: d, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Classification of Cash Flows, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

79.

Of the items below, the one that appears first on the statement of cash flows is a. noncash investing and financing activities. b. net increase (decrease) in cash. c. cash at the end of the period. d. cash at the beginning of the period.

Ans: b, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Format of the Statement of Cash Flows, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

80.

Which of the following transactions does not affect cash during a period? a. Write-off of an uncollectible account b. Collection of accounts receivable c. Sale of common stock d. Redeeming bonds before maturity

Ans: a, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Classification of Cash Flows, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

81.

Significant noncash transactions would not include a. conversion of bonds into common stock. b. asset acquisition through bond issuance. c. treasury stock acquisition. d. exchange of plant assets.

Ans: c, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Significant Noncash Activities, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

82.

Common stock issued in exchange for land would be reported in the statement of cash flows in a. the cash flows from financing activities section. b. the cash flows from investing activities section. c. a separate schedule or note to the financial statements. d. the cash flows from the operating section.

Statement of Cash Flows

83.

12-15

Which type of activity is generally considered to be the best measure of a company's ability to continue as a going concern? a. Cash flows from operating activities b. Cash flows from investing activities c. Cash flows from financing activities d. Cash flows from operating activities and cash flows from investing activities

Ans: a, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Usefulness of the Statement of Cash Flows, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

84.

Which one of the following is not one of the major purposes of the statement of cash flows? a. It provides information about the company’s ability to pay dividends. b. It provides information about the firm's ability to meet its obligations. c. It provides information about the firm's resources and claims against those resources. d. It provides information about the company’s ability to generate cash flows.

Ans: c, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Usefulness of the Statement of Cash Flows, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

85.

In preparing a statement of cash flows, a conversion of bonds into common stock will be reported in a. the financing section. b. the income section. c. a separate schedule or note to the financial statements. d. the stockholders' equity section.

Ans: c, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Significant Noncash Activities, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

86.

The statement of cash flows will not provide insight into a. why dividends were not increased. b. whether cash flow is greater than net income. c. the exact proceeds of a future bond issue. d. how the retirement of debt was accomplished.

Ans: c, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Usefulness of the Statement of Cash Flows, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

87.

Which of the following would not create a cash flow? a. Sale of equipment at book value b. Purchase of a delivery truck c. Payment of a cash dividend d. Conversion of bonds into common stock.

88.

The statement of cash flows a. is prepared instead of an income statement under generally accepted accounting principles. b. is used to assess an entity's ability to pay dividends and meet obligations. c. is prepared from comparative income statements. d. reflects earnings per share figures on a cash basis and an accrual basis in the body of the statement.

12-16

89.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Which of the following is the first step in preparing the statement of cash flows? a. Determine the net cash provided by operating activities b. Determine the net cash provided by investing activities c. Determine the net cash provided by financing activities d. Determine the net increase (decrease) in cash

Ans: a, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Step 1: Operating Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

90.

The information to prepare the statement of cash flows comes from all of the following sources except a. comparative balance sheets. b. additional transaction data about cash provided or used during the period. c. adjusted trial balance. d. current income statement.

Ans: c, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

91.

Which one of the following items is not generally used in preparing a statement of cash flows? a. Adjusted trial balance. b. Comparative balance sheets. c. Current income statement. d. Additional transaction information.

Ans: a, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

92.

Acme Corporation had the following transactions during 2025: 1. Issued $250,000 of par value common stock for cash. 2. Recorded and paid salaries and wages expense of $120,000. 3. Acquired land by issuing common stock valued at $100,000. 4. Declared and paid a cash dividend of $20,000. 5. Sold land (cost $6,000) for cash of $6,000. 6. Recorded cash sales of $800,000. 7. Bought inventory for cash of $320,000. 8. Acquired equipment for cash of $42,000. 9. Converted $1,000,000 in bonds payable to common stock . 10. Repaid a 6-year note payable with a face amount of $440,000. What is the net cash provided by operating activities? a. $610,000. b. $580,000. c. $480,000. d. $360,000.

Ans: d, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Step 1: Operating Activities, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $800,000  $320,000  $120,000  $360,000 (Cash sal. – inv. pur. – wag. pd.)

Statement of Cash Flows

93.

12-17

Acme Corporation had the following transactions during 2025: 1. Issued $250,000 of par value common stock for cash. 2. Recorded and paid salaries and wages expense of $120,000. 3. Acquired land by issuing common stock valued at $100,000. 4. Declared and paid a cash dividend of $20,000. 5. Sold land (cost $6,000) for cash of $6,000. 6. Recorded cash sales of $800,000. 7. Bought inventory for cash of $320,000. 8. Acquired equipment for cash of $42,000. 9. Converted $1,000,000 in bonds payable to common stock. 10. Repaid a 6-year note payable with a face amount of $440,000. What is the net cash provided (used) by financing activities? a. $(210,000) b. $790,000 c. $(1,210,000) d. $230,000

Ans: a, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Step 2: Investing and Financing Activities, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $250,000  $20,000  $440,000  ($210,000) (St. iss. – div. paid. – N/P paid)

94.

Acme Corporation had the following transactions during 2025: 1. Issued $250,000 of par value common stock for cash. 2. Recorded and paid salaries and wages expense of $120,000. 3. Acquired land by issuing common stock valued at $100,000. 4. Declared and paid a cash dividend of $20,000. 5. Sold land (cost $6,000) for cash of $6,000. 6. Recorded cash sales of $800,000. 7. Bought inventory for cash of $320,000. 8. Acquired equipment for cash of $42,000. 9. Converted $1,000,000 of bonds payable to common stock 10. Repaid a 6-year note payable with a face amount of $440,000. What is the net cash provided (used) by investing activities? a. $864,000. b. $424,000 c. ($36,000). d. ($136,000).

Ans: c, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Step 2: Investing and Financing Activities, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $6,000  $42,000  ($36,000) (Land. sale – eqt. pur.)

12-18

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

95.

A1 Pet Supply Company issued 20,000 shares of $1 par common stock for $40 per share during 2025. The company paid dividends of $48,000 and issued a long-term note payable for $440,000 during the year. What amount of cash flows from financing activities will be reported on the statement of cash flows? a. $12,000 net cash inflow. b. $352,000 net cash inflow. c. $705,000 net cash outflow. d. $1,192,000 net cash inflow.

Ans: d, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Step 2: Investing and Financing Activities, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: (20,000  $40)  $48,000 + $440,000  $1,192,000 (Com. sh. × iss. pr.) – div. paid – N/P iss.)

96.

Acme Furniture Company purchased treasury stock with a cost of $55,000 during 2025. During the year, the company paid dividends of $20,000 and issued bonds payable for proceeds of $876,000. Cash flows from financing activities for 2025 total a. $856,000 net cash inflow. b. $911,000 net cash inflow. c. $75,000 net cash outflow. d. $801,000 net cash inflow.

Ans: d, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Step 2: Investing and Financing Activities, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $876,000  $55,000  $20,000  $801,000 (Bond pay. iss. – trea. st. pur. – div. paid)

97.

Ace Service Company issued common stock for proceeds of $558,000 during 2025. The company paid dividends of $99,000 and issued a long-term note payable for $375,000 in exchange for equipment during the year. The company also purchased treasury stock that had a cost of $81,000. The financing section of the statement of cash flows will report net cash inflows of a. $378,000. b. $834,000. c. $459,000. d. $753,000.

Ans: a, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Step 2: Investing and Financing Activities, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $558,000  $99,000  $81,000  $378,000 (Com. st. proc. – div. paid – trea. st. pur.)

98.

During 2025, A1 Office Supply Company sold equipment with a book value of $120,000 for proceeds of $145,000. The company purchased new equipment for $320,000 by signing a long-term note payable. No other transactions impacted long-term asset accounts during 2025. The investing section of the statement of cash flows will report a. net cash outflows of $295,000. b. net cash outflows of $175,000. c. net cash inflows of $145,000. d. net cash inflows of $25,000.

Ans: c, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Increase (Decrease) in Equipment, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $145,000 (Equip. sale proc.)

Statement of Cash Flows

99.

12-19

During 2025, Acme Supply Company’s land account decreased by $270,000 because of a cash sale for $270,000. The equipment account increased $90,000 as a result of a cash purchase, and the bonds payable account increased $300,000 from issuance for cash at face value. The net cash provided by investing activities is a. $270,000. b. $480,000. c. $180,000. d. $210,000.

Ans: c, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Step 2: Investing and Financing Activities, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $270,000  $90,000  $180,000 (Land dec. – equip. inc.)

100.

Which one of the following items is not necessary for preparing a statement of cash flows? a. Determine the change in cash b. Determine the cash provided by operations c. Determine cash from financing and investing activities d. Determine the cash in each of the bank accounts

Ans: d, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

101.

If accounts receivable have increased during the period, a. revenues on an accrual basis are less than revenues on a cash basis. b. revenues on an accrual basis are greater than revenues on a cash basis. c. revenues on an accrual basis are the same as revenues on a cash basis. d. expenses on an accrual basis are greater than expenses on a cash basis.

Ans: b, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Changes in Noncash Current Assets, Bloom: C, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

102.

A1 Company’s accounts receivable amounted to $120,000 at the beginning of fiscal year 2025 and $105,000 at the end of the year, respectively. The company’s net income for the year was $457,000. Assuming that these are the only required adjustments, what are the cash flows from operating activities to be reported on the statement of cash flows? a. $457,000. b. $472,000. c. $562,000. d. $442,000.

Ans: b, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Changes in Noncash Current Assets, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $457,000 + ($120,000  $105,000)  $472,000 (Net inc. + (beg. A/R – end. A/R))

12-20

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

103.

Assume that accounts receivable arising from sales to customers amounted to $35,000 and $40,000 at the beginning and end of 2025, respectively. Income reported on the company’s income statement for the year was $223,000. Exclusive of the effect of other adjustments, the cash flows from operating activities to be reported on the statement of cash flows is a. $223,000. b. $228,000. c. $258,000. d. $218,000.

Ans: d, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Changes in Noncash Current Assets, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $223,000 + ($35,000  $40,000)  $218,000 (Net inc. + (beg. A/R – end. A/R))

104.

Acme, Inc.’s accounts receivable arising from sales to customers amounted to $80,000 and $70,000 at the beginning and end of 2025, respectively. Income reported on the income statement for 2025 was $252,000. Assuming that these are the only required adjustments, what amount of cash flows from operating activities will be reported on the statement of cash flows for 2025? a. $252,000. b. $242,000. c. $262,000. d. $332,000.

Ans: c, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Changes in Noncash Current Assets, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $252,000 + ($80,000  $70,000)  $262,000 (Net inc. + (beg. A/R – end. A/R))

105.

If accounts payable have increased during a period, a. revenues on an accrual basis are less than revenues on a cash basis. b. expenses on an accrual basis are less than expenses on a cash basis. c. expenses on an accrual basis are greater than expenses on a cash basis. d. expenses on an accrual basis are the same as expenses on a cash basis.

Ans: c, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Changes in Current Liabilities, Bloom: C, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

106.

If income taxes payable have increased during a period, a. sales revenues on an accrual basis are less than sales revenues on a cash basis. b. income tax expense on an accrual basis is less than income tax expense on a cash basis. c. income tax expense on an accrual basis is greater than income tax expense on a cash basis. d. income tax expense on an accrual basis is the same as income tax expense on a cash basis.

Statement of Cash Flows

107.

12-21

Which one of the following affects cash during a period? a. Recording depreciation expense b. Declaration of a cash dividend c. Write-off of an uncollectible account receivable d. Payment of accounts payable

Ans: d, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Changes in Current Liabilities, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

108.

A1 Service Company’s net income for 2025 was $290,000. At the end of the year, the company’s accounts receivable balance was $21,000 higher than at the beginning of the year. The accounts payable balance was $9,000 lower than at the beginning of the year and the company reported depreciation expense of $45,000. Net cash provided by operating activities for the year is a. $305,000. b. $275,000. c. $257,000. d. $290,000.

Ans: a, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Changes to Noncash Current Asset and Current Liability Accounts, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $290,000  $21,000  $9,000 + $45,000  $305,000 (Net inc – A/R inc. – A/P dec. + dep. exp.)

109.

Ace Supply Company reported net income of $90,000 for the year 2025. During 2025, accounts receivable increased by $6,000, accounts payable decreased by $4,000 and depreciation expense of $10,000 was recorded. Net cash provided by operating activities for 2025 is a. $100,000. b. $80,000. c. $82,000. d. $90,000.

Ans: d, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Changes to Noncash Current Asset and Current Liability Accounts, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $90,000  $6,000  $4,000 + $10,000  $90,000 (Net inc – A/R inc. – A/P dec. + dep. exp.)

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

110.

Ace Marine Company’s income statement for the year ended December 31, 2025 reported a net loss of $15,000. Additional information for the period is as follows: o The cash balance increased by $5,000 from the beginning to the end of the year. o The accounts receivable balance decreased by $7,500 from the beginning to the end of the year. o The inventory balance increased by $12,000 from the beginning to the end of the year. o The accounts payable balance increased by $15,000 from the beginning to the end of the year. o Depreciation expense for 2025 was $9,000. During 2025, operating activities a. used net cash of $4,500. b. used net cash of $10,500. c. provided net cash of $4,500. d. provided net cash of $10,500.

Ans: c, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Changes to Noncash Current Asset and Current Liability Accounts, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($15,000) + $7,500  $12,000 + $15,000 + $9,000  $4,500 ((Net loss) + A/R dec. − inv. inc. + A/P inc. + dep. exp.)

111.

A1 Lawn Service Company reported a net loss of $12,000 for the year ended December 31, 2025. During the year, accounts receivable decreased $28,000, inventory increased $20,000, accounts payable increased by $30,000, and depreciation expense of $24,000 was recorded. During 2025, operating activities a. used net cash of $14,000. b. used net cash of $50,000. c. provided net cash of $50,000. d. provided net cash of $74,000.

Ans: c, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Changes to Noncash Current Asset and Current Liability Accounts, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($12,000) + $28,000  $20,000 + $30,000 + $24,000  $50,000 ((Net loss) + A/R dec. − inv. inc. + A/P inc.+ dep. exp.)

112.

Computing cash flows from operating activities by starting with net income and adjusting it for items that affected reported net income but which did not affect cash is called the a. direct method. b. indirect method. c. working capital method. d. cost-benefit method.

Ans: b, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Indirect and Direct Methods, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

113.

In calculating net cash provided by operating activities using the indirect method, an increase in prepaid expenses during a period is a. deducted from net income. b. added to net income. c. ignored because it does not affect income. d. ignored because it does not affect expenses. .

Statement of Cash Flows

12-23

Ans: a, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Changes in Noncash Current Assets, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

114.

Using the indirect method, patent amortization expense for the period a. is deducted from net income. b. causes cash to increase. c. causes cash to decrease. d. is added to net income.

Ans: d, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Depreciation Expense, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

115.

In developing the cash flows from operating activities, most companies in the United States a. use the direct method. b. use the indirect method. c. present both the indirect and direct methods in their financial reports. d. prepare the operating activities section on the accrual basis.

116.

Which of the following would be subtracted from net income using the indirect method? a. Depreciation expense b. An increase in accounts receivable c. An increase in accounts payable d. A decrease in prepaid expenses

Ans: b, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Changes to Noncash Current Asset and Current Liability Accounts, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

117.

Which of the following would be added to net income using the indirect method? a. An increase in accounts receivable b. An increase in prepaid expenses c. Depreciation expense d. A decrease in accounts payable

Ans: c, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Depreciation Expense, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

118.

Which of the following would not be an adjustment to net income using the indirect method? a. Depreciation Expense b. An increase in Prepaid Insurance c. Amortization Expense d. An increase in Land

Ans: d, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Increase in Land, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

119.

In calculating cash flows from operating activities using the indirect method, a loss on the sale of equipment will appear as a(n) a. subtraction from net income. b. addition to net income. c. addition to cash flow from investing activities. d. subtraction from cash flow from investing activities.

Ans: b, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Loss (Gain) on Disposal of Plant Assets, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

120.

Using the indirect method, which of the following adjustments to convert net income to net cash provided by operating activities is correct? a. b. c. d.

Accounts Receivable Prepaid Expenses Inventory Taxes Payable

Add to Net Income increase increase decrease decrease

Deduct from Net Income decrease decrease increase increase

Ans: c, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Changes to Noncash Current Asset and Current Liability Accounts, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

121.

Using the indirect method, which of the following adjustments to convert net income to net cash provided by operating activities is incorrect? a. b. c. d.

Accounts Receivable Prepaid Expenses Inventory Accounts Payable

Add to Net Income decrease increase decrease increase

Deduct from Net Income increase decrease increase decrease

Ans: b, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Changes to Noncash Current Asset and Current Liability Accounts, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

122.

Ace Marine Supply Company reported a loss of $1,300 for the sale of equipment for cash. The equipment had a cost of $32,000 and accumulated depreciation of $29,500. How much will Ace report in the cash flows from investing activities section of its statement of cash flows? a. $1,200 b. $1,300 c. $30,700 d. $3,800

Ans: a, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Step 2: Investing and Financing Activities, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $32,000 – $29,500 = $2,500 – $1,300 = $1,200 (Cost – A/D = Book value, Book value – Loss = Proceeds)

123.

Which of the following adjustments to convert net income to net cash provided by operating activities is not added to net income? a. Gain on Disposal of Equipment b. Depreciation Expense c. Amortization Expense d. Depletion Expense

Ans: a, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Step 1: Operating Activities, Bloom: C, Difficulty: Hard, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

124.

Using the indirect method, if equipment is sold at a gain, the a. sale proceeds received are deducted in the operating activities section. b. sale proceeds received are added in the operating activities section. c. amount of the gain is added in the operating activities section. d. amount of the gain is deducted in the operating activities section.

Ans: d, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Loss (Gain) on Disposal of Plant Assets, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Statement of Cash Flows

125.

12-25

On the statement of cash flows using the indirect method, patent amortization expense will a. be added to net income in the operating activities section. b. be deducted from net income in the operating activities section. c. appear as an inflow of cash in the investing activities section. d. appear as an outflow of cash in the investing activities section.

Ans: a, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Depreciation Expense, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

126.

A company had net income of $890,000 for the year ending 12/31/2025. Depreciation expense for 2025 is $110,000. During the year, accounts receivable and inventory increased by $60,000 and $160,000, respectively. Prepaid expenses and accounts payable decreased by $8,000 and $16,000, respectively. There was also a loss on the sale of equipment of $12,000. How much cash was provided by operating activities in 2025? a. $760,000 b. $784,000 c. $1,080,000 d. $1,128,000

Ans: b, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Indirect Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $890,000 + $110,000  $60,000  $160,000 + $8,000  $16,000 + $12,000  $784,000 (Net inc. + dep. exp. – A/R inc. – inv. inc. + prep. exp. dec. – A/P dec. + loss on sale)

127.

Ace Service Company’s income statement reported net income of $282,000 for the year 2025. Amortization expense for the period was $26,000. During the year, accounts receivable and inventory increased by $15,000 and $40,000, respectively. Supplies and accounts payable decreased by $2,000 and $14,000, respectively. There was also a loss on the sale of investments of $17,000. What was the company’s cash provided by operating activities for 2025? a. $258,000 b. $241,000 c. $318,000 d. $339,000

Ans: a, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Indirect Method, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $282,000 + $26,000  $15,000  $40,000 + $2,000  $14,000 + $17,000  $258,000 (Net inc. + dep. exp. – A/R inc. – inv. inc. + prep. exp. dec. – A/P dec. + loss on sale)

128.

The net income reported on the income statement of A1 Discount Supply Company for the current year was $1,360,000. Depreciation recorded on plant assets was $257,000. Accounts receivable and inventories increased by $72,000 and $48,000, respectively. Prepaid expenses and accounts payable decreased by $6,000 and $66,000, respectively. How much cash was provided by operating activities during the year? a. $1,380,000 b. $1,500,000 c. $1,437,000 d. $1,797,000

Ans: c, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Indirect Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $1,360,000 + $257,000  $72,000  $48,000 + $6,000  $66,000  $1,437,000 (Net inc. + dep. exp. – A/R inc. – inv. inc. + prep. exp. dec. – A/P dec.)

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

129.

Acme Corporation’s net income for the current year was $510,000. Depreciation recorded on plant assets was $46,000 and amortization expense was $30,000. Accounts receivable and inventories increased by $40,000 and $16,000, respectively. Supplies and accounts payable decreased by $2,000 and $32,000, respectively. The equipment account balance increased by $55,000 and a $500,000 convertible bond was retired through the issuance of common stock. How much cash was provided by operating activities? a. $480,000 b. $500,000 c. $464,000 d. $672,000

Ans: b, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Indirect Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $510,000 + $46,000 + $30,000  $40,000  $16,000 + $2,000  $32,000  $500,000 (Net inc. + dep. Exp. + amort. exp. – A/R inc. – inv. inc. + supp. dec. – A/P dec.)

130.

A company’s net income for the current year was $480,000. Depreciation was $62,000. Accounts receivable and inventories decreased by $20,000 and $32,000, respectively. Prepaid expenses and salaries payable increased, respectively, by $2,000 and $16,000. Equipment was sold at a gain of $8,000. How much cash was provided by operating activities? a. $536,000 b. $600,000 c. $576,000 d. $476,000

Ans: b, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Indirect Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $480,000 + $62,000 + $20,000 + $32,000  $2,000 + $16,000 – $8,000  $600,000 (Net inc. + dep. exp. + A/R dec.+ inv. dec. – prep. exp. inc. + sal. pay. inc. – gain on sale)

131.

Net income reported on the income statement for the current year was $240,000. Depreciation was $52,000. Accounts receivable and inventories decreased by $5,000 and $15,000, respectively. Prepaid expenses and accounts payable increased, respectively, by $500 and $14,000. Investments were sold at a loss of $20,000. How much cash was provided by operating activities? a. $307,500 b. $317,500 c. $345,500 d. $258,500

Ans: c, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Indirect Method, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $240,000 + $52,000 + $5,000 + $15,000  $500 + $14,000 + $20,000  $345,500 (Net inc. + dep. exp. + A/R dec. + inv. dec. – prep. exp. inc. + A/P inc. + loss on sale)

132.

The indirect and direct methods of preparing the statement of cash flows are identical except for the a. significant noncash activity section. b. operating activities section. c. investing activities section. d. financing activities section.

Statement of Cash Flows

133.

12-27

If $2,500,000 of bonds are issued during the year but $4,000,000 of previously issued bonds are retired during the year, the statement of cash flows will s a(n) a. net increase in cash of $1,500,000. b. net decrease in cash of $1,500,000. c. increase in cash of $2,500,000 and a decrease in cash of $4,000,000. d. net loss on retirement of bonds of $1,500,000.

Ans: c, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Increase (Decrease) in Bonds Payable, Bloom: AP, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

134.

During 2025, A1 Company issued $1,200,000 of bonds during the year and used the proceeds, along with additional cash on hand, to retire $2,500,000 of previously issued bonds. A1’s statement of cash flows for 2025 will report a(n) a. net increase in cash of $1,300,000. b. net decrease in cash of $1,200,000. c. increase in cash of $1,200,000 and a decrease in cash of $2,500,000. d. net loss on retirement of bonds of $1,300,000.

135.

Which of the following changes in retained earnings during a period will be reported in the financing activities section of the statement of cash flows? a. Declaration and payment of a cash dividend during the period b. Net income for the period c. Purchase of land in exchange for a long-term note payable d. Gain on sale of investments

Ans: a, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Increase (Decrease) in Retained Earnings, Bloom: C, Difficulty: Hard, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

136.

In calculating cash flows from operating activities using the indirect method, a gain on the sale of equipment is a. added to net income. b. deducted from net income. c. ignored because it does not affect cash. d. not reported on a statement of cash flows.

Ans: b, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Loss (Gain) on Disposal of Plant Assets, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

137.

In calculating cash flows from operating activities using the indirect method, a loss on the sale of equipment is a. added to net income. b. deducted from net income. c. ignored because it does not affect cash. d. not reported on a statement of cash flows.

Ans: a, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Loss (Gain) on Disposal of Plant Assets, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

138.

In preparing the statement of cash flows, determining the net increase or decrease in cash requires the use of a. the adjusted trial balance. b. a comparative retained earnings statement. c. a comparative balance sheet. d. a comparative income statement. .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ans: c, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Step 3: Net Change in Cash, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

139.

To determine the net cash provided (used) by operating activities, it is necessary to analyze a. the current year's income statement. b. a comparative balance sheet. c. additional transaction information. d. All of these answer choices are correct.

Ans: d, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Indirect and Direct Methods. Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

140.

Which of the following would not be needed to determine net cash provided by operating activities? a. Depreciation expense b. Change in accounts receivable c. Payment of cash dividends d. Change in prepaid expenses

Ans: c, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: NA, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

141.

When equipment is sold for cash, the amount received is reflected as a cash a. inflow in the operating section. b. inflow in the financing section. c. inflow in the investing section. d. outflow in the operating section.

Ans: c, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Increase (Decrease) in Equipment, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

142.

During 2025, Acme Company sold equipment with a book value of $900,000 for cash and recorded a gain of $225,000. What is the total amount reported in the cash flows from investing activities section of the statement of cash flows with regard to this transaction? a. $675,000. b. $900,000. c. $1,125,000. d. $225,000.

Ans: c, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Increase (Decrease) in Buildings, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $225,000 + $900,000  $1,125,000 (Gain on sale + bldg. book val.)

143.

If a loss of $108,000 is realized when selling (for cash) a building having a book value of $800,000, the total amount reported in the cash flows from investing activities section of the statement of cash flows is a. $692,000. b. $800,000. c. $908,000. d. $108,000.

Ans: a, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Increase (Decrease) in Building, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $800,000  $108,000  $692,000 (Bldg. book val. – loss on sale)

Statement of Cash Flows

144.

12-29

If Ace Imports Corporation realizes a gain of $81,000 on a cash sale of a building having a book value of $600,000, the total amount reported in the cash flows from investing activities section of the statement of cash flows is a. $519,000. b. $681,000. c. $600,000. d. $81,000.

Ans: b, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Increase (Decrease) in Buildings, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $600,000 + $81,000  $681,000 (Bldg. book val. + gain)

145.

Suppose that Target realizes a loss of $9,000 on a cash sale of office equipment having a book value of $90,000. The total amount reported in the cash flows from investing activities section of the statement of cash flows is a. $81,000. b. $90,000. c. $99,000. d. $9,000.

Ans: a, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Increase (Decrease) in Equipment, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $90,000  $9,000  $81,000 (Equip. book val. – loss)

146.

Land costing $125,000 was sold for $355,000 cash. The gain on the sale was reported on the income statement as other income. On the statement of cash flows, what amount should be reported as an investing activity from the sale of land? a. $155,000. b. $355,000. c. $310,000. d. $230,000.

Ans: b, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Increase (Decrease) in Land, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $355,000 (Land sell. pr.)

147.

When using the indirect method to compute cash provided by operating activities a. income taxes payable may be ignored. b. depreciation expense is added to net income. c. decreases in inventory are subtracted from net income. d. increases in accounts receivable are added to net income.

Ans: b, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Depreciation Expense, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

148.

A transaction involving a gain on the sale of equipment affects cash provided (used) by a. financing and investing activities. b. operating and financing activities. c. operating and investing activities. d. operating, financing, and investing activities.

Ans: c, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Loss (Gain) on Disposal of Plant Assets, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

12-30

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

149.

A company reported net income of $200,000 for the year ended December 31, 2025. During the year, inventories decreased by $40,000, accounts payable decreased by $60,000, depreciation expense was $45,000 and a gain on disposal of equipment of $15,000 was recorded. Net cash provided by operating activities in 2025 using the indirect method was a. $280,000. b. $210,000. c. $245,000. d. $240.000.

Ans: b, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Summary of Conversion to Net Cash Provided by Operating Activities—Indirect Method, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $200,000 + $40,000  $60,000 + $45,000  $15,000  $210,000 (Net inc. + inv. dec. – A/P dec. + dep. exp. – gain on disp.)

150.

All of the following adjustments are added to net income in computing net cash provided by operating activities except a. amortization expense. b. a decrease in accounts receivable. c. an increase in accounts payable. d. an increase in prepaid expenses.

Ans: d, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Summary of Conversion to Net Cash Provided by Operating Activities—Indirect Method, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

151.

All of the following adjustments would be deducted in determining net cash provided by operating activities except a(n) a. increase in inventories. b. depreciation expense. c. gain on disposal of plant assets. d. decrease in accrued expenses payable.

152.

Each of the following is an adjustment to convert net income to net cash provided by operating activities except a. adding back noncash expenses. b. adding gains and deducting losses. c. analyzing changes to noncash current asset and current liability accounts. d. All of these answer choices are adjustments.

Ans: b, LO: 2, Topic: Preparing the Statement of Cash Flows – Indirect Method, Subtopic: Summary of Conversion to Net Cash Provided by Operating Activities—Indirect Method, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

153.

If a company has both an inflow and outflow of cash related to property, plant, and equipment, the in the investing activities section. a. two cash effects must be netted and presented as one item b. cash inflow and cash outflow must be reported separately c. cash outflow is only presented d. cash inflow and cash outflow can either be reported separately or presented as one item

Ans: b, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Increase (Decrease) in Equipment, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

154.

On the statement of cash flows, the cash flows from operating activities section would be .

Statement of Cash Flows

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affected by a. receipts from the issuance of capital stock. b. receipts from the sale of investments. c. payments for the acquisition of investments. d. cash receipts from sales activities. Ans: d, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Summary of Conversion to Net Cash Provided by Operating Activities—Indirect Method, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

155.

In calculating net cash provided by operating activities using the indirect method, why is there an adjustment to net income for the amount of depreciation expense? a. Depreciation is a cash amount that will not be paid during the current year. b. Depreciation is a cash outflow that reduces the amount of income. c. Depreciation is not a cash amount and was deducted to determine net income, so it must be added back to determine the net cash flows. d. Depreciation is a cash expense that was deducted to determine net income, so it must be added back to determine the net cash flows.

Ans: c, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Depreciation Expense, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

156.

To determine net cash provided by operating activities, a company must convert net income from an accrual basis to a cash basis under a. the direct method only. b. the indirect method only. c. both the direct method and the indirect method. d. neither the direct nor the indirect method.

Ans: c, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Indirect and Direct Methods, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

157.

Cash from investing becomes less positive and cash from financing becomes more negative during the a. introductory phase of the corporate life cycle. b. growth phase of the corporate life cycle. c. maturity phase of the corporate life cycle. d. decline phase of the corporate life cycle.

Ans: d, LO: 3, Topic: Analyzing the Statement of Cash Flows, Subtopic: The Corporate Life Cycle, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

158.

Cash generated from operations exceeds investing needs, and the company can begin retiring debt during the a. introductory phase of the corporate life cycle. b. growth phase of the corporate life cycle. c. maturity phase of the corporate life cycle. d. decline phase of the corporate life cycle.

Ans: c, LO: 3, Topic: Analyzing the Statement of Cash Flows, Subtopic: The Corporate Life Cycle, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

159.

Collections on accounts receivable will lag behind sales, and accrual sales during a period .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

will exceed cash collections during the a. introductory phase of the corporate life cycle. b. growth phase of the corporate life cycle. c. maturity phase of the corporate life cycle. d. decline phase of the corporate life cycle. Ans: b, LO: 3, Topic: Analyzing the Statement of Cash Flows, Subtopic: The Corporate Life Cycle, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

160.

A company would be expected to generate small amounts of cash from operations during the a. introductory phase of the corporate life cycle. b. growth phase of the corporate life cycle. c. maturity phase of the corporate life cycle. d. decline phase of the corporate life cycle.

Ans: b, LO: 3, Topic: Analyzing the Statement of Cash Flows, Subtopic: The Corporate Life Cycle, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

161.

During which of the following phases of the corporate life cycle does a company generate the largest amount of cash flows from operating activities? a. Introductory phase b. Maturity phase c. Decline phase d. Growth phase

162.

A company’s net cash provided by operating activities is approximately the same as its net income. Which phase of the corporate life cycle is this company most likely in? a. Introductory phase b. Maturity phase c. Decline phase d. Growth phase

163.

The phase in the corporate life cycle when a company is purchasing plant assets and beginning to produce and sell is the a. introductory phase. b. growth phase. c. maturity phase. d. decline phase.

Ans: a, LO: 3, Topic: Analyzing the Statement of Cash Flows, Subtopic: The Corporate Life Cycle, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

164.

Cash from operations and net income are approximately the same during which phase of the corporate life cycle? a. introductory phase b. growth phase c. maturity phase d. decline phase

165.

Which of the following is not typically a characteristic experienced by a company during the .

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introductory phase of the corporate life cycle? a. Cash used in operations will exceed cash generated by operations. b. Considerable cash will be used to purchase productive assets. c. Cash from investing is positive. d. Cash from financing is positive. Ans: c, LO: 3, Topic: Analyzing the Statement of Cash Flows, Subtopic: The Corporate Life Cycle, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

166.

Which of the following is not typically a characteristic experienced by a company during the growth phase of the corporate life cycle? a. Cash from operations on the statements of cash flows will be less than net income on the income statement. b. Collections on accounts receivable will lag behind sales. c. Cash from investing is positive. d. Cash from financing is positive.

Ans: c, LO: 3, Topic: Analyzing the Statement of Cash Flows, Subtopic: The Corporate Life Cycle, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

167.

The information in the following table is from the statement of cash flows for a company at four different points in the corporate life cycle (Period 1, Period 2, Period 3, and Period 4). Negative values are presented in parentheses.

Cash provided by operations Cash provided by investing Cash provided by financing Net income

Period 1 $ (180,000) (300,000) 290,000 (120,000)

Period 2 $ 90,000

Period 3 $ 360,000

Period 4 $ 50,000

75,000 (220,000) 30,000

90,000 ($170,000) 300,000

(120,000) $420,000 (15,000)

Based on this information, which of the following answers most likely corresponds with the introductory phase, growth phase, maturity phase, or decline phase? a. Period 2, Period 1, Period 3, Period 4. b. Period 1, Period 4, Period 3, Period 2. c. Period 3, Period 4, Period 1, Period 2. d. Period 4, Period 3, Period 2, Period 1. Ans: b, LO: 3, Topic: Analyzing the Statement of Cash Flows, Subtopic: The Corporate Life Cycle, Bloom: AN, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

168.

Free cash flow provides an indication of a company’s ability to a. generate cash to invest in capital expenditures. b. generate net income. c. generate cash to pay dividends. d. generate cash to invest in capital expenditures and to pay dividends.

Ans: d, LO: 3, Topic: Analyzing the Statement of Cash Flows, Subtopic: Free Cash Flow, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

169.

During 2025, Acme Industries reported cash provided by operations of $794,000, cash used in investing of $686,000, and cash used in financing of $190,000. In addition, cash spent on plant assets during the period was $276,000. Average current liabilities were $650,000 and average total liabilities were $1,716,000. No dividends were paid. Based on this information, what was Acme's free cash flow? a. ($144,000). b. $108,000. c. $518,000. d. ($604,000).

Ans: c, LO: 3, Topic: Analyzing the Statement of Cash Flows, Subtopic: Free Cash Flow, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $794,000  $276,000  $518,000 (Cash from oper. – fix. asset pur.)

170.

A1 Media Company had the following transactions during the year 2025: I. Recorded credit sales of $2,500. II. Collected $1,500 from customers. III. Recorded sales returns of $500 and credited the customer's account. What is the total effect of these transactions on free cash flow? a. Increase b. Decrease c. No Effect d. Cannot be determined

Ans: a, LO: 3, Topic: Analyzing the Statement of Cash Flows, Subtopic: Free Cash Flow, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

171.

A1 Media Company had the following transactions during the year 2025: I. Paid amount owing to suppliers $2,750. II. Purchased new equipment for $5,000 by signing a long-term note payable. III. Purchased a patent and paid $15,000 cash for the asset. How what is the total effect of these transactions on free cash flow? a. Increase b. Decrease c. No Effect d. Cannot be determined

Ans: b, LO: 3, Topic: Analyzing the Statement of Cash Flows, Subtopic: Free Cash Flow, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

172.

All of the following statements about free cash flow are false except: a. Significant free cash flow indicates less potential to finance new investment. b. Free cash flow is most commonly calculated by subtracting capital expenditures from cash provided by operations and then adding cash dividends. c. Free cash flow is not reported on the statement of cash flows. d. Significant free cash flow indicates less potential to pay additional dividends.

Ans: c, LO: 3, Topic: Analyzing the Statement of Cash Flows, Subtopic: Free Cash Flow, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Statement of Cash Flows

173.

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A company reports a $48,000 increase in inventory and a $12,000 increase in accounts payable during the year. Cost of goods sold for the year was $285,000. Using the direct method of reporting cash flows from operating activities, cash payments made to suppliers were a. $285,000. b. $321,000. c. $249,000. d. $237,000.

Ans: b, LO: 4, Topic: Statement of Cash Flows—Direct Method, Subtopic: Cash Payments to Suppliers, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $285,000 + ($48,000  $12,000)  $321,000 (COGS + inv. inc. – A/P inc.)

174.

Cost of goods sold during the year was $305,000. Inventory decreased by $10,000 during the year and accounts payable decreased by $12,000 during the year. Using the direct method of reporting cash flows from operating activities, cash payments for inventory total a. $317,000. b. $307,000. c. $283,000. d. $327,000.

Ans: b, LO: 4, Topic: Statement of Cash Flows—Direct Method, Subtopic: Cash Payments to Suppliers, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $305,000  $10,000 + $12,000  $307,000 (COGS – inv. dec. + A/P dec.)

175.

Ace Beverage Supply Company reports a $20,000 increase in inventory and a $5,000 decrease in accounts payable during the year. Cost of Goods Sold for the year was $282,000. If the direct method of reporting cash flows from operating activities is used, what are the company’s cash payments made to suppliers? a. $282,000. b. $262,000. c. $307,000. d. $257,000.

Ans: c, LO: 4, Topic: Statement of Cash Flows—Direct Method, Subtopic: Cash Payments to Suppliers, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $282,000 + $20,000 + $5,000  $307,000 (COGS + inv. inc. + A/P dec.)

176.

Cost of goods sold during the year was $380,000. Inventory increased by $12,000 during the year and accounts payable decreased by $19,000 during the year. Using the direct method of reporting cash flows from operating activities, cash payments for inventory total a. $399,000. b. $361,000. c. $387,000. d. $411,000.

Ans: d, LO: 4, Topic: Statement of Cash Flows—Direct Method, Subtopic: Cash Payments to Suppliers, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $380,000 + $12,000 + $19,000  $411,000 (COGS + inv. inc. + A/P dec.)

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

177.

A1 Import Company had credit sales of $1,600,000. The beginning accounts receivable balance was $165,000 and the ending accounts receivable balance was $280,000. Using the direct method of reporting cash flows from operating activities, what were the cash collections from customers during the period? a. $1,815,000. b. $1,600,000. c. $1,485,000. d. $1,765,000.

Ans: c, LO: 4, Topic: Statement of Cash Flows—Direct Method, Subtopic: Cash Receipts from Customers, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $1,600,000 + ($165,000  $280,000)  $1,485,000 (Cred. sal. + beg. A/R – end. A/R)

178.

Ace Marine Supply Co. reported credit sales of $640,000 during 2025. The accounts receivable balance increased during the year. Which statement is true? a. b. c. d.

Customers paid more cash than the amount of sales generated during the year. The company sold more goods during the year than it had in previous years. The cash collected was less than the amount of sales generated during the year. Customers owe less at the end of the year compared to the amount they owed at the beginning of the year.

179.

During 2025, Acme Company had $130,000 in cash sales and $1,020,000 in credit sales. The accounts receivable balances were $180,000 and $212,000 at December 31, 2024, and 2025, respectively. Using the direct method of reporting cash flows from operating activities, what was the total cash collected from all customers during 2025? a. $1,418,000. b. $1,642,000. c. $1,182,000. d. $1,118,000.

Ans: d, LO: 4, Topic: Statement of Cash Flows—Direct Method, Subtopic: Cash Receipts from Customers, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $1,020,000 + $130,000 + ($180,000  $212,000)  $1,118,000 (Cred. sal. + cash sal. + beg. A/R – end. A/R)

180.

The following information relates to Ace Company: Prepaid Insurance, December 31, 2024 $ 302,000 Prepaid Insurance, December 31, 2025 280,000 Insurance expense for 2025 1,600,000 Using the direct method of reporting cash flows from operating activities, what was the amount of cash paid for insurance premiums by Ace during 2025? a. $1,578,000. b. $1,622,000. c. $1,880,000. d. $1,622,000.

Ans: a, LO: 4, Topic: Statement of Cash Flows—Direct Method, Subtopic: Adjustments for Prepaid Expenses, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $1,600,000 + ($280,000  $302,000)  $1,578,000 (Ins. exp. + (end. prep. ins. – beg. prep. ins.))

Statement of Cash Flows

181.

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Cash receipts from customers are greater than sales revenues when there is a(n) a. increase in accounts receivable. b. decrease in accounts receivable. c. increase in cost of goods sold. d. decrease in cost of goods sold.

Ans: b, LO: 4, Topic: Statement of Cash Flows—Direct Method, Subtopic: Cash Receipts from Customers, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

182.

Ace Company had an increase in inventory of $120,000. The cost of goods sold was $560,000. There was a $30,000 decrease in accounts payable from the prior period. Using the direct method of reporting cash flows from operating activities, what were Ace's cash payments to suppliers? a. $710,000. b. $650,000. c. $440,000. d. $380,000.

Ans: a, LO: 4, Topic: Statement of Cash Flows—Direct Method, Subtopic: Cash Payments to Suppliers, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $560,000 + $120,000 + $30,000  $710,000 (COGS + inv. inc. + A/P dec.)

183.

A1 Products reported cost of goods sold of $620,000 for the year ended December 31, 2025. During the year, inventories increased by $8,000, accounts payable decreased $12,000, and sales increased by $23,000. How much cash did A1 Products pay to suppliers in 2025? a. $616,000 b. $624,000 c. $600,000 d. $640,000

Ans: d LO: 4, Topic: Statement of Cash Flows—Direct Method, Subtopic: Cash Payments to Suppliers, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $620,000 + $8,000 + $12,000  $640,000 (COGS + inv. inc. + A/P dec.)

184.

Which of the following items does not appear in the statement of cash flows under the direct method? a. Cash payments to suppliers b. Cash collections from customers c. Depreciation Expense d. Cash from the sale of equipment

Ans: c, LO: 4, Topic: Statement of Cash Flows—Direct Method, Subtopic: Depreciation Expense and Loss (Gain) on Disposal of Plant Assets, Bloom LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

185.

Acme Supply Company has other operating expenses of $360,000. There has been a decrease in prepaid expenses of $16,000 during the year, and accrued liabilities are $24,000 larger than in the prior period. Using the direct method of reporting cash flows from operating activities, what were Acme's cash payments for operating expenses? a. $368,000 b. $352,000 c. $320,000 d. $400,000

Ans: c, LO: 4, Statement of Cash Flows—Direct Method, Subtopic: Cash Payments for Operating Expenses, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $360,000  $16,000  $24,000  $320,000 (Oper. exp. – prep. exp. dec. – acc. liab. inc.)

186.

A company reports income tax expense of $270,000. There has been a $30,000 decrease in federal income taxes payable and a $42,000 increase in state income taxes payable during the year. Using the direct method of reporting cash flows from operating activities, what is the company's cash payment for income taxes? a. $270,000 b. $258,000 c. $198,000 d. $342,000

Ans: b, LO: 4, Statement of Cash Flows—Direct Method, Subtopic: Cash Payments for Income Taxes, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $270,000 + ($30,000  $42,000)  $258,000 (Inc. tax exp. + fed. ITP dec. – st. ITP inc.)

187.

Which of the following would not appear in the operating activities section of a statement of cash flows prepared under the direct method? a. Cash receipts from customers. b. Cash paid for income taxes. c. Gain on sale of equipment. d. Cash paid to employees.

Ans: c, LO: 4, Statement of Cash Flows—Direct Method, Subtopic: Step 1: Operating Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

188.

Which of the following statements concerning the statement of cash flows is true? a. The statement of cash flows is usually more accurate when using the indirect method. b. If the direct method is used, a supplementary schedule reconciling the net income to net cash from operating activities must still be provided. c. The statement of cash flows reflects both earnings per share and cash per share. d. The statement of cash flows is an optional financial statement for external reporting purposes.

Ans: b, LO: 4, Statement of Cash Flows—Direct Method, Subtopic: Step 1: Operating Activities, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Statement of Cash Flows

189.

12-39

Ace Supply Company reports the following: End of Year Beginning of Year Inventory $25,000 $40,000 Accounts Payable 30,000 10,000 If cost of goods sold for the year is $240,000, the amount of cash paid to suppliers using the direct method is a. $245,000. b. $235,000. c. $205,000. d. $280,000.

Ans: c, LO: 4, Statement of Cash Flows—Direct Method, Subtopic: Cash Payments to Suppliers, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $240,000 + ($25,000  $40,000)  ($30,000  $10,000)  $205,000 (COGS + (end. inv. – beg. inv.) – (end. A/P – beg. AP)

190.

During the year 2025, Salaries Payable decreased by $12,000. Using the direct method of reporting cash flows from operating activities, if Salaries Expense amounted to $450,000 for the year, the cash paid to employees for the year is a. $462,000. b. $438,000. c. $450,000. d. $454,000.

Ans: a, LO: 4, Statement of Cash Flows—Direct Method, Subtopic: Adjustments for Accrued Expenses, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $450,000 + $12,000  $462,000 (Sal. exp. + sal. pay. dec.)

191.

During 2025, the Interest Payable account decreased by $24,000. Using the direct method of reporting cash flows from operating activities, if the balance in Interest Expense was $400,000 at year-end, the cash paid for interest during the year is a. $276,000. b. $400,000. c. $448,000. d. $424,000.

Ans: d, LO: 4, Statement of Cash Flows—Direct Method, Subtopic: Cash Payments for Interest, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $400,000 + $24,000  $424,000 (Int. exp. + Int. pay. decrease)

192.

Ace Supply Company reports the following for the current year: End of Year Beginning of Year Utilities Payable $2,500 $4,000 If utilities expense for the year is $24,000, the amount of cash paid for utilities using the direct method is a. $24,000. b. $21,500. c. $25,500. d. $22,500.

Ans: c, LO: 4, Statement of Cash Flows—Direct Method, Subtopic: Adjustments for Accrued Expenses, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution: $24,000 + ($4,000  $2,500) = $25,500 Utill. Exp. + Beg. Yr. pay – End. Yr. pay.

193.

Ace Supply Company reports the following for the current year: End of Year Beginning of Year Interest Payable $11,500 $10,000 If the interest expense reported on Ace’s income statement is $125,000, the amount of cash paid for interest using the direct method is a. $125,000. b. $123,500. c. $126,500. d. $135,000.

Ans: b LO: 4, Statement of Cash Flows—Direct Method, Subtopic: Cash Payments for Interest, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $125,000 + ($10,000  $11,500) = $123,500 Int. Exp. + Beg. Yr. pay – End. Yr. pay.

194.

Ace Supply Company reports the following for the current year: End of Year Beginning of Year Salaries Payable $26,100 $23,700 If Ace’s income statement reports Salaries Expense of $625,000, the amount of cash paid to employees for salaries using the direct method is a. $598,900. b. $627,400. c. $622,600. d. $625,000.

Ans: c LO: 4, Statement of Cash Flows—Direct Method, Subtopic: Adjustments for Accrued Expenses: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $625,000 + ($23,700  $26,100) = $622,600 Sal. Exp. + Beg. Yr. pay – End. Yr. pay

*195. A company had a $30,000 increase in accounts payable from the prior period. If a worksheet is used to facilitate the preparation of the statement of cash flows, the entry in the reconciling columns of the worksheet would be a. Operating- Increase in Accounts Payable (debit column), Accounts Payable (credit column). b. Accounts Payable (debit column), Cash (credit column). c. Accounts Payable (debit column) Operating- Increase in Accounts Payable (credit column). d. Cash (debit column), Accounts Payable (credit column). Ans: a, LO: 5, Topic: Worksheet for the Indirect Method, Subtopic: Accounts Payable, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

*196. Ace Corporation’s accounts receivable decreased $130,000 between the end of 2024 and the end of 2025. If Ace uses a worksheet is to facilitate the preparation of the statement of cash flows, the entry in the reconciling columns of the worksheet would be a. Operating- Decrease in Accounts Receivable (debit column), Accounts Receivable (credit column). b. Accounts Receivable (debit column), Cash (credit column). c. Accounts Receivable (debit column), Operating- Decrease in Accounts Receivable (credit column). d. Cash (debit column), Accounts Receivable (credit column). Ans: a, LO: 5, Topic: Worksheet for the Indirect Method, Subtopic: Accounts Receivable, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA

Statement of Cash Flows

12-41

BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

*197. Acme Supply Company’s prepaid expenses increased by $3,000 between 12/31/2024 and 12/31/2025. If Acme uses a worksheet to facilitate the preparation of the statement of cash flows, the entry in the reconciling columns of the worksheet would be a. Operating- Increase in Prepaid Expenses (debit column), Prepaid Expenses (credit column). b. Prepaid Expenses (debit column), Cash (credit column). c. Prepaid Expenses (debit column), Operating- Increase in Prepaid Expenses (credit column). d. Cash (debit column), Prepaid Expenses (credit column). Ans: c, LO: 5, Topic: Worksheet for the Indirect Method, Subtopic: Prepaid Expenses, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

*198. If a worksheet is used to facilitate the preparation of the statement of cash flows, noncash transactions should a. be omitted because the worksheet is only for cash transactions. b. be marked with asterisks. c. not be distinguished from cash transactions. d. not be included because they are for investing and financing activities. Ans: b, LO: 5, Topic: Worksheet for the Indirect Method, Subtopic: Preparing the Worksheet, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

*199. When the T-account approach is used, the change in cash is assumed to be equal to a. the change in equity. b. the change in liabilities plus the change in equity. c. the change in the balance sheet accounts, excluding the noncash transactions. d. the change in all the noncash balance sheet accounts. Ans: d, LO: 6, Topic: Statement of Cash Flows—T-Account Approach, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

*200. When the T-account approach is used, the first entry to the Cash T-account is a. the beginning Cash balance. b. the change in Cash from the beginning of the year to the end of the year. c. net income. d. net income plus gains and minus losses. Ans: c, LO: 6, Topic: Statement of Cash Flows—T-Account Approach, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

12-42

BRIEF EXERCISES Be. 201 Selected transactions of the Acme Marine Supply Company are listed below. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Common stock is sold for cash above par value. Bonds payable are issued for cash at a discount. Interest on a short-term note receivable is collected. Merchandise is sold to customers for cash. Cash is paid to purchase inventory. Equipment is purchased by signing a 3-year, 10% note payable. Cash dividends on common stock are declared and paid. One hundred shares of Amazon.com common stock are purchased for cash. Land is sold for cash at book value. Bonds payable are converted into common stock.

Instructions Classify each transaction as either (a) an operating activity, (b) an investing activity, (c) a financing activity, or (d) a noncash investing and financing activity. Ans: N/A, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Classification of Cash Flows, Bloom: AP, Difficulty: Easy, Min: 8, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 201 1. 2. 3. 4. 5.

Financing activity Financing activity Operating activity Operating activity Operating activity

6. (d) 7. (c) 8. (b) 9. (b) 10. (d)

Noncash activity Financing activity Investing activity Investing activity Noncash activity

Be. 202 Selected transactions for the A1 Furniture Company are listed below. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Collected accounts receivable. Declared and paid dividends on common stock. Sold long-term investments for cash. Issued stock for equipment. Repaid five-year note payable. Paid employee wages. Converted bonds payable to common stock. Acquired long-term investment with cash. Sold buildings and equipment for cash. Sold merchandise to customers.

Statement of Cash Flows

12-43

Solution 202 1. 2. 3. 4. 5.

(a) (c) (b) (d) (c)

Operating activity Financing activity Investing activity Noncash activity Financing activity

6. (a) 7. (d) 8. (b) 9. (b) 10. (a)

Operating activity Noncash activity Investing activity Investing activity Operating activity

Be. 203 (a) (b)

Identify the alternatives for presenting significant noncash activities in financial statements. Give three examples of significant noncash activities.

Ans: N/A, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Significant Noncash Activities, Bloom: K, Difficulty: Easy, Min: 8, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 203 (a)

Significant noncash activities may appear at the bottom of the statement of cash flows as a separate schedule under the heading "Noncash investing and financing activities." They may also be presented in a separate note or supplementary schedule to the financial statements.

(b)

1. 2. 3. 4.

Direct issuance of common stock to purchase assets Conversion of bonds into common stock Direct issuance of debt to purchase assets Exchanges of plant assets

Be. 204 A company reported net income of $225,000 for the current year. Depreciation recorded on buildings and equipment amounted to $75,000 for the year. Balances of the current asset and current liability accounts at the beginning and end of the year are as follows: End of Year Beginning of Year Cash $20,000 $15,000 Accounts receivable 22,000 32,000 Inventory 50,000 60,000 Accounts payable 12,000 18,000 Instructions Prepare the cash flows from operating activities section of the statement of cash flows using the indirect method. Ans: N/A, LO: 2, Topic: Preparing the Statement of Cash Flows: Indirect Method, Subtopic: Step 1: Operating Activities, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 204 Net income ......................................................................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ................................................................................ Decrease in accounts receivable ............................................................... Decrease in inventory................................................................................. Decrease in accounts payable ................................................................... Net cash provided by operating activities ..................................................

$225,000 75,000 10,000 10,000 (6,000) $314,000

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

12-44 Be. 205

Assume the indirect method is used to compute cash flows from operating activities. For each item listed below, indicate the effect on net income in arriving at cash flows from operating activities by choosing one of the following code letters. Code Add to Net Income A Deduct from Net Income D 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Increase in accounts receivable Increase in inventory Decrease in prepaid expenses Decrease in accounts payable Increase in accrued liabilities Increase in income taxes payable Depreciation expense Loss on sale of investment Gain on disposal of equipment Amortization expense

Ans: N/A, LO: 2, Topic: Preparing the Statement of Cash Flows: Indirect Method, Subtopic: Step 1: Operating Activities, Bloom: K, Difficulty: Easy, Min: 10, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 205 1. 2. 3. 4. 5.

D D A D A

6. 7. 8. 9. 10.

A A A D A

Statement of Cash Flows

12-45

Be. 206 Assuming a statement of cash flows is prepared using the indirect method, indicate the reporting of the transactions and events listed below by major categories on the statement. Use the following code letters to indicate the appropriate category under which the item would appear on the statement of cash flows. Code Cash Flows From Operating Activities Add to Net Income A Deduct from Net Income D Cash Flows From Investing Activities Cash Flows From Financing Activities

IA FA Category

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Common stock is issued for cash at an amount above par value Inventory increased during the period Depreciation expense recorded for the period Building was purchased for cash Bonds payable were acquired and retired at their carrying value Accounts payable decreased during the period Prepaid expenses decreased during the period Treasury stock was acquired for cash Land is sold for cash at an amount equal to book value Patent amortization expense recorded for a period

Ans: N/A, LO: 2, Topic: Preparing the Statement of Cash Flows: Indirect Method, Subtopic: Indirect Method, Bloom: C, Difficulty: Medium, Min: 8, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 206 Category 1.

Common stock is issued for cash at an amount above par value

Inventory increased during the period

Depreciation expense recorded for the period

Building was purchased for cash

Bonds payable were acquired and retired at their carrying value

Accounts payable decreased during the period

Prepaid expenses decreased during the period

Treasury stock was acquired for cash

Land is sold for cash at an amount equal to book value

10.

Patent amortization expense recorded for a period

12-46

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Be. 207 A1 Office Supply Company prepared the tabulation below at December 31, 2025. Net Income .................................................

$310,000

Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense, $45,000 ................................................................... Increase in accounts receivable, $55,000 .................................................... Decrease in inventory, $12,000 ................................................................... Increase in accounts payable, $6,000 .......................................................... Increase in prepaid expenses, $4,000 ......................................................... Decrease in income taxes payable, $3,500 .................................................. Gain on disposal of land, $7,500 .................................................................. Net cash provided (used) by operating activities .......................................... Instructions Show how each item should be reported in the statement of cash flows using the indirect method. Use parentheses for deductions. Ans: N/A, LO: 2, Topic: Preparing the Statement of Cash Flows: Indirect Method, Subtopic: Step 1: Operating Activities, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 207 Net Income ...........................................................................................................

$310,000

Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense .................................................................................. Increase in accounts receivable ................................................................... Decrease in inventory .................................................................................. Increase in accounts payable ....................................................................... Increase in prepaid expenses ...................................................................... Decrease in income taxes payable .............................................................. Gain on disposal of land .............................................................................. Net cash provided (used) by operating activities .................................

45,000 (55,000) 12,000 6,000 (4,000) (3,500) (7,500) $303,000

Statement of Cash Flows

12-47

Be. 208 Ace Marine Company had total operating expenses of $135,000 in 2025, which included depreciation expense of $22,000. Also during 2025, prepaid expenses increased by $9,000 and accrued expenses decreased by $5,500. Instructions Calculate the amount of cash payments for operating expenses in 2025 using the direct method. Ans: N/A, LO: 4, Topic: Statement of Cash Flows—Direct Method, Subtopic: Step 1: Operating Activities, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 208 Operating expenses ........................................................... Less: Noncash depreciation expense ................................. Add: Increase in prepaid expenses .................................... Add: Decrease in accrued liabilities .................................... Cash payments for operating expenses .............................

$135,000 (22,000) 9,000 5,500 $127,500

Be. 209 a. Sales = $650,500; Accounts receivable increased by $27,500. Calculate cash receipts from sales. b. Cost of goods sold = $430,000; inventory decreased by $75,000; accounts payable decreased by $28,500. Calculate cash payments for purchases. c. The Income statement shows $12,500 in income taxes. The balance sheet shows an increase in taxes payable of $1,500. Calculate the cash paid for income taxes. d. Operating expenses total $75,750; Depreciation expense = $37,200; Prepaid expenses increased by $15,400; Accrued wages decreased by $10,600. Calculate cash payments for operating expenses. Ans: N/A, LO: 4, Topic: Statement of Cash Flows—Direct Method, Subtopic: Step 1: Operating Activities, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 209 a. $623,000; $650,500 – $27,500 b. $383,500; $430,000 – $75,000 + $28,500 (COGS − inv. dec. + A/P dec.) c. $11,000; $12,500 – $1,500 d. $64,550; $75,750 – $37,200 + $15,400 + $10,600 (Oper. exp. − dep. exp. + prep. exp. inc. + acc. wag. dec.)

12-48

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Be. 210 a. Sales = $850,000; Accounts receivable decreased by $40,000. Calculate cash receipts from sales. b. Cost of goods sold = $650,000; inventory increased by $22,000; accounts payable increased by $28,000. Calculate cash payments for purchases. c. Income statement shows $25,500 in income taxes. The balance sheet shows an increase in taxes payable of $3,500. Calculate the cash paid for income taxes. d. Operating expenses total $103,000; Depreciation expense = $14,000; Prepaid expenses decreased by $13,000; Accrued liabilities increased by $6,000. Calculate cash payments for operating expenses. Ans: N/A, LO: 4, Topic: Statement of Cash Flows—Direct Method, Subtopic: Step 1: Operating Activities Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 210 a. $890,000; $850,000 + $40,000 b. $644,000; $650,000 + $22,000 – $28,000 (COGS + inv. inc. − A/P inc.) c. $22,000; $25,500 – $3,500 d. $70,000; $103,000 – $14,000 – $13,000 – $6,000 (Oper. exp. − dep. exp. − prep. exp. dec. − acc. liab. inc.) Be. 211 The general ledger of Acme Seafood Company provides the following information: Accounts Receivable Inventory Accounts Payable

End of Year $ 64,000 240,000 42,000

Beginning of Year $ 84,000 205,000 62,000

The company's net sales for the year were $2,000,000 and cost of goods sold amounted to $1,700,000. Instructions Compute the following: (a)

Cash receipts from customers

(b)

Cash payments to suppliers

Ans: N/A, LO: 4, Topic: Statement of Cash Flows—Direct Method, Subtopic: Step 1: Operating Activities, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Statement of Cash Flows

12-49

Solution 211 (a)

Cash receipts from customers Sales + Decrease in Accounts Receivable $2,000,000 + $20,000 = $2,020,000

(b)

Cash payments to suppliers First calculate the amount of purchases: Beginning inventory Add: Purchases Less: Ending Inventory Cost of goods sold Purchases

$ 205,000 ? ? 240,000 $1,700,000

= Cost of goods sold + increase in inventory = $1,700,000 + $35,000 = $1,735,000

Amount of cash payments to suppliers: Purchases + decrease in accounts payable $1,735,000 + $20,000 = $1,755,000 Be. 212 The income statement of Ace, Inc. for the year ended December 31, 2025, reported the following condensed information: Service revenue Operating expenses Income from operations Income tax expense Net income

$600,000 360,000 240,000 24,000 $216,000

Ace's balance sheet contained the following comparative data at December 31: Accounts receivable Accounts payable Income taxes payable

2025 $50,000 37,000 4,000

2024 $60,000 46,000 2,000

Ace has no depreciable assets. Accounts payable pertains to operating expenses. Instructions Prepare the operating activities section of the statement of cash flows using the direct method. Ans: N/A, LO: 4, Topic: Statement of Cash Flows—Direct Method, Subtopic: Step 1: Operating Activities Bloom: AP, Difficulty: Medium, Min: 9, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

12-50

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 212 ACE, INC. Statement of Cash Flows For the Year Ending December 31, 2025 Cash flows from operating activities Cash receipts from customers ($600,000 + $10,000) Cash payments: For operating expenses ($360,000 + $9,000) For income taxes ($24,000 – $2,000) Net cash provided by operating activities *(cash rec. − oper. exp. cash pay. − inc. tax cash pay.)

$610,000 $369,000 22,000

391,000 $219,000*

Be. 213 A Company uses a worksheet to prepare its statement of cash flows. Accounts receivable decreased by $12,000 and accounts payable increased by $9,000. The company issued an additional $50,000 in common stock. Instructions Prepare the worksheet entries for these three transactions. Ans: N/A, LO: 5, Topic: Worksheet for the Indirect Method, Subtopic: Preparing the Worksheet, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

*Solution 213 (1) Operating – Decrease in Accounts Receivable Accounts Receivable

12,000

(2) Operating – Increase in Accounts Payable Accounts Payable

9,000

(2) Financing – Issuance of Common Stock Common Stock

50,000

12,000

9,000

50,000

*Be. 214 Eller Company reported net income of $75,000 for the year ending December 31, 2025. Depreciation expense was $27,000. Inventory increased by $12,000 and accounts payable decreased by $7,000. Instructions Compute net cash provided by operating activities using the T-account approach. Ans: N/A, LO: 6, Topic: Statement of Cash Flows—T-Account Approach, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Statement of Cash Flows

12-51

*Solution 214 Cash (1) Net income

75,000 (4) Inventory

12,000

(2) Depreciation Expense

27,000 (5) Accounts Payable

7,000

Net Cash Provided by Operating Activities

83,000

EXERCISES Ex. 215 Ace Supply Company reported net income of $365,000 for the current year. Depreciation recorded on buildings and equipment amounted to $73,000 for the year. Balances of the current asset and current liability accounts at the beginning and end of the year are as follows: Cash Accounts receivable Inventory Prepaid insurance Accounts payable Income taxes payable

End of Year $22,000 17,000 55,000 7,500 11,000 600

Beginning of Year $15,000 32,000 65,000 5,000 18,000 1,200

Instructions Prepare the cash flows from the operating activities section of the statement of cash flows using the indirect method. Ans: N/A, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Step 1: Operating Activities, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 215 Net income ......................................................................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ................................................................................ Decrease in accounts receivable ............................................................... Decrease in inventory ................................................................................ Increase in prepaid insurance .................................................................... Decrease in accounts payable ................................................................... Decrease in income taxes payable ............................................................ Net cash provided by operating activities ..................................................

$365,000 73,000 15,000 10,000 (2,500) (7,000) (600) $452,900

12-52

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ex. 216 Using the indirect method, calculate the amount of cash flows from operating activities from the following data: Net income Beginning accounts receivable Ending accounts receivable Beginning prepaid insurance Ending prepaid insurance Beginning accounts payable Ending accounts payable Depreciation expense Amortization of intangible asset Dividends declared and paid

$199,000 22,000 29,000 5,000 2,000 15,000 14,000 50,000 6,000 11,000

Ans: N/A, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Step 1: Operating Activities, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 216 Net income – Increase accounts receivable + Decrease in prepaid insurance – Decrease in accounts payable + Depreciation + Amortization Cash flows from Operating Activities

$199,000 (7,000) 3,000 (1,000) 50,000 6,000 $250,000

Ex. 217 Use the following information to perform the calculations below (using the indirect method). Clearly label the amount of each answer as positive or negative and show all your calculations. Net income Depreciation expense Beginning accounts receivable Ending accounts receivable Beginning inventory Ending inventory Beginning prepaid insurance Ending prepaid insurance

$401,000 97,000 420,000 439,000 516,000 550,000 42,000 48,000

Beginning accounts payable Ending accounts payable Purchase of long-term assets Issuance of long-term debt Issuance of stock for cash Issuance of stock for long-term assets Purchase of treasury stock Sale of long-term investment at cost

$119,000 146,000 612,000 220,000 180,000 110,000 64,000 56,000

a. Calculate the amount of cash flows from operating activities. b. Calculate the amount of cash flows from investing activities. c. Calculate the amount of cash flows from financing activities. d. Calculate the net change in cash. Ans: N/A, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Indirect Method, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Statement of Cash Flows

12-53

Solution 217 a. Cash flows from operating activities Net income Depreciation expense Increase in accounts receivable Increase in inventory Increase in prepaid insurance Increase in accounts payable Cash flows from operating activities

$401,000 97,000 (19,000) (34,000) (6,000) 27,000 $466,000

b. Cash flows used in investing activities Purchase of long-term assets Sale of long-term investments Cash flows used in investing activities

$(612,000) 56,000 $(556,000)

c. Cash flows from financing activities Issue of long-term debt Issue of stock for cash Purchase of treasury stock Cash flows from financing activities

$220,000 180,000 (64,000) $336,000

d. Net change in cash Increase from operating activities Decrease from investing activities Increase from financing activities Net increase in cash

$466,000 (556,000) 336,000 $246,000

12-54

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ex. 218 The following information is available for A1 Consulting Corporation for the year ended December 31, 2025: Collection of principal on long-term loan to a supplier Acquisition of equipment for cash Proceeds from the sale of long-term investment at book value Issuance of common stock for cash Depreciation expense Redemption of bonds payable at carrying (book) value Payment of cash dividends Net income Purchase of land by issuing bonds payable

$16,000 10,000 22,000 20,000 25,000 34,000 6,000 30,000 40,000

In addition, the following information is available from the comparative balance sheet for A1 at the end of 2025 and 2024: 2025 2024 Cash $148,000 $91,000 Accounts receivable (net) 25,000 15,000 Prepaid insurance 19,000 13,000 Total current assets $192,000 $119,000 Accounts payable Salaries and wages payable Total current liabilities

$ 30,000 6,000 $ 36,000

$19,000 7,000 $26,000

Instructions Prepare A1's statement of cash flows for the year ended December 31, 2025 using the indirect method. Ans: N/A, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Indirect Method, Bloom: AP, Difficulty: Medium, Min: 22, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Statement of Cash Flows

12-55

Solution 218 A1 CONSULTING CORPORATION Statement of Cash Flows For the Year Ended December 31, 2025 Cash flows from operating activities Net income ................................................................................ Adjustments to reconcile net income to net cash provided by operating activities Depreciation ...................................................................... Increase in accounts receivable ......................................... Increase in prepaid insurance ............................................ Increase in accounts payable ............................................ Decrease in salaries and wages payable ........................... Net cash provided by operating activities ........................... Cash flows from investing activities Collection of long-term loan ........................................................ Proceeds from the sale of investments ....................................... Purchase of equipment ............................................................... Net cash provided by investing activities ............................ Cash flows from financing activities Issuance of common stock ......................................................... Redemption of bonds ................................................................. Payment of dividends ................................................................. Net cash used by financing activities ................................. Increase in cash ................................................................................ Cash at beginning of period ................................................................ Cash at end of period .......................................................................... Noncash investing and financing activities Purchase of land by issuing bonds .............................................

$30,000 $25,000 (10,000) (6,000) 11,000 (1,000)

19,000 49,000

16,000 22,000 (10,000) 28,000 20,000 (34,000) (6,000) (20,000) 57,000 91,000 $148,000 $40,000

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

12-56 Ex. 219

Acme Office Supply Company prepared the tabulation below at December 31, 2025. Net Income ............................................................

$323,000

Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense, $27,000 ................................................................... Increase in accounts receivable, $75,000 .................................................... Decrease in inventory, $18,000 ................................................................... Amortization of patent, $4,000 ..................................................................... Increase in accounts payable, $7,500 .......................................................... Decrease in interest receivable, $4,000 ....................................................... Increase in prepaid insurance, $7,000 ......................................................... Decrease in income taxes payable, $2,500 .................................................. Gain on disposal of plant assets, $11,000 .................................................... Net cash provided (used) by operating activities .......................................... Instructions Show how each item should be reported in the statement of cash flows. Use parentheses for deductions. Ans: N/A, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Step 1: Operating Activities, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 219 Net Income ...........................................................................................................

$323,000

Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense .................................................................................. Increase in accounts receivable ................................................................... Decrease in inventory .................................................................................. Amortization of patent .................................................................................. Increase in accounts payable ....................................................................... Decrease in interest receivable .................................................................... Increase in prepaid insurance ...................................................................... Decrease in income taxes payable .............................................................. Gain on disposal of plant assets .................................................................. Net cash provided (used) by operating activities .................................

27,000 (75,000) 18,000 4,000 7,500 4,000 (7,000) (2,500) (11,000) $288,000

Statement of Cash Flows

12-57

Ex. 220 The current sections of Ace Marine Inc.'s balance sheets at December 31, 2024 and 2025 are presented here. Ace Marine's net income for 2025 was $216,000. Depreciation expense was $34,000. 2025

2024

Current assets Cash Accounts receivable Inventory Prepaid insurance Total current assets

$106,000 91,000 168,000 28,000 $393,000

$ 99,000 89,000 173,000 22,000 $383,000

Current liabilities Interest payable Accounts payable Total current liabilities

$ 13,000 85,000 $ 98,000

5,000 92,000 $ 97,000

Instructions Prepare the net cash provided by operating activities section of the company's statement of cash flows for the year ended December 31, 2025 using the indirect method. Ans: N/A, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Step 1: Operating Activities, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 220 ACE MARINE INC. Partial Statement of Cash Flows For the Year Ended December 31, 2025 Cash flows from operating activities Net income ................................................................................. Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ........................................................ Increase in Interest payable ................................................ Decrease in inventory ........................................................ Increase in prepaid insurance ............................................ Decrease in accounts payable ........................................... Increase in accounts receivable ......................................... Net cash provided by operating activities .........................................................

$216,000 $34,000 8,000 5,000 (6,000) (7,000) (2,000)

32,000 $248,000

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

12-58 Ex. 221

The following information is available for Ace Pet Supply Corporation for the year ended December 31, 2025. Beginning cash balance Accounts payable decrease Depreciation expense Accounts receivable increases Inventory increase Net income Cash received for sale of land at book value Sales revenue Cash dividends paid Income tax payable increase Cash used to purchase building Cash used to purchase treasury stock Cash received from issuing bonds

$ 35,000 3,200 76,000 8,200 13,000 269,100 35,000 747,000 12,000 4,700 144,000 32,000 206,000

Instructions Prepare a statement of cash flows using the indirect method. Ans: N/A, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Indirect Method, Bloom: AP, Difficulty: Hard, Min: 8, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 221 ACE PET SUPPLY CORPORATION Statement of Cash Flows—Indirect Method For the Year Ended December 31, 2025 Cash flows from operating activities Net income ................................................................................ Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense ......................................................... Increase in income tax payable .......................................... Decrease in accounts payable ........................................... Increase in accounts receivable ......................................... Increase in inventory .......................................................... Net cash provided by operating activities ........................

$269,100 $76,000 4,700 (3,200) (8,200) (13,000)

Cash flows from investing activities Sale of land ................................................................................ Purchase of building ................................................................... Net cash used by investing activities ..................................

35,000 (144,000)

Cash flows from financing activities Issuance of bonds ....................................................................... Payment of dividends .................................................................. Purchase of treasury stock .......................................................... Net cash provided by financing activities ............................

206,000 (12,000) (32,000)

Net Increase in cash ............................................................................ Cash at beginning of period ................................................................. Cash at end of period .......................................................................... .

56,300 325,400

(109,000)

162,000 378,400 35,000 $413,400

Statement of Cash Flows

12-59

Ex. 222 The three accounts shown below appear in the general ledger of Ace Media Corp. during 2025. Equipment Date Jan. 1 July 31 Sept. 2 Nov. 10

Debit Balance Purchase of equipment 70,000 Cost of equipment constructed 53,000 Cost of equipment sold Accumulated Depreciation—Equipment

Date Jan. 1 Nov. 10

Debit Balance Accumulated depreciation on equipment sold 30,000 Depreciation for year Retained Earnings

Dec. 31

Date Jan. 1 Aug. 23 Dec. 31

Credit

59,000

Credit

Balance 71,000 41,000 64,000

23,000

Debit Balance Dividends (cash paid) Net income

Balance 160,000 230,000 283,000 224,000

Credit

19,000 54,000

Balance 105,000 86,000 140,000

Instructions From the postings in the accounts, indicate how the information is reported on a statement of cash flows using the indirect method. The loss on sale equipment was $7,000. Ans: N/A, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Indirect Method, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 222 ACE MEDIA CORP Partial Statement of Cash Flows For the Year Ended December 31, 2025 Cash flows from operating activities Net income ................................................................................ Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense ......................................................... Loss on disposal of plant assets ........................................ Net cash provided by operating activities .......................................................................... Cash flows from investing activities Sale of equipment ...................................................................... Purchase of equipment ............................................................... Construction of equipment .......................................................... Net cash used by investing activities .................................. Cash flows from financing activities Payment of cash dividends ......................................................... .

$54,000

$23,000 7,000

30,000 84,000

22,000* (70,000) (53,000) (101,000) (19,000)

12-60 Solution 222

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

(Cont.)

*Cost of equipment sold ................................................................ Accumulated depreciation ........................................................... Book value ................................................................................ Loss on disposal of plant assets ................................................. Cash proceeds ............................................................................

$59,000 (30,000) 29,000 (7,000) $22,000

Ex. 223 The comparative balance sheets for Acme Company appear below: ACME COMPANY Comparative Balance Sheets Dec. 31, 2025

Dec. 31, 2024

Cash Accounts receivable Inventory Prepaid insurance

$ 38,000 18,000 25,000 7,000

$13,000 14,000 15,000 9,000

Stock investments Equipment Accumulated depreciation—equipment Total assets

-060,000 (18,000) $130,000

18,000 30,000 (14,000) $85,000

Assets

Liabilities and Stockholders' Equity Accounts payable Bonds payable Common stock Retained earnings Total liabilities and stockholders' equity

$ 25,000 37,000 40,000 28,000 $130,000

$ 7,000 45,000 23,000 10,000 $85,000

Additional information: 1. Net income for the year ending December 31, 2025, was $30,000. 2. Cash dividends of $12,000 were declared and paid during the year. 3. Stock investments that had a book value of $18,000 were sold for $13,000. 4. Sales for 2025 are $130,000. Instructions Prepare a statement of cash flows for the year ended December 31, 2025 using the indirect method. Ans: N/A, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Indirect Method, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Statement of Cash Flows

12-61

Solution 223 ACME COMPANY Statement of Cash Flows For the Year Ended December 31, 2025 Cash flows from operating activities Net income ................................................................................. Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ........................................................ Loss on sale of stock investments ...................................... Increase in accounts receivable ......................................... Decrease in prepaid insurance .......................................... Increase in inventory .......................................................... Increase in accounts payable ............................................ Net cash provided by operating activities ........................... Cash flows from investing activities Sale of stock investments ............................................................ Purchase of equipment ............................................................... Net cash used by investing activities .................................. Cash flows from financing activities Issuance of common stock ......................................................... Retirement of bonds payable ...................................................... Payment of cash dividends ......................................................... Net cash used by financing activities ................................. Net increase in cash ............................................................................ Cash at beginning of period ................................................................ Cash at end of period ..........................................................................

$30,000 $ 4,000 5,000 (4,000) 2,000 (10,000) 18,000

15,000 45,000

13,000 (30,000) (17,000) 17,000 (8,000) (12,000) (3,000) 25,000 13,000 $38,000

Ex. 224 The comparative balance sheets for the A1 Beauty Supply Corporation is presented below: A1 BEAUTY SUPPLY CORPORATION Comparative Balance Sheets 2025 Assets Cash $ 37,000 Accounts receivable (net) 80,000 Prepaid insurance 22,000 Land 18,000 Equipment 70,000 Accumulated depreciation—equipment (20,000) Total Assets $207,000

2024 $ 31,000 60,000 17,000 40,000 60,000 (13,000) $195,000

12-62 Ex. 224

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

(Cont.)

Liabilities and Stockholders' Equity Accounts payable $ 12,000 Bonds payable 27,000 Common stock 140,000 Retained earnings 28,000 Total liabilities and stockholders' equity $207,000

$ 6,000 19,000 115,000 55,000 $195,000

Additional information: 1. Net loss for 2025 is $12,000. Net sales for 2025 are $250,000. 2. Cash dividends of $15,000 were declared and paid in 2025. 3. Land was sold for cash at a loss of $2,000. This was the only land transaction during the year. 4. Equipment with a cost of $15,000 and accumulated depreciation of $10,000 was sold for $5,000 cash. 5. $12,000 of bonds were retired during the year at carrying (book) value. 6. Equipment was acquired for common stock. The fair value of the stock at the time of the exchange was $25,000. Instructions Prepare a statement of cash flows for the year ended 2025 using the indirect method. Ans: N/A, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Indirect Method, Bloom: AP, Difficulty: Medium, Min: 22, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 224 A1 BEAUTY SUPPLY CORPORATION Statement of Cash Flows For the Year Ended December 31, 2025

Cash flows from operating activities Net loss ................................................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense (a)......................................................... $17,000 Loss on disposal of plant assets.......................................... 2,000 Increase in accounts receivable ................................................ (20,000) Increase in prepaid insurance ............................................ (5,000) Increase in accounts payable ............................................. 6,000 Net cash used by operating activities ................................. Cash flows from investing activities Proceeds from the sale of land (b) ............................................... 20,000 Proceeds from the sale of equipment ............................................... 5,000 Net cash provided by investing activities .............................

$(12,000)

0 (12,000)

25,000

Statement of Cash Flows

Solution 224

12-63

(Cont.)

Cash flows from financing activities Retirement of bonds payable ...................................................... Issuance of bonds payable (c)..................................................... Payment of dividends ................................................................. Net cash used by financing activities ................................. Increase in cash .................................................................................. Cash at beginning of period ................................................................ Cash at end of period ..........................................................................

(12,000) 20,000 (15,000)

Noncash investing and financing activities Purchase of equipment through the issuance of common stock . (a)

Accumulated Depreciation 12/31/24 Accumulated Depreciation 12/31/25 Difference Add: Accumulated depreciation on equipment sold Depreciation expense

$13,000 20,000 7,000 10,000 17,000

(b)

Cost of land sold Less: Loss on disposal of land Proceeds from sale of land

$22,000 (2,000) $20,000

(c)

Bonds Payable 12/31/24 Retirement of bonds Difference Add: Bonds issued Bonds Payable 12/31/25

$19,000 (12,000) 7,000 20,000 $27,000

(7,000) 6,000 31,000 $37,000

$25,000

Ex. 225 Information for two companies in the same industry, Corporation A and Corporation B, is presented here. Corporation A Corporation B Cash provided by operating activities $140,000 $140,000 Net earnings Capital expenditures Dividends paid

200,000 60,000 5,000

200,000 90,000 10,000

Instructions Compute the free cash flow for each company. Ans: N/A, LO: 3, Topic: Analyzing the Statement of Cash Flows, Subtopic: Free Cash Flow, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

12-64

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 225 Cash provided by operating activities Less: Capital expenditures Dividends paid Free cash flow

Corporation A

Corporation B

$140,000 (60,000) (5,000) $ 75,000

$140,000 (90,000) (10,000) $ 40,000

*Ex. 226 Condensed financial data of Ace Supply Company appear below: ACE SUPPLY COMPANY Comparative Balance Sheets December 31 2025

2024

$ 70,000 82,000 120,000 19,000 80,000 310,000 (65,000) $616,000

$ 35,000 53,000 132,000 25,000 65,000 250,000 (60,000) $500,000

$ 85,000 22,000 130,000 245,000 134,000 $616,000

$ 75,000 24,000 150,000 170,000 81,000 $500,000

Assets Cash Accounts receivable Inventories Prepaid expenses Investments Plant assets Accumulated depreciation—Plant Assets Total Liabilities and Stockholders' Equity Accounts payable Accrued expenses payable Bonds payable Common stock Retained earnings Total

ACE SUPPLY COMPANY Income Statement For the Year Ended December 31, 2025 Sales Less:

$480,000

Cost of goods sold Operating expenses (excluding depreciation) Depreciation expense Income taxes Interest expense Loss on disposal of plant assets Net income

$290,000 60,000 17,000 15,000 13,000 8,000

403,000 $ 77,000

Additional information: 1. New plant assets costing $85,000 were purchased for cash in 2025. 2. Old plant assets costing $25,000 were sold for $5,000 cash when book value was $13,000. 3. Bonds with a face value of $20,000 were converted into $20,000 of common stock. 4. A cash dividend of $24,000 was declared and paid during the year. 5. Accounts payable pertain to merchandise purchases.

Statement of Cash Flows

Ex. 226

12-65

(Cont.)

Instructions Prepare a statement of cash flows for the year using the direct method. Ans: N/A, LO: 4, Topic: Statement of Cash Flows—Direct Method, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 226 ACE SUPPLY COMPANY Statement of Cash Flows For the Year Ended December 31, 2025 Cash flows from operating activities Cash receipts from customers ($480,000 – $29,000) Cash payments: To suppliers For operating expenses For income taxes For interest Net cash provided by operating activities Cash flows from investing activities Purchase of investments Purchase of plant assets Sale of plant assets Net cash used by investing activities Cash flows from financing activities Issuance of common stock Payment of cash dividends Net cash provided by financing activities Net increase in cash Cash at beginning of period Cash at end of period

$451,000 $268,000 56,000 15,000 13,000

352,000 99,000

(15,000) (85,000) 5,000 (95,000) 55,000 (24,000) 31,000 35,000 35,000 $ 70,000

Noncash investing and financing activities Conversion of bonds payable into common stock

$ 20,000

(a)

Cost of goods sold Deduct: Decrease in inventory Purchases Deduct: Increase in accounts payable Cash payments to suppliers

$290,000 (12,000) 278,000 (10,000) $268,000

(b)

Operating expenses Deduct: Decrease in prepaid expenses Add: Decrease in accrued expenses payable Cash payments for operating expenses

$60,000 (6,000) 2,000 $56,000

(a) (b)

12-66

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

*Ex. 227 The income statement of Ace Company is shown below: ACE COMPANY Income Statement For the Year Ended December 31, 2025 Sales Cost of goods sold Gross profit Operating expenses Selling and administrative expenses Depreciation expense Amortization expense Net income

$8,500,000 5,300,000 3,200,000 $1,210,000 70,000 30,000

1,310,000 $1,890,000

Additional information: 1. Accounts receivable increased by $600,000 during the year. 2. Inventory increased by $250,000 during the year. 3. Prepaid expenses increased by $150,000 during the year. 4. Accounts payable to merchandise suppliers increased by $125,000 during the year. 5. Accrued expenses payable increased by $180,000 during the year. Instructions Prepare the operating activities section of the statement of cash flows for the year ended December 31, 2025 for Ace Company using the direct method. Ans: N/A, LO: 4, Topic: Statement of Cash Flows—Direct Method, Subtopic: Step 1: Operating Activities, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 227 ACE COMPANY Statement of Cash Flows For the Year Ended December 31, 2025 Cash flows from operating activities Cash receipts from customers (1) Cash payments: To suppliers (2) For operating expenses (3) Net cash provided by operations

$7,900,000 $5,425,000 1,180,000

(1)

Sales Deduct: Increase in accounts receivable Cash receipts from customers

$8,500,000 (600,000) $7,900,000

(2)

Cost of goods sold Add: Increase in inventory Purchases Deduct: Increase in accounts payable Cash payments to suppliers

$5,300,000 250,000 5,550,000 (125,000) $5,425,000

6,605,000 $1,295,000

Statement of Cash Flows

Solution 227 (3)

12-67

(Cont.)

Operating expenses exclusive of depreciation and amortization Add: Increase in prepaid expenses Deduct: Increase in accrued expenses payable Cash payments for operating expenses

$1,210,000 150,000 (180,000) $1,180,000

Ex. 228 The financial statements of A1 Outfitters appear below: A1 OUTFITTERS Comparative Balance Sheets December 31 2025

2024

$ 47,000 21,000 22,000 50,000 (20,000) $120,000

$ 25,000 34,000 15,000 78,000 (24,000) $128,000

$ 12,000 13,000 10,000 41,000 44,000 $120,000

$ 31,000 10,000 25,000 24,000 38,000 $128,000

Assets Cash Accounts receivable Inventory Property, plant, and equipment Accumulated depreciation Total Liabilities and Stockholders' Equity Accounts payable Income taxes payable Bonds payable Common stock Retained earnings Total

A1 OUTFITTERS Income Statement For the Year Ended December 31, 2025 Sales Cost of goods sold Gross profit Selling expenses Administrative expenses Income from operations Interest expense Income before income taxes Income tax expense Net income

$350,000 280,000 70,000 $20,000 16,000

36,000 34,000 4,000 30,000 8,000 $ 22,000

12-68 Ex. 228

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

(Cont.)

The following additional data were provided: 1. Dividends declared and paid were $16,000. 2. During the year, equipment was sold for $12,000 cash. This equipment cost $28,000 originally and had a book value of $12,000 at the time of sale. 3. All depreciation expense is in the selling expense category. 4. All sales and purchases are on account. 5. Accounts payable pertain to merchandise suppliers. 6. All operating expenses except for depreciation were paid in cash. Instructions Prepare a statement of cash flows for A1 Outfitters using the direct method. Ans: N/A, LO: 4, Topic: Statement of Cash Flows—Direct Method, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 22, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 228 A1 OUTFITTERS Statement of Cash Flows For the Year Ended December 31, 2025 Cash flows from operating activities Cash receipts from customers ($350,000 + $13,000) Cash payments: To suppliers For operating expenses For interest expense For income taxes ($8,000 – $3,000) Net cash provided by operating activities Cash flows from investing activities Sale of equipment Cash flows from financing activities Redemption of bonds payable Issuance of common stock Payment of cash dividends Net cash used by financing activities Net increase in cash Cash at beginning of period Cash at end of period

$363,000 $306,000 (a) 24,000 (b) 4,000 5,000

12,000 (15,000) 17,000 (16,000) (14,000) 22,000 25,000 $ 47,000

(a)

Cost of goods sold Add: Increase in inventory Purchases Add: Decrease in accounts payable Cash payments to suppliers

$280,000 7,000 287,000 19,000 $306,000

(b)

Operating expenses Less: Depreciation expense Cash payments for operating expenses

$36,000 (12,000)* $24,000

*$24,000 – $16,000 = $8,000 balance in accumulated depreciation after sale. Ending balance, $20,000 – $8,000 = $12,000 depreciation expense.

339,000 24,000

Statement of Cash Flows

12-69

Ex. 229 Ace Water Sports Company completed its first year of operations on December 31, 2025. Its initial income statement showed that the company had revenues of $207,000 and operating expenses of $108,000. Accounts receivable and accounts payable balances at year-end reflected increases of $80,000 and $28,000, respectively. Assume that accounts payable related to operating expenses. Ignore income taxes. Instructions Compute net cash provided by operating activities using the direct method. Ans: N/A, LO: 4, Topic: Statement of Cash Flows—Direct Method, Subtopic: Step 1: Operating Activities, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

*Solution 229 Revenues.................................................................... Deduct: Increase in accounts receivable ..................... Cash receipts from customers* .............................. Operating expenses .................................................... Deduct: Increase in accounts payable......................... Cash payments for operating expenses** .............. Net cash provided by operating activities ....................

$207,000 (80,000) $127,000 108,000 (28,000) 80,000 $ 47,000

Ex. 230 In a recent year, the income statement for McDonald's Corporation reported cost of goods sold $6,175.6 million and operating expenses (including depreciation expense of $1,214.1 million) $18,907.6 million. The comparative balance sheet for the year shows that inventory increased $12.9 million, prepaid expenses increased $102.9 million, accounts payable (merchandise suppliers) decreased $44.6 million, and accrued expenses payable increased $162.4 million. Instructions Using the direct method, compute (a) cash payments to suppliers and (b) cash payments for operating expenses. Ans: N/A, LO: 4, Topic: Statement of Cash Flows—Direct Method, Subtopic: Step 1: Operating Activities, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

12-70 Solution 230 (a)

(b)

Cash payments to suppliers Cost of goods sold ............................... Add: Increase in inventory .................... Cost of purchase .................................. Add: Decrease in accounts payable................................................ Cash payments to suppliers ................. Cash payments for operating expenses Operating expenses exclusive of depreciation ($18,907.6 – $1,214.1) ..................... Add: Increase in prepaid expenses..................................... Deduct: Increase in accrued expenses payable ........................... Cash payments for operating expenses........................................

$6,175.6 million 12.9 $6,188.5 million 44.6 $6,233.1 million

$17,693.5 million $102.9 (162.4)

(59.5) $17,634.0 million

COMPLETION STATEMENTS 231. A statement of cash flows summarizes the operating, activities of an entity.

, and

Ans: N/A, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Format of the Statement of Cash Flows, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

232. The cash effects of selling goods and services is reported in the section of a statement of cash flows.

activities

Ans: N/A, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Classification of Cash Flows, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

233. Net cash provided/used by operating activities can be determined using the method or the method. Ans: N/A, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Indirect and Direct Methods, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

234.

Using the indirect approach, noncash charges in the income statement are to net income and noncash credits are to compute cash provided by operations.

Ans: N/A, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Step 1: Operating Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

235. If accounts receivable increases during a period, revenues on an accrual basis are than revenues on a cash basis. Ans: N/A, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Changes in Noncash Current Assets, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Statement of Cash Flows

236. The sale of equipment at less than its book value is a(an) reported in the activities section.

12-71

of cash that is

Ans: N/A, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Increase (Decrease) in Equipment, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

237. During the phase of the corporate life cycle, cash from operations and net income are approximately the same. Ans: N/A, LO: 3, Topic: Analyzing the Statement of Cash Flows, Subtopic: The Corporate Life Cycle, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

238. During the growth phase of the corporate life cycle, a company will start to generate small amounts of cash . Ans: N/A, LO: 3, Topic: Analyzing the Statement of Cash Flows, Subtopic: The Corporate Life Cycle, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

239.

describes the net cash provided by operating activities after adjustment for capital expenditures and dividends.

Ans: N/A, LO: 3, Topic: Analyzing the Statement of Cash Flows, Subtopic: Free Cash Flow, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

240. Cost of goods sold for the year amounted to $100,000, and during the year, inventory by $7,000 and accounts payable by $3,000 resulting in cash paid to suppliers of $90,000. Ans: N/A, LO: 4, Topic: Statement of Cash Flows—Direct Method, Subtopic: Step 1: Operating Activities, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

241.

In computing cash payments for operating expenses, a decrease in prepaid expenses is and an increase in accrued expenses payable is to (from) operating expenses, exclusive of depreciation.

Ans: N/A, LO: 4, Topic: Statement of Cash Flows—Direct Method, Subtopic: Cash Payments for Operating Expenses, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

242.

In computing cash payments for income taxes, a decrease in income taxes payable is to (from) income tax expense.

Ans: N/A, LO: 4, Topic: Statement of Cash Flows—Direct Method, Subtopic: Cash Payments for Income Taxes Expense, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

243.

Under the direct method, the two largest classes of items in the operating activities section for a merchandising company are cash and cash .

Ans: N/A, LO: 4, Topic: Statement of Cash Flows—Direct Method, Subtopic: Step 1: Operating Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Answers to Completion Statements 231. investing, financing (or vice versa) 232. operating 233. indirect, direct (or vice versa) 234. added, subtracted 235. higher (greater) 236. inflow, investing 237. maturity 238. from operations

239. free cash flow 240. decreased, increased 241. deducted, deducted 242. added 243. receipts from customers, payments to suppliers

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

12-72

MATCHING Set 1 — Indirect Method 244. For each of the following items, indicate by using the appropriate code letter, how the item should be reported in the statement of cash flows, using the indirect method. A. B. C. D. E. F. G.

Added to net income Deducted from net income Cash outflow—investing activity Cash inflow—investing activity Cash outflow—financing activity Cash inflow—financing activity Significant noncash investing and financing activity 1. Decrease in accounts payable during a period 2. Declaration and payment of a cash dividend 3. Loss on disposal of land 4. Decrease in accounts receivable during a period 5. Redemption of bonds for cash 6. Proceeds from the sale of equipment at book value 7. Issuance of common stock for cash 8. Purchase of a building for cash 9. Acquisition of land in exchange for common stock

10. Increase in inventory during a period Ans: N/A, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Indirect Method, Bloom: AP, Difficulty: Easy, Min: 5, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Answers to Matching Set 1 1. 2. 3. 4. 5.

B E A A E

6. 7. 8. 9. 10.

D F C G B

Statement of Cash Flows

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Set 2 — Direct Method 245. For each of the following items, indicate by using the appropriate code letter, how the item should be reported in the statement of cash flows, using the direct method. A. B. C. D. E. F. G. H. I. J.

Added in determining cash receipts from customers Deducted in determining cash receipts from customers Added in determining cash payments to suppliers Deducted in determining cash payments to suppliers Cash outflow—investing activity Cash inflow—investing activity Cash outflow—financing activity Cash inflow—financing activity Significant noncash investing and financing activity Is not shown

Decrease in accounts payable during a period

Declaration and payment of a cash dividend

Decrease in accounts receivable during a period

Depreciation expense

Conversion of bonds payable into common stock

Decrease in inventory during a period

Sale of equipment for cash at book value

Issuance of common stock for cash

Purchase of land for cash

10. Loss on sale of a plant asset Ans: N/A, LO: 4, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Indirect and Direct Method, Bloom: AP, Difficulty: Easy, Min: 5, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Answers to Matching Set 2 1. 2. 3. 4. 5.

C G A J I

6. 7. 8. 9. 10.

D F H E J

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

SHORT-ANSWER ESSAY QUESTIONS S-A E 246 Why is the statement of cash flows useful? Ans: N/A, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Usefulness of the Statement of Cash Flows, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Communications, IMA: Reporting

Solution 246 The statement of cash flows is useful because it provides information to the investors, creditors, and other users about: (1) the company's ability to generate future cash flows, (2) the company's ability to pay dividends and meet obligations, (3) the reasons for the difference between net income and net cash provided by operating activities, and (4) the cash and noncash financing and investing transactions during the period. S-A E 247 Distinguish among the three activities reported in the statement of cash flows. Ans: N/A, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Classification of Cash Flows, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 247 The three activities are: Operating activities include the cash effects of transactions that create revenues and expenses and thus enter into the determination of net income. Investing activities include: (a) purchasing and disposing of investments and productive long-lived assets and (b) lending money and collecting loans. Financing activities include (a) obtaining cash from issuing debt and repaying amounts borrowed and (b) obtaining cash from stockholders, repurchasing shares, and paying stockholders dividends. S-A E 248 The statement of cash flows is the only required financial statement that is not prepared from an adjusted trial balance. What are the sources of information for preparing a statement of cash flows? Explain how the accrual basis of accounting affects the statement of cash flows. Ans: N/A, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: NA, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 248 The information used to prepare the statement of cash flows usually comes from three sources. These sources are (1) a comparative balance sheet, (2) a current income statement, and (3) additional information. The accrual basis of accounting requires that revenues be recorded when earned and that expenses be recorded when incurred. Thus, net income may include earned revenues for which cash has not yet been collected and include incurred expenses that have not yet been paid for in cash. These noncash revenues and noncash expenses do not affect the cash balance. Therefore, the noncash revenues and noncash expenses must be eliminated to determine the net cash provided by operating activities. S-A E 249 When preparing a statement of cash flows using the indirect method, why is depreciation added .

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back to net income within the operating activities section? Ans: N/A, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Depreciation Expense, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 249 The indirect method begins with net income based on accrual accounting. This includes a legitimate deduction for depreciation expense. However, depreciation expense does not represent a cash outflow and thus must be added back to net income to cancel the deduction. *S-A E 250 Cash flows from operating activities can be calculated using the indirect or direct method. Briefly describe how the two methods differ yet arrive at the same dollar amount for net cash provided by operating activities. Ans: N/A, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: Indirect and Direct Methods, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: Communication, IMA: Reporting

*Solution 250 The indirect method (or reconciliation method) starts with net income and converts it to the net cash provided by operating activities. There are two types of adjustments: (1) changes in non-cash current assets and current liabilities and (2) noncash charges and credits. For example, an increase in accounts receivable is deducted from net income and an increase in accounts payable is added to net income. Similarly, a noncash charge for depreciation expense is added to net income. The adjustments are the difference between net income and the net cash provided by operating activities. Under the direct method, net cash provided by operating activities is computed by adjusting each item in the income statement from the accrual to the cash basis. Within the operating activities section, only major classes of operating cash receipts and cash payments are reported. The classes include cash receipts from customers and cash payments to suppliers. The difference between these major classes is the net cash provided by operating activities. The same adjustments are used in both methods, regardless of whether net income is adjusted or individual revenues and expenses are adjusted. Therefore, both methods arrive at the same result. S-A E 251 How is it possible for a company to suffer a net loss for a given year, yet produce a positive net cash flow from operating activities? Ans: N/A, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: NA, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Communications, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 251 A net loss results when accrual-based expenses exceeded accrual-based revenues for the period. However, if you eliminate the effect of (add back) such noncash expenses as depreciation and amortization, it is possible to have produced a positive net cash flow from operations. Increasing payables (not paying all expenses incurred this period) and decreasing receivables (collecting more receivables than sales) this period would also cause cash flow to be higher than related net income or loss. S-A E 252 (a) What are the phases of the corporate life cycle? .

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

(b) What effect does each phase have on the numbers reported in a statement of cash flows? Ans: N/A, LO: 3, Topic: Analyzing the Statement of Cash Flows, Subtopic: The Corporate Life Cycle, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Communications, IMA: Reporting

Solution 252 (a)

The phases of the corporate life cycle are the introductory phase, the growth phase, the maturity phase, and the decline phase.

(b)

During the introductory phase, cash from operations and investing would be expected to be negative, and cash from financing activities would be positive. During the growth phase, a company would be expected to show some small amounts of cash from operations while continuing to show negative cash from investing and positive cash from financing activities. During the maturity phase, cash from operations, investing, and financing activities would all be expected to be positive while in the decline phase, cash from operations and investing would continue to be positive while cash from financing activities would be negative.

S-A E 253 When preparing a statement of cash flows using the direct method, why must the sales revenue figure be adjusted to arrive at cash receipts from sales? Ans: N/A, LO: 4, Topic: Preparing the Statement of Cash Flows—Direct Method, Subtopic: Cash Receipts from Customers, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Communications, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 253 Sales revenue is an accrual-based figure that includes both cash and credit sales for the period. The statement of cash flows is to report the cash collections for the period, whether or not the sale arose in that period or whether the credit sale had yet to be collected. An adjustment based on the change in accounts receivable accomplishes this conversion.

Statement of Cash Flows

S-A E 254

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(Ethics)

Acme Trading Company's most recent financial statements showed dismal performance. There was a net loss of $10,000 and the statement of cash flows showed a net cash decrease in all categories. The company president called all the managers together and asked them to do all they could to make sure the next quarter's performance was better. Kim Kardashian, manager of the manufacturing division, sold off old manufacturing equipment. She also reclassified several workers to part-time (30 hours per week) and hired additional temporary workers to take up the slack. This saved the company money since part-time workers do not have the same insurance and other benefits as full-time workers. Ryan Seacrest, the financial manager, immediately suspended payments on all accounts except those on which interest would accrue. He also instituted aggressive collection procedures. Required: 1. Were Kim Kardashian's actions ethical? Explain. 2. Were Ryan Seacrest’s actions ethical? Explain. 3. Were the company president's actions ethical? Explain. Ans: N/A, LO: 2, Topic: Preparing the Statement of Cash Flows—Indirect Method, Subtopic: NA, Bloom: E, Difficulty: Medium, Min: 5, AACSB: Ethics, AICPA BC: Governance Perspective, AICPA AC: None, AICPA PC: Communications, IMA: Professional Ethics and Values

Solution 254 1. There is a valid question as to whether Kim Kardashian's actions are ethical or not. Either answer could be considered correct. On the one hand, she was probably within her legal rights to reclassify the workers. She also might be commended for allowing more workers to have a job than was previously the case. On the other hand, she has removed a very real benefit from the former full-time workers, and she has done it fairly arbitrarily. She may have harmed morale and harmed the company if the workers quit and new workers have to be hired. 2. Ryan Seacrest’s actions all appear to be ethical. 3. The company president may have placed undue pressure on the employees to show better results. The managers may feel that they need to sacrifice the long-term goals of the firm for short-term benefits. S-A E 255

(Communication)

You are the accountant for a small manufacturing firm. Your company is privately held, so there is no current requirement to issue financial statements using GAAP. You were hired four years ago, and at that time you instituted a cash budgeting system. Presently, you prepare a schedule of predicted cash sources and cash needs at the end of each week for the following week. Katy Perry, the company's president, has asked whether a statement of cash flows would also be useful. Required: Prepare a short memorandum to the president indicating whether you believe such an addition to the financial statements to be useful. Include in your memo the benefits that might be expected from a statement of cash flows and whether those are different from the benefits of a cash sources and cash needs listing. Ans: N/A, LO: 1, Topic: Usefulness and Format of the Statement of Cash Flows, Subtopic: Usefulness of the Statement of Cash Flows, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

12-78 Solution 255 TO:

Katy Perry

FROM: Student Name RE:

Statement of Cash Flows vs. Cash Sources and Needs

You asked whether a statement of cash flows would be useful, in addition to the cash sources and needs schedule. In my opinion, the statement of cash flows would be extremely useful. It gives different information than the cash sources and needs does. A statement of cash flows would provide historical information about where we got the funds for operating, financing, and investing activities, as well as how we used the funds. The cash sources and needs statement, on the other hand, is a prediction of the cash we will need and the source from which it will be obtained. One is our plan; the other is our result. Please let me know if you'd like more details about the statement of cash flows. (signed)

Statement of Cash Flows

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IFRS QUESTIONS 1. Under IFRS, the cash flow statement can be prepared using a. the direct method only. b. the indirect method only. c. either the direct or indirect method. d. the T-account method only. Ans: c, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: FSA

2. Under IFRS, bank overdrafts are classified as a. operating activities. b. investing activities. c. financing activities. d. cash and cash equivalents. Ans: d, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: FSA

3. Which of the following activities is excluded from the statement of cash flows under IFRS? a. Financing activities b. Investing activities c. Noncash investing and financing activities d. Operating activities Ans: c, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: FSA

4. Each of the following items may be classified as operating or financing activities under IFRS except a. dividends paid. b. dividends received. c. interest paid. d. All of these answer choices may be classified as such. Ans: b, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: FSA

5. Under IFRS, some companies present which section of the cash flow statement as a single line item? a. Operating activities b. Investing activities c. Financing activities d. Noncash investing and financing activities Ans: a, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: FSA

CHAPTER 13 FINANCIAL ANALYSIS: THE BIG PICTURE CHAPTER LEARNING OBJECTIVES 1. Apply the concept of sustainable income and quality of earnings. Sustainable income analysis is useful in evaluating a company’s performance. Sustainable income is the most likely level of income to be obtained by the company in the future. Discontinued operations and other comprehensive income are presented on the statement of comprehensive to highlight their unusual nature. Items below income from continuing operations must be presented net of tax. A high quality of earnings provides full and transparent information that will not confuse or mislead users of the financial statements. Issues related to quality of earnings are (1) alternative accounting methods, (2) pro forma income, and (3) improper recognition. 2. Apply horizontal analysis and vertical analysis. Horizontal analysis is a technique for evaluating a series of data over a period of time to determine the increase or decrease that has taken place, expressed as either an amount or a percentage. Vertical analysis is a technique that expresses each item in a financial statement as a percentage of a relevant total or a base amount. 3. Analyze a company's performance using ratio analysis. The price-earnings (P-E) ratio reflects investors' assessment of a company's future earnings potential. Financial ratios are provided in Illustration 13.14 (liquidity), Illustration 13.15 (solvency) and Illustration 13.16 (profitability). Analysis is enhanced by intracompany, intercompany, and industry comparisons of these three classes of ratios.

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Difficulties: Easy: 148 Medium: 114 Hard: 18

Question List by Section Apply the concepts of sustainable income and quality of earnings: 59, 227, 276, 280 Sustainable income: 1, 47, 48, 51, 53, 60, 78, 81, 82, 83, 84, 275 Discontinued Operations: 2, 3, 6, 50, 54, 58, 61, 64, 65, 66, 261 Comprehensive Income: 4, 8, 9, 62, 63, 67, 68, 69, 76, 77 Illustration of Comprehensive Income: 70, 71, 85 Format: 49, 56, 57, 80, 228, 229 Changes in Accounting Principle: 5, 7, 52, 55, 262 Quality of Earnings: 74, 75, 279 Alternative Accounting Methods: 10, 73 Pro Forma Income: 12 Improper Recognition: 11, 72, 79 Apply horizontal analysis and vertical analysis: 30, 86, 87, 88, 89, 90, 91, 92, 93, 94, 130, 236, 251, 252, 253, 277 Horizontal analysis: 13, 14, 15, 16, 17, 95, 96, 97, 98, 99, 100, 101, 102, 103, 104, 105, 106, 107, 108, 109, 110, 111, 112, 113, 230, 231, 235, 250, 263 Vertical analysis: 18, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 114, 115, 116, 117, 118, 119, 120, 121, 122, 123, 124, 125, 126, 127, 128, 129, 131, 132, 232, 233, 234, 237, 238, 248, 249, 254, 264 Analyze a company’s performance using ratio analysis: 133, 134, 144, 148, 151, 182, 265, 273, 274, 278 Liquidity Ratios: 31, 32, 33, 40, 45, 135, 136, 145, 146, 149, 150, 152, 154, 155, 156, 157, 158, 159, 160, 161, 162, 163, 164, 165, 166, 167, 178, 179, 180, 181, 183, 184, 185, 186, 187, 188, 189, 190, 191, 192, 193, 194, 195, 196, 197, 203, 204, 205, 210, 211, 217, 218, 219, 220, 224, 225, 226, 243, 244, 247, 267, 268, 269, 270 Solvency Ratios: 36, 39, 41, 42, 43, 44, 138, 141, 142, 143, 153, 173, 174, 175, 176, 177, 212, 213, 216, 245, 246, 266, 272 Profitability Ratios: 34, 35, 37, 38, 137, 139, 140, 147, 168, 169, 170, 171, 172, 198, 199, 200, 201, 202, 206, 207, 208, 209, 214, 215, 221, 222, 223, 241, 245, 246, 271 Financial Analysis and Data Analytics: 46 Comprehensive Example of Ratio Analysis: 239, 240, 242, 255, 256, 257, 258, 259, 260

Financial Analysis: The Big Picture

13-3

TRUE-FALSE STATEMENTS 1.

Analysts are interested in sustainable income, which is equal to the past year’s net income.

Ans: F, LO: 1, Topic: Sustainable Income, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

One objective of the income statement is to separate the results of continuing operations from those of discontinued operations.

Ans: T, LO: 1, Topic: Sustainable Income, Subtopic: Discontinued Operations, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

When the disposal of a significant segment occurs, the income statement should report both income from continuing operations and income (loss) from discontinued operations.

Other comprehensive income includes all changes in stockholder's equity during a period including those changes resulting from investments by stockholders.

Ans: F, LO: 1, Topic: Sustainable Income, Subtopic: Comprehensive Income, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Companies report the effects of most changes in accounting principle in the current period.

Ans: F, LO: 1, Topic: Sustainable Income, Subtopic: Change in Accounting Principle, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

The loss on the disposal of a significant component of a business is disclosed in the statement of retained earnings.

Ans: F, LO: 1, Topic: Sustainable Income, Subtopic: Discontinued Operations, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

A change in accounting principle occurs when the principle used in the current year is different from the one used by competitors in the current year.

Comprehensive income includes all changes in stockholders’ equity during a period except those resulting from investments by stockholders and distributions to stockholders.

Ans: T, LO: 1, Topic: Sustainable Income, Subtopic: Comprehensive Income, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Comprehensive income includes all revenues, expenses, gains, losses, and dividends.

10.

The use of alternative accounting methods can affect the quality of a company’s earnings.

Ans: T, LO: 1, Topic: Quality of Earnings, Subtopic: Alternative Accounting Methods, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

11.

Improper recognition of income is not one of the factors affecting the quality of earnings.

Ans: F, LO: 1, Topic: Quality of Earnings, Subtopic: Improper Recognition, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

12.

Because pro forma earnings are based on specific rules, these amounts are highly reliable.

Ans: F, LO: 1, Topic: Quality of Earnings, Subtopic: Pro Forma Income, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

13-4 13.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

In horizontal analysis, the base year is the most current year being examined.

Ans: F, LO: 2, Topic: Apply Horizontal and Vertical Analysis, Subtopic: Horizontal Analysis, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

14.

Horizontal analysis is a technique for evaluating a financial statement item in the current year with other items in the current year.

15.

Another name for horizontal analysis is trend analysis.

Ans: T, LO: 2, Topic: Apply Horizontal and Vertical Analysis, Subtopic: Horizontal Analysis, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

16.

If a company has sales of $130 in 2025 and $182 in 2024, the percentage decrease in sales from 2024 to 2025 is 40%.

Ans: F, LO: 2, Topic: Apply Horizontal and Vertical Analysis, Subtopic: Horizontal Analysis, Bloom: AP, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: ($130 - $182) / $182 = -28.57% (2025 Sales – 2024 Sales) 2024 Sales

17.

In horizontal analysis, if an item has a negative amount in the base year, and a positive amount in the following year, a percentage change for that item can be computed but the result can be misleading.

Ans: T, LO: 2, Topic: Apply Horizontal and Vertical Analysis, Subtopic: Horizontal Analysis, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

18.

A primary purpose of vertical analysis is to observe trends over a three-year period.

Ans: F, LO: 2, Topic: Apply Horizontal and Vertical Analysis, Subtopic: Vertical Analysis, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

19.

Vertical analysis is a technique for evaluating a series of financial statement data over a period of time to determine the increase (decrease) that has taken place.

20.

Common size analysis expresses each item in a financial statement as a percent of a base amount.

Ans: T, LO: 2, Topic: Apply Horizontal and Vertical Analysis, Subtopic: Vertical Analysis, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

21.

In a common-size income statement, net sales are represented by 100%.

22.

In a common-size income statement, each item is expressed as a percentage of net income.

23.

In a common-size balance sheet, total assets are represented by 100%.

Financial Analysis: The Big Picture

24.

13-5

In the vertical analysis of a balance sheet, the base for current liabilities is total liabilities.

25.

Vertical analysis is useful in making comparisons of companies of different sizes.

26.

Using vertical analysis of the income statement, a company's net income as a percentage of net sales is 15%; therefore, the cost of goods sold as a percentage of sales must be 85%.

Ans: F, LO: 2, Topic: Apply Horizontal and Vertical Analysis, Subtopic: Vertical Analysis, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

27.

In the vertical analysis of an income statement, each item is generally stated as a percentage of net income.

28.

Intracompany comparisons of the same financial statement items are often useful to detect changes in financial relationships and significant trends.

29.

Comparisons of company data with industry averages provide information about a company's relative position within the industry.

30.

Horizontal, vertical, and circular analyses are the basic tools of financial statement analysis.

Ans: F, LO: 2, Topic: Apply Horizontal and Vertical Analysis, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

31.

Accounts receivable turnover is useful in assessing the profitability of receivables.

Ans: F, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

32.

Inventory turnover measures the number of times on average the inventory was sold during the period.

Ans: T, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

33.

Inventory turnover is a measure of liquidity that focuses on efficient use of inventory.

34.

Profitability ratios are frequently used as a basis for evaluating management's operating effectiveness.

Ans: T, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Profitability Ratios, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

35.

Both profit margin and asset turnover affect a company’s return on assets.

Ans: T, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Profitability Ratios, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

13-6 36.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Leverage and return on equity are closely related.

Ans: T, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Solvency Ratios, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

37.

The return on assets will be greater than the rate of return on common stockholders' equity if the company has been successful in trading on the equity at a gain.

Ans: F, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Profitability Ratios, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

38.

The current ratio is one of the most utilized measures of profitability.

Ans: F, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Profitability Ratios, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

39.

From a creditor's point of view, the higher the debt to assets ratio, the lower the risk that the company may be unable to pay its obligations.

Ans: F, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Solvency Ratios, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

40.

A current ratio of 1.2 to 1 indicates that a company's current assets exceed its current liabilities.

Ans: T, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

41.

Using borrowed money to increase the rate of return on common stockholders' equity is called "trading on the equity."

42.

Declining profitability and liquidity ratios are indications that a company may not survive.

Ans: T, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Solvency Ratios, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

43.

Liquidity ratios measure the ability of the company to survive over a long period of time.

Ans: F, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Solvency Ratios, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

44.

A solvency ratio measures the income or operating success of a company for a given period of time.

45.

The current ratio is a measure of all the ratios calculated for the current year.

46.

Opportunities for investors to apply data analytics to financial data are limited.

Ans: F, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Financial Analysis and Data Analytics, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Data Analytics, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

Financial Analysis: The Big Picture

13-7

MULTIPLE CHOICE QUESTIONS 47.

Which of the following income statement figures would probably be the best indicator of a company’s future performance? a. Total revenues b. Income from operations c. Net income d. Gross profit

Ans: B, LO: 1, Topic: Sustainable Income, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

48.

Which of the following is the best definition of sustainable income? a. Sustainable income is a measure of solvency that does not include capital expenditure. b. Sustainable income is the same as net income. c. Sustainable income is income that is unusual in nature and infrequent in occurrence. d. Sustainable income is the most likely level of income to be obtained in the future.

Ans: D, LO: 1, Topic: Sustainable Income, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

49.

When preparing an income statement, which of the following is the proper order for income statement components? a. Comprehensive income, Other comprehensive income items, Net income b. Net income, Comprehensive income, Other comprehensive income items c. Net income, Other comprehensive income items, Comprehensive income d. Other comprehensive income items Net income, Comprehensive income

Ans: C, LO: 1, Topic: Sustainable Income, Subtopic: Format, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

50.

If a company has a discontinued operations gain of $30,000 and a 32% tax rate, what is the effect on net income? a. Increase of $30,000 b. Increase of $20,400 c. Increase of $9,600 d. No effect

Ans: B, LO: 1, Topic: Sustainable Income, Subtopic: Discontinued Operations, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $30,000  (1  .32)  $20,400 (Gain x (1- tax rate))

51.

All of the following are reported on the income statement net of tax except a. loss on operations from a discontinued division. b. other comprehensive income items. c. income from operations. d. loss on disposal of a division.

Ans: C, LO: 1, Topic: Sustainable Income, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

13-8 52.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Which of the following statements regarding changes in accounting principles is not true? a. Most changes in accounting principles are only reported in current periods when the principle change takes place. b. Changes in accounting principles are allowed when new principles are preferable to old ones. c. Most changes in accounting principles are retroactively reported. d. Consistency is one of the biggest concerns when a change in accounting principle is undertaken.

Ans: A, LO: 1, Topic: Sustainable Income, Subtopic: Change in Accounting Principle, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

53.

An income statement would not include a. other revenue and gains. b. income from operations. c. discontinued operations. d. dividends paid.

Ans: D, LO: 1, Topic: Sustainable Income, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

54.

The discontinued operations section of the income statement refers to a. discontinuance of a product line. b. the income or loss on products that have been completed and sold. c. obsolete equipment and discontinued inventory items. d. the disposal of a significant component of a business.

Ans: D, LO: 1, Topic: Sustainable Income, Subtopic: Discontinued Operations, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

55.

When a change in depreciation method occurs a. prior years' financial statements should be changed to reflect the newly adopted method. b. the change should be reported in current and future years. c. the cumulative effect of the change should be reflected on the income statement as of the beginning of the next year. d. the cumulative effect of the change in accounting principle should be classified as discontinued operations on the income statement.

Ans: B, LO: 1, Topic: Sustainable Income, Subtopic: Change in Accounting Principle, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

56.

The order of presentation of items that may appear on the statement of comprehensive income is a. Other comprehensive income, Discontinued operations, Income before income taxes. b. Discontinued operations, Other comprehensive income, Income before income taxes. c. Income before income taxes, Discontinued operations, Other comprehensive income. d. Income before income taxes, Other comprehensive income, Discontinued operations.

Ans: C, LO: 1, Topic: Sustainable Income, Subtopic: Format, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Financial Analysis: The Big Picture

57.

13-9

Which of the following items appears on the income statement before income before income taxes? a. Other comprehensive income. b. Comprehensive income. c. Other revenues and gains. d. Discontinued operations.

Ans: C, LO: 1, Topic: Sustainable Income, Subtopic: Format, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

58.

Which of the following statements is true with respect to a financial statement reporting a change in accounting principle? a. Comparability across periods is impaired. b. Only a footnote is required to report the change. c. Changes in both depreciation methods and inventory methods are reported retroactively. d. Management must show that the new accounting principle is preferable to the old method.

Ans: D, LO: 1, Topic: Sustainable Income, Subtopic: Discontinued Operations, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

59.

Acme Candy Company sold its toffee division resulting in a loss of $80,000. Assuming a tax rate of 25%, the loss on this disposal will be reported on the income statement at what amount? a. $100,000 b. $20,000 c. $80,000 d. $60,000

Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $80,000  (1  .25)  $60,000 (Loss x (1-tax rate))

60.

Which of the following is not reported net of tax on the statement of comprehensive income? a. Discontinued operations b. Other comprehensive income c. Other revenues and expenses d. Income from continuing operations

Ans: C, LO: 1, Topic: Sustainable Income, Subtopic: NA,, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

61.

Which of the following would not be considered an example of a discontinued operation? a. Shifting production processes within an operation b. Elimination of a major class of customers c. Elimination of an entire activity d. Disposal of a significant component of a business

Ans: A, LO: 1, Topic: Sustainable Income, Subtopic: Discontinued Operations, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

13-10 62.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Other comprehensive income is reported on the statement of comprehensive income immediately a. before income from continuing operations. b. after comprehensive income. c. before income before income taxes. d. after discontinued operations.

Ans: D, LO: 1, Topic: Sustainable Income, Subtopic: Comprehensive Income, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

63.

In reporting discontinued operations, the income statement should show in a special section 1. gains on the disposal of a discontinued component. 2. losses on the disposal of a discontinued component. a. 1 only. b. 2 only. c. neither 1 nor 2. d. both 1 and 2.

64.

The disposal of a significant component of a business is called a. a change in accounting principle. b. comprehensive income. c. an other expense. d. discontinued operations.

65.

Ace Inc. disposes of an unprofitable segment of its business. The operation of the segment suffered a $200,000 loss in the year of disposal. The loss on disposal of the segment was $100,000. If the tax rate is 30%, and income before income taxes was $1,600,000, a. the income tax expense on the income before discontinued operations is $390,000. b. the income from continuing operations is $1,120,000. c. net income is $1,300,000. d. the losses from discontinued operations are reported net of income taxes at $300,000.

Ans: B, LO: 1, Topic: Sustainable Income, Subtopic: Discontinued Operations, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $1,600,000  (1  .3)  $1,120,000 (Income x 1-tax rate))

Financial Analysis: The Big Picture

66.

13-11

Acme Sky, Inc. decided on January 1 to discontinue its telescope manufacturing division. On July 1, the division’s assets with a book value of $1,260,000 are sold for $900,000. Operating income from January 1 to June 30 for the division amounted to $195,000. Ignoring income taxes, what total amount should be reported on Acme’s income statement for the current year under the caption, Discontinued Operations? a. $195,000 b. $165,000 loss c. $360,000 loss d. $555,000

Ans: B, LO: 1, Topic: Sustainable Income, Subtopic: Discontinued Operations, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: ($900,000  $1,260,000) + $195,000  ($165,000) (Proceeds – Bk-Val) + Div. Op. Inc.

67.

Comprehensive income would not include a. dividends declared. b. unrealized gains on available-for-sale securities. c. discontinued operations. d. other expenses and losses.

Ans: A, LO: 1, Topic: Sustainable Income, Subtopic: Comprehensive Income, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

68.

Which of the following would be considered an “Other Comprehensive Income” item? a. Net income b. Gain on disposal of discontinued operations c. Other revenues and gains d. Unrealized loss on available-for-sale securities

69.

Acme Café has the following partial balance sheet for its first period of operations: ACME CAFÉ Balance Sheet (partial) Stockholders’ equity: Common stock $6,000,000 Retained earnings 2,000,000 Total paid-in capital and retained earnings 8,000,000 Accumulated other comprehensive income 800,000 Total stockholders’ equity: $8,800,000 What effect will other comprehensive income have on comprehensive income? a. No effect on comprehensive income b. Increase of $800,000 in comprehensive income c. Increase of $8,800,000 in comprehensive income d. Decrease of $800,000 in comprehensive income

Ans: B, LO: 1, Topic: Sustainable Income, Subtopic: Comprehensive Income, Bloom: C, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: FSA

13-12 70.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

A company has an investment in trading securities of $140,000. The fair value of the investment declined during the current year resulting in an unrealized loss of $7,000. Assuming a 35% tax rate, the effect of this loss on other comprehensive income will be a. no effect. b. $140,000 increase. c. $49,000 decrease. d. $91,000 decrease.

Ans: A, LO: 1, Topic: Sustainable Income, Subtopic: Illustration of Comprehensive Income, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: FSA

71.

Which of the following would be considered an “Other comprehensive income” item? a. Loss on disposal of discontinued operations b. Unrealized loss on available-for-sale debt securities c. Discontinued operations gain d. Net income

Ans: B, LO: 1, Topic: Sustainable Income, Subtopic: Illustration of Comprehensive Income, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

72.

All of the following may be indicators of channel stuffing except a. deep discounts to customers. b. customers incentives for buying early. c. an extremely good earnings period followed by several subsequent bad periods. d. inventory levels that reflect seasonal demand levels.

Ans: D, LO: 1, Topic: Sustainable Income, Subtopic: Improper Recognition, Bloom: C, Difficulty: Medium, Min: 1, AACSB: Ethics, AICPA BC: Governance Perspective, AICPA AC: None, AICPA PC: Professional Behavior, IMA: Strategy, Planning & Performance

73.

The use of alternative accounting methods a. is not a problem in ratio analysis because the footnotes disclose the method used. b. may be a problem in ratio analysis even if disclosed. c. is not a problem in ratio analysis since eventually all methods will lead to the same end. d. is only a problem in ratio analysis with respect to inventory.

Ans: B, LO: 1, Topic: Sustainable Income, Subtopic: Alternative Accounting Methods, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

74.

Which situation below might indicate a company has a low quality of earnings? a. Revenue is recorded when recognized. b. Repair costs that do not prolong the useful life of the asset are capitalized and then depreciated. c. The financial statements are prepared in accordance with generally accepted accounting principles. d. The same accounting principles are used each year.

Ans: B, LO: 1, Topic: Sustainable Income, Subtopic: Quality of Earnings, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

Financial Analysis: The Big Picture

75.

13-13

All of the following situations below might indicate a company has a low quality of earnings except a. a lack of disclosure about guaranteed payments that were mentioned in the MD&A of the annual report. b. maintenance costs that do not prolong the useful life of the asset are capitalized and then depreciated. c. revenue is recognized when the performance obligation is satisfied. d. adoption of a different inventory method for each of the last three years.

Ans: C, LO: 1, Topic: Sustainable Income, Subtopic: Quality of Earnings, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

76.

Which of the following will be considered an “Other Comprehensive Income” item? a. Realized loss on available-for-sale securities b. Gain on disposal of discontinued operations c. Gain related to winning a lawsuit d. Unrealized gain on available-for-sale debt securities

Ans: D, LO: 1, Topic: Sustainable Income, Subtopic: Comprehensive Income, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

77.

All of the following statements are true regarding comprehensive income except a. companies are required to report comprehensive income. b. comprehensive income is always greater than net income. c. comprehensive income does not include changes resulting from investments by stockholders. d. comprehensive income does not include dividends to stockholders.

Ans: B, LO: 1, Topic: Sustainable Income, Subtopic: Comprehensive Income, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

78.

Which of the following is considered to be a financial statement item that is viewed as part of sustainable income? a. Income from continuing operations b. Loss due to hurricane damage c. Gross profit d. Net income

Ans: A, LO: 1, Topic: Sustainable Income, Subtopic: NA, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

79.

What is the most common abuse by managers in achieving increased earnings to cope with pressure from Wall Street? a. Selling more shares of stock than authorized b. Capitalizing expenses that should be expensed c. Under reporting liabilities d. Improper recognition of revenue

Ans: D, LO: 1, Topic: Sustainable Income, Subtopic: Improper Recognition, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

13-14 80.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Which of the following is considered to be an acceptable format for reporting a company’ income’? a. As note disclose to the financial statements b. As a combined statement of income and comprehensive income c. As a separate component of operating expenses on the income statement d. As a component on the statement of retained earnings

Ans: B LO: 1, Topic: Sustainable Income, Subtopic: Format, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

81.

Several investors are anticipating an investment in a company that has performed well over the past few years. Which of the following income statement amounts will likely be the best indicator of the company’s future performance? a. Gross profit b. Operating income c. Net income d. Comprehensive income

Ans: B LO: 1, Topic: Sustainable Income, Subtopic: NA, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

82.

What is sustainable income? a. The most likely level of income to be obtained in the future b. The net cash generated from operating activities c. Income from operations d. Comprehensive income

Ans: A LO: 1, Topic: Sustainable Income, Subtopic: NA, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

83.

Which of the following items is an item considered to be part of comprehensive income, but is not reported as part of net income? a. A gain from the disposal of plant assets b. A realized loss from the sale of a trading security c. An unrealized gain on an available-for-sale debt security d. An impairment loss on a plant asset

Ans: C LO: 1, Topic: Sustainable Income, Subtopic: NA, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

84.

Which of the following should be classified as a discontinued operation? a. Write-off of a significant amount of inventory b. Write-off of a significant amount of receivables c. Loss from the expropriation of facilities by a foreign government d. Loss from the disposal of the service division

Ans: D LO: 1, Topic: Sustainable Income, Subtopic: NA, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Financial Analysis: The Big Picture

85.

13-15

On January 1, 2025, A1 Industries had cash and common stock of $180,000. At that date, the company had no other asset, liability, or equity balances. On January 2, 2025, it purchased $160,000 of equity securities for cash that it classified as available-for-sale. It received cash dividends of $12,000 during the year on these securities. In addition, it had an unrealized holding gain on these securities of $32,000 net of tax. If the company had operating income of $100,000 and a 20% tax rate, what is the amount of comprehensive income in 2025? a. $121,600 b. $89,600 c. $115,200 d. $144,000

Ans: A, LO: 1, Topic: Sustainable Income, Subtopic: Illustration of Comprehensive Income, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $32,000 + ($100,000 +$12,000)(1-.20)  $121,600 (After-tax gain + (Op. inc. + Div. rev)(1-tax rate))

86.

A comparison with other companies that provides insight into a company's competitive position is most commonly known as which of the following types of comparisons? a. Industry average comparison b. Intracompany comparison c. Intercompany comparison d. Comprehensive income comparison

Ans: C, LO: 2, Topic: Apply horizontal analysis and vertical analysis, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

87.

In performing a comparative analysis of a company, which one of the following is not one of the three types of comparisons? a. Intracompany basis b. Industry averages c. Trend basis d. Intercompany basis

Ans: A, LO: 2, Topic: Apply horizontal analysis and vertical analysis, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

88.

The best way to evaluate a series of financial statement data over a period of time is by using a. common-size statements. b. trend analysis. c. vertical analysis. d. ratio analysis.

Ans: B, LO: 2, Topic: Apply horizontal analysis and vertical analysis, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

89.

Which of the following pairs of terms related to financial statement analysis expresses each item in a financial statement as a percent of a base amount? a. Vertical — Trend b. Horizontal — Trend c. Vertical — Common Size d. Horizontal — Common Size

Ans: C, LO: 2, Topic: Apply horizontal analysis and vertical analysis, Subtopic: NA, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

13-16 90.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Which of the following is the best way to evaluate a series of financial statement data over time? a. Perform ratio analysis b. Perform horizontal analysis c. Perform a vertical analysis d. Perform an industry average analysis

Ans: B, LO: 2, Topic: Apply horizontal analysis and vertical analysis, Subtopic: NA, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

91.

In performing a vertical analysis, what is the base for accounts payable? a. Total current liabilities b. Total assets c. Total liabilities d. Sales revenue

92.

Comparisons of financial data made within a company are called a. intracompany comparisons. b. interior comparisons. c. intercompany comparisons. d. industry comparisons.

93.

Which one of the following is not a tool in financial statement analysis? a. Horizontal analysis b. Circular analysis c. Vertical analysis d. Ratio analysis

94.

Which of the following is not a common types of comparison used to evaluate financial information? a. Industry averages b. Intracompany basis c. Intercompany basis d. Sustainable basis

Ans: D, LO: 2, Topic: Apply horizontal analysis and vertical analysis, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

95.

When a horizontal analysis is performed and a zero is reported in the base year, then a. no percentage change can be computed. b. the percent change will be negative. c. the accountant has made a mistake. d. the percentage change will be 100% or greater.

Ans: A, LO: 2, Apply horizontal analysis and vertical analysis, Subtopic: Horizontal Analysis, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

Financial Analysis: The Big Picture

96.

13-17

Acme Corporation reported net sales of $650,000, $720,000, and $780,000 in the years 2024, 2025, and 2026, respectively. If 2024 is the base year, what percentage do 2026 sales represent of the base? a. 108% b. 120% c. 83% d. 20%

Ans: B, LO: 2, Apply horizontal analysis and vertical analysis, Subtopic: Horizontal Analysis, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: $780,000  $650,000  120% (2026 Sales/ Base yr. sales)

97.

In analyzing financial statements, horizontal analysis is a a. requirement. b. tool. c. principle. d. theory.

Ans: B, LO: 2, Apply horizontal analysis and vertical analysis, Subtopic: Horizontal Analysis, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

98.

Horizontal analysis is also known as a. linear analysis. b. vertical analysis. c. trend analysis. d. common-size analysis.

Ans: C, LO: 2, Apply horizontal analysis and vertical analysis, Subtopic: Horizontal Analysis, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

99.

Under which of the following cases may a percentage change be computed that is not misleading? a. The trend of the amounts is decreasing but all amounts are positive. b. There is no amount in the base year. c. There is a negative amount in the base year and a negative amount in the subsequent year. d. There is a negative amount in the base year and a positive amount in the subsequent year.

100.

Horizontal analysis is a technique for evaluating a series of financial statement data over a period of time a. that has been arranged from the highest number to the lowest number. b. that has been arranged from the lowest number to the highest number. c. to determine which items are in error. d. to determine the amount and/or percentage increase or decrease that has taken place.

Ans: D, LO: 2, Apply horizontal analysis and vertical analysis, Subtopic: Horizontal Analysis, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

13-18 101.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Horizontal analysis of comparative financial statements includes the a. development of common-size statements. b. calculation of liquidity ratios. c. calculation of dollar amount and percentage changes from financial statements over a period of time, as compared to a base year. d. evaluation of financial statement data that expresses each item in a financial statement as a percentage of a base amount.

102.

Horizontal analysis is a technique for evaluating financial statement data a. within a period of time. b. over a period of time. c. on a certain date. d. as it may appear in the future.

103.

If Year 1 sales equal $750, Year 2 sales equal $840, and Year 3 sales equal $900, the percentage to be assigned for Year 3 in a trend analysis, assuming that Year 1 is the base year, is a. 120%. b. 112%. c. 83%. d. 107%.

Ans: A, LO: 2, Apply horizontal analysis and vertical analysis, Subtopic: Horizontal Analysis, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: $900 / $750  120% (Yr. 3 sales/ Base yr. sales)

104.

If Year 1 sales equal $780, Year 2 sales equal $819, and Year 3 sales equal $896, the percentage to be assigned for Year 2 in a trend analysis, assuming that Year 1 is the base year, is a. 95%. b. 115%. c. 105%. d. 109%.

Ans: C, LO: 2, Apply horizontal analysis and vertical analysis, Subtopic: Horizontal Analysis, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: $819 / $780  105% (Yr. 2 sales/ Base yr. sales)

Financial Analysis: The Big Picture

105.

13-19

Assume the following sales data for a company: 2026 $980,000 2025 875,000 2024 700,000 If 2024 is the base year, what is the percentage increase in sales from 2024 to 2025? a. 140% b. 125% c. 40% d. 25%

Ans: D, LO: 2, Apply horizontal analysis and vertical analysis, Subtopic: Horizontal Analysis, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: ($875,000  $700,000) / $700,000  25% (2025 sales – Base yr. sales)/ Base yr. sales

106.

If Year 1 cost of goods sold equals $700, Year 2 cost of goods sold equals $840, and Year 3 cost of goods sold equals $630, the percentage to be assigned for Year 1 in a trend analysis, assuming that Year 1 is the base year, is a. 100%. b. 90%. c. 111%. d. 120%.

107.

In horizontal or trend analysis, each item is expressed as a(n) a. amount. b. percentage. c. rate. d. amount or a percentage.

108.

Assume the following sales data for a company: 2026 $960,000 2025 750,000 2024 600,000 If 2024 is the base year, what is the percentage increase in sales from 2024 to 2025? a. 60% b. 25% c. 125% d. 160%

Ans: B, LO: 2, Apply horizontal analysis and vertical analysis, Subtopic: Horizontal Analysis, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: ($750,000  $600,000) / $600,000  25% (2025 sales – Base yr. sales)/ Base yr. sales

13-20 109.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Comparative balance sheets a. are usually prepared for at least one year. b. are usually prepared for at least two years. c. do not show both dollar amount and percentage changes. d. do not show a comparison of total stockholders’ equity.

110.

Assume the following cost of goods sold data for a company: 2026 $1,400,000 2025 1,200,000 2024 1,000,000 If 2024 is the base year, what is the percentage increase in cost of goods sold from 2024 to 2026? a. 140% b. 40% c. 20% d. 17%

Ans: B, LO: 2, Apply horizontal analysis and vertical analysis, Subtopic: Horizontal Analysis, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: ($1,400,000  $1,000,000) / $1,000,000  40% (2026 sales – Base yr. sales)/ Base yr. sales

111.

In horizontal analysis, each item is expressed as a percentage of the a. net income amount. b. stockholders’ equity amount. c. total assets amount. d. base-year amount.

112.

Ace Trading Company reported net sales of $400,000, $440,000, and $560,000 in the years 2024, 2025, and 2026, respectively. If 2024 is the base year, what is the trend percentage for 2026? a. 71% b. 127% c. 140% d. 110%

113.

Comparisons of data within a company are an example of the following comparative basis a. industry averages. b. intercompany. c. intracompany. d. interregional.

Financial Analysis: The Big Picture

114.

13-21

Vertical analysis is also known as a. perpendicular analysis. b. common-size analysis. c. trend analysis. d. straight-line analysis.

Ans: B, LO: 2, Apply horizontal analysis and vertical analysis, Subtopic: Vertical Analysis, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

115.

In a common-size balance sheet, the 100 percent figure is a. total current assets. b. total property, plant, and equipment. c. total liabilities. d. total assets.

Ans: D, LO: 2, Apply horizontal analysis and vertical analysis, Subtopic: Vertical Analysis, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

116.

In a common-size financial statement, which of the following is given a percentage of 100 percent? a. Total liabilities b. Net income c. Total assets d. Cost of goods sold

Ans: C, LO: 2, Apply horizontal analysis and vertical analysis, Subtopic: Vertical Analysis, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

117.

In a common-size income statement, the 100% figure is a. net income. b. cost of goods sold. c. gross profit. d. net sales.

118.

A balance sheet that displays only component percentages is called a sheet. a. condensed b. common-size c. comparative d. trendy

balance

119.

Vertical analysis is a technique that expresses each item in a financial statement a. in dollars and cents. b. as a percent of the item in the previous year. c. as a percent of a base amount. d. starting with the highest value down to the lowest value.

13-22 120.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

In vertical analysis, a. a base amount is required. b. a base amount is optional. c. the same base is used across all financial statements analyzed. d. the results of the horizontal analysis are necessary inputs for performing the analysis.

Ans: A, LO: 2, Apply horizontal analysis and vertical analysis, Subtopic: Vertical Analysis, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

121.

The best way to study the relationship of the components within a financial statement is to prepare a. common-size statements. b. a trend analysis. c. profitability analysis. d. ratio analysis.

122.

In performing a vertical analysis, the base for prepaid expenses is a. total current assets. b. total assets. c. total liabilities. d. prepaid expenses in a previous year.

Ans: B, LO: 2, Apply horizontal analysis and vertical analysis, Subtopic: Vertical Analysis, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

123.

In performing a vertical analysis, the base for sales revenues on the income statement is a. net sales. b. sales revenue. c. net income. d. cost of goods available for sale.

Ans: A, LO: 2, Apply horizontal analysis and vertical analysis, Subtopic: Vertical Analysis, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

124.

In performing a vertical analysis, the base for sales returns and allowances is a. sales revenue. b. sales discounts. c. net sales. d. total revenues.

Ans: C, LO: 2, Apply horizontal analysis and vertical analysis, Subtopic: Vertical Analysis, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

125.

In performing a vertical analysis, the base for cost of goods sold is a. total selling expenses. b. net sales. c. total revenues. d. total expenses.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

Financial Analysis: The Big Picture

126.

13-23

Acme, Inc. has the following Income Statement (in millions): ACME, INC. Income Statement For the Year Ended December 31, 2026 Net Sales Cost of Goods Sold Gross Profit Operating Expenses Net Income

$160 100 60 40 $ 20

Using vertical analysis, what percentage is assigned to net sales? a. 160% b. Can’t be computed. c. 60% d. 100% Ans: D, LO: 2, Apply horizontal analysis and vertical analysis, Subtopic: Vertical Analysis, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: $160 / $160 = 100% (Net Sales/ Net Sales)

127.

Acme, Inc. has the following Income Statement (in millions): ACME, INC. Income Statement For the Year Ended December 31, 2026 Net Sales Cost of Goods Sold Gross Profit Operating Expenses Net Income

$160 100 60 40 $ 20

Using vertical analysis, what percentage is assigned to gross profit? a. 37.5% b. 100% c. 60% d. 62.5% Ans: A, LO: 2, Apply horizontal analysis and vertical analysis, Subtopic: Vertical Analysis, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: $60 / $160  37.5% (Gross Profit/ Net Sales)

13-24 128.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

A1 Corporation, Inc. has the following income statement (in millions): A1 CORPORATION, INC. Income Statement For the Year Ended December 31, 2026 Net Sales Cost of Goods Sold Gross Profit Operating Expenses Net Income

$240 150 90 65 $ 25

Using vertical analysis, what percentage is assigned to cost of goods sold? a. 37.5% b. 62.5% c. 100% d. 50% Ans: B, LO: 2, Apply horizontal analysis and vertical analysis, Subtopic: Vertical Analysis, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: $150 / $240  62.5% (COGS/ Net Sales)

129.

$240 150 90 65 $ 25

Using vertical analysis, what percentage is assigned to net income? a. 100% b. 90% c. 10% d. 17% Ans: C, LO: 2, Apply horizontal analysis and vertical analysis, Subtopic: Vertical Analysis, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: $25 / $240  10% (Net Inc/ Net Sales)

Financial Analysis: The Big Picture

130.

Given the following data for the Ace Company: Current liabilities Long-term debt Common stock Retained earnings Total liabilities & stockholders’ equity

13-25

$ 400 480 700 920 $2,500

How would common stock appear on a common-size balance sheet? a. 20% b. 70% c. 28% d. 30% Ans: C, LO: 2, Bloom: AP, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: $700 / $2,500  28% Com. Stk./ Net Sales

131.

The following schedule is a display of what type of analysis?

a. b. c. d.

Current assets Property, plant, and equipment Total assets Horizontal analysis Differential analysis Vertical analysis Ratio analysis

Amount $100,000 300,000 $400,000

Percent 25% 75% 100%

132.

In vertical analysis, the base amount for salaries and wages expense is generally a. net sales. b. salaries and wages expense in a previous year. c. gross profit. d. net income.

133.

Which one of the following is not a characteristic generally evaluated in ratio analysis? a. Liquidity b. Profitability c. Marketability d. Solvency

Ans: C, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

13-26 134.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ratios are most useful in identifying a. trends. b. differences. c. causes. d. relationships.

Ans: D, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

135.

Short-term creditors are usually most interested in assessing a. solvency. b. liquidity. c. marketability. d. profitability.

Ans: B, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

136.

A common measure of liquidity is a. return on assets. b. accounts receivable turnover. c. profit margin. d. debt to equity.

Ans: B, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

137.

A common measure of profitability is the a. current ratio. b. times interest earned. c. return on common stockholders’ equity. d. debt to assets.

Ans: C, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Profitability Ratios, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

138.

A common measure of long-term solvency is a. the debt to assets ratio. b. the current ratio. c. the asset turnover. d. inventory turnover.

Ans: A, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Solvency Ratios, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

139.

Return on assets is most closely related to a. profit margin and debt to assets ratio. b. profit margin and asset turnover. c. times interest earned and debt to stockholders’ equity. d. profit margin and free cash flow.

Ans: B, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Profitability Ratios, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

Financial Analysis: The Big Picture

140.

13-27

Return on common stockholders’ equity is most closely related to a. gross profit rate and operating expenses to sales ratio. b. profit margin and free cash flow. c. times interest earned and debt to stockholders’ equity ratio. d. return on assets and leverage (debt to assets ratio).

Ans: D, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Profitability Ratios, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

141.

Long-term creditors are usually most interested in evaluating a. liquidity. b. marketability. c. profitability. d. solvency.

Ans: D, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Solvency Ratios, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

142.

Which one of the following would be considered a long-term solvency ratio? a. Accounts receivable turnover b. Return on assets c. Current ratio d. Debt to assets ratio

Ans: D, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Solvency Ratios, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

143.

Present and potential stockholders are most interested in evaluating a. liquidity. b. solvency. c. profitability. d. marketability.

Ans: C, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Solvency Ratios, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

144.

In ratio analysis, the ratios are never expressed as a a. rate. b. logarithm. c. percentage. d. simple proportion.

Ans: B, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

145.

The current ratio is a. calculated by dividing current liabilities by current assets. b. used to evaluate a company's liquidity and short-term debt-paying ability. c. used to evaluate a company's solvency and long-term debt-paying ability. d. calculated by subtracting current liabilities from current assets.

13-28 146.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

What does the price-earnings ratio indicate? a. Investors’ assessments of a company’s future earnings b. The profit earned on each share of stock outstanding c. The percentage of earnings distributed to shareholders d. The profit generated on each sales dollar

Ans: A, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

147.

A company determined its return on assets was 1.5%. Which statement is true? a. The company earned a profit equal to 1.5% of its total revenue for the period. b. The company earned a profit equal to 1.5 times the amount of its assets. c. The company generated $1.50 of net income for each dollar of sales earned by the company. d. The company generated $.015 of net income for each dollar of assets held by the company.

Ans: D LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Profitability Ratios, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

148.

Which of the following combinations presents correct examples of liquidity, profitability, and solvency ratios, respectively? Liquidity Profitability Solvency a. Days in inventory Price-earnings ratio Earnings per share b. Current ratio Free cash flow Debt to assets ratio c. Times interest earned Return on assets Free cash flow d. Average collection period Payout ratio Cash debt coverage

Ans: D LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

149.

The current ratio is a a. liquidity ratio. b. profitability ratio. c. long-term solvency ratio. d. cash flow ratio.

150.

A company with $60,000 in current assets and $35,000 in current liabilities pays a $1,000 current liability. As a result of this transaction, the current ratio and working capital will a. both decrease. b. both increase. c. increase and remain the same, respectively. d. remain the same and decrease, respectively.

Ans: C, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: AN, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: ($60,000 / $35,000) = 1.71; ($60,000 - $1,000) / ($35,000 - $1,000) = 1.74 (CA/ CL); (CA-$1,000)/ (CL-$1,000)

Financial Analysis: The Big Picture

151.

13-29

Which one of the following is not one of the most common types of comparisons used to make ratio analysis of the financial statement data more meaningful? a. Industry average comparisons b. Intracompany comparisons c. Intercompany comparisons d. Sustainable income comparisons

152.

The accounts receivable turnover and inventory turnover are used to analyze a. long-term solvency. b. profitability. c. liquidity. d. leverage.

Ans: C, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

153.

What do solvency ratios measure? a. The level of full and transparent financial information disclosed b. The profitability of a company c. The ability of a company to survive over a long period of time d. The ability of a company to pay its debts as they come due

Ans: C LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Solvency Ratios, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

154.

A1 Discount Retail Company had a balance in the Accounts Receivable account of $760,000 at the beginning of the year and a balance of $840,000 at the end of the year. Net credit sales during the year amounted to $7,200,000. The average collection period of the accounts receivable in terms of days was a. 30 days. b. 81.1 days. c. 42.4 days. d. 40.6 days.

Ans: D, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: $7,200,000 ÷ [($760,000 + $840,000) ÷ 2] = 9; 365 ÷ 9 = 40.6 (Net sales)/ [(Beg A/R + End A/R)/2] = A/R turnover; Avg A/R/ A/R turnover; Avg A/R/ A/R turnover

155.

Ace’s Dollar Store had a balance in the Accounts Receivable account of $760,000 at the beginning of the year and a balance of $840,000 at the end of the year. Net credit sales during the year amounted to $6,400,000. The accounts receivable turnover was a. 7.6 times. b. 8.4 times. c. 8.0 times. d. 4.0 times.

Ans: C, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: ($760,000 + $840,000) / 2  $800,000; $6,400,000 / $800,000  8.0 [(Beg A/R + End A/R)/2] = Avg A/R; Net Sales/ Avg A/R

13-30 156.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

A high accounts receivable turnover indicates a. customers are making payments quickly. b. a large portion of the company’s sales are on credit. c. many customers are not paying their receivables. d. the company’s sales have increased.

Ans: A, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

157.

A company had net credit sales of $5,005,000 and cost of goods sold of $3,500,000 for the year. The Accounts Receivable balances at the beginning and end of the year were $600,000 and $700,000, respectively. The accounts receivable turnover was a. 8.4 times. b. 7.7 times. c. 3.9 times. d. 7.1 times.

Ans: B, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: $5,005,000 / (($600,000 + $700,000) / 2)  7.7 (Net sales)/ [(Beg A/R + End A/R)/2]

158.

Ace Discount Supply Co. had a balance in the Accounts Receivable account of $800,000 at the beginning of the year and a balance of $900,000 at the end of the year. Net credit sales during the year amounted to $8,040,000. The accounts receivable turnover was a. 9.5 times. b. 10.1 times. c. 8.9 times. d. 9.8 times.

Ans: A, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: $8,040,000 / (($800,000 + $900,000) / 2)  9.5 (Net sales)/ [(Beg A/R + End A/R)/2]

159.

Ace Discount Supply Co. had a balance in the Accounts Receivable account of $800,000 at the beginning of the year and a balance of $900,000 at the end of the year. Net credit sales during the year amounted to $8,040,000. The average collection period of the receivables in terms of days was a. 36.1 days. b. 38.6 days. c. 37.2 days. d. 4 days.

Ans: B, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: 365 / ($8,040,000 / (($800,000 + $900,000 / 2))  38.6 365/ (Net sales)/ [(Beg A/R + End A/R)/2]

Financial Analysis: The Big Picture

160.

13-31

Acme Corporation had net credit sales of $5,075,000 and cost of goods sold of $3,750,000 for the year. The Accounts Receivable balances at the beginning and end of the year were $650,000 and $750,000, respectively. The accounts receivable turnover was a. 7.8 times. b. 6.8 times. c. 7.3 times. d. 5.4 times.

Ans: C, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: $5,075,000 / (($650,000 + $750,000) / 2)  7.3 (Net sales)/ [(Beg A/R + End A/R)/2]

161.

A1 Corporation had net credit sales of $13,000,000 and cost of goods sold of $9,250,000 for the year. The average inventory for the year amounted to $1,250,000. The inventory turnover for the year is a. 7.4 times. b. 10.4 times. c. 3.0 times. d. 1.4 times.

162.

A1 Corporation had net credit sales of $13,000,000 and cost of goods sold of $9,250,000 for the year. The average inventory for the year amounted to $1,250,000. The average days in inventory during the year was approximately a. 261 days. b. 122 days. c. 49 days. d. 35 days.

Ans: C, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: 365 / ($9,250,000 / $1,250,000)  49 (365/ (COGS/ Avg Inv)

163.

Acme Wholesale, Inc. had net credit sales of $9,000,000 and cost of goods sold of $5,250,000 for the year. The average inventory for the year amounted to $1,250,000. The inventory turnover for the year is a. 7.2 times. b. 5.6 times. c. 5.2 times. d. 4.2 times.

Ans: D, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: $5,250,000 / $1,250,000  4.2 (Net Sales/ Avg Inv)

13-32 164.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Acme Wholesale, Inc. had net credit sales of $9,000,000 and cost of goods sold of $5,250,000 for the year. The average inventory for the year amounted to $1,250,000. The average days in inventory during the year was approximately a. 51 days. b. 65 days. c. 70 days. d. 87 days.

Ans: D, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: 365 / ($5,250,000 / $1,250,000)  87 (365/ (COGS/ Avg Inv)

165.

Which one of the following is not a liquidity ratio? a. Current ratio b. Inventory turnover c. Average collection period d. Return on assets

Ans: D, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

166.

The asset turnover ratio is a. net sales divided by net income. b. average total assets divided by net income. c. net sales divided by average total assets. d. average total assets divided by net sales.

167.

The asset turnover ratio measures a. how often a company replaces its assets. b. how efficiently a company uses its assets to generate sales. c. the portion of the assets that have been financed by creditors. d. the overall rate of return on assets.

168.

The profit margin is calculated by dividing a. sales by cost of goods sold. b. gross profit by net sales. c. net income by stockholders' equity. d. net income by net sales.

Financial Analysis: The Big Picture

169.

13-33

Ace Marine Supply Corporation had net income of $2,000,000 and paid dividends to common stockholders of $300,000 in 2025. The weighted average number of shares outstanding in 2025 was 400,000 shares. Ace Marine Supply Corporation's common stock is selling for $50 per share on the NASDAQ. Ace Marine Supply Corporation's priceearnings ratio is a. 20 times. b. 12 times. c. 10 times. d. 5 times.

Ans: C, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Profitability Ratios, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: $50 / ($2,000,000 / 400,000)  10 (Mkt price)/ (NI/ Shares o/s)

170.

Ace Marine Supply Corporation had net income of $2,000,000 and paid dividends to common stockholders of $300,000 in 2025. The weighted average number of shares outstanding in 2025 was 400,000 shares. Ace Marine Supply Corporation's common stock is selling for $50 per share on the NASDAQ. Ace Marine Supply Corporation's payout ratio for 2025 is a. $5 per share. b. 12%. c. 15%. d. 7%.

171.

A1 Corporation had net income of $1,600,000 and paid dividends to common stockholders of $400,000 in 2025. The weighted average number of shares outstanding in 2025 was 500,000 shares. A1 Corporation's common stock is selling for $40 per share on the NASDAQ. A1 Corporation's price-earnings ratio is a. 3.2 times. b. 12.5 times. c. 8 times. d. 4 times.

Ans: B, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Profitability Ratios, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: $40 / ($1,600,000 / 500,000)  12.5 times (Mkt price)/ (NI/ Shares o/s)

13-34 172.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

A1 Corporation had net income of $1,600,000 and paid dividends to common stockholders of $320,000 in 2025. The weighted average number of shares outstanding in 2025 was 500,000 shares. A1 Corporation's common stock is selling for $50 per share on the NASDAQ. A1 Corporation's payout ratio for 2025 is a. $5 per share. b. 20%. c. 32%. d. 5%.

173.

The debt to assets ratio measures a. the company's profitability. b. whether interest can be paid on debt in the current year. c. the proportion of interest paid relative to dividends paid. d. the percentage of the total assets provided by creditors.

174.

A company reported the following on its income statement: Income before income taxes $420,000 Income tax expense 120,000 Net income $300,000 An analysis of the income statement revealed that interest expense was $60,000. The company's times interest earned was a. 6 times. b. 9 times. c. 8 times. d. 5 times.

Ans: C, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Solvency Ratios, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: ($60,000 + $420,000) / $60,000  8 (Int Exp + NI)/ NI

175.

Trading on the equity (leverage) refers to the a. amount of working capital. b. amount of capital provided by owners. c. use of borrowed money to increase the return to owners. d. number of times interest is earned.

Financial Analysis: The Big Picture

176.

13-35

Acme Company reported the following on its income statement: Income before income taxes $500,000 Income tax expense 150,000 Net income $350,000 An analysis of the income statement revealed that interest expense was $80,000. Rama Company's times interest earned was a. 5.4 times. b. 7.3 times. c. 6.3 times. d. 4.4 times.

Ans: B, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Solvency Ratios, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: ($80,000 + $500,000) / $80,000  7.3 (Int Exp + NI)/ NI

177.

A company that is leveraged is one that a. has a high earnings per share. b. contains debt financing. c. contains equity financing. d. has a high current ratio.

Ans: B, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Solvency Ratios, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

178.

The current assets of Ace Wholesale Company total $292,500. The current liabilities total $130,000. The current ratio expressed as a proportion is a. 225%. b. 2.25:1. c. .44:1. d. $130,000 ÷ $292,500.

Ans: B, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: $292,500 / $130,000  2.25 (CA/ CL)

179.

A weakness of the current ratio is a. the difficulty of the calculation. b. it uses year-end balances of current asset and current liability accounts. c. it is rarely used by sophisticated analysts. d. it can be expressed as a percentage, as a rate, or as a proportion.

180.

A supplier to a company would be most interested in the a. asset turnover. b. profit margin. c. current ratio. d. earnings per share.

Ans: C, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

13-36 181.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Which one of the following ratios would not likely be used by a short-term creditor in evaluating whether to sell on credit to a company? a. Current ratio b. Inventory turnover c. Asset turnover d. Accounts receivable turnover

182.

Ratios are used as tools in financial analysis a. instead of horizontal and vertical analyses. b. because they can provide information that may not be apparent from inspection of the individual components of the financial statements. c. because even single ratios by themselves are quite meaningful. d. because they are prescribed by GAAP.

183.

The ratios that are used to determine a company's short-term debt paying ability are a. asset turnover, times interest earned, current ratio, and accounts receivables turnover. b. times interest earned, inventory turnover, current ratio, and receivables turnover. c. times interest earned, accounts receivable turnover ratio, current ratio, and inventory turnover. d. current ratio, account receivable turnover, and inventory turnover.

Ans: D, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

184.

A company had $175,000 of current assets and $80,000 of current liabilities before borrowing $60,000 from the bank with a 3-month note payable. What effect did the borrowing transaction have on the company’s current ratio? a. The ratio remained unchanged. b. The change in the current ratio cannot be determined. c. The ratio decreased. d. The ratio increased.

Ans: C, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: AN, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: $175,000/$80,000 =2.2; ($175,000 + $60,000) /($80,000 + $60,000) = 1.7 (CA/CL); (CA + Proceeds)/ (CL + Note pay.)

185.

A liquidity ratio measures the a. income or operating success of an enterprise over a period of time. b. ability of the enterprise to survive over a long period of time. c. short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash. d. number of times interest is earned.

Financial Analysis: The Big Picture

186.

13-37

If equal amounts are added to the numerator and the denominator of the current ratio and the ratio is over one, the ratio will always a. increase. b. decrease. c. stay the same. d. equal zero.

Ans: B, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: AN, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

187.

If a company has a current ratio of 1.2:1, what respective effects will the borrowing of cash by short-term debt and collection of accounts receivable have on the ratio? Short-term Borrowing Collection of Receivable a. Increase No effect b. Increase Increase c. Decrease No effect d. Decrease Decrease

Ans: C, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

188.

A company has an accounts receivable turnover of 10. The average net accounts receivable during the period are $900,000. What is the amount of net credit sales for the period? a. $90,000 b. $9,000,000 c. $900,000 d. $990,000

Ans: B, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: $900,000  10  $9,000,000 Avg A/R x A/R turn.

189.

If the average collection period is 73 days, what is the accounts receivable turnover? a. 5 times b. 20 times c. 10 times d. 6 times

Ans: A, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: 365  73  5.0 365/ Avg Coll. Per.

190.

A general rule to use in assessing the average collection period is that it a. should not exceed 30 days. b. can be any length as long as the customer continues to buy merchandise. c. should not greatly exceed the return period. d. should not greatly exceed the credit term period.

13-38 191.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

The inventory turnover is calculated by dividing a. cost of goods sold by the ending inventory. b. cost of goods sold by the beginning inventory. c. cost of goods sold by the average inventory. d. average inventory by cost of goods sold.

192.

A company has an average inventory on hand of $90,000 and its average days in inventory is 36.5 days. What is the cost of goods sold? a. $900,000 b. $2,102,400 c. $2,106,000 d. $1,051,200

Ans: A, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: AN, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: (365  $36.5)  $90,000  $900,000 (365/ Avg. days in inv) x Avg inv

193.

A successful grocery store would probably have a. a low inventory turnover. b. a high inventory turnover. c. zero profit margin. d. low volume.

194.

Net sales are $2,700,000, beginning total assets are $700,000, and the asset turnover is 3.0. What is the ending total asset balance? a. $900,000 b. $1,100,000 c. $700,000 d. $800,000

Ans: B, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: AN, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: $2,700,000 / 3  $900,000;

$700,000 + X 2

 $900,000; X  1,100,000

Net Sales/ Asset turn. = avg. total assets; (Beg. Assets + End. Assets)/ 2

Financial Analysis: The Big Picture

195.

13-39

The following information pertains to A1 Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets Cash and short-term investments $ 40,000 Accounts receivable (net) 25,000 Inventory 20,000 Property, plant, and equipment 210,000 Total Assets $295,000 Liabilities and Stockholders’ Equity Current liabilities $ 60,000 Long-term liabilities 85,000 Stockholders’ equity—common 150,000 Total Liabilities and Stockholders’ Equity $295,000 Income Statement Sales revenue Cost of goods sold Gross profit Operating expenses Net income

$ 85,000 45,000 40,000 20,000 $ 20,000

Number of shares of common stock Market price of common stock Dividends per share on common stock Cash provided by operations

6,000 $20 0.90 $30,000

What is the current ratio for this company? a. 1.42 b. 0.80 c. 1.16 d. 0.60 Ans: A, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: ($40,000 + $25,000 + $20,000) / $60,000  1.42 (Cash + A/R + Inv)/ CL

13-40 196.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

$ 85,000 45,000 40,000 20,000 $ 20,000

Number of shares of common stock Market price of common stock Dividends per share on common stock Cash provided by operations

6,000 $20 0.90 $30,000

What is the accounts receivable turnover for this company? a. 2.8 times b. 2 times c. 3.4 times d. 3 times Ans: C, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: $85,000 / $25,000  3.4 (Net Sales/ Avg A/R)

Financial Analysis: The Big Picture

197.

13-41

$ 85,000 45,000 40,000 20,000 $ 20,000

Number of shares of common stock Market price of common stock Dividends per share on common stock Cash provided by operations

6,000 $20 0.90 $30,000

What is the inventory turnover for this company? a. 2 times b. 2.25 times c. 1 time d. .44 times Ans: B, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: $45,000 / $20,000  2.25 (COGS/ Avg Inv)

13-42 198.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

$ 85,000 45,000 40,000 20,000 $ 20,000

Number of shares of common stock Market price of common stock Dividends per share on common stock Cash provided by operations

6,000 $20 0.90 $30,000

What is the return on assets for this company? a. 6.8% b. 10.0% c. 11.7% d. 26.7% Ans: A, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Profitability Ratios, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: $20,000 / $295,000  6.8% NI/ Avg total assets

Financial Analysis: The Big Picture

199.

13-43

$ 85,000 45,000 40,000 20,000 $ 20,000

Number of shares of common stock Market price of common stock Dividends per share on common stock Cash provided by operations

6,000 $20 0.90 $30,000

What is the profit margin for this company? a. 42.9% b. 18.8% c. 23.5% d. 15.0% Ans: C, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Profitability Ratios, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: $20,000 / $85,000  23.5% NI/ Net Sales

13-44 200.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

$ 85,000 45,000 40,000 20,000 $ 20,000

Number of shares of common stock Market price of common stock Dividends per share on common stock Cash provided by operations

6,000 $20 0.90 $30,000

What is the return on common stockholders’ equity for this company? a. 13.3% b. 5.0% c. 23.3% d. 53.3% Ans: A, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Profitability Ratios, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: $20,000 / $150,000  13.3% Net inc./ Avg. Equity

Financial Analysis: The Big Picture

201.

13-45

$ 85,000 45,000 40,000 20,000 $ 20,000

Number of shares of common stock Market price of common stock Dividends per share on common stock Cash provided by operations

6,000 $20 0.90 $30,000

What is the price earnings ratio for this company? a. 6.0 times b. 2.5 times c. 8.0 times d. 4.0 times Ans: A, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Profitability Ratios, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: $20,000 / 6,000  $3.33; $20 / $3.33  6.00 (NI/ Avg shares o/s); Mkt price of stock/ EPS

202.

Ace Supply Corporation reported net income $24,000; net sales $400,000; and average assets $600,000 for 2025. What is the 2025 profit margin? a. 6% b. 4% c. 40% d. 67%

Ans: A, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Profitability Ratios, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: $24,000 / $400,000  6% (NI/ Net sales)

13-46 203.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

The following information pertains to Acme Garden Supply Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets Cash and short-term investments $ 45,000 Accounts receivable (net) 30,000 Inventory 25,000 Property, plant, and equipment 210,000 Total Assets $310,000 Liabilities and Stockholders’ Equity Current liabilities $ 60,000 Long-term liabilities 95,000 Stockholders’ equity—common 155,000 Total Liabilities and Stockholders’ Equity $310,000 Income Statement Sales revenue Cost of goods sold Gross margin Operating expenses Net income

$116,000 66,000 50,000 30,000 $ 20,000

Number of shares of common stock Market price of common stock Dividends per share on common stock Cash provided by operations

6,000 $20 .50 $35,000

What is the current ratio for this company? a. 1.17 b. 1.25 c. 1.67 d. 0.75 Ans: C, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: ($45,000 + $30,000 + $25,000) / $60,000  1.67 (Cash + A/R + Inv)/ CL

Financial Analysis: The Big Picture

204.

13-47

$116,000 66,000 50,000 30,000 $ 20,000

Number of shares of common stock Market price of common stock Dividends per share on common stock Cash provided by operations

6,000 $20 .50 $35,000

What is the accounts receivable turnover for this company? a. 2.2 times b. 4.4 times c. 7.7 times d. 3.9 times Ans: D, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: $116,000 / $30,000  3.9 (Net Sales/ Avg A/R)

13-48 205.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

$116,000 66,000 50,000 30,000 $ 20,000

Number of shares of common stock Market price of common stock Dividends per share on common stock Cash provided by operations

6,000 $20 .50 $35,000

What is the inventory turnover for this company? a. 2.6 times b. 4.6 times c. 5.3 times d. 0.38 time Ans: A, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: $66,000 / $25,000  2.6 (COGS/ Avg Inv)

Financial Analysis: The Big Picture

206.

13-49

$116,000 66,000 50,000 30,000 $ 20,000

Number of shares of common stock Market price of common stock Dividends per share on common stock Cash provided by operations

6,000 $20 .50 $35,000

What is the return on assets for this company? a. 16.1% b. 11.3% c. 6.5% d. 12.9% Ans: C, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Profitability Ratios, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: $20,000 / $310,000  6.5% (NI/ Avg total assets)

13-50 207.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

$116,000 66,000 50,000 30,000 $ 20,000

Number of shares of common stock Market price of common stock Dividends per share on common stock Cash provided by operations

6,000 $20 .50 $35,000

What is the profit margin for this company? a. 34.5% b. 43.1% c. 25.8% d. 17.2% Ans: D, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Profitability Ratios Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: $20,000 / $116,000  17.2% (NI/ Net Sales)

Financial Analysis: The Big Picture

208.

13-51

The following information pertains to Acme Garden Supply Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets Cash and short-term investments $ 45,000 Accounts receivable (net) 30,000 Inventory 25,000 Property, plant, and equipment 210,000 Total Assets $310,000 Liabilities and Stockholders’ Equity Current liabilities Long-term liabilities Stockholders’ equity—common Total Liabilities and Stockholders’ Equity

$ 60,000 95,000 155,000 $310,000

Income Statement Sales revenue Cost of goods sold Gross margin Operating expenses Net income

$116,000 66,000 50,000 30,000 $ 20,000

Number of shares of common stock Market price of common stock Dividends per share on common stock Cash provided by operations

6,000 $20 .50 $35,000

What is the return on common stockholders’ equity for this company? a. 25.8% b. 12.9% c. 22.6% d. 32.3% Ans: B, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Profitability Ratios, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: $20,000  $155,000  12.9% NI/ Avg stockholders’ equity

209.

How is the price-earnings ratio calculated? a. Earnings per share divided by market price of stock b. Market price of stock divided by annual dividend c. Par value of stock divided by average shares outstanding d. Market price of stock divided by earnings per share

Ans: D, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Profitability Ratios Bloom: AP, Difficulty: Medium, Min: 4, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

13-52 210.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

The following information is available for Ace Pet Supply Company: 2025 2024 Accounts receivable $ 360,000 $ 340,000 Inventory 280,000 320,000 Net credit sales 3,150,000 2,600,000 Cost of goods sold 1,800,000 840,000 Net income 300,000 170,000 The accounts receivable turnover for 2025 is a. 8.8 times. b. 4.5 times. c. 9.0 times. d. 9.3 times.

Ans: C, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: $3,150,000 / [($360,000 + $340,000) / 2]  9.0 (Net Sales/ [(Beg. A/R + End. A/R)/2)]

211.

The following information is available for Ace Pet Supply Company: 2025 2024 Accounts receivable $ 360,000 $ 340,000 Inventory 280,000 320,000 Net credit sales 3,000,000 1,400,000 Cost of goods sold 1,800,000 840,000 Net income 300,000 170,000 The inventory turnover for 2025 is a. 6.4 times. b. 6.0 times. c. 5.6 times. d. 3.0 times.

Ans: B, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: $1,800,000 / [($280,000 + $320,000) / 2]  6.0 (Net sales/ [(Beg. Inv + End. Inv)/2)]

Financial Analysis: The Big Picture

212.

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The following amounts were taken from the financial statements of Acme Electric Company: 2025 2024 Current liabilities $1,280,000 $1,220,000 Long-term liabilities 1,800,000 1,600,000 Interest expense 100,000 50,000 Income tax expense 50,000 30,000 Net income 300,000 170,000 Net cash provided by operating activity 325,000 270,000 The times interest earned for 2025 is a. 3.0 times. b. 3.5 times. c. 4.0 times. d. 4.5 times.

Ans: D, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Solvency Ratios, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: ($300,000 + $100,000 + $50,000) / $100,000  4.5 (NI + Int exp + Tax Exp)/ Int Exp

213.

The following amounts were taken from the financial statements of A1 Supply Company: 2025 2024 Total assets $800,000 $1,000,000 Net sales 720,000 650,000 Gross profit 352,000 320,000 Net income 108,000 117,000 Weighted average number of common shares outstanding 90,000 90,000 Market price of common stock $42 $39

The return on assets for 2025 is a. 14%. b. 12%. c. 11%. d. 6%. Ans: B, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic:: Solvency Ratios, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: $108,000  [($800,000 + $1,000,000)/2]  12% (NI/ [(Beg. Assets + End. Assets)/2)]

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

215.

Ans: A, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Profitability Ratios, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: $42 / ($108,000 / 90,000)  35 (Mkt price of stock/ (NI/ Avg shares o/s)

216.

Solvency is of most interest to a. short-term creditors. b. stockholders. c. competitors. d. long-term creditors.

Financial Analysis: The Big Picture

217.

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The current ratio would be of most interest to a. short-term creditors. b. long-term creditors. c. stockholders. d. customers.

218.

Which measure(s) is(are) an evaluation of a company’s ability to pay current liabilities? 1. Current ratio. 2. Free cash flow a. Both 1 and 2. b. Neither 1 nor 2. c. 1 only. d. 2 only.

219.

Which measure(s) is(are) useful in evaluating the efficiency in managing inventories? 1. Inventory turnover 2. Days in inventory a. 1 only. b. 2 only. c. Both 1 and 2. d. Neither 1 nor 2.

220.

Which of the following is not a liquidity ratio? a. Current ratio b. Asset turnover c. Inventory turnover d. Accounts receivable turnover

221.

A company reported net income $36,000; net sales $480,000; and average assets $800,000 for 2025. What is the company’s 2025 profit margin? a. 4.5% b. 7.5% c. 13.3% d. 60.0%

Ans: B, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Profitability Ratios, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: $36,000 / $480,000  7.5% NI/ Net sales

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ace Corporation had net income of $325,000 and paid dividends to common stockholders of $39,000 in 2025. The weighted average number of shares outstanding in 2025 was 50,000 shares. Beta Corporation's common stock is selling for $52 per share on the New York Stock Exchange. Beta Corporation's price-earnings ratio is a. 12.5 times. b. 8.0 times. c. 6.5 times. d. 9.1 times.

Ans: B, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Profitability Ratios, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance Solution: $52 / ($325,000 / 50,000) = 8.0 (Mkt price of stock/ (NI/ Avg shares o/s)

223.

Acme Marine Supply Corporation had net income of $325,000 and paid dividends to common stockholders of $39,000 in 2025. The weighted average number of shares outstanding in 2025 was 50,000 shares. Acme Marine Supply Corporation's common stock is selling for $52 per share on the New York Stock Exchange. Acme Marine Supply Corporation's payout ratio for 2025 is a. $6.5 per share. b. 16%. c. 12%. d. 8.3%.

224.

A successful discount retail store such as Walmart would probably have a. a low inventory turnover. b. a high inventory turnover. c. zero profit margin. d. low volume.

225.

Net sales are $3,250,000, beginning total assets are $1,400,000, and the asset turnover is 2.5 times. What is the ending total asset balance? a. $1,300,000 b. $1,200,000 c. $1,400,000 d. $1,500,000

Ans: B, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: AN, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting Solution: $3,250,000 / 2.5  $1,300,000; ($1,400,000 + X) / 2  $1,300,000; X  $1,200,000 Net sales/ Asset turn. = Avg total assets; Beg. Assets + End. Assets/ 2

Financial Analysis: The Big Picture

226.

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If a company has current ratio greater than 1, all of the following are ways that a company's current ratio would decrease except a. purchasing inventory on account. b. adding equal amounts to the numerator and denominator. c. paying off one-third of its accounts payable. d. paying cash for new equipment.

Ans: C, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

BRIEF EXERCISES Be. 227 Listed below are some selected items that may appear on a corporate income statement. Indicate the order in which these items would appear on an income statement. (The first one should be assigned the number “1”, the second “2,” etc.) Income before income taxes Discontinued operations Net income Income from continuing operations Income tax expense Ans: N/A, LO: 1, Topic: Apply the Concepts of Sustainable Income and Quality of Earnings, Subtopic: NA, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 227 1 4 5 3 2

Income before income taxes Discontinued operations Net income Income from continuing operations Income tax expense

Be. 228 Ace Manufacturing Company has income from continuing operations of $621,000 (after tax) for the year ended December 31, 2025. It also has the following items (before considering income taxes): (1)

An unrealized loss of $120,000 available-for-sale debt securities.

(2)

A gain of $60,000 on the discontinuance of a major component of the business.

(3)

A cumulative effect of a change in accounting principle that resulted in an increase in prior years' depreciation of $50,000.

Assume all items are subject to income taxes at a 30% tax rate. Instructions Prepare a combined statement of income and comprehensive income beginning with income from continuing operations. Ans: N/A, LO: 1, Topic: Apply the Concepts of Sustainable Income and Quality of Earnings, Subtopic: Format, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

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Solution 228 ACE MANUFACTURING COMPANY Combined Statement of Income and Comprehensive Income (partial) For the Year Ended December 31, 2025 Income from continuing operations............................................................. Discontinued operations Gain on discontinued segment, net of $18,000 income taxes ............ Net income ................................................................................................. Other comprehensive income Unrealized holding loss, on available-for-sale securities, net of $36,000 income tax savings............................................... Comprehensive income..............................................................................

$621,000 42,000* 663,000

(84,000) $579,000

*$60,000 * 30% = $18,000; $60,000 * (1 - 30%) = $42,000

Be. 229 An inexperienced accountant for A1 Transport Corporation showed the following in its 2025 income statement: income before income taxes $420,000; and unrealized loss on available-forsale securities (before taxes) $60,000. The unrealized loss and income before income taxes are both subject to a 30% tax rate. Instructions Prepare a corrected combined statement of income and comprehensive income beginning with income from continuing operations. Ans: N/A, LO: 1, Topic: Apply the Concepts of Sustainable Income and Quality of Earnings, Subtopic: Format, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Solution 229 A1 TRANSPORT CORPORATION Combined Statement of Income and Comprehensive Income (partial) Income before income taxes ................................................................ Income tax expense ($420,000 × 30%) ................................................ Net Income........................................................................................... Other comprehensive income Unrealized holding loss on available-for-sale securities, net of $18,000 ($60,000 × 30%) tax savings .......................................................... Comprehensive income........................................................................

$420,000 126,000 294,000 (42,000) $252,000

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Be. 230 Comparative information taken from the Bergeron Company financial statements is shown below: (a) (b) (c) (d) (e)

2025 $ 175,000 30,000 855,000 170,000 11,000

Accounts receivable Retained earnings Sales revenue Operating expenses Income taxes payable

2024 $ 140,000 (14,000) 750,000 200,000 10,000

Instructions Using horizontal analysis, show the percentage change from 2024 to 2025 with 2024 as the base year. Ans: N/A, LO: 2, Topic: Apply Horizontal and Vertical Analysis, Subtopic: Horizontal Analysis, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

Solution 230 (a) (b) (c) (d) (e)

$35,000 ÷ $140,000 = 25% increase (2025 A/R – 2024 A/R) ÷ 2024 A/R Base year is negative. Computed percentage is not meaningful. $105,000 ÷ $750,000 = 14% increase $30,000 ÷ $200,000 = 15% decrease (2025 op. exp. – 2024 op. exp.) ÷ 2024 op. exp. $1,000 ÷ $10,000 = 10% increase

Be. 231 The following items were taken from the financial statements of A1 Manufacturing, Inc. over a three-year period: Item Net Sales Cost of Goods Sold Gross Profit

2026 $226,000 150,000 $ 76,000

2025 $212,000 140,000 $ 72,000

2024 $200,000 125,000 $ 75,000

Instructions Using horizontal analysis and 2024 as the base year, compute the trend percentages for net sales, cost of goods sold, and gross profit. Explain whether the trends are favorable or unfavorable for each item. Ans: N/A, LO: 2, Topic: Apply Horizontal and Vertical Analysis, Subtopic: Horizontal Analysis, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

Financial Analysis: The Big Picture

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Solution 231 Item Net Sales Cost of Goods Sold Gross Profit

2026 113%1 120% 101%2

2025 106% 112% 96%

2024 100% 100% 100%

(2026 Net sal./2024 Net sal.)

(2026 Gr. prof./2024 Gr. prof.)

The trend in net sales is increasing and favorable. The cost of goods sold trend is increasing, which is unfavorable, and the sales are increasing each year at a slower pace than cost of goods sold. This is apparent by examining the gross profit percentages, which show a decreasing and then slightly increasing trend. Be. 232 The following items were taken from the financial statements of Acme, Inc., over a three-year period: Item Net Sales Cost of Goods Sold Gross Profit

2026 $355,000 214,000 $141,000

2025 $336,000 206,000 $130,000

2024 $300,000 186,000 $114,000

Instructions Compute the following for each of the above time periods. a. The amount and percentage change from 2024 to 2025. b. The amount and percentage change from 2025 to 2026. Ans: N/A, LO: 2, Topic: Apply Horizontal and Vertical Analysis, Subtopic: Vertical Analysis, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

Solution 232 Item

2026 $ 19,000 8,000 11,000

Net Sales Cost of Goods Sold Gross Profit

*((2026 Net sal. – 2025 Net sal.)/ 2025 Net sal.)

2025 Percent 5.7* 3.9 8.5

$ 36,000 20,000 16,000

Percent 12.0 10.8** 14.0

**(2025 COGS – 2024 COGS)/2024 COGS)

Be. 233 Using these data from the comparative balance sheet of Santa Spice Company, perform horizontal analysis. December 31, 2025 December 31, 2024 Accounts receivable $ 375,000 $ 300,000 Inventory 780,000 600,000 Total assets 3,220,000 2,800,000 Ans: N/A, LO: 2, LO: 2, Topic: Apply Horizontal and Vertical Analysis, Subtopic: Vertical Analysis, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 233

Accounts receivable Inventory Total assets $75,000

Dec. 31, 2025 $ 375,000 780,000 3,220,000

= 0.25*

$300,000

$180,000

Dec. 31, 2024 $ 300,000 600,000 2,800,000

Increase or (Decrease) Amount Percentage* $75,000 25% 180,000 30% 420,000 15% $420,000

= 0.30

$600,000

= 0.15

$2,800,000

*(2025 A/R – 2024 A/R) ÷ 2024 A/R

Be. 234 If Ace Supply Company had net income of $620,000 in 2025 and it experienced a 19% increase in net income over 2024, what was its 2024 net income? Ans: N/A, LO: 2, LO: 2, Topic: Apply Horizontal and Vertical Analysis, Subtopic: Vertical Analysis, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

Solution 234 2025 $620,000

Net Income 0.19 =

2024 X

Increase 19%

$620,000 – X X

0.19X = $620,000 – X 1.19X = $620,000 X = $521,008 (2025 Net inc. ÷ (1 + % inc.)) Be. 235 Horizontal analysis (trend analysis) percentages for A1 Pet Supply Company’s sales, cost of goods sold, and expenses are listed here. Horizontal Analysis Sales revenue Cost of goods sold Expenses

2026 98.2% 103.1 108.6

2025 104.8% 97.5 96.4

2024 100.0% 100.0 100.0

Instructions Explain whether Omega’s net income increased, decreased, or remained unchanged over the 3year period. Ans: N/A, LO: 2, LO: 2, Topic: Apply Horizontal and Vertical Analysis, Subtopic: Horizontal Analysis, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Communications, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

Financial Analysis: The Big Picture

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Solution 235 Comparing the percentages presented results in the following conclusions: The net income for Omega increased in 2025 because of the combination of an increase in sales and a decrease in both cost of goods sold and expenses. However, the reverse was true in 2026 as sales decreased, while both cost of goods sold and expenses increased. This resulted in a decrease in net income. Be. 236 Using the following selected items from the comparative balance sheet of Acme Auto Supply Company illustrate horizontal and vertical analysis. Accounts Receivable Inventory Total Assets

December 31, 2026 $ 720,000 450,000 3,200,000

December 31, 2025 $ 630,000 360,000 3,000,000

Ans: N/A, LO: 2 Topic: Apply Horizontal and Vertical Analysis, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

Solution 236 HORIZONTAL ANALYSIS Accounts Receivable Inventory Total Assets

December 31, 2026 114% 125% 107%

December 31, 2025 100% 100% 100%

*(2026 A/R/2025 A/R)

VERTICAL ANALYSIS Accounts Receivable Inventory Total Assets

December 31, 2026 23% 14% 100%

December 31, 2025 21% 12% 100%

*(Acc. rec. /Tot. assets)

Be. 237 Using these data from the comparative balance sheet of Ace Marine Company, perform a vertical analysis. Accounts receivable Inventory Total assets

December 31, 2025 $ 400,000 864,000 3,200,000

December 31, 2024 $ 400,000 600,000 3,000,000

Ans: N/A, LO: 2, Topic: Apply Horizontal and Vertical Analysis, Subtopic: Vertical Analysis, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 237

Accounts receivable Inventory Total assets $400,000 $3,200,000 $864,000 $3,200,000

Dec. 31, 2025 Amount Percentage* $ 400,000 12.5% 864,000 27.0% 3,200,000 100.0%

= 0.125

Acc. rec Tot. assets

= 0.270

Inven. Tot.assets

Dec. 31, 2024 Amount Percentage** $ 400,000 13.3% 600,000 20.0% 3,000,000 100.0% $400,000 $3,000,000 $600,000 $3,000,000

= 0.133

= 0.200

Be. 238 Vertical analysis (common-size) percentages for A1 Discount Retail Company’s sales, cost of goods sold, and expenses are listed here. Vertical Analysis Sales revenue Cost of goods sold Operating expenses

2026 100.0% 61.2 26.5

2025 100.0% 62.4 27.4

2024 100.0% 63.5 28.5

Did the company’s net income as a percent of sales increase, decrease, or remain unchanged over the 3-year period? Provide numerical support for your answer. Ans: N/A, LO: 2, Topic: Apply Horizontal and Vertical Analysis, Subtopic: Vertical Analysis, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

Solution 238 Sales revenue Cost of goods sold Expenses Net income

2026 100.0 (61.2) (26.5) 12.3

2025 100.0 (62.4) (27.4) 10.2

2024 100.0 (63.5) (28.5) 8.0

Net income as a percent of sales for the company increased over the three-year period because cost of goods sold and expenses both decreased as a percent of sales every year.

Financial Analysis: The Big Picture

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Be. 239 Selected information from the comparative financial statements of Ace Adventure Company for the year ended December 31 appears below: 2025 2024 Accounts receivable (net) $ 175,000 $200,000 Inventory 130,000 170,000 Total assets 1,100,000 800,000 Current liabilities 140,000 110,000 Long-term debt 410,000 300,000 Net credit sales 900,000 700,000 Cost of goods sold 600,000 530,000 Interest expense 40,000 25,000 Income tax expense 60,000 29,000 Net income 120,000 85,000 Net cash provided by operating activities 250,000 135,000 Instructions Answer the following questions relating to the year ended December 31, 2025. Show computations. 1. The inventory turnover for 2025 is

2. The number of times interest earned in 2025 is

3. The accounts receivable turnover for 2025 is 4. The return on assets for 2025 is

. .

Ans: N/A, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Comprehensive Example of Ratio Analysis, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

Solution 239 1. The inventory turnover for 2025 is 4.0 times.

$600,000 ———————————— = 4.0* times. ($130,000 + $170,000) ÷ 2 *(COGS ÷ [(beg. inv. + end. inv.)/2

2. The number of times interest earned in 2025 is 5. 5 times. $120,000 + $60,000 + $40,000 Net inc. + inc. tax exp. + int. exp. = 5.5 times. 40,000 Int. exp. 3. The accounts receivable turnover for 2025 is 4.8 times. (Net cr. sal. ÷ [(beg. A/R + end A/R)/2]) $ 900,000 ———————————— = 4.8 times. ($175,000 + $200,000) ÷ 2 4. The return on assets for 2025 is 12.6%. $120,000 ————————————— = 12.6%. (Net inc. ÷ [(beg. tot. ass. + end. tot. ass.)/2]) ($1,100,000 + $800,000) ÷ 2

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Be. 240 Selected data for Ace Supply Corporation appear below. Net credit sales Cost of goods sold Inventory at end of year Accounts receivable at end of year

2025 $630,000 409,500 64,000 90,000

2024 $520,000 312,000 85,000 50,000

Instructions Compute the following for 2025: (a) Gross profit percentage (b) Inventory turnover (c) Accounts receivable turnover Ans: N/A, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Comprehensive Example of Ratio Analysis, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

Solution 240 (a)

Gross profit = Net Sales - Cost of goods sold = $630,000 - $409,500 = $220,500 Gross profit percentage = Gross profit ÷ Net sales = $220,500 ÷ $630,000 = 35%

(b)

Inventory turnover = Cost of goods sold ÷ Average inventory = $409,500 ÷ [($64,000 + $85,000) ÷ 2] = 5.5 times

(c)

Accounts receivable turnover = Net credit sales ÷ Average accounts receivables = $630,000 ÷ [($90,000 + $50,000) ÷ 2] = $630,000 ÷ $70,000 = 9 times

Financial Analysis: The Big Picture

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Be. 241 A1 Service Corporation had the following comparative current assets and current liabilities: Dec. 31, 2025 Dec. 31, 2024 Current assets Cash $ 25,000 $ 30,000 Debt investments 40,000 10,000 Accounts receivable 60,000 90,000 Inventory 110,000 90,000 Prepaid expenses 35,000 25,000 Total current assets $270,000 $245,000 Cu rrent liabilities Accounts payable $120,000 $110,000 Salaries and wages payable 40,000 30,000 Income tax payable 10,000 15,000 Total current liabilities $170,000 $155,000 During 2025, net credit sales and cost of goods sold were $570,000 and $350,000, respectively. Net cash provided by operating activities for 2025 was $140,000. Instructions Compute the following liquidity measures for 2025: 1. Current ratio 2. Accounts receivable turnover 3. Inventory turnover Ans: N/A, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Profitability Ratios, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

Solution 241 1. Current Ratio = Current Assets ÷ Current Liabilities = $270,000 ÷ $170,000 = 1.59:1 Net credit sales $570,000 2. Accounts Receivable Turnover = ————————————— = ——————————— Average accounts receivable ($60,000 + $90,000) ÷ 2 $570,000 = ———— = 7.6 times $75,500 3. Inventory Turnover

Cost of goods sold $350,000 = ————————— = ——————————— Average inventory ($110,000 + $90,000) ÷ 2 $350,000 = ———— = 3.5 times $100,000

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Be. 242 Selected data from the Acme Transport Company are presented below: Total assets $1,500,000 Average total assets 1,850,000 Net income 175,000 Net sales 1,300,000 Average common stockholders' equity 1,000,000 Net cash provided by operating activities 275,000 Instructions Assuming that no dividends were declared or paid during the period, calculate the following profitability ratios from the above information: 1. Profit margin 2. Asset turnover 3. Return on assets 4. Return on common stockholders’ equity Ans: N/A, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Comprehensive Example of Ratio Analysis, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

Solution 242 With the information provided, the profitability ratios that can be calculated are as follows: 1. Profit margin = Net income ÷ Net sales = $175,000 ÷ $1,300,000 = 13.5% 2. Asset turnover = Net sales ÷ Average total assets = $1,300,000 ÷ $1,850,000 = .70 times 3. Return on assets = Net income ÷ Average total assets = $175,000 ÷ $1,850,000 = 9.5% Net income 4. Return on common stockholders' equity = ————————————————— Average common stockholders' equity = $175,000 ÷ $1,000,000 = 17.5%

Financial Analysis: The Big Picture

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Be. 243 The following data are taken from the financial statements of Ace Wholesale Company: Average accounts receivable Net sales on account Terms for all sales are 2/10, n/30

2025 $ 530,000 5,800,000

2024 $ 550,000 5,200,000

Instructions (a) Compute the accounts receivable turnover and the average collection period for each year. (b) What conclusion can an analyst draw about the management of the accounts receivable? Ans: N/A, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

Solution 243 (a) Accounts receivable turnover

Average collection period

(b)

2025

2024

$5,800,000 ————— $530,000

$5,200,000 ————— $550,000

10.9 times

9.5 times

365 days ————— 10.9 times

365 days ———— 9.5 times

33.5 days

38.4 days

The accounts receivable are turning faster in 2025 than they did in 2024. There is still a problem since the normal credit period is 30 days, and the average collection period for both years exceed this target. Therefore, improvement in the management of the accounts receivable would appear to be desirable.

Be. 244 State the effect of the following transactions on the current ratio. Use increase, decrease, or no effect for your answer. (a)

Collection of an accounts receivable

(b)

Declaration of cash dividends

(c)

Additional stock is sold for cash

(d)

Accounts payable are paid

(e)

Equipment is purchased for cash

(f)

Inventory purchases are made for cash

(g)

Temporary investments are purchased for cash

Ans: N/A, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: AN, Difficulty: Hard, Min: 7, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 244 (a) (b) (c) (d) (e) (f) (g)

no effect decrease increase increase decrease no effect no effect

Be. 245 The balance sheet for A1 Service Corporation at the end of the current year includes the following: Bonds payable, 6% ............................................................. $5,000,000 6% Preferred stock, $100 par ...................................... 1,000,000 Common stock, $10 par ............................................... 2,000,000 Net income was $565,000 and income tax expense for the current year amounted to $285,000. Cash dividends paid on common stock were $200,000, and the common stock was selling for $28 per share at the end of the year. There were no ownership changes during the year. Instructions Determine each of the following: (a) Number of times that bond interest was earned. (b) Earnings per share for common stock. (c) Price-earnings ratio. Ans: N/A, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Solvency Ratios, Profitability Ratios, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

Solution 245 (a) Times interest earned = =

Income before income taxes and interest expense Interest expense $565,000 + $285,000 + $300,000* = 3.8 times $300,000

(b) Earnings per share = =

Net income - Preferred dividends Weighted average common shares outstanding $565,000 - $60,000** = $2.53 per share 200,000 shares Market price per share

$28 $2.53***

*Bond interest =$5,000,000 * 6% = $300,000 **Preferred dividends = $1,000,000 * 6% = $60,000

Earnings per share = 11.1 times

Financial Analysis: The Big Picture

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Be. 246 The income statement for the Acme Discount Retail Company for the year ended December 31, 2025 appears below. Sales revenue Cost of goods sold Gross profit Expenses Net income

$670,000 390,000 280,000 180,000* $100,000

*Includes $25,000 of interest expense and $20,000 of income tax expense. Additional information: 1. Common stock outstanding on January 1, 2025 was 50,000 shares. On July 1, 2025, 10,000 more shares were issued. 2. The market price of the company’s stock was $22 at the end of 2025. 3. Cash dividends of $35,000 were paid, $5,000 of which were paid to preferred stockholders. Instructions Compute the following ratios for 2025: (a) Earnings per share. (b) Price-earnings. (c) Times interest earned. Ans: N/A, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Solvency Ratios, Profitability Ratios, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

Solution 246 (a)

Earnings per share $100,000 - $5,000 $95,000 Net inc. - pref. div. = = $1.73 [50,000 + (10,000 / 2)] 55,000 Beg. com. sh. + (sh. iss. / 2)

(b)

Price-earnings $22.00 ——— = 12.7 times (Mar. pr. ÷ earn. per sh.) 1.73

(c)

Times interest earned ($100,000 + $25,000 + $20,000)/ $25,000 = 5.8 times (Net.inc. + int. exp. + inc. tax exp.)/ int. exp

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Be. 247 Selected data taken from the 2025 financial statements of Phillips Card Company, Inc. are as follows (in millions). Net sales Net cash provided by operating activities Capital expenditures Cash dividends

$295.9 17.0 2.6 6.5

Instructions Compute the free cash flow for 2025 and briefly discuss your results. Ans: N/A, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

Solution 247 Free cash flow = Cash provided by operating activities – Capital expenditures – Cash dividends $7.9 = $17.0 – $2.6 – $6.5 Phillips generated enough cash from operating activities to maintain its current productive capacity and pay dividends. The free cash flow that remained could have been used to expand operations, pay additional dividends, or reduce debt.

Financial Analysis: The Big Picture

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EXERCISES Ex. 248 Acme Corporation had net income of $3,000,000 in 2024. Using 2024 as the base year, net income decreased by 40% in 2025 and increased by 110% in 2026. Instructions Compute the net income reported by Acme Corporation for 2025 and 2026. Ans: N/A, LO: 2, Topic: Apply Horizontal and Vertical Analysis, Subtopic: Vertical Analysis, Bloom: AN, Difficulty: Hard, Min: 8, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

Solution 248 2025: X ÷ $3,000,000 = 40% X = $3,000,000 × .40 = $1,200,000 The decrease is $1,200,000; therefore, net income for 2025 is $1,800,000; ($3,000,000 – $1,200,000). (Net inc. – (Net inc. ×.40)) 2026: X ÷ $3,000,000 = 110% X = $3,000,000 × 1.1 = $3,300,000 The increase is $3,300,000; therefore, net income for 2026 is $6,300,000; ($3,000,000 + $3,300,000). (Net inc. + (Net inc. × 1.10)) Ex. 249 The following items were taken from the financial statements of a company over a four-year period: Item Net Sales Cost of Goods Sold Gross Profit

2026 $655,000 520,000 $135,000

2025 $640,000 480,000 $160,000

2024 $575,000 435,000 $140,000

2023 $500,000 400,000 $100,000

Instructions Using horizontal analysis and 2023 as the base year, compute the trend percentages for net sales, cost of goods sold, and gross profit. Explain whether the trends are favorable or unfavorable for each item. Ans: N/A, LO: 2, Topic: Apply Horizontal and Vertical Analysis, Subtopic: Vertical Analysis, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 249 Item Net Sales Cost of Goods Sold Gross Profit

2026 131% 130% 135%

*(2026 Net sal./2026 Net sal.)

2025 128% 120% 160%

2024 115% 109% 140%

2023 100% 100% 100%

**(2026 Gr. prof./2026 Gr. prof.)

The trend in net sales is increasing and favorable. The cost of goods sold trend is increasing which could be unfavorable, but the sales are increasing each year at a faster pace than cost of goods sold. This is apparent by examining the gross profit percentages, which show a favorable, increasing trend except in 2026. Ex. 250 Here is financial information for A1 Express Inc. Current assets Plant assets (net) Current liabilities Long-term liabilities Common stock, $1 par Retained earnings

December 31, 2026 $114,000 414,000 91,000 134,500 149,500 153,000

December 31, 2025 $80,000 360,000 65,000 90,000 115,000 170,000

Instructions Prepare a schedule showing a horizontal analysis with changes in dollars and percentages for 2026 using 2025 as the base year. Ans: N/A, LO: 2, Topic: Apply Horizontal and Vertical Analysis, Subtopic: Horizontal Analysis, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

Financial Analysis: The Big Picture

13-75

Solution 250 A1 EXPRESS INC. Condensed Balance Sheet December 31 2025

Increase or (Decrease) Amount Percentage

2024

Assets Current assets Plant assets (net) Total assets

$114,000 414,000 $528,000

$ 80,000 360,000 $440,000

$34,000 54,000 $88,000

42.5%* 15.0% 20.0%

Liabilities Current liabilities Long-term liabilities Total liabilities

$ 91,000 134,500 $225,500

$ 65,000 90,000 $155,000

$26,000 44,500 $70,500

40.0%** 49.4% 45.5%

$149,500 153,000

$115,000 170,000

$34,500 (17,000)

30.0% (10.0%)

302,500

285,000

17,500

6.1%

$528,000

$440,000

$88,000

20.0%

Stockholders' Equity Common Stock, $1 par Retained earnings Total stockholders' equity Total liabilities and stockholders' equity

*[(2025 cur. ass. – 2024 cur. ass.)/2024 cur. ass.] **[(2025 cur. liab. – 2024 cur. liab.)/2024 cur. liab.)

Ex. 251 Here are the comparative income statements of A1 Development Corporation. A1 DEVELOPMENT CORPORATION Comparative Income Statements For the Years Ended December 31 December 31, 2025 $600,000 414,000 186,000 150,000 $ 36,000

Net sales Cost of goods sold Gross profit Operating expenses Net income

December 31, 2024 $500,000 350,000 150,000 120,000 $ 30,000

Instructions (a) Prepare a horizontal analysis of the income statement data for A1 Development Corporation using 2024 as a base. (Show the amounts of increase or decrease.) (b) Prepare a vertical analysis of the income statement data for the company for both years. Ans: N/A, LO: 2, Topic: Apply Horizontal and Vertical Analysis, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 251 (a) A1 DEVELOPMENT CORPORATION Condensed Income Statements For the Years Ended December 31 Increase or (Decrease) During 2025 Net sales Cost of goods sold Gross profit Operating expenses Net income *[(2025 Net sal. – 2024 Net sal.)/2024 Net sal.]

2025 $600,000 414,000 186,000 150,000 $ 36,000

2024 $500,000 350,000 150,000 120,000 $ 30,000

Amount $100,000 64,000 36,000 30,000 $ 6,000

Percentage 20.0%* 18.3% 24.0% 25.0% 20.0%

(b) A1 DEVELOPMENT CORPORATION Condensed Income Statements For the Years Ended December 31 2025 $ Percent $600,000 100.0% 414,000 69.0%* 186,000 31.0% 150,000 25.0% $ 36,000 6.0%**

Net sales Cost of goods sold Gross profit Operating expenses Net income *(COGS/Net sal.)

2024 $ $500,000 350,000 150,000 120,000 $ 30,000

Percent 100.0% 70.0% 30.0% 24.0% 6.0%

**(Net inc./Net sal.)

Ex. 252 The comparative balance sheet of Acme Service Company appears below: ACME SERVICE COMPANY Comparative Balance Sheet December 31, Assets Current assets ..................................................................................... Plant assets ......................................................................................... Total assets ...................................................................................

2025 $ 450 550 $1,000

2024 $280 520 $800

Liabilities and stockholders' equity Current liabilities .................................................................................. Long-term debt .................................................................................... Common stock .................................................................................... Retained earnings ............................................................................... Total liabilities and stockholders' equity .........................................

$ 180 250 310 260 $1,000

$120 160 320 200 $800

Financial Analysis: The Big Picture

Ex. 252

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(Cont.)

Instructions (a) Using horizontal analysis, show the percentage change for each balance sheet item using 2024 as a base year. (b) Using vertical analysis, prepare a common-size comparative balance sheet. Ans: N/A, LO: 2, Topic: Apply Horizontal and Vertical Analysis, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 14, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

Solution 252 ACME SERVICE COMPANY Comparative Balance Sheet December 31, 2025 (b) Assets Current assets Plant assets Total assets

Amount $ 450 550 $1,000

Percent 45%* 55% 100%

2024 (b)

(a) Percentage Amount Percent Change $280 35% 61%** 520 65 6% $800 100% 25%

**[(2025 cur. ass. – 2024 cur. ass.)/2024 cur. ass.]

*(Curr. ass./Tot. ass.)

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

$ 180 250 310 260 $1,000

18% 25% 31% 26% 100%

$120 160 320 200 $800

15% 20% 40% 25% 100%

50% 56% (3)% 30% 25%

Ex. 253 The following information was taken from the financial statements of Ace Company: Gross profit on sales ................................................................ Income before income taxes .................................................... Net income ............................................................................... Net income as a percentage of net sales .................................

2025 $600,000 230,000 180,000 10%

2024 $680,000 221,000 153,000 9%

Instructions (a) Compute the net sales for each year. (b) Compute the cost of goods sold in dollars and as a percentage of net sales for each year. (c) Compute operating expenses in dollars and as a percentage of net sales for each year. (Income taxes are not operating expenses). Ans: N/A, LO: 2, Topic: Apply Horizontal and Vertical Analysis, Subtopic: NA, Bloom: AN, Difficulty: Hard, Min: 12, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

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Solution 253 (a)

To calculate net sales, divide net income by the percentage of net income to net sales. 2025 $180,000 ÷ 10% = $1,800,000

Net Sales (b)

2024 $153,000 ÷ 9% = $1,700,000

Using the net sales information from (a) and the gross profit given, it is possible to calculate the cost of goods sold. 2025 2024 Net Sales $1,800,000 $1,700,000 Less: Gross profit 600,000 680,000 Cost of goods sold $1,200,000 $1,020,000 % of net sales

66.7%

60%

2025 $600,000 230,000 $370,000

2024 $680,000 221,000 $459,000

20.6%

27.0%

Ex. 254 Operating data for Acme Wholesale Corporation are presented below Sales revenue Cost of goods sold Selling expenses Administrative expenses Income tax expense Net income

2025 $800,000 480,000 120,000 80,000 24,000 96,000

2024 $600,000 390,000 78,000 54,000 25,000 53,000

Instructions Prepare a schedule showing a vertical analysis for 2025 and 2024. Ans: N/A, LO: 2, Topic: Apply Horizontal and Vertical Analysis, Subtopic: Vertical Analysis, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

Financial Analysis: The Big Picture

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Solution 254 ACME WHOLESALE COMPANY Condensed Income Statements For the Years Ended December 31 2025 Amount Percent $800,000 100.0% 480,000 60.0* 320,000 40.0 120,000 15.0% 80,000 10.0% 200,000 25.0% 120,000 15.0%** 24,000 3.0% $ 96,000 12.0%

Sales revenue Cost of goods sold Gross profit Selling expenses Administrative expenses Total operating expenses Income before income taxes Income tax expense Net income *(COGS/sal. rev.)

2024 Amount Percent $600,000 100.0% 390,000 65.0% 210,000 35.0% 78,000 13.0% 54,000 9.0% 132,000 22.0% 78,000 13.0% 25,000 4.2% $ 53,000 8.8%

**(Inc. bef. inc. tax./sal. rev.)

Ex. 255 A1 Company has these comparative balance sheet data: A1 COMPANY Balance Sheets December 31 Cash Accounts receivable (net) Inventory Plant assets (net) Accounts payable Mortgage payable (15%, due in 15 years) Common stock, $10 par Retained earnings

2025 $ 40,000 65,000 60,000 185,000 $350,000 $ 50,000 100,000 140,000 60,000 $350,000

2024 $ 30,000 60,000 50,000 180,000 $320,000 $ 60,000 100,000 120,000 40,000 $320,000

Additional information for 2025: 1. 2. 3. 4. 5.

Net income was $25,000. Sales on account were $450,000. Sales returns and allowances amounted to $25,000. Cost of goods sold was $275,000. Net cash provided by operating activities was $49,000. Capital expenditures were $23,000, and cash dividends were $18,000.

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ex. 255

(Cont.)

Instructions Compute the following ratios at December 31, 2025. (a) Current ratio. (e) Days in inventory (b) Accounts receivable turnover. (f) Free cash flow. (c) Average collection period. (d) Inventory turnover. Ans: N/A, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Comprehensive Example of Ratio Analysis, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

Solution 255 $165,000 (a) Current ratio =

= 3.3:1

$50,000 (b) Accounts receivable turnover =

$425,000 ($65,000 + $60,000) / 2

= 6.8 times

$275,000 ($60,000 + $50,000) / 2

(e) Days in inventory = 365 days ÷ 5.0 = 73 days (f) Free cash flow = $49,000 – $23,000 – $18,000 = $8,000

= 5.0 times

Financial Analysis: The Big Picture

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Ex. 256 Here is the income statement for Ace Supply, Inc. ACE SUPPLY, INC. Income Statement For the Year Ended December 31, 2025 Sales revenue Cost of goods sold Gross profit Expenses (including $12,000 interest and $22,000 income taxes) Net income

$400,000 250,000 150,000 100,000 $ 50,000

Additional information: 1. Common stock outstanding January 1, 2025, was 30,000 shares, and 40,000 shares were outstanding at December 31, 2025. 2. The market price of Ace Supply, Inc. stock was $15.86 in 2025. 3. Cash dividends of $16,000 were paid, $4,500 of which were to preferred stockholders. Instructions Compute the following measures for 2025: (a) Earnings per share. (b) Price-earnings ratio. (c) Payout ratio. (d) Times interest earned. Ans: N/A, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Comprehensive Example of Ratio Analysis, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

Solution 256 (a) Earnings per share =

(b) Price-earnings ratio =

$50,000 - $4,500 (30,000 + 40,000) / 2

$15.86 $1.30

(d) Times interest earned =

$45,500 35,000

= $1.30

= 12.2 times

$16,000 - $4,500 $50,000

= 23%

$50,000 + $12,000 + $22,000 $12,000

$84,000 $12,000

= 7 times

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ex. 257 A1 Consulting Corporation experienced a fire on December 31, 2025, in which its financial records were partially destroyed. It has been able to salvage some of the records and has ascertained the following balances. Cash Accounts receivable (net) Inventory Accounts payable Notes payable Common stock, $100 par Retained earnings

December 31, 2025 $ 40,000 84,000 200,000 50,000 30,000 400,000 170,000

December 31, 2024 $ 15,000 126,000 180,000 10,000 20,000 400,000 101,000

Additional information: 1. The inventory turnover is 4.2 times 2. The return on common stockholders' equity is 14%. The company had no additional paid-incapital. 3. The accounts receivable turnover is 10.2 times. 4. The return on assets is 12.5%. 5. Total assets, Dec. 31, 2024 = $604,750. Instructions Compute the following values for 2025: (a) Cost of goods sold. (b) Net credit sales. (c) Net income. (d) Total assets. Ans: N/A, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Comprehensive Example of Ratio Analysis, Bloom: AN, Difficulty: Hard, Min: 25, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

Financial Analysis: The Big Picture

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Solution 257

(a) Inventory turnover =

(b) Accounts receivable turnover =

Cost of goods sold Average inventory

= 4.2 times

Cost of goods sold ($200,000 + $180,000) / 2

= 4.2 times

Cost of goods sold $190,000

= 4.2 times

$190,000 X 4.2 times $798,000

= Cost of goods sold = Cost of goods sold

Net sales (Credit) Average accounts receivable

= 10.2

Net sales (Credit) ($126,000 + $84,000) / 2

= 10.2

Net sales (Credit) $105,000

= 10.2

$105,000 X 10.2

= Net sales (Credit)

$1,071,000

= Net sales (Credit)

Net income - Preferred dividends Average common stockholders’ equity

Net income - $0 ($400,000 + $170,000 + $400,000 + $101,000) / 2

= 14%

Net income $535,500

= 14%

$535,500 X 14% $74,970 (d) Return on assets =

= 14%

Net income

= Net income = Net income = 12.5%

Average total assets $74,970 (See c, above) Average total assets $74,970 / 12.5% $599,760

= 12.5% = Average assets = Average assets

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 257 (Cont.)

= Average assets $599,760 (Total assets 2025 + Total assets 2024) /2 (Total assets 2025 + $604,750) /2

= Average assets $599,760

($599,760 X 2) - $604,750

= Total assets 2025

$1,199,520 - $604,750 $594,770

= Total assets 2025 = Total assets 2025

Ex. 258 The financial statements of Acme Office Supply Company appear below: ACME OFFICE SUPPLY COMPANY Comparative Balance Sheet December 31 Assets 2025 Cash .............................................................................................. $ 25,000 Debt investments ........................................................................... 20,000 Accounts receivable (net) .............................................................. 50,000 Inventory ....................................................................................... 140,000 Property, plant, and equipment (net) ............................................. 170,000 Total assets ............................................................................. $405,000

2024 $ 40,000 60,000 30,000 170,000 200,000 $500,000

Liabilities and stockholders' equity Accounts payable .......................................................................... $ 25,000 Short-term notes payable .............................................................. 40,000 Bonds payable ............................................................................... 75,000 Common stock .............................................................................. 160,000 Retained earnings ......................................................................... 105,000 Total liabilities and stockholders' equity .................................... $405,000

$ 30,000 90,000 160,000 145,000 75,000 $500,000

ACME OFFICE SUPPLY COMPANY Income Statement For the Year Ended December 31, 2025 Net sales (all on credit) .................................................................. Cost of goods sold ......................................................................... Gross profit .................................................................................... Expenses Interest expense ...................................................................... Selling expenses ..................................................................... Administrative expenses .......................................................... Total expenses .................................................................. Income before income taxes .......................................................... Income tax expense ...................................................................... Net income ....................................................................................

$360,000 184,000 176,000 $11,000 30,000 20,000 61,000 115,000 35,000 $ 80,000

Financial Analysis: The Big Picture

Ex. 258

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(Cont.)

Additional information: a. Cash dividends of $50,000 were declared and paid on common stock in 2025. b. Weighted-average number of shares of common stock outstanding during 2025 was 50,000 shares. c. Market price of common stock on December 31, 2025, was $16 per share. d. Net cash provided by operating activities for 2025 was $70,000. Instructions Using the financial statements and additional information, compute the following ratios for the company for 2025. Show all computations. Computations 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Current ratio . Return on common stockholders' equity Price-earnings ratio . Inventory turnover . Accounts receivable turnover . Times interest earned . Profit margin . Days in inventory . Payout ratio . Return on assets .

Ans: N/A, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Comprehensive Example of Ratio Analysis, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

Solution 258 1.

Current ratio 3:6. (Cur. assets/cur. liab.)

Return on common stockholders' equity 33%.

$235,000 ————— = 3.6 $65,000 $80,000 ———————————— = .33 ($265,000 + $220,000) ÷ 2

(Net inc./[(end. st. eq. + beg. st. eq.) ÷ 2])

Price-earnings ratio 10.0 times.

$80,000 EPS = ———— = $1.60 50,000

Mar. price Net inc. / Com. sh. out.

$16 = 10.0 times $1.60

Inventory turnover 1.19 times.

$184,000 ———————————— = 1.19 ($140,000 + $170,000) ÷ 2

(COGS/[(end. inv. + beg. inv.) ÷ 2])

Accounts receivable turnover 9.0 times. (Cr. sal./[(end. A/R + beg. A/R) ÷ 2])

$360,000 ——————————— = 9.0 ($50,000 + $30,000) ÷ 2

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 258 (Cont.) 6.

Times interest earned 11.5 times.

$80,000 + $35,000 + $11,000 —————————————— = 11.5 $11,000

Net inc. + inc. tax exp. + int. exp. Int. exp.

Profit margin 22.2%. (Net inc./Net sales)

(365/inv. turn.)

365 days ———— 1.19

Payout ratio 63%.

$50,000 ———— = .63 $80,000

Average days in inventory 306.7 days.

(Cash div. paid/Net inc.)

10.

$80,000 ———— = .222 $360,000

Return on assets 17.7%. (Net inc. / [(end. tot. ass. + beg. tot. ass.) ÷ 2])

= 306.7

$80,000 ———————————— = .177 ($405,000 + $500,000) ÷ 2

Financial Analysis: The Big Picture

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Ex. 259 The following ratios have been computed for Ace Company for 2025. Profit margin ratio Times interest earned Accounts receivable turnover

20% 12 times 5 times

Current ratio Debt to assets ratio

2.5:1 24%

The 2025 financial statements for Ace Company with missing information follows: ACE COMPANY Comparative Balance Sheet December 31 —————————————————————————————————————————— Assets 2025 2024 Cash ........................................................................................ $ 25,000 $ 35,000 Debt Investments ...................................................................... 15,000 15,000 Accounts receivable (net) ......................................................... ? (6) 50,000 Inventory .................................................................................. ? (7) 50,000 Property, plant, and equipment (net) ........................................ 200,000 160,000 Total assets ...................................................................... $ ? (8) $310,000 Liabilities and stockholders' equity Accounts payable ..................................................................... $ 15,000 Short-term notes payable ......................................................... 35,000 Bonds payable ......................................................................... ? (9) Common stock ......................................................................... 200,000 Retained earnings .................................................................... 47,000 Total liabilities and stockholders' equity ............................. $ ? (10)

$ 25,000 30,000 20,000 200,000 35,000 $310,000

ACE COMPANY Income Statement For the Year Ended December 31, 2025 —————————————————————————————————————————— Net sales .................................................................................. $200,000 Cost of goods sold ................................................................... 100,000 Gross profit ............................................................................... 100,000 Expenses: Depreciation expense ......................................................... $ ? (5) Interest expense ................................................................. 5,000 Selling expenses ................................................................ 10,000 Administrative expenses .................................................... 15,000 Total expenses ............................................................. ? (4) Income before income taxes .................................................... ? (2) Income tax expense ........................................................... ? (3) Net income ............................................................................... $ ? (1)

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ex. 259 (Cont.) Instructions Use the above ratios and information from the Ace Company financial statements to fill in the missing information on the financial statements. Follow the sequence indicated. Show computations that support your answers. Ans: N/A, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Comprehensive Example of Ratio Analysis, Bloom: AN, Difficulty: Hard, Min: 35, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

Solution 259 ACE COMPANY Comparative Balance Sheet December 31 —————————————————————————————————————————— Assets 2025 2024 Cash .................................................................................. $ 25,000 $ 35,000 Debt investments ............................................................... 15,000 15,000 Accounts receivable (net) .................................................. 30,000 (6) 50,000 Inventory ........................................................................... 55,000 (7) 50,000 Property, plant, and equipment (net) ................................. 200,000 160,000 Total assets ................................................................ $325,000 (8) $310,000 Liabilities and stockholders' equity Accounts payable .............................................................. Short-term notes payable .................................................. Bonds payable ................................................................... Common stock .................................................................. Retained earnings ............................................................. Total liabilities and stockholders' equity .......................

$ 15,000 35,000 28,000 (9) 200,000 47,000 $325,000 (10)

$ 25,000 30,000 20,000 200,000 35,000 $310,000

ACE COMPANY Income Statement For the Year Ended December 31, 2025 —————————————————————————————————————————— Net sales ........................................................................... $200,000 Cost of goods sold ............................................................. 100,000 Gross profit......................................................................... 100,000 Expenses Depreciation expense .................................................. $15,000 (5) Interest expense .......................................................... 5,000 Selling expenses ......................................................... 10,000 Administrative expenses .............................................. 15,000 Total expenses ...................................................... 45,000 (4) Income before income taxes .............................................. 55,000 (2) Income tax expense .......................................................... 15,000 (3) Net income ........................................................................ $ 40,000 (1)

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Solution 259 (Cont.) (1)

Net income = $40,000; ($200,000 × 20%).

(2)

Income before income taxes = $55,000. Let X = Income before income taxes and interest expense. X ——— = 12 times; X = $60,000; $60,000 – $5,000 = $55,000. 5,000

(3)

Income tax expense = $15,000; ($55,000 – $40,000). (Inc. bef. inc. tax. – Net inc.)

(4)

Total operating expenses = $45,000; ($100,000 – $55,000). (Gr. profit – inc. bef. inc. tax.)

(5)

Depreciation expense = $15,000; [$45,000 – ($5,000 + $10,000 + $15,000)].

(6)

Accounts receivable (net) = $30,000. Let X = Average receivables. $200,000 ———— = 5 times; 5X = $200,000; X = $40,000. (Net sal. ÷ A/R turn.) X Let Y = Accounts receivable at 12/31/2025. $50,000 + Y —————— = $40,000; $50,000 + Y = $80,000; Y = $30,000. [(2 × ave. A/R) – beg. A/R] 2

(7)

Inventory = $55,000 Let X = Total current assets. X ———— = 2.5; X = $125,000; $125,000 – ($25,000 + $15,000 + $30,000) = $55,000.* $50,000 *[(End. A/P + end. N/P) × cur. rat.] – (end. cash + end. invest. + end. A/R)

(8)

Total assets = $325,000

($25,000 + $15,000 + $30,000 + $55,000 + $200,000)

(9)

Bonds payable = $28,000 Let X = Total debt X ———— = 24%; X = $78,000; $78,000 – ($15,000 + $35,000) = $28,000.* $325,000 *[Tot. ass. × debt to ass. rat.) – A/P – N/P]

(10) Total liabilities and stockholders' equity = $325,000; same as total assets—see (8) above.

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Ex. 260 Acme Supply Corporation has issued common stock only. The company has a gross profit rate of 20%. The information shown below was taken from the company's financial statements: Beginning inventory $ 482,000 Purchases 4,346,000 Ending inventory ? Average accounts receivable 700,000 Average common stockholders' equity 3,100,000 Sales revenue (all on credit) 5,600,000 Net income 341,000 Instructions Compute the following: (a) Accounts receivable turnover and the average number of days required to collect the accounts receivable. (b) The inventory turnover and the average days in inventory. (c) Return on common stockholders' equity. Ans: N/A, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Comprehensive Example of Ratio Analysis, Bloom: AN, Difficulty: Hard, Min: 13, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

Solution 260 (a) Accounts receivable turnover

= = =

365 days —————————————— Accounts receivable turnover = 365 ÷ 8.0 times = 45.6 days Inventory turnover = Cost of goods sold ÷ Average inventory First calculate ending inventory. Beginning Inventory $ 482,000 + Purchases 4,346,000 - Cost of Goods Sold (4,480,000)* Ending Inventory $ 348,000 Average collection period

(b)

Credit sales ————————————— Average accounts receivable $5,600,000 ÷ $700,000 8.0 times

*Since the gross profit ratio is 20%, the cost of goods sold ratio is 80%. 80% × $5,600,000 (net sales) = $4,480,000. Ending Inventory = $348,000 (per above) Average Inventory = ($482,000 + $348,000) ÷ 2 = $415,000 Inventory Turnover = $4,480,000 ÷ $415,000 = 10.8 times Days in Inventory = 365 days ÷ 10.8 times = 33.8 days (c)

Net income Return on common stockholders' equity = ————————————————— Average common stockholders' equity $341,000 ÷ $3,100,000 = 11% .

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COMPLETION STATEMENTS 261.

Discontinued operations refers to the disposal of a

of a business.

Ans: N/A, LO: 1, Topic: Apply the Concepts of Sustainable Income and Quality of Earnings, Subtopic: Discontinued Operations, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Business Economics

262.

A change in inventory methods during the year would be classified as a change in .

Ans: N/A, LO: 1, Topic: Apply the Concepts of Sustainable Income and Quality of Earnings, Subtopic: Change in Accounting Principle, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

263.

analysis, also called trend analysis, is a technique for evaluating a series of financial statement data over a period of time.

Ans: N/A, LO: 2, Topic: Apply Horizontal and Vertical Analysis, Subtopic: Horizontal Analysis, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

264.

Expressing each item in a financial statement as a percent of a base amount is called analysis.

Ans: N/A, LO: 2, Topic: Apply Horizontal and Vertical Analysis, Subtopic: Vertical Analysis, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

265.

For analysis of the financial statements, ratios can be classified into three types: (1) ratios, (2) ratios, and (3) ratios.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

266.

The times interest earned is calculated by dividing and by interest expense.

plus

Ans: N/A, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Solvency Ratios, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

267.

The liquidity ratio, known as the ratio, has a disadvantage that it uses year-end balances for current assets and current liabilities.

Ans: N/A, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

268.

The accounts receivable turnover is calculated by dividing .

by average

269.

If the inventory turnover is 7.3 times, and the average inventory was $600,000, the cost of goods sold during the year was $ and the average days to sell the inventory was days.

Ans: N/A, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Liquidity Ratios, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

270.

A company had net sales for the year of $300,000 and average total assets of $200,000. The asset turnover is times.

13-92 271.

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

The cash dividends.

ratio measures the percentage of earnings distributed in the form of

Ans: N/A, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: Profitability Ratios, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

272.

The lower the to ratio, the more equity "buffer" is available to the creditors if the company becomes insolvent.

Answers to Completion Statements 261. significant component 262. accounting principle 263. Horizontal 264. vertical (common-size) 265. liquidity, solvency, profitability (any order) 266. net income, income taxes, interest expense

267. current 268. net credit sales, net receivables 269. $4,380,000 ($600,000 x 7.3), 50 (365/7.3) 270. 1.5 ($300,000 / $200,000) 271. payout 272. debt, assets

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MATCHING SET A 273.

For each of the ratios listed below, indicate by the appropriate code letter, whether it is a liquidity ratio, a profitability ratio, or a solvency ratio. Code: L = P = S = 1.

Price-earnings ratio

Return on assets

Accounts receivable turnover

Earnings per share

Payout ratio

Working capital

Current ratio

Debt to assets ratio

Free cash flow

Liquidity ratio Profitability ratio Solvency ratio

10. Inventory turnover Ans: N/A, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

Answers to Matching P

1. Price-earnings ratio

Working capital

2. Return on assets

Current ratio

8. Debt to assets ratio

4. Earnings per share

9. Free cash flow

5. Payout ratio

Accounts receivable turnover

10.

Inventory turnover

Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

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SET B 274.

Match the ratios with their formulas by entering the appropriate letter in the space provided. A. Current ratio B. Price-earnings ratio C. Profit margin D. Asset turnover E. Earnings per share

F. Times interest earned G. Inventory turnover H. Average collection period I. Days in inventory J. Payout ratio

Cost of goods sold Average inventory

Net income Net sales

Cash dividends declared on common stock Net income

Net sales Average total assets

Current assets Current liabilities

365 days Accounts receivable turnover

Net income − preferred dividends Average common shares outstanding

365 days Inventory turnover

Income before income taxes and interest expense Interest expense

10.

Market price per share Earnings per share

Ans: N/A, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

Answers to Matching 1. 2. 3. 4. 5.

G C J D A

6. 7. 8. 9. 10.

H E I F B

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SHORT-ANSWER ESSAY QUESTIONS S-A E 275 Explain sustainable income. What relationship does this concept have to the treatment of irregular items on the income statement? Ans: N/A, LO: 1, Topic: Apply the Concepts of Sustainable Income and Quality of Earnings, Subtopic: Sustainable Income, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: Communications, IMA: Reporting

Solution 275 Sustainable income is defined as the most likely level of income to be obtained in the future. It is the amount of regular income that a company can expect to earn from its normal operations. In order to distinguish a company's net income from its sustainable income, irregular items, such as an unusual gain or discontinued operations, are reported separately on the income statement. S-A E 276 Ryan Seacrest, the CEO of A1 Products, is a successful entrepreneur and his focus is his products, not his accounting system. He asks you to explain to him, in a memo, the bases of comparison for ratio analysis. Ans: N/A, LO: 1, Topic: Apply the Concepts of Sustainable Income and Quality of Earnings, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: Communications, IMA: Strategy, Planning & Performance

Solution 276 To: Ryan Seacrest From: Student name Re: Bases of Comparison for Ratio Analysis There are three bases of comparison for ratio analysis. They include: Intra-company: This basis compares a ratio for the current year to the same ratio for one or more prior years. Inter-company: This basis compares a ratio for one company with the same ratio for one or more competing companies. Industry averages: This basis compares a ratio for a company with the industry average for the same ratio. S-A E 277 Horizontal and vertical analyses are analytical tools frequently used to analyze financial statements. What type of information or insights can be obtained by using these two techniques? Explain how the output of horizontal analysis and vertical analysis can be compared to industry averages and/or competitive companies. Ans: N/A, LO: 2 Topic: Apply Horizontal and Vertical Analysis, Subtopic: NA, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: Communications, IMA: Strategy, Planning & Performance

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

Solution 277 Horizontal analysis allows an analyst to develop a picture of current trends in a company's operations. The analyst can see whether the account amounts are increasing or decreasing and how large these changes actually are in comparison to a base year. Vertical analysis allows an analyst to evaluate financial statement items within a single financial statement. This technique helps the analyst to evaluate the relative size of the financial statement items and how the items relate to the financial statement as a whole. An example would be if current liabilities were a very large percentage of total liabilities and stockholders' equity. Both techniques allow an analyst to evaluate a company’s performance and position relative to its competitors and its industry as a whole. For example, the analyst could evaluate a company’s current trend in sales and see how favorably its sales performance compared to the sales performance of other companies in the industry. Another example would be comparing the relative size of long-term liabilities or retained earnings. This would show which companies have taken on a large amount of debt and which companies have reinvested earnings. S-A E 278 What do each of the following types of ratio measure? (a) Liquidity ratios. (b) Solvency ratios. (c) Profitability ratios. Ans: N/A, LO: 3, Topic: Analyze a Company’s Performance Using Ratio Analysis, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: Communications, IMA: Strategy, Planning & Performance

Solution 278 (a) Liquidity ratios measure the short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash. (b) Solvency ratios measure the company's ability to survive over a long period of time. (c) Profitability ratios measure the income or operating success of an enterprise for a given period of time. S-A E 279 Identify and explain factors that affect quality of earnings. Ans: N/A, LO: 1, Topic: Apply the Concepts of Sustainable Income and Quality of Earnings, Subtopic: Quality of Earnings, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: Communications, IMA: Strategy, Planning & Performance

Solution 279 (1) Use of alternative accounting methods. Variations among companies in the application of generally accepted accounting principles may hamper comparability. (2) Use of pro forma income measures that do not follow GAAP. Pro forma income is calculated by excluding items that the company believes are unusual or nonrecurring. It is often difficult to determine what was included and excluded. (3) Improper revenue and expense recognition. Many high-profile cases of inappropriate accounting involve recording items in the wrong period.

Financial Analysis: The Big Picture

S-A E 280

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(Communication)

A1 Delivery specializes in the overnight transportation of medical equipment and laboratory specimens. The company has selected the following information from its most recent annual report to be the subject of an immediate press release.      

The financial statements are being released. Net income this year was $3.1 million. Last year's net income had been $2.8 million. The current ratio has changed to 2:1 from last year's 1.6:1. The debt to assets ratio has changed to 4:6 from last year's 3:6. The company expanded its truck fleet substantially by purchasing ten new delivery vans. The company already had twelve delivery vans. The company is now the largest medical courier in the mid-Atlantic region.

Required: Prepare a brief press release incorporating the above information. Include all information. Think carefully about which information (if any) is good news for the company, and which (if any) is bad news. Ans: N/A, LO: 3, Topic: Apply the Concepts of Sustainable Income and Quality of Earnings, Subtopic: NA, Bloom: S, Difficulty: Medium, Min: 5, AACSB: Communications, AICPA BC: Governance Perspective, AICPA AC: Reporting, AICPA PC: Communications, IMA: Strategy, Planning & Performance

Solution 280 A1 Delivery released its financial statements today, disclosing an 11% increase in earnings, to $3.1 million from $2.8 million last year. The company also improved its short-term liquidity. Its current ratio improved to 2:1 from last year's 1.6:1. Part of the improved performance is no doubt due to the addition of ten new delivery vans to its fleet, allowing it to become the largest medical courier in the mid-Atlantic region. The purchase of the vans, however, caused the debt to assets ratio to deteriorate. There is now $4 of debt for every $6 in assets, while last year, there was only $3 of debt to $6 in assets.

IFRS QUESTIONS 1. Under IFRS, there is no classification for a. changes in accounting estimates. b. changes in accounting principles. c. discontinued operations. d. extraordinary items. Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

2. Distinguishing normal levels of income from irregular items is of interest for the FASB IASB a. no no b. no yes c. yes no d. yes yes Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

3. All revenue and expense items are considered ordinary in nature under a. both IFRS and GAAP. b. GAAP. c. IFRS. d. neither IFRS or GAAP. Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

CHAPTER 14 MANAGERIAL ACCOUNTING CHAPTER LEARNING OBJECTIVES 1. Identify the features of managerial accounting and the functions of management. The primary users of managerial accounting reports, issued as frequently as needed, are internal users, who are officers, department heads, managers, and supervisors in the company. The purpose of these reports is to provide special-purpose information for a particular user for a specific decision. The content of managerial accounting reports pertains to subunits of the business. It may be very detailed, and may extend beyond the accrual accounting system. The reporting standard is relevance to the decision being made. No independent audits are required in managerial accounting. The functions of management are planning, directing, and controlling. Planning requires management to look ahead and to establish objectives. Directing involves coordinating the diverse activities and human resources of a company to produce a smooth-running operation. Controlling is the process of keeping the activities on track. 2. Describe the classes of manufacturing costs and the differences between product and period costs. Manufacturing costs are typically classified as either (1) direct materials, (2) direct labor, or (3) manufacturing overhead. Raw materials that can be physically and directly associated with the finished product during the manufacturing process are called direct materials. The work of factory employees that can be physically and directly associated with converting raw materials into finished goods is considered direct labor. Manufacturing overhead consists of costs that are indirectly associated with the manufacture of the finished product. Manufacturing costs are typically incurred at the manufacturing facility. Product costs are costs that are a necessary and integral part of producing the finished product. Product costs are also called inventoriable costs. These costs do not become expenses until the company sells the finished goods inventory. Period costs are costs that are identified with a specific time period rather than with a salable product. These costs relate to nonmanufacturing costs and therefore are not inventoriable costs. They are expensed as incurred. 3. Demonstrate how to compute cost of goods manufactured and prepare financial statements for a manufacturer. Companies add the cost of the beginning work in process inventory to the total manufacturing costs for the current year to arrive at the total cost of work in process for the year. They then subtract the ending work in process inventory from the total cost of work in process to arrive at the cost of goods manufactured. The difference between a merchandising and a manufacturing balance sheet is in the current assets section. The current assets section of a manufacturing company's balance sheet presents three inventory accounts: finished goods inventory, work in process inventory, and raw materials inventory. The difference between a merchandising and a manufacturing income statement is in the cost of goods sold section. A manufacturing cost of goods sold section shows beginning and ending finished goods inventories and the cost of goods manufactured.

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

4 Discuss trends in managerial accounting. Managerial accounting has experienced many changes in recent years, including a shift toward service companies as well as emphasis on ethical behavior. Improved practices include a focus on managing the value chain through techniques such as just-in-time inventory, total quality management, activity-based costing, and theory of constraints. The balanced scorecard is now used by many companies in order to attain a more comprehensive view of the company's operations, and companies are now evaluating their performance with regard to their corporate social responsibility. Finally, data analytics and data visualizations are important tools that help businesses identify problems and opportunities, and then make informed decisions

TRUE-FALSE STATEMENTS 1.

Reports prepared in financial accounting are general-purpose reports while reports prepared in managerial accounting are usually special-purpose reports.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication, IMA: Reporting

Managerial accounting information generally pertains to an entity as a whole and is highly aggregated.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication, IMA: Reporting

All forms of business organizations need managerial accounting information.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication, IMA: Reporting

Determining the unit cost of manufacturing a product is an output of financial accounting.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: FSA

Managerial accounting internal reports are prepared more frequently than financial statements that are distributed externally.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication, IMA: Reporting

The management function of organizing and directing is mainly concerned with setting goals and objectives for the entity.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: None, AICPA PC: Leadership, IMA: Decision Analysis

The controller of a company is responsible for all of the accounting and finance issues a company faces.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Controlling is the process of determining whether planned goals are being met.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: None, AICPA PC: Leadership, IMA: Internal Controls

Decision-making is an integral part of the planning, directing, and controlling functions.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic Perspective, AICPA FC: None, AICPA PC: Leadership, IMA: Decision Analysis

10.

Direct materials costs and indirect materials costs are both included in manufacturing overhead.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Managerial Accounting 11.

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Manufacturing costs that cannot be classified as direct materials or direct labor are classified as manufacturing overhead.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

12.

The balance in the raw materials inventory account is equal to total direct materials minus total indirect materials.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

13.

Raw materials that can be conveniently and directly associated with a finished product are called materials overhead.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

14.

The total cost of a finished product does not generally include equal amounts of materials, labor, and overhead costs.

Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

15.

Both direct labor cost and indirect labor cost are product costs.

Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

16.

Period costs include selling and administrative expenses.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

17.

Indirect materials and indirect labor are both inventoriable costs.

Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

18.

Direct materials and direct labor are the only product costs.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

19.

Total period costs are deducted from total cost of work in process to calculate cost of goods manufactured.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

20.

Period costs are not inventoriable costs.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

21.

Ending finished goods inventory appears on both the balance sheet and the income statement of a manufacturing company.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

22.

The beginning work in process inventory appears on both the balance sheet and the cost of goods manufactured schedule of a manufacturing company.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

23.

In calculating gross profit for a manufacturing company, the cost of goods manufactured is deducted from net sales.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

14- 4 24.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Finished goods inventory does not appear on a cost of goods manufactured schedule.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

25.

If ending work in process inventory is greater than beginning work in process inventory, then cost of goods manufactured will be less than total manufacturing costs for the period.

Ans: T, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

26.

The finished goods inventory account for a manufacturing company is equivalent to the inventory account for a merchandising company.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

27.

Raw materials inventory shows the cost of completed goods available for sale to customers.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

28.

The balanced scorecard approach attempts to maintain minimal inventories on hand.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

29.

The supply chain is all the activities associated with providing a product or service.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

30.

Many companies have significantly lowered inventory levels and costs using just-in-time inventory methods.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

31.

Managerial accounting is primarily concerned with managers and external users.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

32.

Planning involves coordinating the diverse activities and human resources of a company to produce a smoothly running operation.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: None, AICPA PC: Nonet, IMA: Cost Management

33.

When the physical association of raw materials with the finished product is too difficult to trace, these costs are usually classified as indirect materials.

Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

34.

Product costs are also called inventoriable costs.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

35.

Direct materials become a cost of goods manufactured when these items are acquired, not when the items are used.

Ans: F, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

36.

The sum of the direct materials costs, direct labor costs, and the beginning work in process inventory is the total manufacturing costs for the year.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Managerial Accounting 37.

14 - 5

In a manufacturing company balance sheet, manufacturing inventories are reported in the current assets section in the order of their expected use in production.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

MULTIPLE CHOICE QUESTIONS 38.

Managerial accounting is used in each of the following types of businesses except a. service firms. b. merchandising firms. c. manufacturing firms. d. Managerial accounting is used in all types of firms.

Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

39.

Managerial accounting information is generally prepared for a. stockholders. b. creditors. c. managers. d. regulatory agencies.

Ans: c, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

40.

Managerial accounting information a. pertains to the entity as a whole and is highly aggregated. b. pertains to subunits of the entity and may be very detailed. c. is prepared only once a year. d. is constrained by the requirements of generally accepted accounting principles.

Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

41.

The major reporting standard for presenting managerial accounting information is a. relevance. b. generally accepted accounting principles. c. the cost principle. d. the current tax laws.

Ans: a, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

42.

Managerial accounting is also called a. management accounting. b. controlling. c. analytical accounting. d. inside reporting.

Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

43.

Which of the following is not an internal user? a. Creditor b. Department manager c. Controller d. Treasurer

Ans: a, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Professional Behavior, IMA: Business Economics

14- 6 44.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Managerial accounting does not encompass a. calculating product cost. b. calculating earnings per share. c. determining cost behavior. d. profit planning.

Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: FSA

45.

Managerial accounting is applicable to a. service entities. b. manufacturing entities. c. not-for-profit entities. d. all of these.

Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Cost Management

46.

Management accountants would not a. assist in budget planning. b. prepare reports primarily for external users. c. determine cost behavior. d. be concerned with the impact of cost and volume on profits.

Ans: b, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Cost Management

47.

Internal reports are prepared and distributed a. daily. b. monthly. c. annually. d. as needed.

Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

48.

Financial statements for external users can be described as a. user-specific. b. general-purpose. c. special-purpose. d. managerial reports.

Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

49.

Managerial accounting reports can be described as a. general-purpose. b. macro-reports. c. special-purpose. d. classified financial statements.

Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

50.

Which of the following statements about internal reports is not true? a. The content of internal reports may extend beyond the accrual accounting system. b. Internal reports may show all amounts at market values. c. Internal reports may discuss prospective events. d. Internal reports are generally highly summarized rather than detailed.

Ans: d, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Managerial Accounting 51.

14 - 7

While the preparation of financial statements for external users is guided by GAAP, the guideline for the preparation of managerial accounting reports for internal users is a. timeliness. b. special-purpose. c. relevance to decision. d. aggregation.

Ans: c, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

52.

Internal managerial accounting reports are generally a. aggregated. b. detailed. c. regulated. d. unreliable.

Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

53.

A distinguishing feature of managerial accounting is that a. it is prepared for external users. b. it produces general-purpose reports. c. it generally results in very detailed reports. d. it publishes quarterly and annual reports.

Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

54.

What activities and responsibilities are not associated with managerial functions? a. Planning b. Accountability c. Controlling d. Directing

Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Professional Behavior, IMA: Reporting

55.

Planning is a function that involves a. hiring the right people for a particular job. b. coordinating the accounting information system. c. setting goals and objectives for an entity. d. analyzing financial statements.

Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: None, AICPA PC: None, IMA: Cost Management

56.

The managerial function of controlling a. is performed only by the controller of a company. b. is only applicable when the company sustains a loss. c. is concerned mainly with operating a manufacturing segment. d. includes performance evaluation by management.

Ans: d, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: None, AICPA PC: Project Management, IMA: Decision Analysis

57.

Which of the following is not a management function? a. Constraining b. Planning c. Controlling d. Directing

Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: None, AICPA PC: Project Management, IMA: Decision Analysis

58.

A manager that is establishing objectives is performing which management function?

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

14- 8 a. b. c. d.

Controlling Directing Planning Constraining

Ans: c, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: None, AICPA PC: Project Management, IMA: Decision Analysis

59.

The management function that requires managers to look ahead and establish objectives is a. controlling. b. directing. c. planning. d. constraining.

Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Research Management, AICPA FC: None, AICPA PC: Project Management, IMA: Decision Analysis

60.

In determining whether planned goals are being met, a manager is performing the function of a. planning. b. follow-up. c. directing. d. controlling.

Ans: d, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: None, AICPA PC: Project Management, IMA: Decision Analysis

61.

Which of the following is not a separate management function? a. Planning b. Directing c. Decision-making d. Controlling

Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: None, AICPA PC: Project Management, IMA: Decision Analysis

62.

Directing includes a. providing a framework for management to have criteria to terminate employees when needed. b. running a department under quality control standards universally accepted. c. coordinating a company's diverse activities and human resources to produce a smoothrunning operation. d. developing a complex performance ranking system to give certain high performers good raises.

Ans: c, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: None, AICPA PC: Project Management, IMA: Decision Analysis

63.

Both direct materials and indirect materials are a. raw materials. b. manufacturing overhead. c. merchandise inventory. d. sold directly to customers by a manufacturing company.

Ans: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Managerial Accounting 64.

14 - 9

The work of factory employees that can be physically and directly associated with converting raw materials into finished goods is a. manufacturing overhead. b. indirect materials. c. indirect labor. d. direct labor.

Ans: d, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

65.

Which one of the following would not be classified as manufacturing overhead? a. Indirect labor b. Direct materials c. Insurance on factory building d. Indirect materials

Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

66.

Manufacturing costs include a. direct materials and direct labor only. b. direct materials and manufacturing overhead only. c. direct labor and manufacturing overhead only. d. direct materials, direct labor, and manufacturing overhead.

Ans: d, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

67.

Which one of the following is not a direct material? a. A tire used for a lawn mower b. Plastic used in the covered case for an iPhone c. Steel used in the manufacturing of steel-radial tires d. Lubricant for a ball-bearing joint for a large crane

Ans: d, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

68.

Which one of the following is not a cost element in manufacturing a product? a. Manufacturing overhead b. Direct materials c. Office salaries d. Direct labor

Ans: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

69.

A manufacturing process requires small amounts of glue. The glue used in the production process is classified as a(n) a. period cost. b. indirect material. c. direct material. d. miscellaneous expense.

Ans: b, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

14- 10 70.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

The wages of a janitor in the factory would be classified as a. a period cost. b. direct labor. c. indirect labor. d. compliance costs.

Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

71.

Which one of the following is not considered a raw material costs? a. Partially completed motor engines for a motorcycle factory b. Bolts used in manufacturing the compressor of an engine c. Rivets for the wings of a new commercial jet aircraft d. Lumber used to build tables

Ans: a, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

72.

Which of the following is not a manufacturing cost category? a. Cost of goods sold b. Direct materials c. Direct labor d. Manufacturing overhead

Ans: a, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

73.

As technology changes manufacturing processes, it is likely that direct a. labor will increase. b. labor will decrease. c. materials will increase. d. materials will decrease.

Ans: b, LO: 4, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

74.

For the work of factory employees to be considered as direct labor, the work must be conveniently and a. materially associated with raw materials conversion. b. periodically associated with raw materials conversion. c. physically associated with raw materials conversion. d. promptly associated with raw materials conversion.

Ans: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

75.

Which of the following is not classified as direct labor? a. Bottlers of beer in a brewery b. Copy machine operators at a copy shop c. Wages of supervisors d. Bakers in a bakery

Ans: c, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Managerial Accounting

76.

14 - 11

Cotter pins and lubricants used irregularly in a production process are classified as a. miscellaneous expense. b. direct materials. c. indirect materials. d. nonmaterial materials.

Ans: c, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

77.

Which of the following is not another name for the term manufacturing overhead? a. Factory overhead b. Pervasive costs c. Burden d. Indirect manufacturing costs

Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

78.

Because of automation, which component of product cost is declining? a. Direct labor b. Direct materials c. Manufacturing overhead d. Advertising

Ans: a, LO: 4, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost management

79.

The product cost that is most difficult to associate with a product is a. direct materials. b. direct labor. c. manufacturing overhead. d. advertising.

Ans: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Cost Management

80.

Manufacturing costs that cannot be classified as either direct materials or direct labor are known as a. period costs. b. nonmanufacturing costs. c. selling and administrative expenses. d. manufacturing overhead.

Ans: d, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

81.

Which one of the following is an example of a period cost? a. A change in benefits for the union workers who work in the New York factory of a Fortune 1000 manufacturer b. Workers' compensation insurance on factory workers' wages allocated to the factory c. Packaging materials for finished products d. Payroll accountant’s salary for work that is done in the corporate head office

Ans: d, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

14- 12 82.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Which one of the following costs would not be inventoriable? a. Period costs b. Factory insurance costs c. Indirect materials d. Indirect labor costs

Ans: a, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

83.

Direct materials and direct labor of a company total $8,000,000. If manufacturing overhead is $4,000,000, what is direct labor cost? a. $4,000,000 b. $8,000,000 c. $0 d. Cannot be determined from the information provided

Ans: d, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

84.

Which of the following are period costs? a. Raw materials b. Direct materials and direct labor c. Direct labor and manufacturing overhead d. Selling expenses

Ans: d, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

85.

Sales commissions are classified as a. overhead costs b. period costs. c. product costs. d. indirect labor.

Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

86.

Product costs consist of a. direct materials and direct labor only. b. direct materials, direct labor, and manufacturing overhead. c. selling and administrative expenses. d. period costs.

Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

87.

Product costs are also called a. direct costs. b. overhead costs. c. inventoriable costs. d. capitalizable costs.

Ans: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Managerial Accounting 88.

14 - 13

In accordance with the matching principle, inventoriable costs are expensed when a. the product is finished and in stock. b. the product has been returned. c. the product to which the costs attach is sold. d. all accounts payable have been settled.

Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

89.

When goods are sold, their inventoriable costs are transferred to a. selling expenses. b. gross profit. c. cost of goods sold. d. sales revenue.

Ans: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

90.

A manufacturing company calculates cost of goods sold as follows: a. Beginning FG inventory + cost of goods purchased – ending FG inventory. b. Ending FG inventory – cost of goods manufactured + beginning FG inventory. c. Beginning FG inventory – cost of goods manufactured – ending FG inventory. d. Beginning FG inventory + cost of goods manufactured – ending FG inventory.

Ans: d, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

91.

A manufacturing company reports cost of goods manufactured as a(n) a. current asset on the balance sheet. b. administrative expense on the income statement. c. component in the calculation of cost of goods sold on the income statement. d. component of the raw materials inventory on the balance sheet.

Ans: c, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

92.

The subtotal, "Cost of goods manufactured" appears on a. a merchandising company's income statement. b. a manufacturing company's income statement. c. both a manufacturing and a merchandising company's income statement. d. neither a merchandising nor a manufacturing company's income statement.

Ans: b, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

93.

Cost of goods manufactured in a manufacturing company is analogous to a. ending inventory in a merchandising company. b. beginning inventory in a merchandising company. c. cost of goods available for sale in a merchandising company. d. cost of goods purchased in a merchandising company.

Ans: d, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

14- 14

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

94.

Cost of goods sold a. only appears on merchandising companies' income statements. b. only appears on manufacturing companies' income statements. c. appears on both manufacturing and merchandising companies' income statements. d. is calculated exactly the same for merchandising and manufacturing companies.

Ans: c, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

95.

Kushman Combines, Inc. has $20,000 of ending finished goods inventory as of December 31, 2022. If beginning finished goods inventory was $10,000 and cost of goods sold was $50,000, how much would Kushman report for cost of goods manufactured? a. $70,000 b. $10,000 c. $60,000 d. $40,000

Ans: c, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $50,000 – $10,000 + $20,000 = $60,000 (Cost of goods sold – Beginning finished goods inventory + Ending finished goods inventory = Cost of goods manufactured)

96.

Cost of goods manufactured is calculated as follows: a. Beginning WIP + direct materials used + direct labor + manufacturing overhead + ending WIP. b. Direct materials used + direct labor + manufacturing overhead – beginning WIP + ending WIP. c. Beginning WIP + direct materials used + direct labor + manufacturing overhead – ending WIP. d. Direct materials used + direct labor + manufacturing overhead – ending WIP – beginning WIP.

Ans: c, LO: 3, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

97.

If the cost of goods manufactured during a period exceeds the total manufacturing costs for the period, then a. ending work in process inventory is greater than or equal to beginning work in process inventory. b. ending work in process inventory is greater than beginning work in process inventory. c. ending work in process inventory is equal to the cost of goods manufactured. d. ending work in process inventory is less than the beginning work in process inventory.

Ans: d, LO: 3, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

98.

On a costs of goods manufactured schedule, depreciation on factory equipment a. is not listed because it is included with Depreciation Expense on the income statement. b. appears in the manufacturing overhead section. c. is not listed because it is not a product cost. d. is not an inventoriable cost.

Ans: b, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Managerial Accounting 99.

14 - 15

On the costs of goods manufactured schedule, the ending raw materials inventory is reported as a(n) a. addition to raw materials purchases. b. addition to raw materials available for use. c. subtraction from raw materials available for use. d. component of manufacturing overhead.

Ans: c, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation AICPA PC: None, IMA: Reporting

100.

Dolan Company's accounting records reflect the following inventories: Dec. 31, 2022 Dec. 31, 2021 Raw materials inventory $310,000 $260,000 Work in process inventory 300,000 160,000 Finished goods inventory 190,000 150,000 During 2022, $800,000 of raw materials were purchased, direct labor costs amounted to $670,000, and manufacturing overhead incurred was $640,000. (Assume that all raw materials used were direct materials.) The total raw materials available for use during 2022 for Dolan Company is a. $1,110,000. b. $660,000. c. $750,000. d. $1,060,000.

Ans: d, LO: 3, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $260,000 + $800,000 = $1,060,000 (Beginning raw materials inventory + Purchases = Raw materials available)

101.

Dolan Company's accounting records reflect the following inventories: Dec. 31, 2022 Dec. 31, 2021 Raw materials inventory $310,000 $260,000 Work in process inventory 300,000 160,000 Finished goods inventory 190,000 150,000 During 2022, $800,000 of raw materials were purchased, direct labor costs amounted to $670,000, and manufacturing overhead incurred was $640,000. (Assume that all raw materials used were direct materials.) Dolan Company's total manufacturing costs incurred in 2022 amounted to a. $2,060,000. b. $2,020,000. c. $1,920,000. d. $2,110,000.

Ans: a, LO: 3, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $260,000 + $800,000 – $310,000 = $750,000; $750,000 + $670,000 + $640,000 = $2,060,000 (Beginning raw materials inventory + Purchases – Ending raw materials inventory = Raw materials used; Raw materials used + Direct labor + Manufacturing overhead incurred = Total manufacturing costs)

14- 16 102.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Dolan Company's accounting records reflect the following inventories: Dec. 31, 2022 Dec. 31, 2021 Raw materials inventory $310,000 $260,000 Work in process inventory 300,000 160,000 Finished goods inventory 190,000 150,000 During 2022, $800,000 of raw materials were purchased, direct labor costs amounted to $670,000, and manufacturing overhead incurred was $640,000. (Assume that all raw materials used were direct materials.) If Dolan Company's cost of goods manufactured for 2022 amounted to $1,890,000, its cost of goods sold for the year is a. $2,000,000. b. $1,750,000. c. $1,850,000. d. $1,930,000.

Ans: c, LO: 3, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $150,000 + $1,890,000 – $190,000 = $1,850,000 (Beginning finished goods inventory + Cost of goods manufactured – Ending finished goods inventory = Cost of goods sold)

103.

What is work in process inventory generally described as? a. Costs applicable to units that have been started in production but are only partially completed b. Costs associated with the end stage of manufacturing that are almost always complete and ready for customers c. Costs strictly associated with direct labor d. Beginning stage production costs associated with labor costs dealing with bringing in raw materials from the shipping docks

Ans: a, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

104.

Worth Company reported the following year-end information: beginning work in process inventory, $180,000; cost of goods manufactured, $866,000; beginning finished goods inventory, $252,000; ending work in process inventory, $220,000; and ending finished goods inventory, $264,000. Worth Company's cost of goods sold for the year is a. $854,000. b. $878,000. c. $826,000. d. $602,000.

Ans: a, LO: 3, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $252,000 + $866,000 – $264,000 = $854,000 (Beginning finished goods inventory + Cost of goods manufactured – Ending finished goods inventory = Cost of goods sold)

Managerial Accounting 105.

14 - 17

Laflin Company reported the following year-end information: Beginning work in process inventory $1,080,000 Beginning raw materials inventory 300,000 Ending work in process inventory 900,000 Ending raw materials inventory 480,000 Raw materials purchased 960,000 Direct labor 900,000 Manufacturing overhead 720,000 Laflin Company's cost of goods manufactured for the year is a. $2,400,000. b. $2,580,000. c. $2,220,000. d. $2,760,000.

Ans: b, LO: 3, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $300,000 + $960,000 – $480,000 = $780,000; $1,080,000 + $780,000 + $900,000 + $720,000 – $900,000 = $2,580,000 (Beginning raw materials inventory + Purchases – Ending raw materials inventory = Raw materials used; Beginning work in process inventory + Raw materials used + Direct labor + Manufacturing overhead incurred – Ending work in process inventory = Cost of goods manufactured)

106.

Benson Inc.'s accounting records reflect the following inventories: Dec. 31, 2021 Dec. 31, 2022 Raw materials inventory $ 80,000 $ 64,000 Work in process inventory 104,000 116,000 Finished goods inventory 100,000 92,000 During 2022, Benson purchased $1,450,000 of raw materials, incurred direct labor costs of $250,000, and incurred manufacturing overhead totaling $160,000. (Assume that all raw materials used were direct materials.) What was the cost of raw materials transferred to production during 2022 for Benson? a. $1,386,000 b. $1,466,000 c. $1,450,000 d. $1,434,000

14- 18 107.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Benson Inc.'s accounting records reflect the following inventories: Dec. 31, 2021 Dec. 31, 2022 Raw materials inventory $ 80,000 $ 64,000 Work in process inventory 104,000 116,000 Finished goods inventory 100,000 92,000 During 2022, Benson purchased $1,450,000 of raw materials, incurred direct labor costs of $250,000, and incurred manufacturing overhead totaling $160,000. (Assume that all raw materials used were direct materials.) What total manufacturing costs were incurred during 2022 for Benson? a. $1,864,000 b. $1,876,000 c. $1,860,000 d. $1,872,000

Ans: b, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $80,000 + $1,450,000 – $64,000 = $1,466,000; $1,466,000 + $250,000 + $160,000 = $1,876,000 (Beginning raw materials inventory + Purchases – Ending raw materials inventory = Raw materials used; Raw materials used + Direct labor + Manufacturing overhead incurred = Total manufacturing costs)

108.

Benson Inc.'s accounting records reflect the following inventories: Dec. 31, 2021 Dec. 31, 2022 Raw materials inventory $ 80,000 $ 64,000 Work in process inventory 104,000 116,000 Finished goods inventory 100,000 92,000 During 2022, Benson purchased $1,450,000 of raw materials, incurred direct labor costs of $250,000, and incurred manufacturing overhead totaling $160,000. (Assume that all raw materials used were direct materials.) Assume Benson’s cost of goods manufactured for 2022 amounted to $1,660,000. What amount would the company report as cost of goods sold for the year? a. $1,668,000 b. $1,568,000 c. $1,760,000 d. $1,652,000

Ans: a, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation AICPA PC: None, IMA: Reporting Solution: $100,000 + $1,660,000 – $92,000 = $1,668,000 (Beginning finished goods inventory + Cost of goods manufactured – Ending finished goods inventory = Cost of goods sold)

Managerial Accounting 109.

14 - 19

Walker Company reported the following year-end information: Beginning work in process inventory $ 46,000 Beginning raw materials inventory 24,000 Ending work in process inventory 50,000 Ending raw materials inventory 20,000 Raw materials purchased 830,000 Direct labor 440,000 Manufacturing overhead 100,000 What is Walker’s cost of goods manufactured for the year? a. $834,000 b. $1,374,000 c. $1,370,000 d. $1,378,000

Ans: c, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $24,000 + $830,000 – $20,000 = $834,000; $46,000 + $834,000 + $440,000 + $100,000 – $50,000 = $1,370,000 (Beginning raw materials inventory + Purchases – Ending raw materials inventory = Raw materials used; Beginning work in process inventory + Raw materials used + Direct labor + Manufacturing overhead incurred – Ending work in process inventory = Cost of goods manufactured)

110.

Ogleby Inc.'s accounting records reflect the following inventories: Dec. 31, 2021 Dec. 31, 2022 Raw materials inventory $120,000 $ 96,000 Work in process inventory 156,000 174,000 Finished goods inventory 150,000 138,000 During 2022, Ogleby purchased $980,000 of raw materials, incurred direct labor costs of $175,000, and incurred manufacturing overhead totaling $224,000. (Assume that all raw materials used were direct materials.) What total manufacturing costs was incurred during 2022 for Ogleby? a. $1,385,000 b. $1,403,000 c. $1,379,000 d. $1,415,000

Ans: b, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $120,000 + $980,000 – $96,000 = $1,004,000; $1,004,000 + $175,000 + $224,000 = $1,403,000 (Beginning raw materials inventory + Purchases – Ending raw materials inventory = Raw materials used; Raw materials used + Direct labor + Manufacturing overhead incurred = Total manufacturing costs)

14- 20 111.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ogleby Inc.'s accounting records reflect the following inventories: Dec. 31, 2021 Dec. 31, 2022 Raw materials inventory $120,000 $ 96,000 Work in process inventory 156,000 174,000 Finished goods inventory 150,000 138,000 During 2022, Ogleby purchased $980,000 of raw materials, incurred direct labor costs of $175,000, and incurred manufacturing overhead totaling $224,000. (Assume that all raw materials used were direct materials.) What would Ogleby Manufacturing report as cost of goods manufactured for 2022? a. $1,229,000 b. $1,397,000 c. $1,391,000 d. $1,385,000

Ans: d, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $120,000 + $980,000 – $96,000 = $1,004,000; $156,000 + $1,004,000 + $175,000 + $224,000 – $174,000 = $1,385,000 (Beginning raw materials inventory + Purchases – Ending raw materials inventory = Raw materials used; Beginning work in process inventory + Raw materials used + Direct labor + Manufacturing overhead incurred – Ending work in process inventory = Cost of goods manufactured)

112.

Wasson Company reported the following year-end information: Beginning work in process inventory Beginning raw materials inventory Ending work in process inventory Ending raw materials inventory Raw materials purchased Direct labor Manufacturing overhead

$ 35,000 18,000 38,000 15,000 560,000 210,000 120,000

What is Wasson’s total cost of work in process for the year? a. $925,000 b. $893,000 c. $890,000 d. $928,000 Ans: d, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $18,000 + $560,000 – $15,000 = $563,000; $35,000 + $563,000 + $210,000 + $120,000 = $928,000 (Beginning raw materials inventory + Purchases – Ending raw materials inventory = Raw materials used; Beginning work in process inventory + Raw materials used + Direct labor + Manufacturing overhead incurred = Total cost of work in process)

113.

Edmiston Company reported the following year-end information: beginning work in process inventory, $80,000; cost of goods manufactured, $750,000; beginning finished goods inventory, $50,000; ending work in process inventory, $70,000; and ending finished goods inventory, $40,000. What is Edmiston’s cost of goods sold for the year? a. $750,000 b. $760,000 c. $740,000 d. $770,000

Ans: b, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $50,000 + $750,000 – $40,000 = $760,000 (Beginning finished goods inventory + Cost of goods manufactured – Ending finished goods inventory = Cost of goods sold)

Managerial Accounting 114.

14 - 21

A company compiled the following information for the current year. (Assume that all raw materials used were direct materials.) Raw materials inventory, January 1 Raw materials inventory, December 31 Work in process inventory, January 1 Work in process inventory, December 31 Finished goods inventory, January 1 Finished goods inventory, December 31 Raw materials purchases Direct labor Factory utilities Indirect labor Factory depreciation Operating expenses

20,000 40,000 18,000 12,000 40,000 32,000 1,700,000 760,000 150,000 50,000 400,000 420,000

What amount of the direct materials were used during the period? a. $1,760,000. b. $1,720,000. c. $1,700,000. d. $1,680,000. Ans: d, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $20,000 + $1,700,000 – $40,000 = $1,680,000 (Beginning raw materials inventory + Purchases – Ending raw materials inventory = Raw materials used)

115.

20,000 40,000 18,000 12,000 40,000 32,000 1,700,000 760,000 150,000 50,000 400,000 420,000

If direct materials used were $1,700,000, what were the total manufacturing costs for the period? a. $3,060,000. b. $3,066,000. c. $2,860,000. d. $3,480,000. Ans: a, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $1,700,000 + $760,000 + $150,000 + $50,000 + $400,000 = $3,060,000 (Direct materials used + Direct labor + Factory utilities + Indirect labor + Factory depreciation = Total manufacturing costs)

14- 22 116.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

20,000 40,000 18,000 12,000 40,000 32,000 1,700,000 760,000 150,000 50,000 400,000 420,000

If the total manufacturing costs are $3,000,000, what is the cost of goods manufactured for the period? a. $3,014,000. b. $2,994,000. c. $3,006,000. d. $3,008,000. Ans: c, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $18,000 + $3,000,000 – $12,000 = $3,006,000 (Beginning work in process inventory + Total manufacturing costs – Ending work in process inventory = Cost of goods manufactured)

117.

20,000 40,000 18,000 12,000 40,000 32,000 1,700,000 760,000 150,000 50,000 400,000 420,000

If the cost of goods manufactured is $3,040,000, what is cost of goods sold for the period? a. $3,046,000. b. $3,008,000. c. $3,032,000. d. $3,048,000. Ans: d, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $40,000 + $3,040,000 – $32,000 = $3,048,000 (Beginning finished goods inventory + Cost of goods manufactured – Ending finished goods inventory = Cost of goods sold)

Managerial Accounting 118.

14 - 23

30,000 60,000 27,000 18,000 60,000 48,000 1,800,000 890,000 225,000 75,000 500,000 630,000

What is the cost of direct materials used during the period? a. $1,740,000. b. $1,830,000. c. $1,800,000. d. $1,770,000. Ans: d, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $30,000 + $1,800,000 – $60,000 = $1,770,000 (Beginning raw materials inventory + Purchases – Ending raw materials inventory = Raw materials used)

119.

30,000 60,000 27,000 18,000 60,000 48,000 1,800,000 890,000 225,000 75,000 500,000 630,000

If the cost of direct materials used is $1,800,000 during a period, what are total manufacturing costs? a. $3,490,000. b. $3,499,000. c. $3,190,000. d. $4,120,000. Ans: a, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $1,800,000 + $890,000 + $225,000 + $75,000 + $500,000 = $3,490,000 (Direct materials used + Direct labor + Factory utilities + Indirect labor + Factory depreciation = Total manufacturing costs)

14- 24 120.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

30,000 60,000 27,000 18,000 60,000 48,000 1,800,000 890,000 225,000 75,000 500,000 630,000

Assuming that total manufacturing costs are $3,400,000, what is the cost of goods manufactured for the period? a. $3,421,000. b. $3,391,000. c. $3,409,000. d. $3,142,000. Ans: c, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $27,000 + $3,400,000 – $18,000 = $3,409,000 (Beginning work in process inventory + Total manufacturing costs – Ending work in process inventory = Cost of goods manufactured)

121.

30,000 60,000 27,000 18,000 60,000 48,000 1,800,000 890,000 225,000 75,000 500,000 630,000

If the cost of goods manufactured is $3,460,000, what is cost of goods sold for the period? a. $3,469,000. b. $3,412,000. c. $3,448,000. d. $3,472,000. Ans: d, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $60,000 + $3,460,000 – $48,000 = $3,472,000 (Beginning finished goods inventory + Cost of goods manufactured – Ending finished goods inventory = Cost of goods sold)

Managerial Accounting 122.

14 - 25

Samson Company reported total manufacturing costs of $320,000, manufacturing overhead totaling $52,000, and direct materials totaling $64,000. What is the company’s direct labor cost? a. Cannot be determined from the information provided. b. $268,000 c. $256,000 d. $204,000

Ans: d, LO: 3, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: $320,000 – $64,000 – $52,000 = $204,000 (Total manufacturing costs – Direct materials – Manufacturing overhead = Direct labor cost)

123.

Given the following data for Mehring Company, what are (A) total manufacturing costs and (B) cost of goods manufactured? Direct materials used Direct labor Manufacturing overhead Operating expenses a. b. c. d.

(A) $620,000 $635,000 $635,000 $650,000

$230,000 Beginning work in process inventory 150,000 Ending work in process inventory 255,000 Beginning finished goods inventory 263,000 Ending finished goods inventory

$30,000 15,000 38,000 23,000

(B) $650,000 $620,000 $650,000 $665,000

Ans: c, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $230,000 + $150,000 + $255,000 = $635,000; $30,000 + $635,000 – $15,000 = $650,000 (Direct materials + Direct labor + Manufacturing overhead = Total manufacturing costs; Beginning work in process inventory + Total manufacturing costs – Ending work in process inventory = Cost of goods manufactured)

124.

Penner Company reported total manufacturing costs of $450,000, manufacturing overhead totaling $78,000, and direct materials totaling $96,000. What is the company’s direct labor cost? a. Cannot be determined from the information provided. b. $624,000 c. $354,000 d. $276,000

Ans: d, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $450,000 – $96,000 – $78,000 = $276,000 (Total manufacturing costs – Direct materials – Manufacturing overhead = Direct labor cost)

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

14- 26 125.

Given the following data for Glennon Company, what are (A) total manufacturing costs and (B) costs of goods manufactured? Direct materials used Direct labor Manufacturing overhead Operating expenses a. b. c. d.

(A) $700,000 $720,000 $720,000 $740,000

$270,000 200,000 250,000 350,000

Beginning work in process Ending work in process Beginning finished goods Ending finished goods

$40,000 20,000 50,000 30,000

(B) $740,000 $700,000 $740,000 $760,000

Ans: c, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $270,000 + $200,000 + $250,000 = $720,000; $40,000 + $720,000 – $20,000 = $740,000 (Direct materials + Direct labor + Manufacturing overhead = Total manufacturing costs; Beginning work in process + Total manufacturing costs – Ending work in process = Cost of goods manufactured)

126.

Barton Company has beginning work in process inventory of $144,000 and total manufacturing costs of $686,000. If cost of goods manufactured is $660,000, what is the cost of the ending work in process inventory? a. $150,000. b. $118,000. c. $190,000. d. $170,000.

Ans: d, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $144,000 + $686,000 – X = $660,000; X = $170,000 (Beginning work in process inventory + Total manufacturing costs – Ending work in process inventory = Cost of goods manufactured)

127.

Gammil Company has beginning and ending raw materials inventories of $96,000 and $120,000, respectively. If direct materials used were $490,000, what was the cost of raw materials purchased? a. $490,000. b. $520,000. c. $466,000. d. $514,000.

Ans: d, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $96,000 + X – $120,000 = $490,000; X = $514,000 (Beginning raw materials inventory + Purchases – Ending raw materials inventory = Raw materials used)

128.

Molina Company has beginning and ending work in process inventories of $130,000 and $145,000, respectively. If total manufacturing costs are $680,000, what is the total cost of goods manufactured? a. $810,000. b. $825,000. c. $665,000. d. $695,000.

Ans: c, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $130,000 + $680,000 – $145,000 = $665,000 (Beginning work in process inventory + Total manufacturing costs – Ending work in process inventory = Cost of goods manufactured)

Managerial Accounting 129.

14 - 27

Costas Company has beginning and ending raw materials inventories of $64,000 and $80,000, respectively. If direct materials used were $310,000, what was the cost of raw materials purchased? a. $310,000. b. $330,000. c. $294,000. d. $326,000.

Ans: d, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $64,000 + X – $80,000 = $310,000; X = $326,000 (Beginning raw materials inventory + Purchases – Ending raw materials inventory = Direct materials used)

130.

Wood Company has beginning work in process inventory of $138,000 and total manufacturing costs of $477,000. If cost of goods manufactured is $480,000, what is the cost of the ending work in process inventory? a. $120,000. b. $141,000. c. $150,000. d. $135,000.

Ans: d, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $138,000 + $477,000 – X = $480,000; X = $135,000 (Beginning work in process inventory + Total manufacturing cost – Ending work in process inventory = Cost of goods manufactured)

131.

Given the following data for Harder Company, what is the cost of goods manufactured? Direct materials used Direct labor Manufacturing overhead Operating expenses a. b. c. d.

$120,000 200,000 180,000 175,000

Beginning work in process Ending work in process Beginning finished goods Ending finished goods

$20,000 10,000 25,000 15,000

$490,000 $500,000 $510,000 $520,000

Ans: c, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $20,000 + $120,000 + $200,000 + $180,000 – $10,000 = $510,000 (Beginning work in process inventory + Direct materials used + Direct labor + Manufacturing overhead – Ending work in process inventory = Cost of goods manufactured)

132.

Which one of the following does not appear on the balance sheet of a manufacturing company? a. Finished goods inventory b. Work in process inventory c. Cost of goods manufactured d. Raw materials inventory

Ans: c, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

133.

The equivalent account to finished goods inventory for a merchandising firm is referred to as a. purchases. b. cost of goods purchased. c. inventory. d. raw materials inventory.

Ans: c, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

14- 28 134.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

How have many companies significantly lowered inventory levels and costs? a. They use activity-based costing. b. They utilize a balanced scorecard system. c. They have a just-in-time method. d. They focus on total quality management.

Ans: c, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

135.

Which of the following terms describes the business processes associated with providing a product or service? a. The manufacturing chain b. The product chain c. The supply chain d. The value chain

Ans: d, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

136.

Which of the following managerial accounting approaches attempts to allocate manufacturing overhead more accurately? a. Balanced scorecard b. Just-in-time inventory c. Activity-based costing d. Total quality management

Ans: c, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

137.

What is “balanced” in the balanced scorecard approach? a. The number of products produced b. The emphasis on financial and non-financial performance measurements c. The amount of costs allocated to products d. The number of defects found on each product

Ans: b, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: None, AICPA PC: Measurement Analysis and Interpretation, IMA: Performance Measurement

138.

Which of the following characteristics would likely be associated with a just-in-time inventory method? a. Ending work in process inventory that would allow several production runs b. A backlog of inventory orders not yet shipped c. Minimal finished goods inventory on hand d. An understanding with customers that they may come to the showroom and select from inventory on hand

Ans: c, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Cost Management

139.

Many companies now focus on reducing defects in finished products with the goal of zero defects. This is called a. activity-based costing. b. balanced scorecard. c. value chain. d. total quality management.

Ans: d, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Performance Measurement

Managerial Accounting

140.

14 - 29

Financial and managerial accounting are similar in that both a. have the same primary users. b. produce general-purpose reports. c. have reports that are prepared quarterly and annually. d. deal with the economic events of an enterprise.

Ans: d, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Cost Management

141.

The managerial function that pertains to keeping the activities of the enterprise on track is a. planning. b. directing. c. controlling. d. accounting.

Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Research Management, AICPA FC: None, AICPA PC: Project Management, IMA: Performance Measurement

142.

Property taxes on a manufacturing facility are an element of a a. b. c. d.

Product Cost Yes Yes No No

Period Cost No Yes Yes No

Ans: a, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

143.

For a manufacturing company, which of the following is an example of a period cost rather than a product cost? a. Depreciation on factory equipment b. Wages of salespersons c. Wages of machine operators d. Insurance on factory equipment

Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

144.

For a manufacturing firm, cost of goods available for sale is computed by adding the beginning finished goods inventory to a. cost of goods purchased. b. cost of goods manufactured. c. net purchases. d. total manufacturing costs.

Ans: b, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

145.

If cost of goods manufactured is less than cost of goods sold, which of the following is correct? a. Finished Goods Inventory has increased. b. Work in Process Inventory has increased. c. Finished Goods Inventory has decreased. d. Work in Process Inventory has decreased.

Ans: c, SO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

14- 30 146.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

The principal difference between the income statements of a merchandising company’s and a manufacturing company is the a. cost of goods sold section. b. operating income section. c. operating expense section. d. revenue section.

Ans: a, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

147.

If total manufacturing costs are greater than cost of goods manufactured, which of the following is correct? a. Work in Process Inventory has increased. b. Finished Goods Inventory has increased. c. Work in Process Inventory has decreased. d. Finished Goods Inventory has decreased.

Ans: a, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

148.

The sum of the direct materials costs, direct labor costs, and manufacturing overhead incurred is the a. cost of goods manufactured. b. total manufacturing overhead. c. total manufacturing costs. d. total cost of work in process.

Ans: c, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

149.

The inventory accounts that show the cost of completed goods on hand and the costs applicable to production that is only partially completed are, respectively a. Work in Process Inventory and Raw Materials Inventory. b. Finished Goods Inventory and Raw Materials Inventory. c. Finished Goods Inventory and Work in Process Inventory. d. Raw Materials Inventory and Work in Process Inventory.

Ans: c, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Managerial Accounting

14 - 31

BRIEF EXERCISES BE 150 Presented below are Truck Company’s monthly manufacturing cost data related to its personal computer products. (Assume that all raw materials used were direct materials.) (a) (b) (c) (d)

Taxes on factory building Raw materials transferred to production Depreciation on manufacturing equip. Wages for assembly line workers

$820,000 66,000 210,000 340,000

Instructions Enter each cost item in the following table, placing an “X” under the appropriate headings. Direct Materials

Product Costs Direct Labor Manufacturing Overhead

(a) (b) (c) (d) Ans: N/A, LO: 2, Bloom: C, Difficulty: Moderate, Min: 3, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 150

(3 min.)

Direct Materials (a) (b) (c) (d)

Product Costs Direct Labor Manufacturing Overhead X

X X X

BE 151 Determine whether each of the following costs should be classified as direct materials (DM), direct labor (DL), or manufacturing overhead (MO). a.

Depreciation on factory equipment

Table legs used in manufacturing tables

Wages paid to assembly line workers

Factory rent

Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 151 a. MO b. DM c. DL d. MO BE 152

(2 min.)

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

14- 32

Indicate whether each of the following costs of a pencil manufacturer would be classified as direct materials (DM), direct labor (DL), or manufacturing overhead (MO). a.

Depreciation of pencil painting machinery

Lead inserted into pencils

Factory utilities

Wages of assembly line worker

Salary of supervisor

Factory machinery maintenance

Wood used in pencils

Eraser compound

Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 4, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 152 a. b. c. d. e. f. g. h.

(4 min.)

MO DM MO DL MO MO DM DM

BE 153 Presented below are Cricket Company’s monthly manufacturing cost data related to its personal computer products. a. Hard drives and memory sticks $30,000 b. Wages to assemble equipment $65,000 c. Insurance on manufacturing building $41,000 d. Wages for factory supervisors $64,000 Instructions Enter each cost item in the following table, placing an ‘X’ under the appropriate headings. Direct Materials

Product Costs Direct Labor

Manufacturing Overhead

a. b. c. d. Ans: N/A, LO: 2, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Managerial Accounting Solution 153

a. b. c. d.

14 - 33

(2 min.) Product Costs Direct Labor

Direct Materials X

Manufacturing Overhead

X X X

BE 154 Identify whether each of the following is classified as a product cost or a period cost. 1. Direct labor 2. Direct materials 3. Factory utilities 4. Repairs to office equipment 5. Property taxes on factory building 6. Sales salaries Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 154

(5 min.)

1. Product cost 2. Product cost 3. Product cost

4. Period cost 5. Product cost 6. Period cost

BE 155 Criba Company has the following data: direct labor $560,000, direct materials used $421,000, total manufacturing overhead $206,000, and beginning work in process inventory $47,000. Instructions Compute (a) total manufacturing costs and (b) total cost of work in process. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 155

(5 min.)

(a) Direct labor Direct materials used Total manufacturing overhead Total manufacturing costs

$ 560,000 421,000 206,000 $1,187,000

(b) Beginning work in process inventory Total manufacturing costs Total cost of work in process

47,000 1,187,000 $1,234,000

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

14- 34 BE 158

Presented below are incomplete 2022 manufacturing cost data for Swartnez Corporation. Direct Materials Used

Direct Labor

Manufacturing Overhead

Total Manufacturing Costs

(a)

$ 22,000

$42,000

$ 88,000

(b)

$148,000

$112,000

$460,000

Instructions Determine the missing amounts. Ans: N/A, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 156

(3 min.)

(a) Total manufacturing costs Less: Direct materials used Less: Direct labor Equals: Manufacturing overhead

$88,000 (22,000) (42,000) $24,000

(b) Total manufacturing costs Less: Direct materials Less: Manufacturing overhead Equals: Direct labor

$460,000 (148,000) (112,000) $200,000

BE 157 Presented below are incomplete 2022 manufacturing cost data for Supreme Corporation.

Direct Materials Used

Direct Labor

Manufacturing Overhead

Total Manufacturing Costs

(a)

$48,000

$72,000

$194,000

(b)

$95,000

$80,000

$305,000

(c)

$80,000

$120,000

$260,000

Instructions Determine the missing amounts. Ans: N/A, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Managerial Accounting Solution 157

14 - 35

(4 min.)

Direct Materials Used

Direct Labor

Manufacturing Overhead

Total Manufacturing Costs

(a)

$48,000

$72,000

$74,000

$194,000

(b)

$95,000

$130,000

$80,000

$305,000

(c)

$60,000

$80,000

$120,000

$260,000

BE 158 Raynor Company has the following data: Direct labor Direct materials used Total manufacturing overhead Ending work in process inventory Beginning work in process inventory

$76,000 84,000 65,000 30,000 45,000

Instructions Compute (a) total manufacturing costs and (b) cost of goods manufactured. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 158

(5 min.)

(a) Direct labor Direct materials used Total manufacturing overhead Total manufacturing costs

$ 76,000 84,000 65,000 $225,000

(b) Beginning work in process Total manufacturing costs Less ending work in process Cost of goods manufactured

$ 45,000 225,000 (30,000) $240,000

BE 159 Sudler Company’s current assets at December 31, 2022 are listed below in alphabetical order. Prepare the current assets section of the company’s balance sheet as of the same date. Accounts receivable Cash Finished goods inventory Prepaid expenses Raw materials inventory Work in process inventory

$41,000 61,000 26,000 3,000 22,000 32,000

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

14- 36

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 159

(4 min.)

Current Assets Cash Accounts receivable Inventories Finished goods Work in process Raw materials Prepaid expenses Total current assets

$ 61,000 41,000 $26,000 32,000 22,000

80,000 3,000 $185,000

EXERCISES Ex. 160 Financial accounting information and managerial accounting information have a number of distinguishing characteristics. For each of the characteristics listed below, indicate which characteristics are more closely related to financial accounting by placing the letter "F" in the space to the left of the item and indicate those characteristics which are more closely associated with managerial accounting by placing the letter "M" to the left of the item. 1.

General-purpose reports

Reports are used internally

Prepared in accordance with generally accepted accounting principles

Special purpose reports

Limited to historical cost data

Reporting standard is relevance to the decision to be made

Financial statements

Reports generally pertain to the business as a whole

Reports generally pertain to subunits

10.

Reports issued quarterly or annually

Ans: N/A, LO: 1, Bloom: C, Difficulty: Easy, Min: 7, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Solution 160 1. 2. 3. 4. 5.

(7–11 min.)

F M F M F

6. 7. 8. 9. 10.

M F F M F

Managerial Accounting

14 - 37

Ex. 161 Determine whether each of the following is classified as: DM: Direct materials DL: Direct labor MO: Manufacturing overhead 1. Assembly line workers' wages 2. Factory supervisors' salaries 3. Steel used in manufacturing product 4. Insurance on factory building 5. Small tools used in production 6. Tires used in manufacturing vehicles Ans: N/A, SO: 2, Bloom: C, Difficulty: Moderate, Min: 5, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 161

(5 min.)

1. DL 2. MO 3. DM

4. MO 5. MO 6. DM

Ex. 162 Presented below is a list of costs and expenses incurred in the factory by Nu-Way Corporation, a manufacturer of teardrop travel trailers. 1.

Property taxes on the factory land

Nails and glue used in production

Cabinet maker's wages

Factory supervisors’ salaries

Metal used in manufacturing

Depreciation on factory machines

Factory utilities

USB ports installed in the travel trailers

Property taxes on the factory building

10.

Insurance on factory equipment

Instructions Classify the above items into the following categories: DM — Direct Materials DL — Direct Labor MO — Manufacturing Overhead Ans: N/A, LO: 2, Bloom: C, Difficulty: Moderate, Min: 8, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

14- 38

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 162

(8–10 min.)

1. 2. 3. 4. 5.

MO MO DL MO DM

6. 7. 8. 9. 10.

MO MO DM MO MO

Ex. 163 For each item, identify all applicable cost labels. Use the following code in your answer: 1 — Product Cost 2 — Period Cost a.

Advertising

Direct materials used

Sales salaries

Indirect factory labor

Repairs to office equipment

Factory manager's salary

Direct labor

Indirect materials

Ans: N/A, SO: 2, Bloom: C, Difficulty: Easy, Min: 6, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 163 (6–9 min.) a.

Advertising

Direct materials used

Sales salaries

Indirect factory labor

Repairs to office equipment

Factory manager's salary

Direct labor

Indirect materials

Managerial Accounting

14 - 39

Ex. 164 Kennedy Company reports the following costs and expenses in May. Factory utilities Depreciation on factory equipment Depreciation on delivery trucks Indirect factory labor Indirect materials Direct materials used Factory manager's salary

$ 16,500 12,650 3,800 48,900 70,800 157,600 8,000

Direct labor Sales salaries Property taxes on factory building Repairs to office equipment Factory repairs Advertising Office supplies used

$79,100 48,400 2,500 1,300 2,000 23,000 4,640

Instructions From the information, determine the total amount of: (a) Manufacturing overhead. (b) Product costs. (c) Period costs. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 12, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 164

(10–12 min.)

(a)

Factory utilities ...................................................................... Depreciation on factory equipment ........................................ Indirect factory labor.............................................................. Indirect materials ................................................................... Factory manager's salary ...................................................... Property taxes on factory building ......................................... Factory repairs ...................................................................... Manufacturing overhead........................................................

$ 16,500 12,650 48,900 70,800 8,000 2,500 2,000 $161,350

(b)

Direct materials ..................................................................... Direct labor............................................................................ Manufacturing overhead........................................................ Product costs ........................................................................

$157,600 79,100 161,350 $398,050

(c)

Depreciation on delivery trucks................................................ Sales salaries.......................................................................... Repairs to office equipment ..................................................... Advertising .............................................................................. Office supplies used ................................................................ Period costs ............................................................................

$ 3,800 48,400 1,300 23,000 4,640 $ 81,140

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ex. 165 Kwik Delivery Service reports the following costs and expenses in June 2022. Indirect materials Depreciation on delivery equipment Dispatcher's salary Property taxes on office building CEO's salary Gas and oil for delivery trucks

$ 8,400 11,200 5,000 870 12,000 3,200

Driver's salaries Advertising Delivery equipment repairs Office supplies Office utilities Repairs on office equipment

$17,000 5,100 300 650 2,490 180

Instructions Determine the total amount of (a) delivery service (product) costs and (b) period costs. Ans: N/A, LO: 2, 4, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 165 (a)

(b)

(10–12 min.)

Delivery service (product) costs: Indirect materials Depreciation on delivery equipment Dispatcher's salary Gas and oil for delivery trucks Drivers' salaries Delivery equipment repairs Total Period costs: Property taxes on office building CEO's salary Advertising Office supplies Office utilities Repairs on office equipment Total

$ 8,400 11,200 5,000 3,200 17,000 300 $ 45,100 $

870 12,000 5,100 650 2,490 180 $21,290

Managerial Accounting

14 - 41

Ex. 166 For each item listed below, indicate in the space to the left whether the item would be considered a product cost or a period cost for a manufacturing company. Use the following code: Pr = Product cost Pe = Period cost 1. Factory supervisory salaries 2. Sales commissions 3. Income tax expense 4. Indirect materials used 5. Indirect labor 6. Office salaries expense 7. Property taxes on factory building 8. Sales manager's salary 9. Factory wages expense 10. Direct materials used Ans: N/A, LO: 2, Bloom: C, Difficulty: Moderate, Min: 7, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 166 1. 2. 3. 4. 5.

Pr Pe Pe Pr Pr

(7–10 min.) 6. 7. 8. 9. 10.

Pe Pr Pe Pr Pr

Ex. 167 Yates Manufacturing Company incurs the following manufacturing costs and expenses during the month of May. 1. Assembly line wages 2. Raw materials used directly in product 3. Depreciation on office equipment 4. Property taxes on factory building 5. Rent on factory building 6. Sales commissions 7. Depreciation on factory equipment 8. Factory utilities 9. Wages for factory maintenance workers 10. Advertising 11. Indirect materials used in production 12. Factory manager's salary

14- 42

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ex. 167.

(Cont.)

Instructions Complete the following matrix by placing an X mark under the appropriate headings. Cost Item 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

Direct Materials

Direct Labor

Manufacturing Overhead

Period Costs

Ans: N/A, LO: 2, Bloom: C, Difficulty: Moderate, Min: 10, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 167 Cost Item 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

(10–15 min.) Direct Materials

Direct Labor X

Manufacturing Overhead

Period Costs

X X X X X X X X X X X

Managerial Accounting

14 - 43

Ex. 168 Presented below are incomplete 2022 manufacturing cost data for Tardy Corporation. Direct Materials Used (a ) (b ) (c)

Direct Labor

Manufacturin g Overhead

Total Manufacturin g Costs

Work in Process (1/1)

$38,000

$80,000

$48,000

$149,00 0 $53,000

$53,000

$90,000

$292,000

$120,00 0 ?

$116,00 0

$121,000

$290,000

$403,00 0

Work in Proces s (12/31) $96,00 0 $98,00 0 ?

Cost of Goods Manufacture d ? $311,000 $515,000

Instructions Determine the missing amounts. Ans: N/A, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 6, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 168

(6 min.)

Direct Materials Used

Direct Labor

Manufacturing Overhead

Total Manufacturing Costs

Work in Process (1/1)

Work in Process (12/31)

Cost of Goods Manufactured

(a)

$38,000

$80,000

$48,000

$166,000

$120,000

$96,000

$190,000

(b)

$149,000

$53,000

$90,000

$292,000

$117,000

$98,000

$311,000

(c)

$53,000

$116,000

$121,000

$290,000

$403,000

$178,000

$515,000

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

14- 44 Ex. 169

Among the items that Howard Print Shop accounts for are the following: 1. Direct labor 2. Office supplies used 3. Depreciation on printing machines 4. Finished goods inventory, 12/31 5. Raw materials inventory, 1/1 6. Cost of goods manufactured 7. Work in process inventory, 1/1 8. Office supplies inventory, 12/31 9. Indirect labor 10. Heat and electricity for the print shop Howard Print Shop prepares the following schedule and financial statements on a yearly basis: (a) Cost of goods manufactured schedule. (b) Income statement. (c) Balance sheet. Instructions For each item, indicate by using the appropriate letter(s) the schedule and/or financial statements in which the item will appear. Ans: N/A, SO: 3, Bloom: C, Difficulty: Moderate, Min: 8, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

Solution 169 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

(8–12 min.)

Direct labor Office supplies used Depreciation on printing machines Finished goods inventory, 12/31 Raw materials inventory, 1/1 Cost of goods manufactured Work in process inventory, 1/1 Office supplies inventory, 12/31 Indirect labor Heat and electricity for the print shop

(a) (b) (a) (b), (c) (a) (a), (b) (a) (c) (a) (a)

Managerial Accounting

14 - 45

Ex. 170 Klein Company manufactures boats, each of which is equipped with a cellular phone. During September, 2022, the company purchased 100 cellular phones at a cost of $110 each. Klein withdrew 70 phones from the warehouse during the month. Twenty of these phones were installed in salespersons’ cars and the remaining 50 phones were put in boats manufactured during the month. The remaining phones are to be installed in boats in the next production run. Of the boats put into production during September, 2022, 80% were completed and transferred to the company's storage lot. Fifty percent of the boats completed during the month were sold by September 30. Instructions Determine the cost of cellular phones that would appear in each of the following accounts at September 30, 2022: Raw materials inventory Work in process inventory Finished goods inventory Cost of goods sold Selling expenses Ans: N/A, LO: 3, Bloom: AP, Difficulty: Hard, Min: 12, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 170

(12–17 min.)

Raw materials: Work in process: Finished goods: Cost of goods sold: Selling expenses:

(100 – 70) × $110 = $3,300 (50 × 20%) × $110 = $1,100 (50 × 80% × 50%) × $110 = $2,200 (50 × 80% × 50%) × $110 = $2,200 20 × $110 = $2,200

Costs to account for: 100 × $110 = $11,000 Raw materials inventory Work in process inventory Finished goods inventory Cost of goods sold Selling expenses Total

$ 3,300 1,100 2,200 2,200 2,200 $11,000

Ex. 171 Peters Manufacturing Company has the following data at June 30, 2022: Raw materials inventory, June 1 Work in process inventory, June 1 Finished goods inventory, June 1 Total manufacturing costs Sales Work in process inventory, June 30 Finished goods inventory, June 30 Raw materials inventory, June 30

$ 13,800 18,100 43,500 430,000 580,000 30,400 55,200 18,000

14- 46

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ex. 171.

(Cont.)

Instructions (a) Prepare an income statement through gross profit for the month of June. (b) Indicate the balance sheet presentation of the June 30 inventories. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 171

(10–15 min.)

(a)

PETERS MANUFACTURING COMPANY (Partial) Income Statement For the Month Ended June 30, 2022 —————————————————————————————————————————— Sales .................................................................................................... $580,000 Cost of goods sold Finished goods inventory, June 1 ................................................ $ 43,500 Cost of goods manufactured ........................................................ 417,700* Cost of goods available for sale ................................................... 461,200 Finished goods inventory, June 30 .............................................. 55,200 Cost of goods sold ....................................................................... 406,000 Gross profit........................................................................................... $ 174,000

*$18,100 + $430,000 – $30,400 = $417,700 (b)

PETERS MANUFACTURING COMPANY (Partial) Balance Sheet June 30, 2022 Current assets Cash ...................................................................................... Accounts receivable ............................................................... Inventories: Finished goods................................................................. Work in process ............................................................... Raw materials ..................................................................

$ XXXX XXXX $55,200 30,400 18,000

103,600

Glavine Corporation incurred the following costs while manufacturing its product: Materials used in product $ 125,000 Advertising expense Depreciation on factory 60,000 Property taxes on factory Property taxes on store 7,500 Delivery expense Labor costs of assembly-line workers 110,000 Sales commissions Factory supplies used 23,000 Salaries paid to sales clerks

$45,000 19,000 21,000 35,000 50,000

Ex. 172

Work in process inventory was $27,000 at January 1 and $15,500 at December 31. Finished goods inventory was $65,000 at January 1 and $50,600 at December 31. (Assume all raw materials used were direct materials.) Instructions (a) Compute cost of goods manufactured. (b) Compute cost of goods sold. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Managerial Accounting Solution 172

14 - 47

(10–12 min.)

(a) Work in process inventory, 1/1 ................................... Direct materials used.................................................. Direct labor................................................................. Manufacturing overhead Depreciation on factory......................................... Factory supplies used........................................... Property taxes on factory...................................... Total manufacturing overhead .................................... Total manufacturing costs .......................................... Total cost of work-in-process...................................... Less: Work in process inventory, 12/31 ............................... Cost of goods manufactured ......................................

$ 27,000 $ 125,000 110,000 $60,000 23,000 19,000 102,000 337,000 364,000 15,500 $348,500

(b) Finished goods inventory, 1/1..................................... Cost of goods manufactured ...................................... Cost of goods available for sale ................................. Less: Finished goods inventory, 12/31 ....................... Cost of goods sold .....................................................

$ 65,000 348,500 413,500 50,600 $362,900

Ex. 173 The following information is available for Elliot Company. (Assume all raw materials used were direct materials.) Raw materials inventory Work in process inventory Finished goods inventory Materials purchased Direct labor Manufacturing overhead Sales

January 1, 2022 $ 26,000 18,500 30,000

2022

December 31, 2022 $30,000 22,200 21,000

$170,000 230,000 180,000 800,000

Instructions (a) Compute cost of goods manufactured. (b) Prepare an income statement through gross profit. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Hard, Min: 12, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 173

(12–16 min.)

(a) Work in process inventory, 1/1................................... Direct materials Materials inventory, 1/1........................................ Materials purchased ............................................ Materials available for use ................................... Less: Materials inventory, 12/31 .......................... Direct materials used ................................................. Direct labor ................................................................ Manufacturing overhead ............................................ Total manufacturing costs.......................................... Total cost of work in process ..................................... Less: Work in process inventory, 12/31 .................... Cost of goods manufactured......................................

$ 18,500 $ 26,000 170,000 196,000 30,000 $166,000 230,000 180,000 576,000 594,500 22,200 $572,300

(b) Sales ......................................................................... Cost of goods sold Finished goods inventory, 1/1 .............................. Cost of goods manufactured ................................ Cost of goods available for sale ........................... Less: Finished goods inventory, 12/31 ................. Cost of goods sold ......................................... Gross profit................................................................

$800,000 $ 30,000 572,300 602,300 21,000 581,300 $218,700

Ex. 174 Manufacturing cost data for Morton Company are presented below. (Assume all raw materials used were direct materials.)

Direct materials used Direct labor Manufacturing overhead Total manufacturing costs Work in process inventory, 1/1/22 Total cost of work-in-process Work in process inventory, 12/31/22 Cost of goods manufactured

Case A (a) $ 57,000 46,500 195,650 (b) 221,500 (c) 180,275

Case B $75,400 76,000 81,600 (d) 16,500 (e) 9,000 (f)

Case C $130,000 (g) 102,000 283,700 (h) 327,000 80,000 (i)

Instructions Indicate the missing amount for each letter (a) through (i). Ans: N/A, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 12, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Managerial Accounting Solution 174

14 - 49

(12–16 min.)

A + $57,000 + $46,500 = $195,650 A = $92,150

$249,500 – $9,000 = F F = $240,500

$195,650 + B = $221,500 B = $25,850

$130,000 + G + $102,000 = $283,700 G = $51,700

$221,500 – C = $180,275 C = $41,225

$283,700 + H = $327,000 H = $43,300

$75,400 + $76,000 + $81,600 = D D = $233,000

$327,000 – $80,000 = I I = $247,000

$233,000 + $16,500 = E E = $249,500 Ex. 175 From the account balances listed below, prepare a schedule of cost of goods manufactured for Sampson Manufacturing Company for the month ended December 31, 2022. (Assume all raw materials used were direct materials.) Finished Goods Inventory, December 31 Factory Supervisory Salaries Income Tax Expense Raw Materials Inventory, December 1 Work in Process Inventory, December 31 Sales Salaries Expense Factory Depreciation Expense Finished Goods Inventory, December 1 Raw Materials Purchases Work in Process Inventory, December 1 Factory Utilities Expense Direct Labor Raw Materials Inventory, December 31 Sales Returns and Allowances Indirect Labor

Account Balances $42,000 12,000 18,000 12,000 15,000 14,000 8,000 35,000 105,000 25,000 6,000 70,000 19,000 5,000 21,000

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 12, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 175

(12–16 min.) SAMPSON MANUFACTURING COMPANY Cost of Goods Manufactured Schedule For the Month Ended December 31, 2022

Work in process inventory, December 1 Direct materials Raw materials inventory, December 1 Raw materials purchases Total raw materials available for use Less: Raw materials inventory, December 31 Direct materials used Direct labor Manufacturing overhead Indirect labor Factory supervisory salaries Factory depreciation expense Factory utilities expense Total manufacturing overhead Total manufacturing costs Total cost of work in process Less: Work in process inventory, December 31 Cost of goods manufactured

$ 25,000 $ 12,000 105,000 117,000 19,000 $98,000 70,000 $21,000 12,000 8,000 6,000 47,000 215,000 240,000 15,000 $225,000

Ex. 176 Rapid Manufacturing Company has the following data: Direct labor Direct materials used Total manufacturing overhead Beginning work in process inventory

$145,000 151,000 208,000 26,000

Instructions Compute (a) total manufacturing costs and (b) total cost of work in process. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 6, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 176

(6 min.)

(a)

Direct labor Direct materials used Total manufacturing overhead Total manufacturing costs

$145,000 151,000 208,000 $504,000

(b)

Beginning work in process inventory Total manufacturing costs Total cost of work in process

$ 26,000 504,000 $530,000

Managerial Accounting

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Ex. 177 The following costs and inventory data were taken from the accounts of Simon Company for 2022. (Assume all raw materials used were direct materials.)

Inventories: Raw materials Work in process Finished goods Costs incurred: Raw materials purchases Direct labor Factory rent Factory utilities Indirect materials Indirect labor Operating expenses

January 1, 2022

December 31, 2022

$ 8,000 15,000 16,000

$ 7,000 13,000 12,000 $98,000 42,000 8,000 10,000 6,000 9,000 17,000

Instructions a. Prepare a schedule showing the amount of direct materials used in production during the year. b. Compute the amount of manufacturing overhead incurred during the year. c. Prepare a schedule of Cost of Goods Manufactured for Simon Company for the year ended December 31, 2022 in good form. d. Prepare the Cost of Goods Sold section of the Income Statement for Simon Company for the year ended December 31, 2022 in good form. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 18, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 177

(18–20 min.)

a. Raw materials inventory, beginning Raw materials purchases Raw materials available for use Less: Raw materials inventory, ending Direct materials used b. Manufacturing overhead: Factory rent Factory utilities Indirect materials Indirect labor Total manufacturing overhead c.

8,000 98,000 106,000 7,000 $ 99,000 $ 8,000 10,000 6,000 9,000 $33,000

SIMON COMPANY Schedule of Cost of Goods Manufactured For the Year Ended December 31, 2022

Work in process inventory, beginning Direct materials Raw materials inventory, beginning $ 8,000 Raw materials purchases 98,000 Raw materials available for use 106,000 Less: Raw materials inventory, ending 7,000 Direct materials used Direct labor Manufacturing overhead Total manufacturing costs Total cost of work in process Less: Work in process inventory, ending Cost of goods manufactured d. SIMON COMPANY (Partial) Income Statement For the Year Ended December 31, 2022 Finished goods inventory, January 1 Cost of goods manufactured Cost of goods available for sale Less: Finished goods inventory, December 31 Cost of goods sold

$ 15,000

$99,000 42,000 33,000 174,000 189,000 13,000 $176,000

$ 16,000 176,000 192,000 12,000 $180,000

Managerial Accounting

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Ex. 178 Manufacturing costs for Carson Company for selected months are as follows. (Assume all raw materials used were direct materials.)

Beginning work in process inventory Direct materials used Direct labor Manufacturing overhead Total manufacturing costs Total cost of work in process Ending work in process inventory Cost of goods manufactured Beginning finished goods Cost of goods available for sale Ending finished goods Cost of goods sold

April $ 80,000 280,000 195,000 (a) 860,000 (b) 75,000 (c) (d) 960,000 (e) 820,000

July (f) $190,000 170,000 150,000 510,000 640,000 (g) 515,000 38,000 (h) 75,000 (i)

October $ 88,000 155,000 (j) 90,000 450,000 (k) (l) 385,000 (m) 480,000 (n) 355,000

Instructions Indicate the missing amounts. (Show computations.) Ans: N/A, LO: 3, Bloom: AN, Difficulty: Hard, Min: 12, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 178

(12–17 min.)

(a)

$385,000 ($860,000 – $280,000 – $195,000).

(b)

$940,000 ($860,000 + $80,000).

(c)

$865,000 ($940,000 – $75,000).

(d)

$95,000

(e)

$140,000 ($960,000 – $820,000).

(f)

$130,000 ($640,000 – $510,000).

(g)

$125,000 ($640,000 – $515,000).

(h)

$553,000 ($515,000 + $38,000).

(i)

$478,000 ($553,000 – $75,000).

(j)

$205,000 ($450,000 – $155,000 – $90,000).

(k)

$538,000 ($88,000 + $450,000).

(l)

$153,000 ($538,000 – $385,000).

(m) $95,000 (n)

($960,000 – $865,000).

($480,000 – $385,000).

$125,000 ($480,000 – $355,000).

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ex. 179 Fill in the missing information on the cost of goods manufactured schedule of Noland Manufacturing Company. (Assume all raw materials used were direct materials.)

NOLAND MANUFACTURING COMPANY Cost of Goods Manufactured Schedule For the Year Ended December 31, 2022 Work in process inventory (1/1) Direct materials Raw materials inventory (1/1) Raw materials purchases Raw materials available for use Raw materials inventory (12/31) Direct materials used Direct labor Manufacturing overhead Indirect labor Factory depreciation Factory utilities Total overhead Total manufacturing costs Total cost of work in process Less: Work in process inventory (12/31) Cost of goods manufactured

$340,000 $

? 246,000 ? 37,000 $255,000 ? 19,000 38,000 39,000 ? ? ? 322,000 $480,000

Ans: N/A, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 6, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 179

(6–9 min.) NOLAND MANUFACTURING COMPANY Cost of Goods Manufactured Schedule For the Year Ended December 31, 2022

Work in process inventory (1/1) Direct materials Raw materials inventory (1/1) Raw materials purchases Raw materials available for use Raw materials inventory (12/31) Direct materials used Direct labor Manufacturing overhead Indirect labor Factory depreciation Factory utilities Total overhead Total manufacturing costs Total cost of work in process Less: Work in process inventory (12/31) Cost of goods manufactured .

$340,000 $ 46,000 246,000 292,000 37,000 $255,000 111,000 19,000 38,000 39,000 96,000 462,000 802,000 322,000 $480,000

Managerial Accounting

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Ex. 180 Data for the cost of direct materials for the month ended March 31, 2022, are as follows: Raw materials inventory, March 1, 2022 $76,000 Raw materials inventory, March 31, 2022 70,000 During March, the company purchased $260,000 of raw materials on account from Reed Company and $92,000 of raw materials for cash from Frye Company. In addition, $50,000 was paid on the Reed account balance. (Assume all raw materials used were direct materials.)

Instructions Compute the cost of direct materials used during March. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 180

(5–7 min.)

Raw materials inventory, March 1 Raw materials purchases ($260,000 + $92,000) Total raw materials available for use Less: Raw materials inventory, March 31 Direct materials used during March

$ 76,000 352,000 428,000 70,000 $358,000

Note: Payment on account to Reed is irrelevant to the direct materials used calculation. Ex. 181 Presented below are incomplete 2022 manufacturing cost data for Tardy Corporation.

(a) (b) (c)

Direct Materials Used $61,000 ? $53,000

Direct Labor $72,000 $53,000 ?

Manufacturing Overhead $54,000 $90,000 $96,000

Total Manufacturing Costs ? $252,000 $310,000

Instructions Determine the missing amounts. Ans: N/A, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Solution 181

(a) (b) (c)

(5 min.) Direct Materials Used $61,000 $109,000 $53,000

Direct Labor $72,000 $53,000 $161,000

Manufacturing Overhead $54,000 $90,000 $96,000

Total Manufacturing Costs $187,000 $252,000 $310,000

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

14- 56 Ex. 182

Indicate whether each of the following would appear on the: A—Cost of goods manufactured schedule B—Income statement C—Balance sheet Note: If it would appear in more than just one, indicate which ones. 1. Cost of goods sold 2. Finished goods inventory, 12/31 3. Direct materials used 4. Raw materials inventory, 1/1 5. Insurance on factory equipment 6. Work in process inventory, 12/31 7. Indirect labor 8. Property taxes on office building Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 182 1. 2. 3. 4.

(5 min.)

B B, C A A

5. 6. 7. 8.

A A, C A B

Ex. 183 Listed below are current asset items for Lester Company at December 31, 2022. Finished goods inventory Cash Prepaid expenses Accounts receivable

$35,000 22,000 2,000 4,000

Short-term investments Raw materials inventory Work in process inventory Supplies

$25,000 17,000 23,000 500

Instructions Prepare the current assets section of the balance sheet. (Include a complete heading.) Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 6, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting

Managerial Accounting Solution 183

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(6–9 min.) LESTER COMPANY (Partial) Balance Sheet December 31, 2022

Current assets Cash Short-term investments Accounts receivable Inventories: Finished goods Work in process Raw materials Prepaid expenses Supplies Total current assets

$22,000 25,000 4,000 $35,000 23,000 17,000

75,000 2,000 500 $128,500

COMPLETION STATEMENTS 184. Financial accounting information is prepared mainly for

users while

managerial accounting information is prepared primarily for

users.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

185. The types of reports prepared in managerial accounting are often

purpose reports prepared for a specific decision. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

186. Managerial accounting reports generally pertain to

of a business and may

be very detailed. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

187. Three broad managerial functions are: (1) (3)

, (2)

, and

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Research Management, AICPA FC: None, AICPA PC: Project Management, IMA: Performance Measurement

188. The

function is concerned with setting goals and objectives for the entity.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: None, AICPA PC: Project Management, IMA: Performance Measurement

189. Exercising good judgment in performing the managerial functions and choosing among alternative courses of action is called

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Process and Resource Management Perspectives, AICPA FC: None, AICPA PC: Project Management, IMA: Decision Analysis

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

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190. The three cost elements in manufacturing a product are (1) (2)

, and (3)

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

191. The work of factory employees that can be physically and directly associated with converting raw materials into products is classified as

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

192. Indirect materials and indirect labor are classified as

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

193. Each of the manufacturing cost components is a

cost.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

194. A major difference between the income statements of a merchandising company and that of a manufacturing company is that the cost of goods sold section of a merchandising company shows cost of goods cost of goods

while a manufacturing company shows .

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

195.

is added to direct labor and manufacturing overhead to compute total manufacturing costs for the current period.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

196. The ending work in process inventory is subtracted from the total cost of work in process to calculate

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

197. A manufacturing company computes cost of goods sold by adding cost of goods manufactured to the

and subtracting the

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

198. A

manufacturing

(1)

company , (2)

usually

has

three

inventory , and (3)

accounts

which

are .

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Managerial Accounting

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Answers to Completion Statements 184. 185. 186. 187. 188. 189. 190. 191. 192. 193. 194. 195. 196. 197. 198.

external, internal special subunits planning, directing, controlling planning decision making direct materials, direct labor, manufacturing overhead direct labor manufacturing overhead product purchased, manufactured Direct materials used cost of goods manufactured beginning finished goods inventory, ending finished goods inventory Finished Goods Inventory, Work in Process Inventory, Raw Materials Inventory

MATCHING 199. Match the items in the two columns below by entering the appropriate code letter in the space provided. A. B. C. D. E.

Managerial accounting Financial accounting Planning Directing Controlling

F. G. H. I. J.

Work in process inventory Direct materials Manufacturing overhead Period costs Value chain

The cost of products that are partially complete.

The function of keeping activities in accordance with plans.

Primarily concerned with internal users and reports pertain to subunits of the entity.

Materials that can be physically and directly associated with manufacturing a product.

The function of setting goals and objectives.

Indirect costs of manufacturing a product.

Primarily concerned with external users and reports pertain to the entity as a whole.

Costs that are not inventoriable.

All business processes associated with providing a product or service.

10.

The function of coordinating diverse activities to produce a smooth-running operation.

Ans: N/A, LO: 1, 2, 4, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Matching 199

(Cont.)

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

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Answers to Matching 1. 2. 3. 4. 5.

F E A G C

6. 7. 8. 9. 10.

H B I J D

SHORT-ANSWER ESSAY QUESTIONS S-A E 200 Financial and managerial accounting are both concerned with the economic events of an enterprise. Similarities between financial and managerial accounting do exist, but they do have a different focus. Briefly distinguish between financial and managerial accounting as they relate to (1) the primary users, (2) the type and frequency of reports, (3) the purpose of reports, and (4) the content of reports. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication, IMA: Cost Management

Solution 200 Financial accounting is primarily concerned with external users such as stockholders and creditors, while the primary users of managerial accounting are those within the company (internal users) such as officers, managers, supervisors, etc. Quarterly and annual classified financial statements are the end product of financial accounting. Internal reports that are prepared as often as needed are the result of managerial accounting. The financial statements produced by financial accounting are general-purpose reports which are highly aggregated, pertain to the enterprise as a whole, and are constrained by generally accepted accounting principles. The internal reports prepared by management accountants are special purpose reports which are detailed, pertain to subunits of the enterprise, and may contain any information relevant to the decision at hand. S-A E 201 Julie Mills is studying for her accounting mid-term examination. Summarize for Julie what she should know about management functions. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication, IMA: Reporting

Solution 201 Julie should know that the management of an organization performs three broad functions: (1) Planning requires management to look ahead and to establish objectives. (2) Directing involves coordinating the diverse activities and human resources of a company to produce a smooth-running operation. (3) Controlling is the process of keeping the company's activities on track.

S-A E 202 A manufacturing company makes the products that it sells. Briefly identify and define the cost elements that are incurred in making a product. After product cost elements are identified, how is the cost of goods manufactured for a period determined? .

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Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: None, AICPA FC: Reporting, Measurement Analysis and Interpretation, AICPA PC: Communication, IMA: Reporting, Cost Management

Solution 202 Costs incurred to manufacture a product include direct materials which can be physically and directly associated with the finished product; direct labor, which is the work of factory employees which can be physically and directly associated with the finished product; and manufacturing overhead, those manufacturing costs which are indirectly associated with production of the finished product. Cost of goods manufactured is computed by adding the cost of direct materials used, direct labor, and manufacturing overhead to the beginning work in process inventory, and subtracting the ending work in process inventory. S-A E 203 Kevin Scott is confused about the differences between a product cost and a period cost. Explain the differences to Kevin. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: None, AICPA FC: Reporting, Measurement Analysis and Interpretation, AICPA PC: Communication, IMA: Reporting, Cost Management

Solution 203 Product costs, or inventoriable costs, are costs that are a necessary and integral part of producing the finished product. Period costs are costs that are identified with a specific time period rather than with a salable product. These costs relate to nonmanufacturing costs and, therefore, are not inventoriable costs. S-A E 204 Assume you have just taken a position as controller for a new company that manufactures and sells wrought iron wall hangings. Although the founder of the company, who is the president and CEO, is a great artisan, she has very limited knowledge of accounting. Instructions To help your new boss better understand accounting for a manufacturing organization, prepare a response to her in which you: (1) identify, (2) describe, and (3) provide examples of the three manufacturing costs and the three inventory accounts used in accounting for a manufacturing company. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: None, AICPA FC: Reporting, Measurement Analysis and Interpretation, AICPA PC: Communication, IMA: Reporting, Cost Management

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 204 The three manufacturing costs are: direct materials, direct labor, and manufacturing overhead. Raw materials that can be physically and directly associated with the finished product during the manufacturing process are called direct materials. The iron used in making the wall hangings is an example of direct materials. The work of factory employees that can be physically and directly associated with converting raw materials to finished goods is considered direct labor. Manufacturing overhead consists of costs that are indirectly associated with the manufacture of the finished product. These costs may also be manufacturing costs that cannot be classified as direct materials or direct labor. Manufacturing overhead includes indirect materials, indirect labor, depreciation on factory buildings and machinery, utilities, insurance, taxes and maintenance on factory facilities. The three inventory accounts are: raw materials, work in process, and finished goods. Raw materials inventory represents the cost of the materials and parts that are to be used in the manufacturing process. The iron purchased to make the wall hangings would be considered raw materials until the time it was put into production. Work in process inventory is the cost applicable to units that have been started into production but are only partially complete. Wall hangings on the assembly line that are in various stages of completion would be work in process. The finished goods inventory represents the cost of completed goods that have not been sold. S-A E 205 (Ethics) Million Dollar Mills is a textile manufacturing firm located in the southern United States. The company carefully prepares all financial statements in accordance with GAAP and gives a copy of the financial statements to each department. In addition, the company keeps records on quality control, safety, and environmental pollution by the company. It then prepares "scorecards" for each department indicating their performance. Recently, the financial impact of the second set of information was added, and the information has been used in the evaluation of employees for merit pay and promotions. At the most recent employee meeting, Tyler Hanes, marketing manager, expressed his discomfort with the system. He said there was no guarantee that the second set of information was fair, since there were no generally accepted principles for this kind of information. He also said that it was kind of like keeping two sets of books—one following all legal requirements, and the other one actually used by the company. Required: 1. Is it ethical to evaluate managers in the way described? Explain briefly. 2. Name at least two safeguards the company could build into its system to ensure the ethical treatment of employees. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication, Ethical Conduct IMA: Business Applications, Performance Measurement

Solution 205 1. It is ethical for a company to use all available data in order to evaluate managers, and even to collect data not routinely available. In fact, such a method seems preferable to one in which the company may only use specified financial data in its evaluation of a manager's performance. It does not imply a departure from GAAP, nor that the company does not actually use the information prepared according to GAAP. It supplements the standard reports, it does not replace them.

Managerial Accounting

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Solution 205 (Cont.) 2. The company should make certain that the appropriate information is calculated in the same way each period. All the relevant data should be collected and reported each period. New data should be limited. The qualitative information should be complemented, not replaced, by the regular financial information. S-A E 206 (Communication) Volumetrica, a producer of audio equipment for large computer systems, is reviewing its policies as part of a biannual self-examination of the company. As part of this process, all managers have been asked to carefully examine costs and determine as closely as possible which costs are direct and which are indirect. Linda Bedard and Sam Hilton, managers of different manufacturing departments in the same building, have been working together. They found the following four costs that could be economically traced to the products, but have historically been a part of overhead: 

Cost of setting up the machinery for a different production run.



Cost of minor assembly components such as knobs and switches.



Cost of packaging, which is quite different for each model.



Cost of inspecting and testing each model.

None of the costs is significant by itself, but together these four costs make up between 10 and 15% of the total cost of the product. Linda favors "leaving well enough alone," as she puts it, and leaving these costs in overhead. She is afraid that her volunteering to trace these costs will result in her having to trace many more costs in the future. Sam, on the other hand, prefers to have the product cost as accurate as possible. He points out that these costs are already known, and the process would require little extra work. Required: You have been called on in your function as accounting manager to resolve the dispute. Write a memo to Linda and Sam, supporting one or the other position. Be sure to adequately defend your position, but be brief. Ans: N/A, LO: 2, Bloom: E, Difficulty: Moderate, Min: 5, AACSB: Communications, AICPA BB: None, AICPA FC: Reporting, Measurement Analysis and Interpretation, AICPA PC: Communication, IMA: Reporting, Cost Management

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

14- 64 Solution 206 TO:

Linda Bedard and Sam Hilton

FROM: Nancy West, Accounting Manager RE:

Tracing overhead

I strongly support the tracing of as much of what is now overhead directly to the products as possible (sorry, Linda). Besides giving more accurate product costs now, as Sam says, it will help us considerably in the future. The more we know about which products generate which costs, the better we can evaluate their profitability. Otherwise, we just assign them some amount of overhead, which may be either more or less than they actually cost. Thank you both for your hard work. It is true, as Linda says, that our reviews will (temporarily) cause us more work (sorry, Sam). However, I think you'll both agree that the benefits of knowing the costs of our products better will make the effort well worthwhile. So, let's start tracing the four costs you mentioned now. Once we have the glitches ironed out, we'll share the results with the other departments. (signed)

CHAPTER 15 JOB ORDER COSTING CHAPTER LEARNING OBJECTIVES 1. Describe cost systems and the flow of costs in a job order system. Cost accounting involves the procedures for measuring, recording, and reporting product costs. From the data accumulated, companies determine the total cost and the unit cost of each product. The two basic types of cost accounting systems are process cost and job order cost. In job order costing, companies first accumulate manufacturing costs in three accounts: Raw Materials Inventory, Factory Labor, and Manufacturing Overhead. They then assign the accumulated costs to Work in Process Inventory and eventually to Finished Goods Inventory and Cost of Goods Sold. 2. Use a job cost sheet to assign costs to Work in Process. A job cost sheet is a form used to record the costs chargeable to a specific job and to determine the total and unit costs of the completed job. Job cost sheets constitute the subsidiary ledger for the Work in Process Inventory control account. 3. Demonstrate how to determine and use the predetermined overhead rate. The predetermined overhead rate is based on the relationship between estimated annual overhead costs and estimated annual operating activity. This is expressed in terms of a common activity base, such as direct labor cost, direct labor hours, or machine hours. Companies use this rate to assign overhead costs to Work in Process and to specific jobs. 4. Prepare entries for manufacturing and service jobs completed and sold. When jobs are completed, companies debit the cost to Finished Goods Inventory and credit it to Work in Process Inventory. When a job is sold the entries are: (a) Debit Cash or Accounts Receivable and credit Sales Revenue for the selling price, and (b) Debit Cost of Goods Sold and credit Finished Goods Inventory for the cost of the goods. 5. Distinguish between under- or overapplied manufacturing overhead. Underapplied manufacturing overhead indicates that the overhead assigned to Work in Process is less than the overhead incurred. Overapplied overhead indicates that the overhead assigned to Work in Process is greater than the actual overhead costs incurred.

TRUE-FALSE STATEMENTS 1.

Cost accounting is primarily concerned with accumulating information about product costs.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A job order cost system is most appropriate when a large volume of uniform products is produced.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: Reporting

A process cost system is appropriate for similar products that are continuously mass produced.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: Reporting

15 - 2 4.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e The perpetual inventory method cannot be used in a job order cost system.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: Reporting

A job order cost system and a process cost system are two alternative methods for accumulating product costs.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A job order cost system identifies costs with a particular job rather than with a set time period.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A company may use either a job order cost system or a process cost system, but not both.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Raw Materials Inventory, Factory Labor, and Manufacturing Overhead are all control accounts in the general ledger when a job order cost accounting system is used.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Accumulating and assigning manufacturing costs are two important activities in a job order cost system.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: FSA

10.

Recording the acquisition cost of raw materials is a part of accumulating manufacturing costs.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: FSA

11.

Manufacturing costs are generally incurred in one period and recorded in a subsequent period.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: FSA

12.

The Purchases account is credited for all returns and allowances of raw materials purchases

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: FSA

13.

When raw materials are received, there is no effort at this point to associate the cost of materials with specific jobs.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: FSA

14.

When raw materials are purchased, the Work in Process Inventory account is debited.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: FSA

15.

Factory labor should be assigned to selling and administrative expenses on a proportionate basis.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Job Order Costing 16.

15 - 3

Benefits and payroll taxes associated with factory workers should be accumulated as a part of Factory Labor.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: FSA

17.

Job order cost sheets constitute the subsidiary ledger of the control account Work in Process Inventory.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: FSA

18.

In a job order cost system, each entry to the Work in Process Inventory account should be accompanied by a posting to one or more job cost sheets.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: FSA

19.

Direct materials requisitioned from the storeroom should be charged to the Work in Process Inventory account and the job cost sheets for the individual jobs on which the materials were used.

Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: FSA

20.

Manufacturing overhead is the only product cost that can be assigned to jobs as soon as the costs are incurred.

Ans: F, LO: 3 Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

21.

There should be a separate job cost sheet for each job.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: Business Economics

22.

Actual manufacturing overhead costs are assigned to each job by tracing each overhead cost to a specific job.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: FSA

23.

The calculation for the predetermined overhead rate is estimated annual overhead costs divided by an estimated volume of annual operating activity.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: Business Economics

24.

Actual manufacturing overhead costs should be charged to the Work in Process Inventory account as they are incurred.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

25.

Finished Goods Inventory is decreased for the cost of jobs completed during a period.

Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Risk Management, AICPA PC: None, IMA: Internal Controls

26.

Finished Goods Inventory is charged for the cost of jobs completed during a period.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: FSA

27.

When goods are sold, the Cost of Goods Sold account is debited and Work in Process Inventory account is credited.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: FSA

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

28.

Total manufacturing costs for a period consists of the cost of direct materials used, the cost of direct labor incurred, and the manufacturing overhead applied during the period.

Ans: T, LO: 5 Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

29.

Overapplied overhead means that actual manufacturing overhead costs were greater than the manufacturing overhead costs applied to jobs.

Ans: F, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: Business Economics

30.

At the end of the year, the amount of the overapplied overhead is usually credited to Cost of Goods Sold.

Ans: T, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

31.

A cost accounting system consists of manufacturing cost accounts that are fully integrated into the general ledger of a company.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: Business Economics

32.

The cost of raw materials purchased is credited to Raw Materials Inventory when materials are received.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: FSA

33.

Requisitions for direct materials are posted daily to the individual job cost sheets.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: None, AICPA PC: None, IMA: Business Economics

34.

The predetermined overhead rate is based on the relationship between the estimated annual overhead costs and the estimated annual operating activity expressed in terms of a common activity base.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: Business Economics

35.

At the end of the year, underapplied overhead is usually credited to Cost of Goods Sold.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

MULTIPLE CHOICE QUESTIONS 36.

Which of the following is one of the purposes of cost accounting? a. It involves measuring product costs. b. It involves the determination of company profits. c. It requires GAAP to be applied. d. It requires cost minimizing principles.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: Business Economics

37.

A major purpose of cost accounting is to a. classify all costs as operating or nonoperating. b. measure, record, and report period costs. .

Job Order Costing

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c. provide information to stockholders for investment decisions. d. measure, record, and report product costs. Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

38.

The two basic types of cost accounting systems are a. job order cost and job cost accumulation systems. b. job order cost and process cost systems. c. process cost and batch cost systems. d. job order cost and batch cost systems.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

39.

A process cost system would most likely be used by a company that makes a. music videos. b. repairs to electric bicycles. c. ramen noodles. d. college graduation announcements.

Ans: C, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

40.

Which of the following would be accounted for using a job order cost system? a. The production of computer docking stations. b. The production of electric cars. c. The refining of petroleum. d. The construction of a new campus dormitory.

Ans: D, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

41.

Process costing is used when a. the production process is continuous. b. production is aimed at filling a specific customer order. c. dissimilar products are involved. d. costs are to be assigned to specific jobs.

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

42.

Process costing is not used when a. similar goods are being produced. b. large volumes are produced. c. jobs have distinguishing characteristics. d. a series of connected manufacturing processes is necessary.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

43.

An important feature of a job order cost system is that each job a. must be similar to previous jobs completed. b. has its own distinguishing characteristics. c. must be completed before a new job is accepted. d. consists of one unit of output.

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

44.

As of December 31, 2022, Stand Still Industries had $2,500 of raw materials inventory. At the beginning of 2022, there was $2,000 of materials on hand. During the year, the company purchased $375,000 of materials; however, it paid for only $312,500. How much inventory was requisitioned for use on jobs during 2022? a. $312,000 b. $374,500 c. $375,500 d. $313,000

Ans: B, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, Process and Resource Management Perspectives, AICPA FN: Reporting, AICPA PC: Decision Making, IMA: Business Economics Solution: $2,000 + $375,000 – $2,500 = $374,500 (Beginning raw materials inventory + Purchases – Ending raw materials inventory = Raw materials requisitioned)

45.

The flow of costs in a job order cost system a. involves accumulating manufacturing costs incurred and assigning the accumulated costto work done. b. cannot be measured until all jobs are complete. c. measures product costs for a set time period. d. generally follows a LIFO cost flow assumption. Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: Business Economics

46.

In a job order cost system, the Work in Process Inventory account is a. an expense. b. a control account. c. not used. d. a period cost.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

47.

When a job is completed and all costs have been accumulated on a job cost sheet, the journal entry that should be made is a. Finished Goods Inventory Direct Materials Direct Labor Manufacturing Overhead b. Work in Process Inventory Direct Materials Direct Labor Manufacturing Overhead c. Raw Materials Inventory Work in Process Inventory .

Job Order Costing

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d. Finished Goods Inventory Work in Process Inventory Ans: D, LO: 1, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: FSA

48.

The two major steps in the flow of costs are a. allocating and assigning. b. acquiring and accumulating. c. accumulating and assigning. d. accumulating and amortizing.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: Business Economics

49.

The Raw Materials Inventory account is a. a subsidiary account. b. debited for invoice costs and freight costs charged to the purchaser. c. debited for purchase discounts taken. d. debited for purchase returns and allowances.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

50.

Records of individual items of raw materials would not be maintained a. electronically. b. manually. c. on stores ledger cards. d. in the Raw Materials Inventory account.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Leverage Technology, AICPA PC: Project Management, IMA: Business Applications

51.

The cost of raw materials is debited to Raw Materials Inventory when the a. materials are ordered. b. materials are received. c. materials are put into production. d. bill for the materials is paid.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: FSA

52.

Which of the following is not included in factory labor costs? a. Gross earnings. b. Employer payroll taxes. c. Employee benefits. d. All of these are included in factory labor costs.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

53.

All of the following would be entries in assigning accumulated costs to the Work in Process Inventory except a. the purchase of raw materials. b. raw materials are used. c. overhead is applied. d. factory labor is used.

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ans: A, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

54.

Factory labor costs a. are accumulated in a control account. b. do not include pension costs. c. include vacation pay. d. are based on workers’ net pay.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: Business Economics

55.

Factory Labor is a(n) a. expense account. b. control account. c. subsidiary account. d. temporary account.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

56.

Kline Manufacturing has the following labor costs: Factory—Gross wages Factory—Net wages Employer Payroll Taxes Payable

$500,000 420,000 50,000

The entry to record the cost of factory labor and the associated payroll tax expense will include a debit to Factory Labor for a. $550,000. b. $500,000. c. $470,000. d. $450,000. Ans: A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: FSA Solution: $500,000 + $50,000 = $550,000 (Gross Wages + Payroll Taxes = Factory Labor)

57.

Factory labor costs a. accumulate in advance of utilization. b. accumulate in a control account. c. include sick pay earned by factory workers. d. accumulate in the Factory Labor Expense account.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: Business Economics

58.

Which of the following is not a control account? a. Finished Goods Inventory b. Raw Materials Inventory c. Work in Process Inventory d. All of these are control accounts .

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Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

59.

Manufacturing Overhead does not include amounts paid for a. factory utilities. b. property taxes on the manufacturing facility. c. supervisor labor costs. d. the CEO’s salary.

Ans: D, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

60.

The entry to record the acquisition of raw materials on account is a. Work in Process Inventory Accounts Payable b. Manufacturing Overhead Raw Materials Inventory Accounts Payable c. Accounts Payable Raw Materials Inventory d. Raw Materials Inventory Accounts Payable

Ans: D, LO: 1, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: FSA

61.

Which one of the following best describes a job cost sheet? a. It is a form used to record the costs chargeable to a specific job and to determine the total and unit costs of the completed job. b. It is used to track manufacturing overhead costs to specific jobs. c. It is used by management to understand how direct costs affect profitability. d. It is a daily form that management uses for tracking worker productivity on which employee raises are based.

Ans: A, LO: 2, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

62.

Job cost sheets constitute the subsidiary ledger for the a. Finished Goods Inventory account. b. Cost of Goods Sold account. c. Work in Process Inventory account. d. Cost of Goods Manufactured account.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

63.

A materials requisition slip shows that direct materials requisitioned were $66,000 and indirect materials requisitioned were $9,000. The entry to record the transfer of materials from the storeroom is a. Work in Process Inventory .................................................. 66,000 Raw Materials Inventory ............................................. 66,000 b. Direct Materials ................................................................... 66,000 9,000 Indirect Materials................................................................. 75,000 Work in Process Inventory.......................................... c. Manufacturing Overhead..................................................... 75,000 Raw Materials Inventory ............................................. 75,000 d. Work in Process Inventory .................................................. 66,000 Manufacturing Overhead..................................................... 9,000 Raw Materials Inventory ............................................. 75,000

Ans: D, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: FSA

64.

The job cost sheet does not show a. costs chargeable to a specific job. b. the total costs of a completed job. c. the unit cost of a completed job. d. the cost of goods sold.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

65.

Under an effective system of internal control, the authorization for issuing materials is made a. orally. b. on a prenumbered materials requisition slip. c. by the accounting department. d. by anyone on the production line.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Risk Management, AICPA PC: None, IMA: Internal Controls

66.

A copy of the materials requisition slip would not include the a. quantity. b. stock number. c. cost per unit. d. name of the supplier.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Reporting, AICPA PC: None, IMA: Internal Controls

67.

Materials requisition slips are costed a. by production supervisors. b. by factory personnel who work on the production line. c. after the goods have been sold. d. using any of the inventory costing methods.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: FSA

Job Order Costing 68.

15 - 11

Postings to control accounts in a costing system are made a. monthly. b. daily. c. annually. d. when errors are discovered

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: Business Applications

69.

Which one of the following should be equal to the balance of the Work in Process Inventory account at the end of the period? a. The total of the amounts transferred from raw materials for the current period b. The sum of the costs shown on the job cost sheets for unfinished jobs c. The total of manufacturing overhead applied to Work in Process for the period d. The total manufacturing costs for the period

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

70.

Which of the following shows entries only to control accounts? a. Factory Labor Factory Wages Payable b. Work in Process Inventory Factory Labor Raw Materials Inventory Factory Wages Payable c. Work in Process Inventory Manufacturing Overhead Raw Materials Inventory d. All of these entries include control accounts.

Ans: C, LO: 2, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: FSA

71.

A time ticket does not indicate the a. employee's name. b. account to be charged. c. number of personal exemptions claimed by the employee. d. job number.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

72.

Which one of the following is a source document that impacts the job cost sheet? a. Raw materials receiving slips. b. Materials purchase orders. c. Labor time tickets. d. Finished goods shipping documents.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Internal Controls

15 - 12 73.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e Time tickets should be approved by a. the audit committee. b. co-workers. c. the employee's supervisor. d. the payroll department.

Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Internal Controls

74.

If the entry to assign factory labor shows only a debit to Work in Process Inventory, then all labor costs were a. direct labor. b. indirect labor. c. overtime related. d. regular hours.

Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: FSA

75.

The principal accounting record used in assigning costs to jobs is a. the job cost sheet. b. the cost of goods manufactured schedule. c. the Manufacturing Overhead control account. d. the stores ledger cards.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

76.

The following information is available for completed Job No. 402: Direct materials, $120,000; direct labor, $180,000; manufacturing overhead applied, $90,000; units produced, 5,000 units; units sold, 4,000 units. The cost of the finished goods inventory on hand from this job is a. $60,000. b. $390,000. c. $78,000. d. $312,000.

Ans: C, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Decision Making, IMA: Reporting Solution: $120,000 + $180,000 + $90,000 = $390,000; $390,000 ÷ 5,000 = $78; $78 x (5,000- 4,000) = $78,000 (Direct materials + Direct labor + Manufacturing overhead applied = Cost of job; Cost of job ÷ Units produced = Cost per unit; Cost per unit x Units on hand = Cost of finished goods on hand)

77.

Sportly, Inc. completed Job No. B14 during 2022. The job cost sheet listed the following: Direct materials Direct labor Manufacturing overhead applied Units produced Units sold

$110,000 $60,000 $40,000 3,000 units 1,800 units

What is the cost of the finished goods inventory on hand from this job? a. $210,000 b. $126,000 c. $ 84,000 d. $102,000 Ans: C, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Decision Making, IMA: Reporting Solution: $110,000 + $60,000 + $40,000 = $210,000; $210,000 ÷ 3,000 = $70; $70 x (3,000 – 1,800) = $84,000 (Direct materials + Direct labor + Manufacturing overhead applied = Cost of job; Cost of job ÷ Units produced = Cost per unit; Cost per unit x Units on hand = Cost of finished goods on hand)

Job Order Costing

15 - 13

15 - 14

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

78.

Madison Inc. uses job order costing for its line of dual zone wine refrigerators. The cost incurred for production during 2022 totaled $18,000 of materials, $9,000 of direct labor costs, and $6,000 of manufacturing overhead applied. The company ships the refrigerators as soon as they are completed which results in no finished goods inventory on hand at the end of any year. Beginning Work in Process inventory totaled $15,000, and the ending balance is $9,000. During the year, the company completed 25 refrigerators. What is the cost per refrigerator? a. b. c. d.

$1,080 $1,560 $1,320 $1,920

Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: Business Economics Solution: $15,000 + $18,000 + $9,000 + $6,000 – $9,000 = $39,000; $39,000 ÷ 25 = $1,560 (Beginning Work in Process inventory + Direct materials + Direct labor + Manufacturing overhead applied – Ending Work in Process inventory= Costs incurred for complete units; Costs incurred for complete units ÷ Units completed = Cost per completed unit)

79.

As of December 31, 2022, Nilsen Industries had $2,000 of raw materials inventory. At the beginning of 2022, there was $1,600 of materials on hand. During the year, the company purchased $354,000 of materials; however it paid for only $314,000. How much inventory was requisitioned for use on jobs during 2022? a. $354,400 b. $344,400 c. $352,600 d. $353,600

Ans: D, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: Business Economics Solution: $1,600 + $354,000 – $2,000 = $353,600 (Beginning raw materials inventory + Purchases – Ending raw materials inventory = Raw materials requisitioned)

80.

Cost of goods manufactured equals $85,000 for 2022. Finished goods inventory is $2,000 at the beginning of the year and $5,500 at the end of the year. Beginning and ending Work in Process inventory for 2022 are $4,000 and $5,000, respectively. How much is cost of goods sold for the year? a. $87,500 b. $83,000 c. $81,500 d. $80,500

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Decision Making, IMA: Reporting Solution: $2,000 + $85,000 – $5,500 = $81,500 (Beginning finished goods inventory + Cost of goods manufactured – Ending finished goods inventory = Cost of goods sold)

81.

A company estimated its annual overhead costs to be $1,500,000 and direct labor costs to be $1,000,000. Actual overhead was $1,450,000, and actual labor costs totaled $1,100,000. What is the company’s predetermined overhead rate (rounded to the nearest cent)? a. $1.45 b. $1.32 c. $1.50 d. $1.36

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: Business Economics Solution: $1,500,000 ÷ $1,000,000 = $1.50 (Estimated overhead ÷ Estimated direct labor cost = Predetermined overhead rate)

Job Order Costing 82.

15 - 15

Vektek, Inc. considers machine hours to be the best activity base for applying its manufacturing overhead. In the current period, the estimate of annual overhead costs for its jobs was $2,050,000. The company used 1,000 hours of processing on Job No. B12 during the period and incurred overhead costs totaling $2,100,000. The budgeted machine hours for the year totaled 20,000. How much overhead should be applied to Job No. B12? a. $2,100 b. $102,500 c. $105,000 d. $2,050

Ans: B, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: FSA Solution: $2,050,000 ÷ 20,000 = $102.50 per direct labor hour; 1,000 x $102.50 = $102,500 (Estimated overhead ÷ Estimated direct labor hours = Predetermined overhead rate; Actual hours x Predetermined overhead rate = Overhead applied)

83.

Barr Mfg. provided the following information from its accounting records for 2022: Estimated production Actual production Estimated overhead Actual overhead

60,000 labor hours 56,000 labor hours $900,000 $870,000

What is the overhead application rate if Barr bases the rate on direct labor hours (rounded to the nearest cent)? a. $16.07 per hour b. $15.00 per hour c. $14.50 per hour d. $15.54 per hour Ans: B, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: FSA Solution: $900,000 ÷ 60,000 = $15.00 per direct labor hour (Estimated overhead ÷ Estimated direct labor hours = Predetermined overhead rate)

84.

Kinney Company applies overhead on the basis of 150% of direct labor cost. Job No. 176 is charged with $150,000 of direct materials costs and $180,000 of manufacturing overhead. The total manufacturing costs for Job No. 176 is a. $430,000. b. $600,000. c. $450,000. d. $405,000.

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: FSA Solution: $180,000 ÷ 150% = $120,000; $150,000 + $120,000 + $180,000 = $450,000 (Manufacturing overhead ÷ Overhead rate = Direct labor cost; Direct materials + Direct labor + Manufacturing overhead applied = Total manufacturing cost of job)

85.

Redman Company manufactures customized sit-stand desks. The following pertains to Job No. 978:

15 - 16

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e Direct materials used Direct labor hours worked Direct labor rate per hour Machine hours used Applied factory overhead rate per machine hour

$15,450 360 $15.00 300 $22.00

What is the total manufacturing cost for Job No. 978? a. $25,650 b. $27,450 c. $28,950 d. $30,750 Ans: B, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Decision Making, IMA: Reporting Solution: $15,450 + (360 x $15) + (300 x $22) = $27,450 [Direct materials + (Direct labor hours worked x Direct labor hour rate) + (Machine hours used x Factory overhead rate) = Total manufacturing cost of job]

86.

Henson Company applies overhead on the basis of 120% of direct labor cost. Job No. 190 is charged with $140,000 of direct materials costs and $180,000 of manufacturing overhead. The total manufacturing costs for Job No. 190 is a. $320,000. b. $536,000. c. $488,000. d. $470,000.

Ans: D, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: FSA Solution: $180,000 ÷ 120% = $150,000; $140,000 + $150,000 + $180,000 = $470,000 (Manufacturing overhead ÷ Overhead rate = Direct labor cost; Direct materials + Direct labor + Manufacturing overhead applied = Total manufacturing cost of job)

87.

Norman Company manufactures customized metal buildings. The following pertains to Job No. 953: Direct materials used Direct labor hours worked Direct labor rate per hour Machine hours used Applied factory overhead rate per machine hour

$22,800 600 $16.00 400 $30.00

What is the total manufacturing cost for Job No. 953? a. $41,200 b. $44,400 c. $47,200 d. $50,400 Ans: B, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Decision Making, IMA: Reporting Solution: $22,800 + (600 x $16) + (400 x $30) = $44,400 [Direct materials + (Direct labor hours worked x Direct labor hour rate) + (Machine hours used x Factory overhead rate) = Total manufacturing cost of job]

88.

Minton Company provided the following information from its accounting records for 2022: .

Job Order Costing Estimated production Actual production Estimated overhead Actual overhead

15 - 17

60,000 labor hours 56,000 labor hours $1,800,000 $1,740,000

What is the predetermined overhead application rate if Minton Company bases it on direct labor hours (rounded to the nearest cent)? a. $30.00 per hour b. $29.00 per hour c. $32.14 per hour d. $31.07 per hour Ans: A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: FSA Solution: $1,800,000 ÷ 60,000 = $30.00 per direct labor hour (Estimated overhead ÷ Estimated direct labor hours = Predetermined overhead rate)

89.

The labor costs that have been identified as indirect labor should be charged to a. manufacturing overhead. b. direct labor. c. the individual jobs worked on. d. salary expense.

Ans: A, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: Reporting

90.

Manufacturing overhead is applied to each job a. at the time when the overhead cost is incurred. b. by means of a predetermined overhead rate. c. at the end of the year when actual costs are known. d. only if the overhead costs can be directly traced to that job.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: Business Economics

91.

The predetermined overhead rate is based on the relationship between a. estimated annual costs and actual activity. b. estimated annual costs and estimated annual activity. c. actual monthly costs and actual annual activity. d. estimated monthly costs and actual monthly activity.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: Business Economics

92.

The predetermined overhead rate is a. determined on a moving average basis throughout the year. b. not calculated until actual overhead costs are incurred. c. determined at the beginning of the year. d. determined at the end of the current year.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: Business Economics

93.

In calculating a predetermined overhead rate, a trend in automated manufacturing operations is to choose an activity base related to

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

15 - 18 a. b. c. d.

direct labor hours. indirect labor dollars. machine hours. raw materials dollars.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: Business Economics

94.

Annual overhead costs are estimated to be $750,000 and direct labor costs are estimated to be $1,000,000. If the activity base is direct labor costs, a. $1.33 is the predetermined overhead rate. b. for every dollar of manufacturing overhead, 75 cents of direct labor cost will be assigned. c. for every dollar of direct labor cost, 75 cents of manufacturing overhead will be assigned. d. a predetermined overhead rate cannot be determined.

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: Business Economics Solution: $750,000 ÷ $1,000,000 = $.75 (Estimated overhead ÷ Estimated direct labor cost = Predetermined overhead rate)

95.

Overhead application is recorded with a a. credit to Work in Process Inventory. b. credit to Manufacturing Overhead. c. debit to Manufacturing Overhead. d. credit to job cost sheets.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: FSA

96.

Manufacturing overhead applied is added to direct labor incurred and to what other item to equal total manufacturing costs for the period? a. Goods available for sale b. Raw materials purchased c. Work in Process inventory d. Direct materials used

Ans: D, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: Business Economics

97.

Simmons Inc. applies overhead to production at a predetermined rate of 90% of direct labor cost. Job No. 250, the only job still in process at the end of August, has been charged with manufacturing overhead of $8,100. What was the amount of direct materials charged to Job 250 if the balance in Work in Process Inventory is $30,000? a. $8,100 b. $9,000 c. $12,900 d. $14,610

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Decision Making, IMA: Reporting Solution: $8,100 ÷ 90% = $9,000; X + $9,000 + $8,100 = $30,000; X = $12,900 (Manufacturing overhead ÷ Overhead rate = Direct labor cost; Direct materials + Direct labor + Manufacturing overhead applied = Total manufacturing cost of job)

98.

Spencer Inc. applies overhead to production at a predetermined rate of 80% of direct labor cost. Job No. 130, the only job still in process at the end of August, has been charged with manufacturing overhead of $6,400. What was the amount of direct materials charged to Job 130 if the balance in Work in Process Inventory is $20,000? .

Job Order Costing a. b. c. d.

15 - 19

$7,000 $6,400 $5,600 $8.480

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Decision Making, IMA: Reporting Solution: $6,400 ÷ 80% = $8,000; X + $8,000 + $6,400 = $20,000; X = $5,600 (Manufacturing overhead ÷ Overhead rate = Direct labor cost; Direct materials + Direct labor + Manufacturing overhead applied = Total manufacturing cost of job)

99.

For Jacobs Company, the predetermined overhead rate is 70% of direct labor cost. During the month, $600,000 of factory labor costs are incurred of which $140,000 is indirect labor. Actual overhead incurred was $320,000. The amount of overhead debited to Work in Process Inventory should be a. $322,000. b. $320,000. c. $420,000. d. $460,000.

Ans: A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: Business Economics Solution: ($600,000 – $140,000) x 70% = $322,000 [(Factory labor costs – Indirect labor) x Predetermined overhead rate = Amount debited to Work in Process inventory]

100.

Simpson Company applies overhead on the basis of 200% of direct labor cost. Job No. 305 is charged with $180,000 of direct materials costs and $200,000 of manufacturing overhead. The total manufacturing cost for Job No. 305 is a. $380,000. b. $480,000. c. $560,000. d. $580,000.

Ans: B, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Decision Making, IMA: Reporting Solution: $200,000 ÷ 200% = $100,000; $180,000 + $100,000 + $200,000 = $480,000 (Manufacturing overhead ÷ Overhead rate = Direct labor cost; Direct materials + Direct labor + Manufacturing overhead applied = Total manufacturing cost of job)

101.

For Wilton Company, the predetermined overhead rate is 70% of direct labor cost. During the month, $720,000 of factory labor costs are incurred of which $200,000 is indirect labor. Actual overhead incurred was $360,000. The amount of overhead charged to Work in Process Inventory is a. $364,000. b. $360,000. c. $504,000. d. $520,000

Ans: A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: Business Economics Solution: ($720,000 – $200,000) x 70% = $364,000 [(Factory labor costs – Indirect labor) x Predetermined overhead rate = Amount debited to Work in Process inventory]

102.

At the beginning of the year, Monroe Company estimates annual overhead costs to be $2,400,000 and that 300,000 machine hours will be operated. Machine hours is the overhead allocation base. What is the amount of overhead applied during the year if actual machine hours for the year was 315,000 hours? a. $2,400,000

15 - 20

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e b. $2,285,714 c. $1,680,000 d. $2,520,000

Ans: D, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: FSA Solution: $2,400,000 ÷ 300,000 = $8.00 per machine hour; 315,000 x $8 = $2,520,000 (Estimated overhead ÷ Estimated machine hours = Predetermined overhead rate; Actual machine hours x Predetermined overhead rate = Overhead applied)

103.

Cost of goods sold is obtained from a. analysis of all the control accounts in the cost system. b. the Finished Goods Inventory records. c. the Work in Process Inventory records. d. the Raw Materials Inventory control account.

Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

104.

When determining costs of jobs, how does a company account for the cost of indirect materials? a. The cost is added to Work in Process inventory as used. b. The cost remains part of Raw Materials Inventory. c. The cost is transferred out of Raw Materials Inventory and into manufacturing overhead when used. d. The cost is transferred out of Raw Materials Inventory and into Work in Process inventory as used.

Ans: C, LO: 4, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

105.

In a job order cost system, a credit to Manufacturing Overhead will be accompanied by a debit to a. Cost of Goods Manufactured. b. Finished Goods Inventory. c. Work in Process Inventory. d. Raw Materials Inventory.

Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: FSA

106.

During 2022, Tanner Manufacturing estimated that Job No. 26 would incur $300,000 of overhead, $500,000 of materials, and $200,000 in labor. Tanner applied overhead based on direct labor cost. Actual production required an overhead cost of $290,000, $550,000 in materials used, and $220,000 in labor. All of the goods were completed. What amount was transferred to Finished Goods Inventory? a. $1,000,000 b. $1,060,000 c. $1,070,000 d. $1,100,000

Ans: D, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: FSA Solution: $300,000 ÷ $200,000 = 150% of direct labor cost; $550,000 + $220,000 + ($220,000 x 150%) = $1,100,000 [Estimated overhead ÷ Estimated direct labor cost = Predetermined overhead rate; Direct materials + Direct labor + (Direct labor x Predetermined overhead rate) = Amount transferred to finished goods]

107.

Debits to Work in Process Inventory are accompanied by credits to all but which one of the following accounts? a. Raw Materials Inventory b. Factory Labor .

Job Order Costing

15 - 21

c. Manufacturing Overhead d. Cost of Goods Sold Ans: D, LO: 4, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: FSA

108.

Which of the following is not viewed as part of accumulating manufacturing costs in a job order cost system? a. Cost of goods sold is recognized. b. Raw materials are purchased. c. Factory labor is incurred. d. Manufacturing overhead is incurred.

Ans: A, LO: 4, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: Business Economics

109.

Which of the following is not viewed as part of assigning manufacturing costs in a job order cost system? a. Manufacturing overhead is applied. b. Raw materials are used. c. Manufacturing overhead is incurred. d. Completed goods are recognized.

Ans: C, LO: 4, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: Business Economics

110.

In determining total manufacturing costs on the cost of goods manufactured schedule, a. beginning Work in Process Inventory should have a zero balance. b. actual manufacturing overhead costs appear as a deduction. c. manufacturing overhead applied is added to direct materials and direct labor. d. ending Work in Process inventory is deducted from beginning Work in Process Inventory.

Ans: C, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

111.

Gulick Company developed the following data for the current year: Beginning Work in Process Inventory Direct materials used Actual overhead Overhead applied Cost of goods manufactured Total manufacturing costs

$240,000 144,000 288,000 216,000 264,000 720,000

Gulick Company's direct labor cost for the year is a. $72,000. b. $360,000. c. $216,000. d. $288,000. Ans: B, LO: 5 Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Decision Making, IMA: Reporting Solution: $144,000 + X + $216,000 = $720,000; X = $360,000 (Direct materials used + Direct labor + Manufacturing overhead applied = Total manufacturing costs)

112.

Gulick Company developed the following data for the current year: Beginning Work in Process Inventory Direct materials used

$240,000 144,000

15 - 22

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e Actual overhead Overhead applied Cost of goods manufactured Total manufacturing costs

288,000 216,000 264,000 720,000

Gulick Company's ending Work in Process Inventory is a. $696,000. b. $480,000. c. $456,000. d. $216,000. Ans: A, LO: 45 Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Decision Making, IMA: Reporting Solution: $240,000 + $720,000 – X = $264,000; X = $696,000 (Beginning Work in Process inventory + Total manufacturing costs – Ending Work in Process inventory = Cost of goods manufactured)

113.

Hayward Manufacturing Company developed the following data: Beginning Work in Process Inventory Direct materials used Actual overhead Overhead applied Cost of goods manufactured Ending Work in Process Inventory

$900,000 700,000 1,100,000 800,000 1,200,000 1,500,000

Hayward Manufacturing Company's total manufacturing costs for the period is a. $1,900,000. b. $1,800,000. c. $1,300,000. d. cannot be determined from the data provided. Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Decision Making, IMA: Reporting Solution: $900,000 + X – $1,500,000 = $1,200,000; X = $1,800,000 (Beginning Work in Process inventory + Total manufacturing costs – Ending Work in Process inventory = Cost of goods manufactured)

114.

Which of the following is not used in assigning manufacturing costs to Work in Process Inventory? a. Actual manufacturing overhead b. Time tickets c. Materials requisitions d. Predetermined overhead rate

Ans: A, LO: 4, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: Business Economics

115.

On the cost of goods manufactured schedule, the cost of goods manufactured agrees with the a. balance of Finished Goods Inventory at the end of the period. b. total debits to Work in Process Inventory during the period. c. amount transferred from Work in Process Inventory to Finished Goods Inventory during the period. d. debits to Cost of Goods Sold during the period.

Ans: C, LO: 45 Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Job Order Costing 116.

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Gannon Company had the following information at December 31: Finished goods inventory, January 1 Finished goods inventory, December 31

$ 50,000 150,000

If the cost of goods manufactured during the year amounted to $2,200,000 and annual sales were $2,750,000, the amount of gross profit for the year is a. $550,000. b. $2,100,000. c. $650,000. d. $450,000. Ans: C, LO: 5 Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Decision Making, IMA: Reporting Solution: $50,000 + $2,200,000 – $150,000 = $2,100,000; $2,750,000 – $2,100,000 = $650,000 (Beginning finished goods inventory + Cost of goods manufactured – Ending finished goods inventory = Cost of goods sold; Sales – Cost of goods sold = Gross profit)

117.

Haight Company incurred direct materials costs of $2,500,000 during the year. Manufacturing overhead applied was $450,000 and is applied at the rate of 60% of direct labor costs. Haight Company’s total manufacturing costs for the year was a. $3,700,000. b. $3,220,000. c. $2,950,000. d. $4,720,000.

Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Decision Making, IMA: Reporting Solution: $450,000 ÷ 60% = $750,000; $2,500,000 + $750,000 + $450,000 = $3,700,000 (Manufacturing overhead ÷ Overhead rate = Direct labor cost; Direct materials + Direct labor + Manufacturing overhead applied = Total manufacturing costs)

118.

Greer Company developed the following data for the current year: Beginning Work in Process Inventory Direct materials used Actual overhead Overhead applied Cost of goods manufactured Total manufacturing costs

$136,000 208,000 176,000 184,000 900,000 856,000

What is Greer Company's direct labor cost for the year? a. $508,000 b. $600,000 c. $464,000 d. $472,000 Ans: C, LO: 4, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: Business Economics Solution: $208,000 + X + $184,000 = $856,000; X = $464,000 (Direct materials + Direct labor + Manufacturing overhead applied = Total manufacturing cost of job)

15 - 24 119.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e Greer Company developed the following data for the current year: Beginning Work in Process inventory Direct materials used Actual overhead Overhead applied Cost of goods manufactured Total manufacturing costs

$136,000 208,000 176,000 184,000 900,000 856,000

What is Greer Company's ending Work in Process Inventory for the year? a. $92,000 b. $484,000 c. $84,000 d. $372,000 Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Decision Making, IMA: Reporting Solution: $136,000 + $856,000 – X = $900,000; X = $92,000 (Beginning Work in Process inventory + Total manufacturing costs – Ending Work in Process inventory = Cost of goods manufactured)

120.

Chomelar Manufacturing Company developed the following data: Beginning Work in Process inventory Direct materials used Actual overhead Overhead applied Cost of goods manufactured Ending Work in Process inventory

$ 120,000 720,000 840,000 810,000 1,920,000 90,000

What are total manufacturing costs for the period? a. $2,370,000 b. $1,890,000 c. $1,650,000 d. $1,830,000 Ans: B, LO: 5 Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: Business Economics Solution: $120,000 + X – $90,000 = $1,920,000; X = $1,890,000 (Beginning Work in Process inventory + Total manufacturing costs – Ending Work in Process inventory = Cost of goods manufactured)

121.

Barger Company had the following information at December 31: Finished goods inventory, January 1 Finished goods inventory, December 31

$ 90,000 126,000

If the cost of goods manufactured during the year totaled $1,895,000 and annual sales were $2,994,000, what is the company’s gross profit for the year? a. $1,099,000 b. $1,063,000 c. $1,859,000 d. $1,135,000 Ans: D, LO: 5 Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Decision Making, IMA: Reporting Solution: $90,000 + $1,895,000 – $126,000 = $1,859,000; $2,994,000 – $1,859,000 = $1,135,000 (Beginning finished goods inventory + Cost of goods manufactured – Ending finished goods inventory = Cost of goods sold; Sales – Cost of goods sold = Gross profit)

Job Order Costing 122.

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Emley Company incurred direct materials cost of $750,000 during the year. Manufacturing overhead applied was $700,000 and is applied based on direct labor costs. The predetermined overhead rate is 70%. What are Emley Company’s total manufacturing costs for the year? a. $1,940,000 b. $1,750,000 c. $1,450,000 d. $2,450,000

Ans: D, LO: 5 Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Decision Making, IMA: Reporting Solution: $700,000 ÷ 70% = $1,000,000; $750,000 + $1,000,000 + $700,000 = $2,450,000 (Manufacturing overhead ÷ Overhead rate = Direct labor cost; Direct materials + Direct labor + Manufacturing overhead applied = Total manufacturing costs)

123.

During 2022, Durham Manufacturing expected Job No. 51 to incur $300,000 of overhead, $500,000 of direct materials, and $200,000 in direct labor. Durham applied overhead based on direct labor cost. Actual production required overhead cost of $295,000, $570,000 in direct materials used, and $220,000 in direct labor. All of the goods were completed. What amount was transferred to Finished Goods Inventory? a. $1,090,000 b. $1,120,000 c. $1,000,000 d. $1,085,000

Ans: B, LO: 5 Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: FSA Solution: $300,000 ÷ $200,000 = 150%; $570,000 + $220,000 + ($220,000 x 150%) = $1,120,000 [Estimated overhead ÷ Estimated direct labor cost = Predetermined overhead rate; Direct material + Direct labor + (Direct labor x Predetermined overhead rate) = Amount transferred to finished goods]

124.

During 2022, Cotte Manufacturing expected Job No. 59 to incur $300,000 of overhead cost, $500,000 of direct materials cost, and $200,000 in direct labor cost. Cotte applied overhead based on direct labor cost. Actual production required overhead cost of $295,000, $570,000 in direct materials used, and $220,000 in direct labor. All of the goods were completed. What is the amount of over- or underapplied overhead? a. $5,000 underapplied b. $5,000 overapplied c. $35,000 underapplied d. $35,000 overapplied

Ans: D, LO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: Business Economics Solution: $300,000 ÷ $200,000 = 150%; $220,000 x 150% = $330,000; $330,000 – $295,000 = $35,000 overapplied (Estimated overhead ÷ Estimated direct labor cost = Predetermined overhead rate; Direct labor x Predetermined overhead rate = Overhead applied; Overhead applied – Actual overhead = Under/overapplied overhead)

125.

Kimble Company applies overhead on the basis of machine hours. Given the following data, what is the overhead applied and the under- or overapplication of overhead for the period?

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

15 - 26

a. b. c. d.

Estimated annual overhead cost $1,600,000 Actual annual overhead cost $1,575,000 Estimated machine hours 400,000 Actual machine hours 390,000 $1,560,000 applied and $15,000 overapplied $1,600,000 applied and $15,000 overapplied $1,560,000 applied and $15,000 underapplied $1,575,000 applied and neither under-nor overapplied

Ans: C, LO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: Business Economics Solution: $1,600,000 ÷ 400,000 = $4/machine hour; 390,000 x $4 = $1,560,000; $1,560,000 – $1,575,000 = $15,000 underapplied (Estimated overhead ÷ Estimated machine hours = Predetermined overhead rate; Actual machine hours x Predetermined overhead rate = Overhead applied; Overhead applied – Actual overhead = Under/overapplied overhead)

126.

Barnes Company applies overhead on the basis of machine hours. Given the following data, what is the overhead applied and the under- or overapplication of overhead for the period? Estimated annual overhead cost Actual annual overhead cost Estimated machine hours Actual machine hours a. b. c. d.

$3,000,000 $2,970,000 300,000 295,000

$2,950,000 applied and $20,000 overapplied $3,000,000 applied and $20,000 overapplied $2,950,000 applied and $20,000 underapplied $2,970,000 applied and neither under- nor overapplied

Ans: C, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: Business Economics Solution: $3,000,000 ÷ 300,000 = $10/machine hour; 295,000 x $10 = $2,950,000; $2,950,000 – $2,970,000 = $20000 underapplied (Estimated overhead ÷ Estimated machine hours = Predetermined overhead rate; Actual machine hours x Predetermined overhead rate = Overhead applied; Overhead applied – Actual overhead = Under/overapplied overhead)

127.

A company assigned overhead to Work in Process Inventory. At year end, what does it mean if overhead is overapplied? a. The overhead assigned to Work in Process Inventory is greater than the estimated overhead costs. b. The overhead assigned to Work in Process Inventory is less than the estimated overhead costs. c. The overhead assigned to Work in Process Inventory is less than the actual overhead. d. The overhead assigned to Work in Process Inventory is greater than the overhead incurred.

Ans: D, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: Business Economics

128.

If the Manufacturing Overhead account has a debit balance at the end of a period, it means that a. actual overhead costs were less than overhead costs applied to jobs. b. actual overhead costs were greater than overhead costs applied to jobs. c. actual overhead costs were equal to overhead costs applied to jobs. d. no jobs have been completed.

Ans: B, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

129.

If the manufacturing overhead cost applied to jobs is greater than the actual manufacturing costs incurred during a period, overhead is said to be a. underapplied. .

Job Order Costing

15 - 27

b. overapplied. c. in error. d. prepaid. Ans: B, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

130.

At the end of the year, any balance in the Manufacturing Overhead account is generally eliminated by adjusting a. Work in Process Inventory. b. Finished Goods Inventory. c. Cost of Goods Sold. d. Raw Materials Inventory.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

131.

If Manufacturing Overhead has a credit balance at the end of the period, then a. overhead has been underapplied. b. the overhead assigned to Work in Process Inventory is less than the overhead incurred. c. overhead has been overapplied. d. management must take corrective action.

Ans: C, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

132.

The Manufacturing Overhead account shows debits of $30,000, $24,000, and $28,000 and a credit for $86,000. Based on this information, manufacturing overhead a. has been overapplied. b. has been underapplied. c. has not been applied. d. shows a zero balance.

Ans: A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: FSA Solution: ($30,000 + $24,000 + $28,000) = $82,000 debit balance (actual) - $86,000 credit balance (applied) = $4,000 overapplied manufacturing overhead. Account debits – Account credits = overapplied debit balance

133.

If Manufacturing Overhead has a debit balance at the end of the period, then a. overhead has been underapplied. b. the overhead assigned to Work in Process Inventory is more than the overhead incurred. c. overhead has been overapplied. d. management must take corrective action.

Ans: A, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

15 - 28

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

134.

If actual manufacturing is greater than applied manufacturing overhead, then manufacturing overhead is a. underapplied. b. overapplied. c. a loss on the income statement under "Other Expenses and Losses." d. considered a miscellaneous expense.

Ans: A, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

135.

If actual overhead is less than applied manufacturing overhead, then manufacturing overhead is a. underapplied. b. overapplied. c. a loss on the income statement under "Other Expenses and Losses." d. considered a miscellaneous expense.

Ans: B, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

136.

If manufacturing overhead has been underapplied during the year, the adjusting entry at the end of the year will generally include a a. debit to Manufacturing Overhead. b. credit to Cost of Goods Sold. c. debit to Work in Process Inventory. d. debit to Cost of Goods Sold.

Ans: D, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: FSA

137.

If manufacturing overhead has been overapplied during the year, the adjusting entry at the end of the year will include a a. debit to Manufacturing Overhead. b. credit to Finished Goods Inventory c. debit to Cost of Goods Sold. d. credit to Work in Process Inventory.

Ans: A, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: FSA

138.

The existence of under- or overapplied overhead at the end of the year usually a. requires an adjustment to Cost of Goods Sold. b. indicates that an error has been made. c. requires a retroactive adjustment to the cost of all jobs completed. d. is written off as a bad estimate expense.

Ans: A, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: Business Economics

139.

Conceptually, any under- or overapplied overhead at the end of the year should be allocated among all of the following accounts except a. Cost of Goods Sold. b. Work in Process Inventory. c. Raw Materials Inventory. d. Finished Goods Inventory.

Ans: C, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Job Order Costing 140.

15 - 29

If manufacturing overhead has been overapplied at the end of the year, it means that a. actual overhead costs were greater than the overhead assigned to jobs. b. actual overhead costs were less than the overhead assigned to jobs. c. overhead has not been applied to jobs still in process. d. cost of goods will have to be increased by the amount of the overapplied overhead.

Ans: B, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

141.

A process cost system would be used for all of the following except the a. manufacture of energy bars. b. refining of petroleum. c. production of custom skateboards. d. production of microphones.

Ans: C, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Reporting, AICPA PC: None, IMA: Business Applications

142.

In a job order cost system, the purchase of raw materials is recorded with a debit to a. Work in Process Inventory. b. Work in Process Inventory and Manufacturing Overhead. c. Raw Materials Inventory. d. Finished Goods Inventory.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: FSA

143.

In a manufacturing company, the cost of factory labor includes all of the following costs except a. employer payroll taxes. b. employee benefits incurred by the employer. c. net earnings of factory workers. d. gross earnings of factory workers.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: Business Economics

144.

When direct labor costs are assigned to jobs, is debited and credited. , a. Work in Process Inventory; Salaries and Wages Payable b. Work in Process Inventory; Factory Labor c. Manufacturing Overhead; Factory Labor d. Factory Labor; Manufacturing Overhead

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

145.

When the company assigns factory labor costs to jobs, direct labor cost is debited to a. Direct Labor. b. Factory Labor. c. Manufacturing Overhead. d. Work in Process Inventory.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: FSA

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

146.

Jinnah Company applies overhead on the basis of 200% of direct labor cost. Job No. 501 is charged with $240,000 of direct materials cost and $320,000 of manufacturing overhead. The total manufacturing cost for Job No. 501 is a. $560,000. b. $880,000. c. $720,000. d. $800,000.

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Decision Making, IMA: Reporting Solution: $320,000 ÷ 200% = $160,000; $240,000 + $160,000 + $320,000 = $720,000 (Manufacturing overhead ÷ Overhead rate = Direct labor cost; Direct materials + Direct labor + Manufacturing overhead applied = Total manufacturing cost of job)

147.

Companies assign manufacturing overhead to Work in Process Inventory on an estimated basis through the use of a(n) a. actual overhead rate. b. estimated overhead rate. c. assigned overhead rate. d. predetermined overhead rate.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: Business Economics

148.

Overapplied manufacturing overhead exists when overhead assigned to Work in Process Inventory is a. more than overhead incurred and there is a debit balance in Manufacturing Overhead at the end of a period. b. less than overhead incurred and there is a debit balance in Manufacturing Overhead at the end of a period. c. more than overhead incurred and there is a credit balance in Manufacturing Overhead at the end of a period. d. less than overhead incurred and there is a credit balance in Manufacturing Overhead at the end of a period.

Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: Business Economics

149.

Usually, under- or overapplied overhead is eliminated with an adjustment to a. Work in Process Inventory. b. Finished Goods Inventory. c. Finished Goods Inventory and Cost of Goods Sold. d. Cost of Goods Sold.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: FSA

150.

Which of the following statements about under- or overapplied manufacturing overhead is correct? a. After the entry to transfer over- or underapplied overhead to Cost of Goods Sold is posted, Manufacturing Overhead will have a zero balance. b. When Manufacturing Overhead has a credit balance, overhead is said to be underapplied. c. At the end of the year, under- or overapplied overhead is eliminated by a closing entry. d. When year-end financial statements are prepared, overapplied overhead is reported in current liabilities.

Ans: A, LO: 5, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Job Order Costing

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BRIEF EXERCISES BE 151 During the first year of operations, Shapiro Tool accumulated the following manufacturing costs: Raw materials purchased on account Factory labor incurred Manufacturing overhead incurred on account

$12,000 6,000 4,000

Instructions Prepare separate journal entries for each manufacturing cost. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: FSA

Solution 151

(4 min.)

Raw Materials Inventory.................................................................... Accounts Payable.....................................................................

12,000

Factory Labor.................................................................................... Payroll Liabilities.......................................................................

6,000

Manufacturing Overhead................................................................... Accounts Payable.....................................................................

4,000

12,000

6,000 4,000

BE 152 In January, the production supervisor for Harlan, Inc. requisitioned raw materials for production as follows: Job 1 $700, Job 2 $900, Job 3 $400, and general factory use, $520. Instructions Prepare a summary journal entry to record raw materials used. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: FSA

Solution 152

(2 min.)

Work in Process Inventory ................................................................ Manufacturing Overhead................................................................... Raw Materials Inventory ...........................................................

2,000 520 2,520

BE 153 Lando Company reported the following amounts for 2022: Raw materials purchased $83,000 Beginning Raw Materials Inventory 5,200 Ending Raw Materials Inventory 4,500

Ending Work in Process Inventory $ 6,300 Manufacturing overhead costs applied 36,000 Beginning Work in Process inventory 6,100

Instructions Calculate the cost of materials used in production Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: Business Economics

Solution 153

(2 min.)

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

$5,200 + $83,000 – $4,500 = $83,700 BE 154 Builder Bug Company allocates overhead at the rate of $9 per direct labor hour. Job A45 required 4 boxes of direct materials at a cost of $30 per box and took employees 20 hours to complete. Employees earn $15 per hour. Instructions Compute the total cost of Job A45. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: Business Economics

Solution 154

(4 min.)

Direct material (4 × $30) Direct labor (20 hours × $15) Manufacturing overhead (20 hours × $9) Total job cost

$120 300 180 $600

BE 155 Colby Company estimates that annual manufacturing overhead costs will be $600,000. Estimated annual operating activity bases are: direct labor cost $460,000, direct labor hours 40,000 and machine hours 80,000. The actual manufacturing overhead cost for the year was $601,000 and the actual direct labor cost for the year was $456,000. Actual direct labor hours totaled 39,800 and machine hours totaled 79,000. Colby applies overhead based on direct labor hours. Instructions Compute the predetermined overhead rate and determine the amount of manufacturing overhead applied. Determine if overhead is over- or underapplied and the amount. Ans: N/A, LO: 3, 5, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: Business Economics

Solution 155

(5 min.)

Predetermined Overhead Rate = $600,000 ÷ 40,000 = $15 per direct labor hour Manufacturing Overhead Applied = $15  39,800 = $597,000 Underapplied = $597,000 - $601,000 = $4,000 BE 156 Martin Company applies manufacturing overhead based on direct labor hours. Information concerning manufacturing overhead and labor for the year is as follows: Actual manufacturing overhead $150,000 Estimated manufacturing overhead $145,000 Direct labor hours incurred 4,800 Direct labor hours estimated 5,000 Instructions Compute the predetermined overhead rate. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: Business Economics

Job Order Costing Solution 156

15 - 33

(2 min.)

$145,000 ÷ 5,000 = $29 per direct labor hour BE 157 The manufacturing operations of Bryant, Inc. had the following balances for the month of January: Inventories Raw Materials Work in Process Finished Goods

January 1 $12,000 21,000 14,000

January 31 $13,000 23,000 16,000

Bryant transferred $290,000 of completed goods out of Work in Process Inventory during January. Instructions Compute the cost of goods sold. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Decision Making, IMA: Reporting

Solution 157 (2 min.) $14,000 + $290,000 – $16,000 = $288,000 BE 158 The following amounts were reported by Burke Company before recording an adjustment for its immaterial overapplied manufacturing overhead of $8,000. Raw Materials Inventory Finished Goods Inventory Work in Process Inventory Cost of Goods Sold

$ 40,000 60,000 100,000 730,000

Instructions Compute what amount Burke will report as Cost of Goods Sold after it eliminates the overapplied overhead. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Decision Making, IMA: Reporting

Solution 158

(2 min.)

$730,000 – $8,000 = $722,000 BE 159 During 2022, Arb Company incurred the following direct labor costs: January $20,000 and February $30,000. Arb uses a predetermined overhead rate of 120% of direct labor cost. Estimated overhead for the 2 months, respectively, totaled $19,500 and $35,700. Actual overhead for the 2 months, respectively, totaled $25,000 and $33,500. Instructions Determine if overhead is over- or underapplied for each of the two months and the respective amounts. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: Business Economics

15 - 34

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 159

(4 min.)

Overhead applied: January: February:

120% × $20,000 = $24,000 120% × $30,000 = $36,000

Over- or underapplied: January: $24,000 – $25,000 = $1,000 underapplied February: $36,000 – $33,500 = $2,500 overapplied BE 160 At December 31, Ding Company reported the following balances in its accounts: Cost of Goods Sold Finished Goods Inventory

$210,000 30,000

The company’s balance in its Manufacturing Overhead account at the same date was a debit of $2,800. Instructions Prepare the entry to adjust the over- or underapplied overhead amount at December 31. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: FSA

Solution 160

(2 min.)

Cost of Goods Sold .............................................................................. Manufacturing Overhead...............................................................

2,800 2,800

EXERCISES Ex. 161 The manufacturing operations of Beatly, Inc. had the following inventory balances for the month of January: January 1 $12,000 21,000 14,000

Raw Materials Work in Process Finished Goods

January 31 $13,000 23,000 12,000

Beatly transferred $270,000 of completed goods out of Work in Process Inventory during January. Instructions Compute the cost of goods sold for January. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Decision Making, IMA: Reporting

Solution 161

(3 min.)

$14,000 + $270,000 - $12,000 = $272,000

Job Order Costing

15 - 35

Ex. 162 A selected list of accounts used by Cline Manufacturing Company follows: Code A Cash B Accounts Receivable C Raw Materials Inventory D Work in Process Inventory E Finished Goods Inventory

Code F Accounts Payable G Factory Labor H Manufacturing Overhead I Cost of Goods Sold J Sales Revenue

Cline Manufacturing Company uses a job order system and maintains perpetual inventory records. Instructions Place the appropriate code letter in the columns indicating the appropriate account(s) to be debited and credited for the transactions listed below. ——————————————————————————————————————————— Account(s) Account(s) Transactions Debited Credited ——————————————————————————————————————————— 1. Raw materials were purchased on account. ——————————————————————————————————————————— 2. Issued a check to Dixon Machine Shop for repair work on factory equipment. ——————————————————————————————————————————— 3. Direct materials were requisitioned for Job 280. ——————————————————————————————————————————— 4. Factory labor was paid as incurred. ——————————————————————————————————————————— 5. Recognized direct labor and indirect labor used. ——————————————————————————————————————————— 6. The production department requisitioned indirect materials for use in the factory. ——————————————————————————————————————————— 7. Manufacturing overhead was applied to production based on a predetermined overhead rate of $8/ labor hour. ——————————————————————————————————————————— 8. Goods that were completed were transferred to finished goods inventory. ——————————————————————————————————————————— 9. Goods costing $80,000 were sold for $105,000 on account. ——————————————————————————————————————————— 10. Paid for raw materials purchased previously on account. ——————————————————————————————————————————— Ans: N/A, LO: 1, 2, 3, Bloom: C, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: FSA

15 - 36

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 162

(10–15 min.)

——————————————————————————————————————————— Account(s) Account(s) Transactions Debited Credited ——————————————————————————————————————————— 1. Raw materials were purchased on account. C F ——————————————————————————————————————————— 2. Issued a check to Dixon Machine Shop for H A repair work on factory equipment. ——————————————————————————————————————————— 3. Direct materials were requisitioned for Job 280 D C ——————————————————————————————————————————— 4. Factory labor was paid as incurred. G A ——————————————————————————————————————————— 5. Recognized direct labor and indirect labor used D, H G ——————————————————————————————————————————— 6. The production department requisitioned indirect H C materials for use in the factory. ——————————————————————————————————————————— 7. Manufacturing overhead was applied to production based on a predetermined overhead rate of $8 per labor hour D H ——————————————————————————————————————————— 8. Goods that were completed were transferred to E D finished goods inventory. ——————————————————————————————————————————— 9. Goods costing $80,000 were sold for $105,000 B, I J, E on account. ——————————————————————————————————————————— 10. Paid for raw materials purchased previously F A on account. Ex. 163 Finn Manufacturing Company uses a job order cost system and keeps perpetual inventory records. Prepare journal entries to record the following transactions during the month of June. June 1

Purchased raw materials for $20,000 on account.

Raw materials requisitioned by production: Direct materials $8,000 Indirect materials 1,000

Paid factory utilities, $2,100 and repairs for factory equipment, $8,000.

Incurred $108,000 of factory labor.

Time tickets indicated the following: Direct labor (7,000 hrs. × $12 per hr.) = $ 84,000 Indirect labor (3,000 hrs. × $8 per hr.) = 24,000 $108,000

Job Order Costing Ex. 163

15 - 37

(Cont.)

Applied manufacturing overhead to production based on a predetermined overhead rate of $7 per direct labor hour worked.

Goods costing $18,000 were completed in the factory and were transferred to finished goods inventory.

Goods costing $15,000 were sold for $20,000 on account.

Ans: N/A, LO: 1, 2, 3, Bloom: AP, Difficulty: Moderate, Min: 16, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: FSA

Solution 163 June 1

(16–23 min.)

Raw Materials Inventory .................................................... Accounts Payable ..................................................... (Purchase of raw materials on account)

20,000

Work in Process Inventory ................................................. Manufacturing Overhead ................................................... Raw Materials Inventory ............................................ (To assign materials to jobs and overhead)

8,000 1,000

Manufacturing Overhead ................................................... Cash ......................................................................... (To record payment of factory utilities and repairs)

10,100

Factory Labor .................................................................... Payroll Liabilities ....................................................... (To record factory labor costs)

108,000

Work in Process Inventory ................................................. Manufacturing Overhead ................................................... Factory Labor ............................................................ (To assign factory labor to jobs and overhead)

84,000 24,000

Work in Process Inventory ................................................. Manufacturing Overhead ........................................... (To apply overhead to jobs)

49,000

Finished Goods Inventory .................................................. Work in Process Inventory ........................................ (To record completion of production)

18,000

20,000

9,000

10,100

108,000

49,000

Accounts Receivable ......................................................... 20,000 Cost of Goods Sold ............................................................ 15,000 Sales Revenue .......................................................... Finished Goods Inventory ......................................... (To record sales of finished goods inventory and its cost)

18,000

20,000 15,000

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

15 - 38 Ex. 164

Selected accounts of Kosar Manufacturing Company at year end appear below: RAW MATERIALS INVENTORY (a)

40,000

(d)

25,000

WORK IN PROCESS INVENTORY (d) (e) (f)

FINISHED GOODS INVENTORY (g)

140,000

(h)

120,000

110,000

(e)

(g)

140,000

COST OF GOODS SOLD (h)

FACTORY LABOR (b)

25,000 80,000 100,000

120,000 MANUFACTURING OVERHEAD

110,000

75,000 30,000

(f)

100,000

Instructions Explain the probable transaction that took place for each of the items identified by letters in the accounts. For example: (a) Raw materials costing $40,000 were purchased. Ans: N/A, LO: 1, 2, 3, Bloom: C, Difficulty: Hard, Min: 9, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: FSA

Solution 164 (a) (b) (c) (d) (e) (f) (g) (h)

(9–14 min.)

Raw materials costing $40,000 were purchased. Factory labor costs incurred amounted to $110,000. Actual manufacturing overhead costs incurred were $75,000. Direct materials requisitioned for production amounted to $25,000. Factory labor used consisted of: Direct labor $80,000 Indirect labor 30,000 Manufacturing overhead applied to production was $100,000. Completed goods costing $140,000 were transferred to finished goods inventory. Finished goods inventory costing $120,000 were sold.

Ex. 165 Sardin Company begins the month of March with $17,000 of Work in Process Inventory from Job 324. Information from job cost sheets shows the following additional costs assigned during March, April, and May of 2022: Manufacturing Costs Assigned Job No. March April May 324 $26,000 325 20,000 $28,000 $15,000 326 41,000 11,000 327 16,000 39,000 328 34,000 51,000 Job 324 was completed in March. Jobs 325 and 327 were completed in May, and Job 326 was completed in April. Jobs are sold during the month after completion. Total revenue for jobs sold during the 3-month period is $145,000. .

Job Order Costing Ex. 165

15 - 39

(Cont.)

Instructions Calculate the balances of the Work in Process Inventory and Finished Goods Inventory accounts at the end of May. Ans: N/A, LO: 1, 2, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Decision Making, IMA: Business Economics

Solution 165

(5–6 min.)

Work in Process Inventory Job 328 $34,000 + $51,000 = $85,000 Finished Goods Inventory Job 325 $20,000 + $28,000 + $15,000 = Job 327 $16,000 + $39,000 =

$63,000 55,000 $118,000

Ex. 166 The gross earnings of factory workers for Dinkel Company during the month of January are $400,000. The employer's payroll taxes for the factory payroll are $80,000. Of the total accumulated cost of factory labor, 75% is related to direct labor and 25% is attributable to indirect labor. Instructions (a) Prepare the entry to record the factory labor costs for the month of January. (b) Prepare the entry to assign factory labor to production. (c) Prepare the entry to assign manufacturing overhead to production, assuming the predetermined overhead rate is 125% of direct labor cost. Ans: N/A, LO: 1, 2, 3, 4, Bloom: AP, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: FSA

Solution 166 (a) (b)

(c)

(8–12 min.)

Factory Labor .............................................................................. Payroll Liabilities .................................................................

480,000

Work in Process Inventory........................................................... Manufacturing Overhead ............................................................. Factory Labor ..................................................................... ($480,000 × 75% = $360,000)

360,000 120,000

Work in Process Inventory........................................................... Manufacturing Overhead .................................................... ($360,000 × 125% = $450,000)

450,000

480,000

450,000

15 - 40

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ex. 167 Foster Manufacturing uses a job order cost system. On April 1, the company has Work in Process Inventory of $7,600 and two jobs in process: Job No. 221, $3,600, and Job No. 222, $4,000. During April, a summary of source documents reveals the following: For Job No. 221 222 223 224 General use Totals

Materials Requisition Slips $1,200 1,700 2,400 2,600 600 $8,500

Labor Time Tickets $2,100 2,200 2,900 2,800 400 $10,400

Foster applies manufacturing overhead to jobs at an overhead rate of 70% of direct labor cost. Job No. 221 is completed during the month. Instructions (a) Prepare summary journal entries to record the raw materials requisitioned, factory labor used, the assignment of manufacturing overhead to jobs, and the completion of Job No. 221. (b) Calculate the balance of the Work in Process Inventory account at April 30. Ans: N/A, LO: 1, 2, 3, 4, Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: FSA

Solution 167 (a) April 30

(10–15 min.) Work in Process Inventory............................................. Manufacturing Overhead ............................................... Raw Materials Inventory .......................................

7,900 600

Work in Process Inventory............................................. Manufacturing Overhead ............................................... Factory Labor .......................................................

10,000 400

Work in Process Inventory............................................. Manufacturing Overhead ...................................... ($10,000 × 70% = $70,000)

7,000

Finished Goods Inventory ............................................. Work in Process Inventory .................................... ($3,600 + $1,200 + $2,100 + $1,470 = $8,370)

8,370

(b) Work in Process Inventory, April 30 = $24,130 Job No. 222 Job No. 223 Job No. 224

$9,440 7,330 7,360 $24,130

($4,000 + $1,700 + $2,200 + $1,540) ($2,400 + $2,900 + $2,030) ($2,600 + $2,800 + $1,960)

8,500

10,400 7,000

8,370

Job Order Costing

15 - 41

Ex. 168 Manufacturing cost data for Dolan Company, which uses a job order cost system, are presented below: Case A Case B Direct Materials Used (a) $103,000 Direct Labor $ 70,000 150,000 Manufacturing Overhead Applied 63,000 (d) Total Manufacturing Costs 240,000 (e) Work in Process Inventory, 1/1/22 (b) 45,000 Total Cost of Work in Process 300,000 (f) Work in Process Inventory, 12/31/22 (c) 40,000 Cost of Goods Manufactured 205,000 (g) Instructions Indicate the missing amount for each letter. Assume that overhead is applied on the basis of direct labor cost and that the rate is the same for both cases. Ans: N/A, LO: 1, 2, 3, 4, Bloom: AN, Difficulty: Hard, Min: 9, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: Business Economics

Solution 168

(9–12 min.)

Case A (a) + $70,000 + $63,000 = $240,000 (a) = $107,000

$300,000 – (c) = $205,000 (c) = $95,000

$240,000 + (b) = $300,000 (b) = $60,000 Case B [Note that the overhead rate from Case A is 90% ($63,000 ÷ $70,000)] $150,000 × 90% = (d) (d) = $135,000

$388,000 + $45,000 = (f) (f) = $433,000

$103,000 + $150,000 + $135,000 = (e) (e) = $388,000

$433,000 – $40,000 = (g) (g) = $393,000

Ex. 169 Fort Corporation had the following transactions during its first month of operations: 1. Purchased raw materials on account, $85,000. 2. Raw materials of $30,000 were requisitioned to the factory. An analysis of the materials requisition slips indicated that $6,000 was classified as indirect materials. 3. Factory labor costs incurred were $175,000 of which $145,000 pertained to factory wages payable and $30,000 pertained to employer payroll taxes payable. 4. Time tickets indicated that $145,000 was direct labor and $30,000 was indirect labor. 5. Overhead costs incurred on account were $198,000. 6. Manufacturing overhead was applied at the rate of 150% of direct labor cost. 7. Goods costing $115,000 are still incomplete at the end of the month; the other goods were completed and transferred to Finished Goods Inventory. 8. Finished Goods Inventory with a cost of $100,000 was sold on account for $130,000.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

15 - 42 Ex. 169

(Cont.)

Instructions Journalize the above transactions for Fort Corporation. Ans: N/A, LO: 1, 2, 3, 4, Bloom: AP, Difficulty: Moderate, Min: 12, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: FSA

Solution 169

(12–17 min.)

1. Raw Materials Inventory ................................................................. Accounts Payable ..................................................................

85,000

2. Work in Process Inventory .............................................................. Manufacturing Overhead ................................................................ Raw Materials Inventory.........................................................

24,000 6,000

3. Factory Labor ................................................................................. Payroll Liabilities ....................................................................

175,000

4. Work in Process Inventory .............................................................. Manufacturing Overhead ................................................................ Factory Labor.........................................................................

145,000 30,000

5. Manufacturing Overhead ................................................................ Accounts Payable ..................................................................

198,000

6. Work in Process Inventory .............................................................. Manufacturing Overhead........................................................ ($145,000 × 150% = $217,500)

217,500

7. Finished Goods Inventory ............................................................... Work in Process Inventory ..................................................... ($24,000 + $145,000 + $217,500 = $386,500) ($386,500 – $115,000 = $271,500)

271,500

8. Accounts Receivable ...................................................................... Sales Revenue ..................................................................... Cost of Goods Sold ........................................................................ Finished Goods Inventory ......................................................

130,000

Ex. 170 Lando Company reported the following amounts for 2022: Raw materials purchased Beginning raw materials inventory Ending raw materials inventory Beginning finished goods inventory Ending finished goods inventory Direct labor used Manufacturing overhead costs applied Beginning work in process inventory Ending work in process inventory

$85,000 5,200 4,500 7,600 8,000 20,000 30,000 6,100 6,300

85,000

30,000 175,000

175,000 198,000 217,500

271,500

130,000 100,000 100,000

Job Order Costing Ex. 170

15 - 43

(Cont.)

Instructions Calculate (a) the cost of materials used in production and (b) total manufacturing costs. Ans: N/A, LO: 1, 2, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Decision Making, IMA: Business Economics

Solution 170

(4 min.)

(a) Cost of materials used in production: $5,200 + $85,000 – $4,500 = $85,700 (b) Total manufacturing costs: $85,700 + $20,000 + $30,000 = $135,700 Ex. 171 A job cost sheet of Fugate Company is given below. Job Cost Sheet JOB NO. 172 FOR

James Company

Date

Direct Materials 1,330 1,120

5/10 12 15 22 24 27 31

Quantity

1,500

Date Completed

5/31

Direct Labor

Manufacturing Overhead

550 480

825 720

670

1,005

1,000 1,870

Cost of completed job: Direct materials Direct labor Manufacturing Overhead Total cost Unit cost

Instructions (a) Answer the following questions. (1) What is the predetermined manufacturing overhead rate? (2) What are the total cost and the unit cost of the completed job? (b) Prepare the entry to record the completion of the job. Ans: N/A, LO: 1, 2, 3, 4, Bloom: AP, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: Business Economics

15 - 44

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 171

(8 min.)

(a) (1) The predetermined overhead rate is 150% of direct labor cost. For example, on May 15, the computation is $825 ÷ $550 = 150%. The same result is obtained on May 22 and 31. (2) The total cost is: Direct material....................................................... Direct labor ........................................................... Manufacturing overhead ........................................

$5,320 1,700 2,550 $9,570

The unit cost is $6.38 ($9,570 ÷ 1,500) (b) May 31

Finished Goods Inventory ......................... Work in Process Inventory....................

9,570 9,570

Ex. 172 At May 31, 2022, the accounts of Kuhlmann Manufacturing Company show the following. 1. May 1 inventories—finished goods $12,600, work in process $14,700, and raw materials $8,200. 2. May 31 inventories—finished goods $8,500, work in process $22,900, and raw materials $7,100. 3. Debit postings to Work in Process Inventory were: direct materials $77,400, direct labor $50,000, and manufacturing overhead applied $45,000. 4. Sales totaled $225,000. Instructions (a) Prepare a condensed cost of goods manufactured schedule. (b) Prepare an income statement for May through gross profit. Ans: N/A, LO: 1, 4 Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Decision Making, IMA: Reporting

Solution 172

(10 min.)

(a)

KUHLMANN MANUFACTURING COMPANY Cost of Goods Manufactured Schedule For the Month Ended May 31, 2022

Work in Process inventory, May 1 .............................. Direct materials used................................................. Direct labor................................................................ Manufacturing overhead applied ............................... Total manufacturing costs................................... Total cost of Work in Process ..................................... Less: Work in Process inventory, May 31 ................... Cost of goods manufactured ......................................

$ 14,700 $77,400 50,000 45,000 172,400 187,100 22,900 $164,200

Job Order Costing Solution 172

(b)

15 - 45

(Cont.)

KUHLMANN MANUFACTURING COMPANY (Partial) Income Statement For the Month Ended May 31, 2022

Sales revenue .............................................................. Cost of goods sold Finished goods inventory, May 1 ........................... Cost of goods manufactured ................................. Cost of goods available for sale............................. Less: Finished goods inventory, May 31................ Cost of goods sold ..................................... Gross profit ...................................................................

$225,000 $ 12,600 164,200 176,800 8,500 168,300 $56,700

Ex. 173 Watson Manufacturing Company employs a job order cost system and keeps perpetual inventory records. The following transactions occurred in the first month of operations: 1. Direct materials requisitioned during the month: Job 101 $20,000 Job 102 16,000 Job 103 24,000 $60,000 2. Direct labor incurred and charged to jobs during the month was: Job 101 $32,000 Job 102 28,000 Job 103 20,000 $80,000 3. Manufacturing overhead was applied to jobs using a predetermined overhead rate based on 75% of direct labor costs. 4. Actual manufacturing overhead costs incurred during the month amounted to $66,000. 5. Job 101 consisting of 1,000 units and Job 103 consisting of 200 units were completed during the month. Instructions (a) Prepare journal entries to record the above transactions. (b) Answer the following questions: 1. How much manufacturing overhead was applied to Job 103 during the month? 2. What is the unit cost of Jobs 101 and 103? 3. What is the balance in Work in Process Inventory at the end of the month? 4. By what amount was manufacturing overhead was under- or overapplied during the month? Ans: N/A, LO: 1, 2, 3, 4, 5, Bloom: AP, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: FSA

15 - 46

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 173 (15–20 min.) (a) 1. Work in Process Inventory....................................................... Raw Materials Inventory .................................................

60,000

2. Work in Process Inventory....................................................... Factory Labor ................................................................

80,000

3. Work in Process Inventory....................................................... Manufacturing Overhead ................................................

60,000

4. Manufacturing Overhead ......................................................... Cash, Payables, etc........................................................

66,000

5. Finished Goods Inventory........................................................ Work in Process Inventory .............................................. [Job 101 $76,000; Job 103 $59,000—see (b) 2]

135,000

60,000 80,000 60,000 66,000 135,000

(b) 1. $15,000 ($20,000 × 75%). 2. Unit cost: Job 101, $76; Job 103, $295. Direct materials Direct labor Overhead applied Total cost Units Unit cost

Job 101 $20,000 32,000 24,000 76,000 ÷ 1,000 $76

Job 103 $24,000 20,000 15,000 59,000 ÷ 200 $295

3. Work in Process Inventory is $65,000 and consists of work performed on Job 102. Job 102 Direct materials $16,000 Direct labor 28,000 Overhead applied 21,000 Total cost $65,000 4. Manufacturing overhead costs were underapplied by $6,000 during the month. Actual manufacturing overhead $66,000 Manufacturing overhead applied 60,000 Underapplied overhead $ 6,000 Ex. 174 Graham Manufacturing is a small manufacturer that uses machine hours as its activity base for assigning overhead costs to jobs. The company estimated the following amounts for 2022 for the company and for Job 62: Company Job 62 Direct materials $60,000 $4,500 Direct labor $25,000 $2,500 Manufacturing overhead costs $72,000 Machine hours 90,000 1,350 During 2022, the actual machine hours totaled 95,000, and actual overhead costs were $71,000.

Job Order Costing Ex. 174

15 - 47

(Cont.)

Instructions (a) Compute the predetermined overhead rate. (b) Compute the total manufacturing costs for Job 62. (c) How much overhead is over or underapplied for the year for the company? State amount and whether it is over- or underapplied. (d) If Graham Manufacturing sells Job 62 for $14,000, compute the gross profit. Ans: N/A, LO: 1,2,5, Bloom: AP, Difficulty: Moderate, Min: 7, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: Business Economics

Solution 174

(7–9 min.)

(a) $72,000  90,000 = $0.80 per machine hour (b) $4,500 + $2,500 + ($0.80 × 1,350) = $8,080 (c) Actual – Applied = Over/Underapplied $71,000 – ($0.80 × 95,000) = $5,000 overapplied (d) $14,000 – $8,080 (from (b) above) = $5,920 Ex. 175 The following inventory information is available for Ricci Manufacturing Corporation for the year ended December 31, 2022: Beginning Ending Inventories: Raw materials $17,000 $19,000 Work in Process 9,000 14,000 Finished goods 11,000 8,000 Total $37,000 $41,000 In addition, the following transactions occurred in 2022: 1. Raw materials purchased on account, $75,000. 2. Incurred factory labor, $80,000, all is direct labor. 3. Incurred the following overhead costs during the year: utilities $6,800, depreciation on manufacturing machinery $8,000, manufacturing machinery repairs $9,200, factory insurance $9,000 (Credit Accounts Payable and Accumulated Depreciation). 4. Assigned $80,000 of factory labor to jobs. 5. Applied $36,000 of overhead to jobs. Instructions (a) Journalize the above transactions. (b) From an analysis of the accounts, compute the following: 1. Raw materials used. 2. Completed jobs transferred to finished goods inventory. 3. Cost of goods sold. 4. Under- or overapplied overhead. Ans: N/A, LO: 1, 2, 3, 4, 5, Bloom: AP, Difficulty: Moderate, Min: 16, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: FSA

15 - 48

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 175

(16–22 min.)

(a) 1. Raw Materials Inventory .......................................................... Accounts Payable ...........................................................

75,000

2. Factory Labor .......................................................................... Payroll Liabilities .............................................................

80,000

3. Manufacturing Overhead ......................................................... Accounts Payable ........................................................... Accumulated Depreciation ..............................................

33,000

4. Work in Process Inventory....................................................... Factory Labor .................................................................

80,000

5. Work in Process Inventory....................................................... Manufacturing Overhead ................................................

36,000

75,000 80,000 25,000 8,000 80,000 36,000

(b) 1. Raw materials used = $17,000 + $75,000 – $19,000 = $73,000. 2. Completed jobs transferred to finished goods inventory = W/P debits $9,000 + $73,000 + $116,000 – $14,000 = $184,000. 3. Cost of goods sold = $11,000 + $184,000 – $8,000 = $187,000. 4. Overhead overapplied = $3,000 (credit balance in Manufacturing Overhead). Ex. 176 Builder Bug Company allocates manufacturing overhead at $9 per direct labor hour. Job A45 required 4 boxes of direct materials at a cost of $30 per box and took employees 14 hours to complete. Employees earn $15 per hour. Instructions Compute the total cost of Job A45. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: Business Economics

Job Order Costing Solution 176

15 - 49

(5 min.)

Direct materials (4 boxes × $30) Direct labor (14 hours × $15) Manufacturing overhead (14 hours × $9) Total job cost of Job A45

$120 210 126 $456

Ex. 177 Job cost sheets for Howard Manufacturing are as follows: Job No 210 Date July 1 8 10 15 25

Quantity

Direct Materials 9,000 8,500

Direct Labor 8,000

Manufacturing Overhead 12,000

10,000 5,500 20,000

Job No 211

Date July 1 10 15 20 27

1,500

Quantity

Direct Materials 5,000 9,000

Direct Labor 6,000

1,200

Manufacturing Overhead 9,000

8,000 7,000 12,000

Instructions (a) Answer the following questions. 1. What was the balance in Work in Process Inventory on July 1 if these were the only unfinished jobs? 2. What was the predetermined overhead rate in June if overhead was applied on the basis of direct labor cost? 3. If July is the start of a new fiscal year and the overhead rate is 20% higher than in the preceding year, how much overhead should be applied to Job 210 in July? 4. Assuming Job 210 is complete, what is the total and unit cost of the job? 5. Assuming Job 211 is the only unfinished job at July 31, what is the balance in Work in Process Inventory on this date? (b) Journalize the summary entries to record the assignment of costs to the jobs in July. (Note: Make one entry in total for each manufacturing cost element.) Ans: N/A, LO: 2, 3, 4, Bloom: AN, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Decision Making, IMA: Reporting

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 177

(15–20 min.)

Job 210 — $9,000 + $8,000 + $12,000 = $29,000 Job 211 — $5,000 + $6,000 + $9,000 = 20,000 $49,000

(a) 1.

2. Manufacturing overhead rate = 150% of direct labor cost ($12,000 ÷ $8,000 or $9,000 ÷ $6,000) 3. July overhead rate = 150% × 120% = 180% Overhead applied in July = $30,000 × 180% = $54,000 4. Direct materials Direct labor Manufacturing overhead ($12,000 + $54,000) Total cost Unit cost ($127,000 ÷ 1,500) 5. Direct materials Direct labor Manufacturing overhead ($9,000 + $36,000) Total cost of Work in Process inventory

(b)

$ 23,000 38,000 66,000 $127,000 $84.67 $21,000 26,000 45,000 $92,000

Work in Process Inventory ............................................................ Raw Materials Inventory .......................................................

30,000

Work in Process Inventory ............................................................ Factory Labor .......................................................................

50,000

Work in Process Inventory ............................................................ Manufacturing Overhead ......................................................

90,000

30,000 50,000 90,000

Job Order Costing Ex. 178

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(Cont.)

Instructions (a) Compute the balance in Work in Process Inventory at the end of July. (b) Compute the balance in Finished Goods Inventory at the end of September. (c) Compute the gross profit for August. Ans: N/A, LO: 2, 4, Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Decision Making, IMA: Reporting

Solution 178 (a)

(b)

(c)

(10–13 min.)

Work in Process Inventory July Job 100 Job 101 Balance, July 31

$12,000 10,800 $22,800

Finished Goods Inventory Job 101 Job 103 Balance, Sept. 30

$32,500 17,800 $50,300

Gross Profit Month Job Number August 102

Sales $8,000

COGS $5,000

Gross Profit $3,000

Ex. 179 The accounting records of Roland Manufacturing Company include the following information: Dec. 31 Jan. 1 Work in Process Inventory $ 20,000 $ 50,000 Finished Goods Inventory 120,000 150,000 Direct materials used 350,000 Direct labor 160,000 Selling expenses 125,000 Manufacturing overhead is applied at a rate of 150% of direct labor cost. Instructions Answer the following questions: 1. What is the total of the debits to Work in Process Inventory during the year? 2. What is the amount transferred to Finished Goods Inventory during the year? 3. What is Cost of Goods Sold? Ans: N/A, LO: 2, 4, Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: FSA

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 179

(10–14 min.)

1. Direct Materials Direct Labor Manufacturing Overhead Applied ($160,000 × 150%) Total debits 2.

$ 350,000 160,000 240,000 $750,000

WORK IN PROCESS INVENTORY Balance From (1) Balance

50,000 750,000 20,000

Transferred to Finished Goods

780,000

FINISHED GOODS INVENTORY

3. Balance From WIP (see 2) Balance

150,000 780,000 120,000

Cost of Goods Sold

810,000

Ex. 180 Grant Marwick and Associates, a CPA firm, uses job order costing to capture the costs of its audit jobs. There were no audit jobs in process at the beginning of November. Listed below are data concerning the three audit jobs conducted during November. Rondelli $900 $5,900 66

Direct materials Auditor labor costs Auditor hours

Preston $600 $6,600 88

Lopez $300 $3,700 45

Overhead costs are applied to jobs on the basis of auditor hours and the predetermined overhead rate is $50 per auditor hour. The Rondelli job is the only incomplete job at the end of November. Actual overhead for the month was $10,500. Instructions (a) Determine the cost of each job. (b) Indicate the balance of the Work in Process Inventory account at the end of November. (c) Calculate the ending balance of the Operating Overhead account for November. Ans: N/A, LO: 2, 3, 5, Bloom: AP, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Decision Making, IMA: Reporting

Solution 180

(8 min.)

(a)

Rondelli $ 900 5,900 3,300 $10,100

Direct materials Auditor labor costs Applied overhead Total cost

Preston $ 600 6,600 4,400 $11,600

(b) The Rondelli job is the only incomplete job, therefore, $10,100 (c)

Actual overhead Applied overhead

$10,500 (DR) 9,950 (CR) .

Lopez $ 300 3,700 2,250 $6,250

Job Order Costing Balance

550 (DR - underapplied)

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

15 - 54 Ex. 181

Gallagher Company applies manufacturing overhead to jobs on the basis of machine hours used. Overhead costs are expected to total $425,000 for the year, and machine usage is estimated at 125,000 hours. For the year, $450,000 of overhead costs are incurred and 130,000 hours are used. Instructions (a) Compute the manufacturing overhead rate for the year. (b) What is the amount of under - or overapplied overhead at December 31? (c) Assuming the under - or overapplied overhead for the year is not allocated to inventory accounts, prepare the adjusting entry to assign the amount to cost of goods sold Ans: N/A, LO: 3, 5, Bloom: AP, Difficulty: Moderate, Min: 6, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: Business Economics

Solution 181

(6 min.)

(a)

$3.40 per machine hour ($425,000 ÷ 125,000).

(b)

($450,000) – ($3.40  130,000 Machine Hours) $450,000 – $442,000 = $8,000 underapplied

(c)

Cost of Goods Sold............................... Manufacturing Overhead..........................

8,000 8,000

Ex. 182 Fancy Decorating uses a job order costing system to collect the costs of its interior decorating business. Each client's consultation is treated as a separate job. Overhead is applied to each job based on the number of decorator hours incurred. Listed below are data for the current year. Estimated overhead Actual overhead Estimated decorator hours Actual decorator hours

$880,000 $910,000 40,000 41,000

The company uses Operating Overhead in place of Manufacturing Overhead. Instructions (a) Compute the predetermined overhead rate. (b) Prepare the entry to apply the overhead for the year. (c) Determine whether the overhead was under - or overapplied and by what amount. Ans: N/A, LO: 3, 5, Bloom: AP, Difficulty: Moderate, Min: 6, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: Business Economics

Job Order Costing Solution 182

(6 min.)

(a)

Predetermined overhead rate = Estimated overhead ÷ Estimated decorator hours = $880,000 ÷ 40,000 decorator hours = $22 per decorator hour

(b)

Applied Overhead Work in Process Inventory (41,000 hrs.  $22) Operating Overhead

(c)

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Actual overhead Applied overhead Balance

$910,000 902,000 $ 8,000

902,000 902,000

underapplied

Ex. 183 Martin Company applies manufacturing overhead based on direct labor hours. Information concerning manufacturing overhead and labor for the year follows: Actual manufacturing overhead Estimated manufacturing overhead Direct labor hours incurred Direct labor hours estimated

$80,000 $75,000 4,800 5,000

Instructions Compute (a) the predetermined overhead rate and (b) the amount of applied manufacturing overhead. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: Business Economics

Solution 183

(4 min.)

(a)

Predetermined overhead rate: $75,000  5,000 = $15 per direct labor hour

(b)

Applied manufacturing overhead: 4,800 × $15 = $72,000

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

15 - 56 Ex. 184

(Cont.)

During January, the job cost sheet showed the following costs and production data: Department A B Direct materials used $195,000 $128,000 Direct labor cost 100,000 110,000 Manufacturing overhead incurred 130,000 135,000 Direct labor hours 8,000 8,400 Machine hours 16,000 34,000 Instructions (a) Compute the predetermined overhead rate for each department. (b) Compute the total manufacturing cost assigned to jobs in January in each department. (c) Compute the balance in the Manufacturing Overhead account at the end of January and indicate whether overhead is over- or underapplied. Ans: N/A, LO: 3, 5, Bloom: AP, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: Business Economics

Solution 184

(15–20 min.)

(a) Predetermined overhead rates: Department A (using direct labor cost): $2,100,000 ÷ $1,500,000 = 140% Department B (using machine hours): $1,400,000 ÷ 400,000 = $3.50 per machine hour (b) Total manufacturing costs by department: Department A: Direct materials Direct labor cost Manufacturing overhead applied ($100,000 × 140%) Total manufacturing costs

$195,000 100,000 140,000 $435,000

Department B: Direct materials Direct labor cost Manufacturing overhead applied (34,000 hrs. × $3.50) Total manufacturing costs (c)

$128,000 110,000 119,000 $357,000

MANUFACTURING OVERHEAD Dept. A Dept. B Bal. Underapplied

130,000 135,000 265,000 6,000

Dept. A Dept. B

140,000 119,000 259,000

Job Order Costing

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Ex. 185 Edwards Company applies manufacturing overhead to jobs on the basis of machine hours used. Overhead costs are expected to total $1,800,000 for the year, and machine usage is estimated at 200,000 hours. In January, $186,000 of overhead costs are incurred and 22,000 machine hours are used. For the remainder of the year, $1,940,000 of additional overhead costs are incurred and 214,000 additional machine hours are worked. Instructions (a) Compute the predetermined manufacturing overhead rate for the year. (b) What is the amount of over- or underapplied overhead at January 31? (c) What is the amount of over- or underapplied overhead at December 31? Ans: N/A, LO: 3, 5, Bloom: AP, Difficulty: Moderate, Min: 11, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: Business Economics

Solution 185

(11–14 min.)

(a)

$9 per machine hour ($1,800,000 ÷ 200,000)

(b)

Incurred Applied ($9 × 22,000) Overapplied overhead

(c)

Incurred ($186,000 + $1,940,000) Applied ($9 × 236,000) Underapplied overhead

$186,000 198,000 $ 12,000 $2, 126,000 2,124,000 $ 2,000

Ex. 186 Klinger Company estimates that annual manufacturing overhead costs will be $4,800,000 for 2022. The actual overhead costs at the end of 2022 are $4,980,000. Activity base information for 2022 follows: Activity Base Estimated Actual Direct Labor Cost $3,000,000 $3,150,000 Direct Labor Hours 200,000 212,000 Machine Hours 150,000 152,000 Instructions (a) Compute the predetermined overhead rate for each activity base. (b) Compute the amount of overhead applied in 2022 for each activity base. (c) Compute the amount of under- or overapplied overhead for 2022 for each activity base. Ans: N/A, LO: 3, 5, Bloom: AP, Difficulty: Moderate, Min: 12, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Decision Making, IMA: Business Economics

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 186

(12–16 min.)

(a) Predetermined overhead rate as a % of direct labor cost: $4,800,000 ÷ $3,000,000 = 160% Predetermined overhead rate per hour of direct labor: $4,800,000 ÷ 200,000 = $24 per hour Predetermined overhead rate per machine hour used: $4,800,000 ÷ 150,000 = $32 per machine hour (b) Overhead applied as a % of direct labor cost: $3,150,000 × 160% = $5,040,000

Overhead applied per hour of direct labor: 212,000 × $24 = $5,088,000

($5,088,000 – $4,980,000 = $108,000 Overapplied)

Overhead applied per machine hour used: 152,000 × $32 = $4,864,000

($4,864,000 – $4,980,000 = $116,000 Underapplied)

Ex. 187 Jensen Manufacturing Company makes specialty tools. In January, Jensen incurs manufacturing costs of $13,000,000 for direct material, direct labor, and overhead. 20% of the total costs represents overhead applied. The overhead rate is $1 for every $2 of direct labor costs incurred. Inventory balances were: January 1 $300,000 600,000 400,000

Raw Materials Work in Process Finished Goods

January 31 $500,000 400,000 200,000

At the end of January, there was $1,000 of overapplied overhead. Instructions (a) Determine the cost of raw materials purchased in January. (b) Prepare a Cost of Goods Manufactured Schedule for January 2022. (c) Compute Cost of Goods Sold for January. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Decision Making, IMA: Reporting

Solution 187 (a)

(15–20 min.)

Overhead applied ($13,000,000 × 20%) Direct labor used ($2 × $2,600,000) Direct materials used ($13,000,000 – $7,800,000)

= = =

$2,600,000 $5,200,000 $5,200,000

Job Order Costing Solution 187

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(Cont.)

Ending Raw Materials Inventory Direct materials used Less: Beginning Raw Materials Inventory Raw materials purchases

$ 500,000 5,200,000 5,700,000 300,000 $5,400,000

(b)

JENSEN MANUFACTURING COMPANY Cost of Goods Manufactured Schedule For the Month Ended January 31, 2022 ——————————————————————————————————————————— Work in Process Inventory, January 1 .............................. $ 600,000 Direct Materials Used ....................................................... $5,200,000 Direct Labor...................................................................... 5,200,000 Manufacturing Overhead Applied ..................................... 2,600,000 Total Manufacturing Costs.......................................... 13,000,000 Total Work in Process Inventory....................................... 13,600,000 Less: Work in Process Inventory, January 31.................. 400,000 Cost of Goods Manufactured............................................ $ 13,200,000 (c)

Finished Goods Inventory, January 1 ...................................................... Cost of Goods Manufactured................................................................... Cost of Goods Available for Sale............................................................. Finished Goods Inventory, January 31 .................................................... Cost of Goods Sold ................................................................................

$ 400,000 13,200,000 13,600,000 200,000 $13,400,000

Ex. 188 The following information is available for Marks Company at December 31, 2022: 1. Inventory balance Finished Goods Work in Process Raw Materials

Beginning of Year $14,000 6,000 10,300

End of Year $10,000 12,000 6,500

2. Debit postings to Work in Process Inventory during the year were: Direct materials $90,000 Direct labor 60,000 Manufacturing overhead applied 75,000 3. Sales totaled $310,000 for the year. Instructions (a) Prepare a condensed cost of goods manufactured schedule. (b) Prepare an income statement for the year through gross profit. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 14, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Decision Making, IMA: Reporting

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 188

(14–18 min.)

(a)

MARKS COMPANY Cost of Goods Manufactured Schedule For the Year Ended December 31, 2022 Work in process inventory, January 1 Direct materials used Direct labor Manufacturing overhead applied Total manufacturing costs Total cost of work in process inventory Less: work in process inventory, December 31 Cost of goods manufactured

(b)

6,000

$90,000 60,000 75,000 225,000 231,000 12,000 $219,000

MARKS COMPANY (Partial) Income Statement For the Year Ended December 31, 2022 Sales revenue Cost of Goods Sold Finished Goods Inventory, January 1 Cost of Goods Manufactured Cost of Goods Available for Sale Less: Finished Goods Inventory, December 31 Cost of Goods Sold Gross Profit

$310,000 $ 14,000 219,000 233,000 10,000 223,000 $87,000

COMPLETION STATEMENTS 189. Cost accounting involves the measuring, recording, and reporting of costs. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: Business Applications

190. There are two basic types of cost accounting systems: (1) and (2) system.

system,

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

191. A cost system is appropriate when similar products are continuously produced, whereas a cost system would be more appropriate if the product is custom-made. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Reporting, AICPA PC: None, IMA: Business Applications

192. In a job order cost system, raw materials purchased are charged to the account. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Global and Industry Perspectives, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: FSA

Job Order Costing 193. In a job order cost system, and placed into production.

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is charged when direct materials are requisitioned

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

194. If $20,000 direct materials are requisitioned for a job and $7,000 of indirect materials are requisitioned for general use, the debit to Work in Process Inventory should be for $ . Ans: N/A, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: FSA

195. The cost of producing a particular job under a job order cost system is accumulated on a record called a . Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: Business Economics

196. Manufacturing overhead is applied to jobs by means of a

rate.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: Business Economics

197. If actual manufacturing overhead is greater than the amount of manufacturing overhead applied to jobs, the Manufacturing Overhead account will have a balance and overhead is said to be . Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: Business Economics

198. At the end of the period, any balance in the Manufacturing Overhead account should be eliminated as an adjustment to . Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: FSA

Answers to Completion Statements 189. 190. 191. 192. 193. 194. 195. 196. 197. 198.

product or service job order cost, process cost process, job order Raw Materials Inventory Work in Process Inventory 20,000 job cost sheet predetermined overhead debit, underapplied cost of goods sold

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

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MATCHING 199.

Match the items in the two columns below by entering the appropriate code letter in the space provided. A. B. C. D. E.

Cost accounting Materials requisition slip Time ticket Cost accounting system Job order cost system

F. G. H. I. J.

Process cost system Job cost sheets Predetermined overhead rate Overapplied overhead Underapplied overhead

1. Used to apply manufacturing overhead to jobs. 2. Measures, records, and reports product and service costs. 3. Actual manufacturing overhead costs are greater than overhead applied to products. 4. Manufacturing cost accounts are fully integrated into the general ledger. 5. Source document which authorizes issuance of raw materials to production. 6. Appropriate when products have distinguishing and heterogeneous characteristics. 7. Constitutes a subsidiary ledger for Work in Process Inventory. 8. Indicates number of hours that employees work and the account to be charged. 9. Appropriate when products are similar and are produced continuously. 10. Actual manufacturing overhead costs are less than overhead applied to products. Ans: N/A, LO: 1-5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: None, IMA: FSA

Answers to Matching 1. 2. 3. 4. 5.

H A J D B

6. 7. 8. 9. 10.

E G C F I

Job Order Costing

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SHORT-ANSWER ESSAY QUESTIONS S-A E 200 (a) Distinguish between the two types of cost accounting systems. (b) May a company use both types of cost accounting systems? Ans: N/A, LO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Global and Industry Perspectives, AICPA FN: Reporting, AICPA PC: Communications, IMA: Business Applications

Solution 200 (a)

(b)

The two principal types of cost accounting systems are; (1) job order costing and (2) process costing. Under a job order cost system, costs are assigned to each job or batch of goods; at all times each job or batch of goods can be separately identified. A job order cost system measures costs for each completed job, rather than for set time periods. Under a process cost system, product-related costs are accumulated by or assigned to departments or processes for a set period of time. Job order costing lends itself to specific, special-order manufacturing or servicing while process costing is better suited to similar, large-volume products and continuous process manufacturing. A company may use both types of systems. For example, General Motors uses process costing for standard model cars and job order costing for custom-made vehicles.

S-A E 201 A job order cost system is fully integrated into the general ledger of a company. Identify the major general ledger accounts used in a job order cost system. Explain how manufacturing costs flow through these accounts so that inventories may be costed and income determined when goods are sold. Ans: N/A, LO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Business Economics

Solution 201 When a job order cost system is fully integrated into the general ledger of a company, the major general ledger accounts used are Raw Materials Inventory, Factory Labor, Manufacturing Overhead, Work in Process Inventory, and Finished Goods Inventory. As manufacturing costs are incurred, they are debited to the Raw Materials Inventory, Factory Labor, and Manufacturing Overhead accounts. As materials are used, labor is assigned, or overhead is applied to production, the costs are taken out of these accounts and charged to Work in Process Inventory. When jobs are finished, the costs flow from the Work in Process Inventory account to the Finished Goods Inventory account, and when jobs are sold, the costs are transferred to Cost of Goods Sold from Finished Goods Inventory. S-A E 202 Manufacturing overhead items are indirect product costs that cannot be traced to individual products. Explain how manufacturing overhead costs are accumulated and how they are assigned to products in a job order cost system. Ans: N/A, LO: 3, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Governance Perspective, AICPA FN: Measurement, Analysis, and Interpretation, AICPA PC: Communications, IMA: Business Economics

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 202 As manufacturing overhead costs are incurred, they are debited to the Manufacturing Overhead account. As jobs move through the factory, manufacturing overhead costs are applied to specific jobs using the predetermined overhead rate. This rate is computed prior to the beginning of the year by dividing estimated annual overhead costs by estimated annual operating activity (generally expressed as direct labor hours, direct labor cost, or machine hours). The overhead is applied by determining how much activity was expended on a particular job (for example, direct labor hours), and applying the rate to that activity. S-A E 203 Mike Hilyer is confused about under and overapplied manufacturing overhead. Define the terms for Mike and indicate the balance in the manufacturing overhead account applicable to each term. Ans: N/A, LO: 3, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Business Economics

Solution 203 Underapplied overhead means that the overhead assigned to Work in Process inventory is less than the overhead incurred. Overapplied overhead means than the overhead assigned to Work in Process inventory is greater than the overhead incurred. Manufacturing overhead will have a debit balance when overhead is underapplied and a credit balance when overhead is overapplied. S-A E 204 (Ethics) People Carrier Systems, Inc. (PCS) modifies vans that seat 15–20 people by adding additional safety features or wheelchair ramps. Most of its customers are cities and counties, who use the vans to transport school children, the elderly, or the handicapped. The company has specialized in a no-frills approach, emphasizing safety, high quality, and low cost. The company's president was quoted as saying, "Let the other guys make a van pretty. We get people where they need to go— faster, better, and cheaper than anybody else." The company obtains jobs by being the lowest bidder in a sealed bidding process. Recently, the company was solicited by a top-10 college to submit a bid for a van to be used by its athletic team. Some specialized items were required, such as the school's logo on the outside of the van, and the vinyl seats had to be covered in school colors. The company submitted a bid, and was very surprised to obtain it. When the job was being prepared, the job manager pointed out that several extra costs could result in this job showing a loss. The boss, an ardent supporter of sports in general and this team in particular, told the manager to just record the standard labor and overhead cost for this job. He says that they could use the preset rate for specialized jobs, and increase the overhead application rate (used in submitting bids) by 5% for future routine jobs. "After all," he says, "nobody else comes close to our price anyway. This could start a whole new line of business for us." Required: 1. Who are the stakeholders in the decision to increase overhead for routine jobs? 2. Is the decision to subsidize special jobs by increasing the overhead rate on routine jobs ethical? Briefly explain. Ans: N/A, LO: 2, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Business Economics

Job Order Costing

15 - 65

Solution 204 1. The stakeholders include:  The employees and managers of PCS  Customers who purchase standard vans  Customers who purchase sports vans  Shareholders of PCS 2. The decision could be considered ethical, if the company clearly understands that it is allowing the customers of the standard vans to cover some of the costs of the specialty ones. This might not be a bad decision, especially if the specialty business is only a small fraction of the total business. The company might be compromising its own best interests, however, if it arbitrarily damages relationships with existing customers in order to gain others. Established customers are generally preferable to untested ones. While probably ethical, the decision may not be a good one. S-A E 205 (Communication) Bridal Treasures, Inc. makes customized wedding gowns. The customer selects a pattern for the basic gown, and then selects fabric and trim. Once the design and the materials have been agreed upon, a Statement of Estimated Cost is signed by the company and by the customer. Overhead is applied based on the number of days a gown is in process. Usually, five gowns are being worked on at a time. Therefore, each gown is charged 1/5 of a daily estimated overhead amount. Customer Mary Landon's wedding dress took four days to complete. However, after the first three days had elapsed, Hanna Hunt, a movie personality, suddenly decided to get married, and ordered a very lavish gown. All other work was suspended, and the work on Ms. Landon's dress was delayed six days. The final day of its construction was on the tenth day after it had been begun. Required: You are the accounting manager for Bridal Treasures. Write a memo to the billing department. Instruct them as to the appropriate number of overhead days to charge to Ms. Landon's account. Ans: N/A, LO: 3, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Governance Perspective, AICPA FN: None, AICPA PC: Communications, IMA: Business Economics

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

15 - 66 Solution 205 TO:

Billing Department

FROM: M. Long, Accounting Manager RE:

Overhead billing, Landon account

As you know, our standard procedure in billing overhead is to simply multiply our daily overhead rate by the number of days the gown was in our possession. However, for the Landon gown, and any other jobs we suspended for the Hanna Hunt gown, we should not charge for the days the gowns were in our possession but not being worked on. We should adjust the billing for the Hanna Hunt gown, so that it absorbs the full daily cost of overhead, since it actually was the only job worked on during those six days. The Landon job should be charged only four days of overhead. Other suspended jobs should be treated similarly. Please call if you have questions. (signed)

CHAPTER 15A JOB ORDER COSTING CHAPTER LEARNING OBJECTIVES 1. Describe cost systems and the flow of costs in job order system. Cost accounting involves the procedures for measuring, recording, and reporting product and service costs. From the data accumulated, companies determine the total cost and the unit cost of each product. The two basic types of cost accounting systems are process cost and job order cost. In job order costing, companies first accumulate manufacturing costs in three accounts: Raw Materials Inventory, Factory Labor, and Manufacturing Overhead. They then assign the accumulated costs to Work in Process Inventory and eventually to Finished Goods Inventory and Cost of Goods Sold. 2. Use a job cost sheet to assign costs to work in process. A job cost sheet is a form used to record the costs chargeable to a specific job and to determine the total and unit costs of the completed job. Job cost sheets constitute the subsidiary ledger for the Work in Process Inventory control account. 3. Demonstrate how to determine and use the predetermined overhead rate. The predetermined overhead rate is based on the relationship between estimated annual overhead costs and estimated annual operating activity. This is expressed in terms of a common activity base, such as direct labor cost. Companies use this rate to assign overhead costs to work in process and to specific jobs. 4. Record manufacturing and service jobs completed and sold. When jobs are completed, companies add the cost to Finished Goods Inventory and remove it from Work in Process Inventory. When a job is sold, companies increase Cost of Goods Sold and decrease Finished Goods Inventory for the cost of the goods. 5. Distinguish between under- or overapplied manufacturing overhead. Underapplied manufacturing overhead indicates that the overhead assigned to work in process is less than the overhead incurred. Overapplied overhead indicates that the overhead assigned to work in process is greater than the overhead incurred.

15A - 2

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

TRUE-FALSE STATEMENTS 1.

Cost accounting is primarily concerned with accumulating information about product costs.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

A job order cost system is most appropriate when a large volume of uniform products is produced.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

A process cost accounting system is appropriate for similar products that are continuously mass produced.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

The perpetual inventory method cannot be used in a job order cost system.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

A job order cost system and a process cost system are two alternative methods for accumulating product costs.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

A job order cost system identifies costs with a particular job rather than with a set time period.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

A company may use either a job order cost system or a process cost system, but not both.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Raw Materials Inventory, Factory Labor, and Manufacturing Overhead are all control accounts is a job order cost system.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Accumulating and assigning manufacturing costs are two important activities in a job order cost system.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

10.

Recording the acquisition cost of raw materials is a part of accumulating manufacturing costs.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

11.

The acquisition of raw materials increases an asset.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Job Order Costing 15A - 3 12.

The Work in Process Inventory account is decreased for all raw materials purchase returns and allowances.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

13.

When raw materials are received, no effort is made at this point to associate the cost of the materials with specific jobs.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

14.

When raw materials are purchased, the Work in Process Inventory account is increased.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

15.

Factory labor should be assigned to selling and administrative expenses on a proportionate basis.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

16.

Benefits and payroll taxes associated with factory workers should be accumulated as a part of Factory Labor.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

17.

Job order cost sheets constitute the subsidiary ledger of the control account, Work in Process Inventory.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

18.

In a job order cost system, each entry to the Work in Process Inventory account should be accompanied by a posting to one or more job cost sheets.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

19.

Direct materials requisitioned increase the Work in Process Inventory account and the job cost sheets for the individual jobs on which the materials are used.

Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

20.

Manufacturing overhead is the only product cost that can be assigned to jobs as soon as the costs are incurred.

Ans: F, LO: 3 Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

21.

There should be a separate job cost sheet for each job.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

22.

Actual manufacturing overhead costs are assigned to each job by tracing each overhead cost to a specific job.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

23.

The equation for the predetermined overhead rate is estimated annual overhead costs divided by an estimated volume of annual operating activity. .

15A - 4

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

24.

Actual manufacturing overhead costs should be recorded in the Work in Process Inventory account as they are incurred.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

25.

A job order cost sheet be destroyed as soon as the job is complete.

Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: System and Process Management, AICPA PC: Ethical Conduct, IMA: Cost Management

26.

Finished Goods Inventory is increased for the cost of jobs completed during a period.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

27.

When goods are sold, Cost of Goods Sold is increased and Work in Process Inventory account is decreased.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

28.

Total manufacturing costs for a period consists of the costs of direct materials used, the cost of direct labor incurred, and the manufacturing overhead applied during the period.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

29.

Overapplied overhead means that actual manufacturing overhead costs were greater than the manufacturing overhead costs applied to jobs.

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

30.

At the end of the year, the amount of the overapplied overhead is recorded as a decrease to Cost of Goods Sold.

Ans: T, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

31.

A cost accounting system consists of manufacturing cost accounts that are fully integrated into the accounting records of a company.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

32.

The cost of raw materials purchased is recorded as a decrease to Raw Materials Inventory when materials are received.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

33.

Requisitions for direct materials are recorded daily to the individual job cost sheets.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: None, AICPA PC: None, IMA: Cost Management

34.

The predetermined overhead rate is based on the relationship between estimated annual overhead costs and estimated volume of annual operating activity expressed in terms of a common activity base.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

35.

At the end of the year, underapplied overhead is usually recorded as a decrease to Cost of Goods Sold. .

Job Order Costing 15A - 5 Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Answers to True-False Statements Item

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Item

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Item

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Item

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Item

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Item

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Item

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1. 2. 3. 4. 5.

T F T F T

6. 7. 8. 9. 10.

T F F T T

11. 12. 13. 14. 15.

F F T F F

16. 17. 18. 19. 20.

T T T T F

21. 22. 23. 24. 25.

T F T F F

26. 27. 28. 29. 30.

T F T F T

31. 32. 33. 34. 35.

T F T T F

MULTIPLE CHOICE QUESTIONS 36.

Which of the following is one of the components of cost accounting? a. It involves measuring product costs. b. It involves the determination of company profits. c. It requires GAAP to be applied. d. It requires cost minimizing principles.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

37.

A major purpose of cost accounting is to a. classify all costs as operating or nonoperating. b. measure, record, and report period costs. c. provide information to stockholders for investment decisions. d. measure, record, and report product costs.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

38.

The two basic types of cost accounting systems are a. job order and job accumulation systems. b. job order and process cost systems. c. process cost and batch systems. d. job order and batch systems.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

39.

A process cost system would most likely be used by a company that makes a. videos. b. repairs to automobiles. c. breakfast cereal. d. college graduation announcements.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

40.

Which of the following would be accounted for using a job order cost system? a. The production of cell phones. b. The production of automobiles. c. The refining of petroleum. d. The construction of a new campus building.

Ans: D, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

15A - 6 41.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

42.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

43.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

44.

Ans: B, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $2,000 + $375,000 – $2,500 = $374,500

45.

The flow of costs in a job order cost system a. involves accumulating manufacturing costs incurred and assigning the accumulated costs to work done. b. cannot be measured until all jobs are complete. c. measures product costs for a set time period. d. generally follows a LIFO cost flow assumption.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

46.

In a job order cost accounting system, the Raw Materials Inventory account is a. increased when the Manufacturing Overhead account is decreased. b. increased for the purchase of direct and indirect materials c. not used. d. used to accumulate period costs.

Ans: B, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Job Order Costing 15A - 7 47.

When a job is completed and all costs have been accumulated on a job cost sheet, the journal entry that should be made is a. Increase Finished Goods Inventory and decrease Raw Materials Inventory, Factory Labor, and Manufacturing Overhead. b. Increase Work in Process Inventory and decrease Raw Materials Inventory, Factory Labor, and Manufacturing Overhead. c. Increase Raw Materials Inventory and decrease Work in Process Inventory. d. Increase Finished Goods Inventory and decrease Work in Process Inventory.

Ans: D, LO: 1, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

48.

The two major steps in the flow of costs are a. allocating and assigning. b. acquiring and accumulating. c. accumulating and assigning. d. accumulating and amortizing.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

49.

The Raw Materials Inventory account is a. a subsidiary account. b. increased for invoice costs and freight costs chargeable to the purchaser. c. increased for purchase discounts taken. d. increased for purchase returns and allowances.

Ans: B, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

50.

When raw materials are ordered, the Raw Materials Inventory account a. is increased if Accounts Payable is decreased. b. is decreased when the goods are shipped. c. is increased if the purchase is for direct materials. d. is not adjusted until the goods are received.

Ans: D, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

51.

The Raw Materials Inventory account is increased for the cost of raw materials when the a. materials are ordered. b. materials are received. c. materials are put into production. d. bill for the materials is paid.

Ans: B, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

52.

Which of the following is included in factory labor costs? a. Gross earnings b. Employer payroll taxes c. Employee benefits d. All of these are included

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

15A - 8 53.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

All of the following would be recorded in assigning accumulated costs to the Work in Process Inventory except a. the purchase of raw materials. b. raw materials are used. c. overhead is applied. d. factory labor is used.

Ans: A, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

54.

Factory labor costs a. are accumulated in a control account. b. do not include pension costs. c. include vacation pay. d. are based on workers’ net pay.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

55.

Factory Labor a. is an expense account. b. is a control account for direct and indirect labor. c. is a subsidiary account for direct and indirect labor. d. accumulates the cost of factors labor.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

56.

Kline Manufacturing has the following labor costs: Factory—Gross wages Factory—Net wages Employer Payroll Taxes Payable

$500,000 420,000 50,000

The amount recorded as an increase to Factory Labor will be a. $550,000. b. $500,000. c. $470,000. d. $450,000. Ans: A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $500,000 + $50,000 = $550,000

57.

Factory labor costs a. accumulate in advance of utilization. b. accumulate in a control account. c. include sick pay earned by factory workers. d. accumulate in Factory Labor Expense.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

58.

Which of the following is not a control account? a. Work in Process Inventory b. Finished Goods Inventory c. Both Work in Process Inventory and Finished Goods Inventory are control accounts. d. Neither Work in Process Inventory nor Finished Goods Inventory are control accounts.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Job Order Costing 15A - 9 59.

Factory labor is increased for a. gross wages of direct labor. b. net wages of factory labor. c. gross wages and benefits of factory labor. d. net wages and benefits of factory labor.

Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

60.

The acquisition of raw materials will a. increase Work in Process Inventory. b. increase Manufacturing Overhead and decrease Raw Materials Inventory. c. increase Raw Materials Inventory and Manufacturing Overhead. d. increase Raw Materials Inventory.

Ans: D, LO: 1, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

61.

Ans: A, LO: 2, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

62.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

63.

A materials requisition slip showed direct materials requisitions of $66,000 and indirect materials requisitions of $9,000. This transaction will a. Increase Work in Process Inventory $66,000 and decrease Raw Materials Inventory $66,000. b. Increase Direct Materials $66,000, increase Indirect Materials $9,000, and decrease Work in Process Inventory. c. Increase Manufacturing Overhead $75,000 and decrease Raw Materials Inventory $75,000. d. Increase Work in Process Inventory $66,000, increase Manufacturing Overhead $9,000, and decrease Raw Materials Inventory $75,000.

Ans: D, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

15A - 10 64.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

A job cost sheet does not show a. the costs chargeable to a specific job. b. the total costs of a completed job. c. the unit cost of a completed job. d. the cost of goods sold.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

65.

Under an effective system of internal control, an authorization for issuing materials is made a. orally. b. on a prenumbered materials requisition slip. c. by the accounting department. d. by anyone on the production line.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: System and Process Management, AICPA PC: Ethical Conduct, IMA: Cost Management

66.

The materials requisition slip would not include the a. quantity of materials requisitioned. b. stock number of the materials requisitioned. c. cost per unit of the materials requisitioned. d. name of the supplier for the materials requisitioned.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

67.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

68.

Transactions are posted to control accounts in a costing system a. monthly. b. daily. c. annually. d. semi-annually.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

69.

Which one of the following should be equal to the total of the Work in Process Inventory account at the end of the period? a. The total of the amounts transferred from raw materials for the current period b. The sum of the costs shown on the job cost sheets of unfinished jobs c. The total of manufacturing overhead applied to work in process for the period d. The total manufacturing costs for the period

Ans: B, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Job Order Costing 15A - 11 70.

Which of the following is not included on a time ticket? a. overtime hours worked by the employee b. job number c. materials requisitioned d. account to be charged

Ans: C, LO: 2, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

71.

A time ticket does not indicate the a. employee's name. b. account to be charged. c. number of personal exemptions claimed by the employee. d. job number.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

72.

Which one of the following is a source document that requires a posting to the job cost sheet? a. Raw materials receiving slips b. Materials purchase orders c. Labor time tickets d. Finished goods shipping documents

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

73.

Time tickets should be approved by a. the audit committee. b. co-workers. c. the employee's supervisor. d. the payroll department.

Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

74.

If the entry to assign factory labor showed only an increase to Work in Process Inventory, then all labor costs were a. direct labor. b. indirect labor. c. overtime related. d. regular hours.

Ans: A, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

75.

The principal accounting record used in assigning costs to jobs is a. the job cost sheet. b. the cost of goods manufactured schedule. c. the Manufacturing Overhead account. d. the raw materials requisition form.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

15A - 12 76.

The following information is available for completed Job No. 402: direct materials, $120,000; direct labor, $180,000; manufacturing overhead applied, $90,000; units produced, 5,000 units; units sold, 4,000 units. The cost of the finished goods on hand from this job is a. $60,000. b. $390,000. c. $78,000. d. $312,000.

Ans: C, LO: 2, 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (($120,000 + $180,000 + $90,000) / 5,000) x 1,000 = $78,000.

77.

Sportly, Inc. completed Job No. B14 during 2022. The job cost sheet listed the following: Direct materials Direct labor Manufacturing overhead applied Units produced Units sold

$110,000 $60,000 $82,000 3,000 units 1,800 units

What is the cost of the finished goods on hand from this job? a. $151,200 b. $126,000 c. $100,800 d. $102,000 Ans: C, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (($110,000 + $60,000 + $82,000) / 3,000) x 1,200 = $100,800

78.

Madison Inc. uses job order costing for its line of dual zone wine refrigerators. The cost incurred for production during 2022 totaled $18,000 of materials, $9,000 of direct labor costs, and $6,000 of manufacturing overhead applied. The company ships all goods as soon as they are completed which results in no finished goods inventory on hand at the end of any year. Beginning Work in Process Inventory totaled $15,000, and the ending balance is $9,000. During the year, the company completed 25 refrigerators. What is the cost per refrigerator? a. b. c. d.

$1,080 $1,560 $1,320 $1,920

Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (($18,000 + $9,000 + $6,000) + ($15,000 – $9,000)) / 25 = $1,560

Job Order Costing 15A - 13 79.

As of December 31, 2022, Nilsen Company had $2,000 of raw materials inventory. At the beginning of 2022, there was $1,600 of raw materials on hand. During the year, the company purchased $354,000 of raw materials and paid raw materials invoices totaling $314,000. How much raw materials inventory was requisitioned for use on jobs during 2022? a. $354,400 b. $352,000 c. $343,600 d. $353,600

80.

Cost of goods manufactured equals $85,000 for 2022. Finished Goods Inventory is $2,000 at the beginning of the year and $5,500 at the end of the year. Beginning and ending Work in Process Inventory for 2022 are $4,000 and $5,000, respectively. What is Cost of Goods Sold for the year? a. $080,500 b. $83,000 c. $81,500 d. $88,500

Ans: C, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($2,000 + $85,000 – $5,500) = $81,500

81.

A company estimated its annual overhead costs to be $1,500,000 and its direct labor costs to be $1,000,000. Actual overhead was $1,450,000, and actual labor costs totaled $1,100,000. What is the company’s predetermined overhead rate based on direct labor costs (rounded to the nearest cent)? a. $1.45 b. $1.32 c. $1.50 d. $1.36

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($1,500,000 / $1,000,000) = $1.50

82.

Vektek, Inc. considers machine hours to be the best activity base for allocating its manufacturing overhead. At the beginning of the current period, the company estimated annual overhead costs totaling $2,050,000. The company used 1,000 hours of processing on Job No. B12 during the period and incurred manufacturing overhead costs totaling $2,100,000. The estimated machine hours for the year totaled 20,000. How much overhead should be applied to Job No. B12? a. $2,100 b. $102,500 c. $105,000 d. $2,050

Ans: B, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($2,050,000 / 20,000) = $102.50 x 1,000 = $102,500

15A - 14 83.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Barr Mfg. provided the following information from its accounting records for 2022: Estimated production Actual production Estimated overhead Actual overhead

60,000 labor hours 56,000 labor hours $900,000 $870,000

What is the predetermined overhead rate if Barr bases the rate on direct labor hours (rounded to the nearest cent)? a. $16.07 per hour b. $15.00 per hour c. $14.50 per hour d. $15.54 per hour Ans: B, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($900,000 / 60,000) = $15

84.

Kinney Company applies overhead on the basis of 150% of direct labor cost. Job No. 176 incurs $150,000 of direct materials costs and $180,000 of manufacturing overhead. The total manufacturing costs for Job No. 176 is a. $330,000. b. $430,000. c. $450,000. d. $405,000.

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $150,000 + ($180,000 / 1.5) + $180,000 = $450,000

85.

Redman Company manufactures customized desks. The following pertains to Job No. 978: Direct materials used Direct labor hours worked Direct labor rate per hour Machine hours used Predetermined overhead rate per machine hour

$15,450 360 $15 300 $22

What is the total manufacturing cost for Job No. 978? a. $25,650 b. $27,450 c. $28,950 d. $30,750 Ans: B, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $15,450 + (360 x $15) + (300 x $22) = $27,450

86.

Henson Company applies overhead on the basis of 120% of direct labor cost. Job No. 190 is increased with $140,000 of direct materials costs and $180,000 of manufacturing overhead. The total manufacturing costs for Job No. 190 is a. $320,000. b. $488,000. c. $348,000. d. $470,000.

Ans: D, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $140,000 + ($180,000 / 1.2) + $180,000 = $470,000

Job Order Costing 15A - 15 87.

Norman Company manufactures customized plexiglass shields. The following pertains to Job No. 953: Direct materials used Direct labor hours worked Direct labor rate per hour Machine hours used Predetermined overhead rate per machine hour

$22,800 600 $16 400 $30

What is the total manufacturing cost for Job No. 953? a. $41,200 b. $44,400 c. $47,200 d. $50,400 Ans: B, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $22,800 + (600 x $16) + (400 x $30) = $44,400

88.

Minton Company provided the following information from its accounting records for 2022: Estimated production Actual production Estimated overhead Actual overhead

60,000 direct labor hours 56,000 direct labor hours $1,800,000 $1,740,000

What is the predetermined overhead rate if Minton Company bases it on direct labor hours (rounded to the nearest cent)? a. $30.00 per hour b. $29.00 per hour c. $32.14 per hour d. $31.07 per hour Ans: A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $1,800,000 / 60,000 = $30

89.

Labor costs that have been identified as indirect labor are recorded as a. manufacturing overhead. b. direct labor. c. the individual jobs worked on. d. salary expense.

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

90.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

15A - 16 91.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

92.

Ans: C, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

93.

In calculating a predetermined overhead rate, a recent trend in automated manufacturing operations is to choose an activity base related to a. direct labor hours. b. indirect labor dollars. c. machine hours. d. raw materials dollars.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

94.

Annual overhead costs are estimated to be $750,000 and direct labor costs are estimated to be $1,000,000. If the activity base for calculation of the overhead rate is direct labor costs, a. $1.33 is the predetermined overhead rate. b. for every dollar of manufacturing overhead, 75 cents of direct labor will be assigned. c. for every dollar of direct labor, 75 cents of manufacturing overhead will be assigned. d. a predetermined overhead rate cannot be determined.

95.

Overhead application is recorded as a(n) a. decrease to Work in Process Inventory. b. decrease to Manufacturing Overhead. c. increase to Manufacturing Overhead. d. decrease to job cost sheets.

Ans: B, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

96.

Manufacturing overhead applied plus direct labor incurred and what other item equals total manufacturing costs for the period? a. Goods available for sale b. Raw materials purchased c. Work in process inventory d. Direct materials used

Ans: D, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Job Order Costing 15A - 17 97.

Simmons Inc. applies overhead to production at a predetermined rate of 90% of direct labor cost. Job No. 250, the only job still in process at the end of August, has been charged with manufacturing overhead of $8,100. What was the amount of direct materials added to Job No. 250 if the balance in Work in Process Inventory is $30,000? a. $ 8,100. b. $ 9,000. c. $12,900. d. $14,610.

98.

Spencer Inc. applies overhead to production at a predetermined rate of 80% of direct labor cost. Job No. 130, the only job still in process at the end of August, has been charged with manufacturing overhead of $6,400. What was the amount of direct materials added to Job No. 130 if the balance in Work in Process Inventory is $20,000? a. $7,000. b. $6,400. c. $5,600. d. $8,480.

Ans: C, LO: 3, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($6,400 / .80) + $6,400 + x = $20,000; x = $5,600

99.

For Jacobs Company, the predetermined overhead rate is 70% of direct labor cost. During the month, $600,000 of factory labor was incurred of which $140,000 is indirect labor. Actual overhead incurred was $320,000. The amount of overhead charged to Work in Process Inventory is a. $322,000 b. $320,000 c. $420,000 d. $460,000

Ans: A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($600,000 – $140,000) x .70 = $322,000

100.

Simpson Company applies overhead on the basis of 200% of direct labor cost. Job No. 305 is increased with $180,000 of direct materials costs and $200,000 of manufacturing overhead. The total manufacturing costs for Job No. 305 is a. $380,000. b. $480,000. c. $560,000. d. $580,000.

15A - 18 101.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

For Wilton Company, the predetermined overhead rate is 70% of direct labor cost. During the month, $720,000 of Factory Labor was incurred of which $200,000 is indirect labor. Actual overhead incurred was $360,000. The amount of overhead charged to Work in Process Inventory is a. $364,000. b. $360,000. c. $504,000. d. $520,000.

102.

At the beginning of the year, Monroe Company estimates annual overhead costs to be $2,400,000 with a volume of 300,000 machine hours. Using machine hours as a base, the amount of overhead applied during the year if actual volume for the year was 315,000 hours is a. $2,400,000. b. $2,285,714. c. $1,680,000. d. $2,520,000.

Ans: D, LO: 3 Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($2,400,000 / 300,000) x 315,000 = $2,520,000

103.

Cost of goods sold can be determined from a. analysis of all the control accounts in the cost system. b. the Finished Goods Inventory records. c. the Work in Process Inventory records. d. the Raw Materials Inventory account.

Ans: B, LO: 4, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

104.

When determining the costs of jobs, how does a company account for indirect materials? a. They are added to work in process as used. b. They remain part of the raw materials inventory. c. They are transferred out of raw materials inventory into manufacturing overhead when used. d. They are transferred out of raw materials inventory into work in process inventory as used.

Ans: C, LO: 4, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

105.

In a job order cost system, a decrease to Manufacturing Overhead will be accompanied by an increase to a. Cost of Goods Manufactured. b. Finished Goods Inventory. c. Work in Process Inventory. d. Raw Materials Inventory.

Ans: C, LO: 4, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Job Order Costing 15A - 19 106.

During 2022, Tanner Manufacturing estimated Job No. 26 to cost $300,000 of overhead, $500,000 of materials, and $200,000 in labor. Tanner applied overhead based on direct labor cost. Actual production required an overhead cost of $290,000, $550,000 in materials, and $220,000 in labor. All of the goods were completed. What amount was transferred to Finished Goods Inventory for Job No. 26? a. $1,000,000 b. $1,060,000 c. $1,070,000 d. $1,100,000

Ans: D, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $300,000 / $200,000 = 150% x $220,000 = $330,000 + $550,000 + $220,000 = $1,100,000

107.

Increases to Work in Process Inventory are accompanied by decreases to all but which of the following accounts? a. Raw Materials Inventory b. Factory Labor c. Manufacturing Overhead d. Cost of Goods Sold

Ans: D, LO: 4, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

108.

Which of the following transactions is not part of accumulating manufacturing costs in a job order cost system? a. Cost of goods sold is recognized. b. Raw materials are purchased. c. Factory labor is incurred. d. Manufacturing overhead is incurred.

Ans: A, LO: 4, Bloom: C, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

109.

Which one of the following is not a part of assigning manufacturing costs in a job order cost system? a. Manufacturing overhead is applied. b. Raw materials are used. c. Manufacturing overhead is incurred. d. Factory labor is incurred.

Ans: C, LO: 4, Bloom: C, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

110.

In determining total manufacturing costs on the cost of goods manufactured schedule, a. beginning Work in Process Inventory should have a zero balance. b. actual manufacturing overhead costs appear as a deduction. c. manufacturing overhead applied is added to direct materials and direct labor. d. ending Work in Process Inventory is deducted from beginning Work in Process Inventory.

Ans: C, LO: 5 Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

15A - 20 111.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

$240,000 144,000 288,000 216,000 264,000 720,000

Gulick Company's direct labor cost for the year is a. $72,000. b. $360,000. c. $216,000. d. $288,000.5 Ans: B, LO: 4, Bloom: AN, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $720,000 – $144,000 – $216,000 = $360,000

112.

$240,000 144,000 288,000 216,000 264,000 720,000

Gulick Company's ending Work in Process Inventory is a. $696,000. b. $480,000. c. $456,000. d. $216,000. Ans: A, LO: 5 Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $240,000 + $720,000 – x = $264,000; x = $696,000

113.

$900,000 700,000 1,100,000 800,000 1,200,000 1,500,000

Hayward Manufacturing Company's total manufacturing costs for the period is a. $1,900,000. b. $1,800,000. c. $1,300,000. d. cannot be determined from the data provided. Ans: B, LO: 5 Bloom: AN, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $900,000 + x – $1,500,000 = $1,200,000; x = $1,800,000

Job Order Costing 15A - 21 114.

Ans: A, LO: 4, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

115.

On the cost of goods manufactured schedule, the cost of goods manufactured agrees with the a. balance of Finished Goods Inventory at the end of the period. b. total additions to Work in Process Inventory during the period. c. amount transferred from Work in Process Inventory to Finished Goods Inventory during the period. d. increases to Cost of Goods Sold during the period.

Ans: C, LO: 5 Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

116.

Gannon Company had the following information at December 31: Finished goods inventory, January 1 Finished goods inventory, December 31

$ 50,000 150,000

If the cost of goods manufactured during the year amounted to $2,200,000 and annual sales were $2,750,000, the amount of gross profit for the year is a. $550,000. b. $2,100,000. c. $650,000. d. $450,000. Ans: C, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $50,000 + $2,200,000 – $150,000 = $2,100,000 Cost of Goods Sold; $2,750,000 – $2,100,000 = $650,000

117.

Haight Company incurred direct materials costs of $2,500,000 during the year. Manufacturing overhead applied was $450,000 and was applied at the rate of 60% of direct labor costs. Haight Company’s total manufacturing costs for the year was a. $3,700,000. b. $3,220,000. c. $2,950,000. d. $4,720,000.

Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $2,500,000 + $450,000 + ($450,000/.60) = $3,700,000

15A - 22 118.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

$ 136,000 208,000 176,000 184,000 900,000 856,000

What is Greer Company's direct labor cost for the year? a. $508,000 b. $600,000 c. $464,000 d. $472,000 Ans: C, LO: 4, Bloom: AN, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $856,000 – $208,000 – $184,000 = $464,000

119.

$ 136,000 208,000 176,000 184,000 900,000 856,000

What the ending balance in Greer Company's Work in Process Inventory? a. $92,000 b. $484,000 c. $84,000 d. $372,000 Ans: A, LO: 5 Bloom: AN, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $136,000 + $856,000 – x = $900,000; x = $92,000

120.

Chomelar Manufacturing Company developed the following data for the current period: Beginning Work in Process inventory Direct materials used Actual overhead Overhead applied Cost of goods manufactured Ending Work in Process Inventory

$ 120,000 720,000 840,000 810,000 1,920,000 90,000

What are total manufacturing costs for the period? a. $2,370,000 b. $1,890,000 c. $1,650,000 d. $1,830,000 Ans: B, LO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $120,000 + x – $90,000 = $1,920,000; x = $1,890,000

Job Order Costing 15A - 23 121.

Barger Company had the following information at December 31: Finished goods inventory, January 1 Finished goods inventory, December 31

$ 90,000 126,000

If the cost of goods manufactured during the year totaled $1,895,000 and annual sales were $2,994,000, what was the amount of gross profit for the year? a. $1,099,000 b. $1,009,000 c. $1,063,000 d. $1,135,000 Ans: D, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: $90,000 + $1,895,000 – $126,000 = $1,859,000; $2,994,000 – $1,859,000 = $1,135,000

122.

Emley Company incurred direct materials costs of $750,000 during the year. Manufacturing overhead applied was $700,000 and was applied based on direct labor costs. The predetermined overhead rate is 70%. What were Emley Company’s total manufacturing costs for the year? a. $1,940,000 b. $1,750,000 c. $1,450,000 d. $2,450,000

Ans: D, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($700,000 / .70) + $700,000 + $750,000 = $2,450,000

123.

During 2022, Durham Manufacturing estimated Job No. 51 to incur $300,000 of overhead, $500,000 of materials, and $200,000 in labor. Durham applied overhead based on direct labor cost. Actual production incurred overhead of $295,000, $570,000 in materials, and $220,000 in labor. All of the goods were completed. What amount was transferred to Finished Goods Inventory? a. $1,090,000 b. $1,120,000 c. $1,000,000 d. $1,085,000

Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting Solution: ($300,000 / $200,000) = 1.5 x $220,000 = $330,000; $220,000 + $330,000 + $570,000 = $1,120,000

124.

During 2022, Cotte Manufacturing expected Job No. 59 to incur $300,000 of overhead, $500,000 of materials, and $200,000 in labor. Cotte applied overhead based on direct labor cost. Actual production incurred overhead of $295,000, $570,000 in materials, and $220,000 in labor. All of the goods were completed. What is the amount of over- or underapplied overhead for this job? a. $5,000 underapplied b. $5,000 overapplied c. $35,000 underapplied d. $35,000 overapplied

Ans: D, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $300,000 / $200,000 = 1.5 x $220,000 = $330,000; $330,000 – $295,000 = $35,000 overapplied

15A - 24 125.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Kimble Company applies overhead on the basis of machine hours. Given the following data, what is the amount of overhead applied and the amount by which it is under- or overapplied for the period? Estimated annual overhead cost $1,600,000 Actual annual overhead cost $1,575,000 Estimated machine hours 400,000 Actual machine hours 390,000 a. b. c. d.

$1,560,000 applied and $15,000 overapplied $1,600,000 applied and $15,000 overapplied $1,560,000 applied and $15,000 underapplied $1,575,000 applied and neither under-nor overapplied

Ans: C, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $1,600,000 / 400,000 = $4; $4 x 390,000 = $1,560,000 applied; $1,575,000 – $1,560,000 = $15,000 underapplied

126.

Barnes Company applies overhead on the basis of machine hours. Given the following data, what is the amount of overhead applied and the amount by which it is under- or overapplication for the period? Estimated annual overhead cost Actual annual overhead cost Estimated machine hours Actual machine hours a. b. c. d.

$3,000,000 $2,970,000 300,000 295,000

$2,950,000 applied and $20,000 overapplied $3,000,000 applied and $20,000 overapplied $2,950,000 applied and $20,000 underapplied $2,970,000 applied and neither under- nor overapplied

Ans: C, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($3,000,000 / 300,000) = $10; $10 x 295,000 = $2,950,000 applied; $2,970,000 – $2,950,000 = 20,000 underapplied

127.

A company assigned overhead to work in process inventory. At year-end, what does the amount of overapplied overhead mean? a. The overhead applied to work in process inventory is greater than the estimated overhead costs. b. The overhead applied to work in process inventory is less than the estimated overhead costs. c. The overhead applied to work in process inventory is less than the actual overhead incurred. d. The overhead applied to work in process inventory is greater than the actual overhead incurred.

Ans: D, LO: 5, Bloom: C, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Job Order Costing 15A - 25 128.

If the Manufacturing Overhead has a positive balance at the end of a period, it means that a. actual overhead costs were less than overhead applied to jobs. b. actual overhead costs were greater than overhead applied to jobs. c. actual overhead costs were equal to overhead applied to jobs. d. no jobs have been completed.

Ans: B, LO: 5, Bloom: C, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

129.

If the manufacturing overhead costs applied to jobs are greater than the actual manufacturing overhead costs incurred during a period, overhead is said to be a. underapplied. b. overapplied. c. in error. d. prepaid.

Ans: B, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

130.

At the end of the year, any balance in Manufacturing Overhead is generally eliminated by adjusting a. Work in Process Inventory. b. Finished Goods Inventory. c. Cost of Goods Sold. d. Raw Materials Inventory.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

131.

If Manufacturing Overhead has a negative balance at the end of the period, then a. manufacturing overhead has been underapplied. b. the manufacturing overhead assigned to Work in Process Inventory is less than the manufacturing overhead incurred. c. manufacturing overhead has been overapplied. d. management must take corrective action.

Ans: C, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

132.

The Manufacturing Overhead shows additions of $30,000, $24,000, and $28,000 and one deduction for $86,000. Based on this information, manufacturing overhead a. has been overapplied. b. has been underapplied. c. has not been applied. d. shows a zero balance.

Ans: A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($30,000 + $24,000 + $28,000) – $86,000 = $4,000 overapplied.

133.

If Manufacturing Overhead has a positive balance at the end of the period, then a. manufacturing overhead has been underapplied. b. the manufacturing overhead assigned to Work in Process Inventory is more than the manufacturing overhead incurred. c. manufacturing overhead has been overapplied. d. management must take corrective action.

Ans: A, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

15A - 26 134.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

If actual manufacturing overhead is greater than applied manufacturing overhead, then manufacturing overhead is a. underapplied. b. overapplied. c. reported as a loss on the income statement under "Other Expenses and Losses." d. considered a miscellaneous expense.

Ans: A, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

135.

If actual manufacturing overhead is less than applied manufacturing overhead, then manufacturing overhead is a. underapplied. b. overapplied. c. reported as a loss on the income statement under "Other Expenses and Losses." d. considered a miscellaneous expense.

Ans: B, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

136.

If manufacturing overhead has been underapplied during the year, the adjustment at the end of the year will generally include a(n) a. increase to Manufacturing Overhead. b. decrease to Cost of Goods Sold. c. increase to Work in Process Inventory. d. increase to Cost of Goods Sold.

Ans: D, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

137.

If manufacturing overhead has been overapplied during the year, the adjustment at the end of the year will generally include a(n) a. increase to Manufacturing Overhead. b. decrease to Finished Goods Inventory c. increase to Cost of Goods Sold. d. decrease to Work in Process Inventory.

Ans: A, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

138.

The existence of under- or overapplied manufacturing overhead at the end of the year a. typically requires an adjustment to Cost of Goods Sold. b. indicates that an error has been made. c. requires a retroactive adjustment to the cost of all jobs completed. d. is written off as a bad estimate expense.

Ans: A, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

139.

Ans: C, LO: 5, Bloom: C, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Job Order Costing 15A - 27 140.

If, at the end of the year, manufacturing overhead has been overapplied, it means that a. actual overhead costs were greater than the overhead assigned to jobs. b. actual overhead costs were less than the overhead assigned to jobs. c. overhead has not been applied to jobs still in process. d. cost of goods will have to be increased by the amount of the overapplied overhead.

Ans: B, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

141.

A process cost system would be used for all of the following except the a. manufacture of ramen noodles. b. refining of petroleum. c. printing of wedding invitations. d. production of kayaks.

Ans: C, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

142.

In a job order cost system, the purchase of raw materials is recorded by increasing a. Work in Process Inventory. b. Work in Process Inventory and Manufacturing Overhead. c. Raw Materials Inventory. d. Finished Goods Inventory.

Ans: C, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

143.

In a manufacturing company, the cost of factory labor consists of all of the following except a. employer payroll taxes. b. the cost of employee benefits. c. net earnings of factory workers. d. gross earnings of factory workers.

Ans: C, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

144.

When direct labor costs are assigned to jobs, a. Work in Process and Manufacturing Overhead both increase. b. Factory Labor decreases and Work in Process increases. c. Manufacturing Overhead increases and Factory Labor decreases. d. Work in Process and Factory Labor both increase.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

145.

When the company assigns factory labor costs to jobs, the direct labor cost is added to a. Direct Labor. b. Factory Labor. c. Manufacturing Overhead. d. Work in Process Inventory.

Ans: D, LO: 2, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

15A - 28 146.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Jinnah Company applies overhead on the basis of 200% of direct labor cost. Job No. 501 is charged with $240,000 of direct materials costs and $320,000 of manufacturing overhead. The total manufacturing costs for Job No. 501 is a. $560,000. b. $880,000. c. $720,000. d. $800,000.

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($320,000 / 2.0) + $320,000 + $240,000 = $720,000

147.

Companies apply manufacturing overhead to work in process on an estimated basis through the use of a(n) a. actual overhead rate. b. estimated overhead rate. c. assigned overhead rate. d. predetermined overhead rate.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

148.

Overapplied manufacturing overhead exists when manufacturing overhead assigned to Work in Process Inventory is a. more than overhead incurred and there is a positive balance in Manufacturing Overhead at the end of a period. b. less than overhead incurred and there is a positive balance in Manufacturing Overhead at the end of a period. c. more than overhead incurred and there is a negative balance in Manufacturing Overhead at the end of a period. d. less than overhead incurred and there is a negative balance in Manufacturing Overhead at the end of a period.

Ans: C, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

149.

Usually, under- or overapplied manufacturing overhead is eliminated with an adjustment to a. Work in Process Inventory. b. Finished Goods Inventory. c. Finished Goods Inventory and Cost of Goods Sold. d. Cost of Goods Sold.

Ans: D, LO: 5, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

150.

Which of the following statements about under- or overapplied manufacturing overhead is correct? a. After the adjustment to transfer over- or underapplied overhead to Cost of Goods Sold, Manufacturing Overhead will have a zero balance. b. When Manufacturing Overhead has a negative balance, overhead is said to be underapplied. c. At the end of the year, under- or overapplied overhead is not eliminated by adjustment. d. When annual financial statements are prepared, overapplied overhead is reported in current liabilities.

Ans: A, LO: 5, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Job Order Costing 15A - 29

Answers to Multiple Choice Questions Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52.

a d b c d a c b b a b d c b d b d

53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69.

a c d a c d d d a c d d b d d a b

70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86.

C c c c a a c c b d c c b b c b d

87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103.

b a a b b c c c b d c c a b a d b

104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120.

c c d d a c c b a b a c c a c a b

121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137.

d d b d c c d b b c c a a a b d a

138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150.

a c b c c c b d c d c d a

BRIEF EXERCISES BE 151 During the first year of operations, Shapiro Tool accumulated the following manufacturing costs: Raw materials purchased Factory labor incurred Manufacturing overhead incurred

$12,000 6,000 4,000

Instructions Using the grid below, record the above costs. Use (+) to show increases and (–) to show decreases to the accounts. Manufacturing Costs Raw Materials Inventory

Factory Labor

Manufacturing Overhead

Work in Process Inventory

Ans: N/A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

15A - 30

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 151

(4 min.) Manufacturing Costs

Raw materials purchased Factory labor incurred Manufacturing overhead incurred

Raw Materials Inventory +$12,000

Factory Labor

Manufacturing Overhead

Work in Process Inventory

+$6,000 +$4,000

BE 152 In January, Harlan, Inc. production supervisor requisitioned raw materials for production as follows: Job 1 $700, Job 2 $900, Job 3 $400, and general factory use, $520. Instructions Using the grid below, record the usage of materials. Use (+) to show increases and (–) to show decreases to the accounts. Manufacturing Costs Raw Materials Inventory

Factory Labor

Manufacturing Overhead

Work in Process Inventory

Ans: N/A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 152

(2 min.) Manufacturing Costs Raw Materials Inventory –$2,000 –$520

Direct materials Indirect materials

Factory Labor

Manufacturing Overhead +$520

Work in Process Inventory +$2,000

Job Order Costing 15A - 31 BE 153 Lando Company reported the following amounts for 2022: Raw materials purchased Beginning raw materials inventory Ending raw materials inventory

$83,000 5,200 4,500

Ending Work in Process Inventory $ 6,300 Manufacturing overhead costs applied 36,000 Beginning Work in Process Inventory 6,100

Instructions Calculate the cost of materials used in production Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 153

(2 min.)

$5,200 + $83,000 – $4,500 = $83,700 BE 154 Builder Bug Company allocates manufacturing overhead at $9 per direct labor hour. Job A45 required 4 boxes of direct materials at a cost of $30 per box and took employees 20 hours to complete. Employees earn $15 per hour. Instructions Compute the total cost of Job A45. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 154

(4 min.)

Direct materials (4 × $30) Direct labor (20 hours × $15) Overhead (20 hours × $9) Total Job A45

$120 300 180 $600

BE 155 At the beginning of the current period, Colby Company estimated that annual manufacturing overhead costs would be $600,000. Estimated annual operating activity bases are: direct labor cost $460,000, direct labor hours 40,000 and machine hours 80,000. The actual manufacturing overhead cost for the year was $601,000 and the actual direct labor cost for the year was $456,000. Actual direct labor hours totaled 39,800 and machine hours totaled 79,000. Colby applies manufacturing overhead based on direct labor hours. Instructions Compute the predetermined overhead rate and determine the amount of manufacturing overhead applied. Determine if overhead is over- or underapplied and the amount. Ans: N/A, LO: 3, 5, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 155

(5 min.)

Predetermined overhead rate = $600,000 ÷ 40,000 = $15 per direct labor hour Manufacturing overhead applied = $15  39,800 = $597,000 Underapplied overhead = $597,000 – $601,000 = $4,000 .

15A - 32

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

BE 156 Martin Company applies manufacturing overhead based on direct labor hours. Information concerning manufacturing overhead and labor for the year follows: Actual manufacturing overhead $150,000 Estimated manufacturing overhead $145,000 Direct labor hours incurred 4,800 Direct labor hours estimated 5,000 Instructions Compute the predetermined overhead rate. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 156

(2 min.)

$145,000 ÷ 5,000 = $29 per direct labor hour BE 157 The manufacturing operations of Bryant, Inc. had the following balances at the beginning and end of January: Inventories Raw materials Work in process Finished goods

January 1 $12,000 21,000 14,000

January 31 $13,000 23,000 16,000

Bryant transferred $290,000 of completed goods out of Work in Process Inventory during January. Instructions Compute the cost of goods sold for the month. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 157 (2 min.) $14,000 + $290,000 – $16,000 = $288,000 BE 158 The following amounts were reported manufacturing overhead of $8,000. Raw Materials Inventory Finished Goods Inventory Work in Process Inventory Cost of Goods Sold

by Burke Company before adjusting its overapplied $ 40,000 60,000 100,000 730,000

Instructions Compute what amount Burke will report as Cost of Goods Sold after it adjusts for its overapplied overhead. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Job Order Costing 15A - 33 Solution 158

(2 min.)

$730,000 – $8,000 = $722,000 BE 159 During the first two months of 2022, Arb Company incurred the following direct labor costs: January $20,000 and February $30,000. Arb uses a predetermined overhead rate of 120% of direct labor cost. Estimated overhead for the 2 months, respectively, totaled $19,500 and $35,700. Actual overhead for the 2 months, respectively, totaled $25,000 and $33,500. Instructions Determine if manufacturing overhead is over- or underapplied for each of the two months and the respective amounts. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 159

(4 min.)

Overhead applied: January: 120% × $20,000 = $24,000 February: 120% × $30,000 = $36,000 Over- or underapplied: January: $24,000 – $25,000 = $1,000 underapplied February: $36,000 – $33,500 = $2,500 overapplied BE 160 At December 31, Ding Company reported the following unadjusted balances: Cost of Goods Sold Finished Goods Inventory

$210,000 30,000

The company’s unadjusted balance in its Manufacturing Overhead account at the same date was a positive $2,800. Instructions Using the grid below, enter the unadjusted balances, record the appropriate adjustment for overor underapplied overhead at December 31, and show the resulting adjusted balances. Use (+) to indicate increases and (–) to indicate decreases. Manufacturing Costs Raw Materials Inventory

Factory Labor

Manufacturing Overhead

Work in Process Inventory

Finished Goods Inventory

Cost of Goods Sold

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

15A - 34

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 160

(2 min.) Manufacturing Costs Raw Materials Inventory

Factory Labor

Unadjusted balances Adjustment Adjusted balances

Work in Manufacturing Process Overhead Inventory $2,800 –2,800 $0

Finished Goods Inventory $30,000 $30,000

Cost of Goods Sold $210,000 +2,800 $212,800

EXERCISES Ex. 161 The manufacturing operations of Beatly, Inc. had the following balances at the beginning and end of January: Raw Materials Inventory Work in Process Inventory Finished Goods Inventory

January 1 $12,000 21,000 14,000

January 31 $13,000 23,000 12,000

Beatly transferred $270,000 of completed goods out of Work in Process Inventory during January. Instructions Compute the cost of goods sold for January. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 161

(3 min.)

$14,000 + $270,000 – $12,000 = $272,000

Job Order Costing 15A - 35 Ex. 162 A selected list of accounts used by Cline Manufacturing Company follows: Code A B C

Code Raw Materials Inventory Work in Process Inventory Finished Goods Inventory

D E F

Factory Labor Manufacturing Overhead Cost of Goods Sold

Cline Manufacturing Company uses a job order system. Instructions Place the appropriate code letter in the columns indicating the appropriate account(s) to be increased and decreased for the transactions listed below. ——————————————————————————————————————————— Account(s) Account(s) Transactions Increased Decreased ——————————————————————————————————————————— 1. Raw materials were purchased. ——————————————————————————————————————————— 2. Issued a check to Dixon Machine Shop for repair work on factory equipment. ——————————————————————————————————————————— 3. Direct materials were requisitioned for Job 280. ——————————————————————————————————————————— 4. Factory labor was incurred. ——————————————————————————————————————————— 5. Assigned direct labor and indirect labor used. ——————————————————————————————————————————— 6. The production department requisitioned indirect materials for use in the factory. ——————————————————————————————————————————— 7. Overhead was applied to production based on a predetermined overhead rate of $8 per labor hour. ——————————————————————————————————————————— 8. Goods that were completed were transferred to finished goods. ——————————————————————————————————————————— 9. Goods costing $80,000 were sold. ——————————————————————————————————————————— 10. Recorded factory depreciation. ——————————————————————————————————————————— Ans: N/A, LO: 1, 2, 3, Bloom: C, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

15A - 36

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 162

(10–15 min.)

——————————————————————————————————————————— Account(s) Account(s) Transactions Increased Decreased ——————————————————————————————————————————— 1. Raw materials were purchased. A ——————————————————————————————————————————— 2. Issued a check to Dixon Machine Shop for E repair work on factory equipment. ——————————————————————————————————————————— 3. Direct materials were requisitioned for Job 280. B A ——————————————————————————————————————————— 4. Factory labor was incurred. D ——————————————————————————————————————————— 5. Assigned direct labor and indirect labor used B, E D ——————————————————————————————————————————— 6. The production department requisitioned indirect E A material for use in the factory. ——————————————————————————————————————————— 7. Overhead was applied to production based on a predetermined overhead rate of $8 per labor hour B E ——————————————————————————————————————————— 8. Goods that were completed were transferred to C B finished goods. ——————————————————————————————————————————— 9. Goods costing $80,000 were sold. F C ——————————————————————————————————————————— 10. Recorded factory depreciation. E

Job Order Costing 15A - 37 Ex. 163 Finn Manufacturing Company uses a job order cost accounting system and keeps perpetual inventory records. Using the grid below, record the following transactions during the month of June. Use (+) to indicate increases and (–) to indicate decreases. June 1

Purchased raw materials for $20,000.

Raw materials requisitioned by production: Direct materials $8,000 Indirect materials 1,000

Incurred factory utilities, $2,100 and repairs for factory equipment, $8,000.

Incurred $108,000 of factory labor.

Time tickets indicated the following: Direct Labor (7,000 hrs × $12 per hr) = Indirect Labor (3,000 hrs × $8 per hr) =

$84,000 24,000 $108,000

Applied manufacturing overhead to production based on a predetermined overhead rate of $7 per direct labor hour worked.

Goods costing $18,000 were completed in the factory and were transferred to finished goods.

Goods costing $15,000 were sold. Manufacturing Costs

Date

Raw Materials Inventory

Factory Labor

Manufacturing Overhead

Work in Process Inventory

Finished Goods Inventory

Cost of Goods Sold

Ans: N/A, LO: 1, 2, 3, Bloom: AP, Difficulty: Moderate, Min: 16, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

15A - 38

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 163

(16–23 min.) Manufacturing Costs

Raw Materials Date Inventory June 1 +$20,000 8 –8,000 8 –1,000 15 25 25 25 25 28 30

Factory Labor

Manufacturing Overhead

Work in Process Inventory

Finished Goods Inventory

Cost of Goods Sold

+49,000 –18,000 +$18,000 –15,000

+$15,000

+$8,000 +$1,000 +10,100 +$108,000 –84,000 –24,000

+84,000 +24,000 –49,000

Ex. 164 Selected accounts of Kosar Manufacturing Company at year end appear in the grid below: Manufacturing Costs

(a) (b) (c) (d) (e) (e) (f) (g) (h)

Raw Materials Inventory +$40,000

Factory Labor

Manufacturing Overhead

Work in Process Inventory

Finished Goods Inventory

Cost of Goods Sold

+$140,000 –120,000

+$120,000

+$110,000 +$75,000 –25,000 –80,000 –30,000

+$25,000 +80,000 +30,000 –100,000 +100,000 –140,000

Instructions Explain the probable transaction that took place for each of the items identified by letters in the accounts. For example: (a) Raw materials costing $40,000 were purchased. Ans: N/A, LO: 1, 2, 3, Bloom: C, Difficulty: Hard, Min: 9, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Job Order Costing 15A - 39 Solution 164 (a) (b) (c) (d) (e) (f) (g) (h)

(9–14 min.)

Raw materials costing $40,000 were purchased. Factory labor costs incurred amounted to $110,000. Actual manufacturing overhead costs incurred were $75,000. Direct materials requisitioned for production amounted to $25,000. Factory labor used consisted of: Direct labor $80,000 Indirect labor 30,000 Manufacturing overhead applied to production was $100,000. Completed goods costing $140,000 were transferred to Finished Goods Inventory. Finished goods costing $120,000 were sold.

Ex. 165 Sardin Company began March with a $17,000 balance in Work in Process Inventory from Job 324. Information from job cost sheets shows the following additional costs assigned during March, April, and May of 2022: Manufacturing Costs Assigned March April May $26,000 20,000 $28,000 $15,000 41,000 11,000 16,000 39,000 34,000 51,000

Job No. 324 325 326 327 328

Job 324 was completed in March. Jobs 325 and 327 were completed in May, and Job 326 was completed in April. All of the jobs were sold during the month after completion. Instructions Calculate the balances of the Work in Process Inventory and Finished Goods Inventory at the end of May. Ans: N/A, LO: 1, 2, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 165

(5–6 min.)

Work in Process Inventory Job 328 $34,000 + $51,000 Finished Goods Inventory Job 325 $20,000 + $28,000 + $15,000 Job 327 $16,000 + $39,000

$85,000

$ 63,000 55,000 $118,000

15A - 40

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ex. 166 The gross earnings of factory workers for Dinkel Company during the month of January are $480,000. Of the total factory labor cost, 75% is attributable to direct labor and 25% is attributable to indirect labor. Instructions Using the grid below: (a) Record the factory labor costs for the month of January. (b) Record the assignment of factory labor to production. (c) Record the application of manufacturing overhead to production, assuming the predetermined overhead rate is 125% of direct labor cost. Use (+) to indicate increases and (–) to indicate decreases. Manufacturing Costs Raw Materials Inventory

Factory Labor

Manufacturing Overhead

Work in Process Inventory

Ans: N/A, LO: 1, 2, 3, 4, Bloom: AP, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 166

(8–12 min.) Manufacturing Costs Raw Materials Inventory (a) (b) (b) (c)

Factory Labor +$480,000 –360,000 –120,000

Manufacturing Overhead

Work in Process Inventory +$360,000

+$120,000 –450,000

+450,000

Job Order Costing 15A - 41 Ex. 167 Foster Manufacturing uses a job order cost accounting system. On April 1, the company has Work in Process Inventory of $7,600 and two jobs in process: Job No. 221, $3,600, and Job No. 222, $4,000. During April, a summary of source documents reports the following: For Job No. 221 222 223 224 General use Totals

Materials Requisition Slips $1,200 1,700 2,400 2,600 600 $8,500

Labor Time Tickets $ 2,100 2,200 2,900 2,800 400 $10,400

Foster applies manufacturing overhead to jobs at an overhead rate of 70% of direct labor cost. Job No. 221 is completed during the month. Instructions (a) Using the grid below: (1) Enter the beginning Work in Process Inventory balance, prepare summary entries to record the raw materials requisitioned, factory labor used, the assignment of manufacturing overhead to jobs, and the completion of Job No. 221. Use (+) to indicate increases and (–) to indicate decreases. (2) Calculate the balance of the Work in Process Inventory account at April 30. (b) Prove the agreement of the Work in Process Inventory account with the job cost sheets. Manufacturing Costs Raw Materials Inventory

Factory Labor

Manufacturing Overhead

Work in Process Inventory

Finished Goods Inventory

Ans: N/A, LO: 1, 2, 3, 4, Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

15A - 42

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 167

(10–15 min.)

(a) Manufacturing Costs Raw Materials Inventory (1) Beginning balance (1) Direct materials (1) Indirect materials (1) Direct labor (1) Indirect labor (1) Assigned overhead* (1) Job. No. 221 completion** (2) Ending balance

Factory Labor

Manufacturing Overhead

Work in Process Inventory

Finished Goods Inventory

$7,600 +7,900

–$7,900 –600

+$600 –$10,000 –400

+10,000 +400 –7,000

+7,000 –8,370 $24,130

+$8,370

* ($10,000 x 70% = $7,000) ** ($3,600 + $1,200 + $2,100 + ($2,100 x 70%) = $8,370)

(b) Work in Process Inventory, April 30: $24,130 Job No. 222 Job No. 223 Job No. 224

$9,440 7,330 7,360 $24,130

($4,000 + $1,700 + $2,200 + $1,540) ($2,400 + $2,900 + $2,030) ($2,600 + $2,800 + $1,960)

Ex. 168 Manufacturing cost data for Dolan Company, which uses a job order cost system, are presented below: Case A Case B Direct materials used (a) $103,000 Direct labor $ 70,000 150,000 Manufacturing overhead applied 63,000 (d) Total manufacturing costs 240,000 (e) Work in Process Inventory, 1/1/22 (b) 45,000 Total cost of work in process 300,000 (f) Work in Process Inventory, 12/31/22 (c) 40,000 Cost of goods manufactured 205,000 (g) Instructions Indicate the missing amount for each letter. Assume that overhead is applied on the basis of direct labor cost and that the rate is the same for both cases. Ans: N/A, LO: 1, 2, 3, 4, Bloom: AN, Difficulty: Hard, Min: 9, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Job Order Costing 15A - 43 Solution 168

(9–12 min.)

Case A $300,000 – (c) = $205,000 (c) = $95,000

(a) + $70,000 + $63,000 = $240,000 (a) = $107,000 $240,000 + (b) = $300,000 (b) = $60,000

Case B [Note that the overhead rate from Case A is 90% ($63,000 ÷ $70,000)] $150,000 × 90% = (d) (d) = $135,000

$388,000 + $45,000 = (f) (f) = $433,000

$103,000 + $150,000 + $135,000 = (e) (e) = $388,000

$433,000 – $40,000 = (g) (g) = $393,000

Ex. 169 Fort Corporation had the following transactions during its first month of operations: 1. Raw materials were purchased for $85,000. 2. Raw Materials of $30,000 were requisitioned to the factory. An analysis of the materials requisition slips indicated that $6,000 was classified as indirect materials. 3. Factory labor costs incurred were $175,000. 4. Time tickets indicated that $145,000 was direct labor and $30,000 was indirect labor. 5. Manufacturing overhead costs incurred were $198,000. 6. Manufacturing overhead was applied at the rate of 150% of direct labor cost. 7. Goods costing $115,000 were still incomplete at the end of the month; the other goods were completed and transferred to finished goods. 8. Finished goods costing $100,000 to manufacture were sold. Instructions Using the grid below, record the above transactions for Fort Corporation. Use (+) to indicate increases and (–) to indicate decreases. Manufacturing Costs Raw Materials Inventory

Factory Labor

Manufacturing Overhead

Work in Process Inventory

Finished Goods Inventory

Cost of Goods Sold

Ans: N/A, LO: 1, 2, 3, 4, Bloom: AP, Difficulty: Moderate, Min: 12, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

15A - 44

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 169

(12–17 min.) Manufacturing Costs Raw Materials Inventory 1. +$85,000 2. –24,000 2. –6,000 3. 4. 4. 5. *6. **7. 8.

Factory Labor

Manufacturing Overhead

Work in Process Inventory

Finished Goods Inventory

Cost of Goods Sold

+$271,500 –100,000

+$100,000

+$24,000 +$6,000 +$175,000 –145,000 –30,000

+145,000 +30,000 +198,000 –217,500 +217,500 –271,500

*($145,000 x 150% = $217,500) **[($24,000 + $145,000 + $217,500) – $115,000 = $271,500]

$85,000 5,200 4,500 7,600 8,000 20,000 30,000 6,100 6,300

Instructions Calculate (a) the cost of materials used in production and (b) total manufacturing costs. Ans: N/A, LO: 1, 2, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 170

(4 min.)

(a) Cost of materials used in production: $5,200 + $85,000 – $4,500 = $85,700 (b) Total manufacturing costs: $85,700 + $20,000 + $30,000 = $135,700

Job Order Costing 15A - 45 Ex. 171 A job cost sheet of Fugate Company is given below. Job Cost Sheet JOB NO. 172 FOR

James Company

Date

Direct Materials 1,330 1,120

5/10 12 15 22 24 27 31

Quantity

1,500

Date Completed

5/31

Direct Labor

Manufacturing Overhead

550 480

825 720

670

1,005

1,000 1,870

Cost of completed job: Direct materials Direct labor Manufacturing Overhead Total cost Unit cost

Instructions (a) Answer the following questions. (1) What is the predetermined manufacturing overhead rate? (2) What is the total cost and the unit cost of the completed job? (b)

Using the grid below, prepare the entry to record the completion of the job. Use (+) to indicate increases and (–) to indicate decreases. Manufacturing Costs

Date

Raw Materials Inventory

Factory Labor

Manufacturing Overhead

Work in Process Inventory

Finished Goods Inventory

Ans: N/A, LO: 1, 2, 3, 4, Bloom: AP, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

15A - 46

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 171

(8 min.)

(a) (1) The predetermined overhead rate is 150% of direct labor cost. For example, on May 15, the computation is $825 ÷ $550 = 150%. The same result is obtained on May 22 and 31. (2) The total cost is: Direct materials ..................................................... Direct labor ........................................................... Manufacturing overhead ........................................

$5,320 1,700 2,550 $9,570

The unit cost is $6.38 ($9,570 ÷ 1,500) (b) Manufacturing Costs Raw Materials Inventory

Date May 31

Factory Labor

Manufacturing Overhead

Work in Process Inventory –$9,570

Finished Goods Inventory +$9,570

Ex. 172 At May 31, 2022, the accounts of Kuhlmann Manufacturing Company show the following. 1. May 1 inventories—finished goods $12,600, work in process $14,700, and raw materials $8,200. 2. May 31 inventories—finished goods $8,500, work in process $22,900, and raw materials $7,100. 3. Additions to work in process inventory were: direct materials $77,400, direct labor $50,000, and manufacturing overhead applied $45,000. 4. Sales totaled $225,000. Instructions (a) Prepare a condensed cost of goods manufactured schedule. (b) Prepare an income statement for May through gross profit. Ans: N/A, LO: 1, 4, 5, Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Job Order Costing 15A - 47 Solution 172

(10 min.)

(a) KUHLMANN MANUFACTURING COMPANY Cost of Goods Manufactured Schedule For the Month Ended May 31, 2022 Work in process inventory, May 1 .............................. Direct materials used ................................................. $77,400 Direct labor ................................................................ 50,000 Manufacturing overhead applied ................................ 45,000 Total manufacturing costs .................................. Total cost of work in process ...................................... Less: Work in process inventory, May 31 ................... Cost of goods manufactured ...................................... (b) KUHLMANN MANUFACTURING COMPANY Income Statement (Partial) For the Month Ended May 31, 2022

$ 14,700

Sales............................................................................ Cost of goods sold Finished goods, May 1 .......................................... Cost of Goods manufactured................................. Cost of goods available for sale............................. Finished goods, May 31 ........................................ Cost of goods sold ..................................... Gross profit .................................................................

$225,000

172,400 187,100 22,900 $164,200

$ 12,600 164,200 176,800 8,500 168,300 $ 56,700

15A - 48

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ex. 173 Watson Manufacturing Company employs a job order cost system and keeps perpetual inventory records. The following transactions occurred in the first month of operations: 1. Direct materials requisitioned during the month: Job 101 $20,000 Job 102 16,000 Job 103 24,000 $60,000 2. Direct labor incurred and charged to jobs during the month was: Job 101 $32,000 Job 102 28,000 Job 103 20,000 $80,000 3. Manufacturing overhead was applied to jobs worked on using a predetermined overhead rate based on 75% of direct labor costs. 4. Actual manufacturing overhead costs incurred during the month totaled $66,000. 5. Job 101 consisting of 1,000 units and Job 103 consisting of 200 units were completed during the month. Instructions (a) Using the grid below, record the above transactions and determine the ending balance for Work in Process Inventory. Use (+) to indicate increases and (–) to indicate decreases. (b) Address the following: 1. How much manufacturing overhead was applied to Job 103 during the month? 2. Compute the unit cost of Jobs 101 and 103. 3. Prove the balance in Work in Process Inventory at the end of the month. 4. Determine if manufacturing overhead was under- or overapplied during the month. How much? Manufacturing Costs Raw Materials Inventory

Factory Labor

Manufacturing Overhead

Work in Process Inventory

Finished Goods Inventory

Cost of Goods Sold

Ans: N/A, LO: 1, 2, 3, 4, 5, Bloom: AP, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Job Order Costing 15A - 49 Solution 173 (15–20 min.) (a) Manufacturing Costs Raw Materials Inventory 1. –$60,000 2. 3. 4. *5. Ending balance

Factory Labor –$80,000

Work in Finished Manufacturing Process Goods Overhead Inventory Inventory +$60,000 +80,000 –$60,000 +60,000 +66,000 –135,000 +$135,000 $65,000

Cost of Goods Sold

*[($20,000 + $32,000 + ($32,000 x 75%)) + ($24,000 + $20,000 + ($20,000 x 75%)) = $135,000]

(b) 1. $15,000 ($20,000 × 75%). 2. Unit cost: Job 101, $76; Job 103, $295. Direct materials Direct labor Overhead applied Total cost Units Unit cost

Job 101 $20,000 32,000 24,000 $76,000 ÷ 1,000 $76

Job 103 $24,000 20,000 15,000 $59,000 ÷ 200 $295

3. Work in Process Inventory is $65,000 and consists of work performed on Job 102. Job 102 Direct materials $16,000 Direct labor 28,000 Overhead applied 21,000 Total cost $65,000 4. Manufacturing overhead costs were underapplied by $6,000 during the month. Actual manufacturing overhead $66,000 Manufacturing overhead applied 60,000 Underapplied overhead $ 6,000 Ex. 174 Graham Manufacturing is a small manufacturer that uses machine hours as its activity base for assigned overhead costs to jobs. The company estimated the following amounts for 2022 for the company and had actual results for Job 62: Company Job 62 Direct materials $60,000 $4,500 Direct labor $25,000 $2,500 Manufacturing overhead costs $72,000 Machine hours 90,000 1,350 During 2022, the actual machine hours totaled 95,000, and actual overhead costs were $71,000. .

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

15A - 50 Ex. 174

(Cont.)

Instructions (a) Compute the predetermined overhead rate. (b) Compute the total manufacturing costs for Job 62. (c) How much overhead is over or underapplied for the year for the company? Compute the amount and specify whether it is over- or underapplied. (d) Compute the gross profit If Graham Manufacturing sells Job 62 for $14,000. Ans: N/A, LO: 1,2,5, Bloom: AP, Difficulty: Moderate, Min: 7, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 174

(7–9 min.)

(a) $72,000  90,000 = $0.80 per machine hour (b) $4,500 + $2,500 + ($0.80 × 1,350) = $8,080 (c) Actual – Applied = Over/Underapplied $71,000 – ($0.80 × 95,000) = $5,000 overapplied (d) $14,000 – $8,080 (from (b) above) = $5,920 Ex. 175 The following inventory information is available for Ricci Manufacturing Corporation for the year ended December 31, 2022: Beginning Ending Inventories: Raw materials $17,000 $19,000 Work in process 9,000 14,000 Finished goods 11,000 8,000 Total $37,000 $41,000 The following transactions occurred during 2022: 1. Purchased raw materials, $75,000. 2. Incurred factory labor, $80,000 (all direct labor). 3. Incurred the following overhead costs during the year: utilities $6,800, depreciation on manufacturing machinery $8,000, Manufacturing machinery repairs $9,200, factory insurance $9,000. 4. Assigned $80,000 of factory labor to jobs. 5. Applied $36,000 of manufacturing overhead to jobs. Instructions (a) Using the grid below, enter the beginning balances, record the above transactions, and then enter the ending balances. Use (+) to indicate increases and (–) to indicate decreases. (b) From an analysis of the accounts, compute the following: 1. Raw materials used. 2. Completed jobs transferred to finished goods. 3. Cost of goods sold. 4. Under- or overapplied overhead.

Job Order Costing 15A - 51 Ex. 175 (Continued) Manufacturing Costs Raw Materials Inventory

Factory Labor

Manufacturing Overhead

Work in Process Inventory

Finished Goods Inventory

Cost of Goods Sold

Ans: N/A, LO: 1, 2, 3, 4, 5, Bloom: AP, Difficulty: Moderate, Min: 16, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 175

(16–22 min.)

(a) Manufacturing Costs Raw Work in Finished Materials Factory Manufacturing Process Goods Inventory Labor Overhead Inventory Inventory $17,000 $9,000 $11,000 +75,000 +$80,000 +$33,000 -80,000 +80,000 -36,000 +36,000

Beginning balances 1. 2. *3. 4. 5.

Cost of Goods Sold

(b) 1. Raw materials used = $17,000 + $75,000 – $19,000 = $73,000. 2. Completed jobs transferred to finished goods = $9,000 + $73,000 + ($80,000 + $36,000) – $14,000 = $184,000. 3. Cost of goods sold = $11,000 + $184,000 – $8,000 = $187,000. 4. Overhead overapplied = $3,000 (negative balance in Manufacturing Overhead). Ex. 176 Bergman Company allocates manufacturing overhead at $10 per direct labor hour. Job A890 required 3 pounds of direct materials at a cost of $25 per pound. Employees worked 15 hours to complete the job. Employees earn $20 per hour. Instructions Compute the total cost of Job 890. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

15A - 52

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 176

(5 min.)

Direct materials (3 pounds × $25) Direct labor (15 hours × $20) Manufacturing overhead (15 hours × $10) Total job cost of Job A890

$ 75 300 150 $525

Ex. 177 Job cost sheets for Howard Manufacturing are as follows: Job No 210 Date July 1 8 10 15 25

Quantity

Direct Materials 9,000 8,500

Direct Labor 8,000

Manufacturing Overhead 12,000

10,000 5,500 20,000

Job No 211 Date July 1 10 15 20 27

1,500

Quantity

Direct Materials 5,000 9,000

Direct Labor 6,000

1,200

Manufacturing Overhead 9,000

8,000 7,000 12,000

Instructions (a) Answer the following questions. 1. What was the balance in Work in Process Inventory on July 1 if these were the only unfinished jobs? 2. What was the predetermined overhead rate in June if overhead was applied on the basis of direct labor cost? 3. If July is the start of a new fiscal year and the overhead rate is 30% higher than in the preceding year, how much overhead should be applied to Job 210 in July? 4. Assuming Job 210 is complete, what is the total and unit cost of the job? 5. Assuming Job 211 is the only unfinished job at July 31, what is the balance in Work in Process Inventory on this date? (b) Using the grid below, record the summary transactions for the assignment of costs to the jobs in July. Use (+) to indicate increases and (–) to indicate decreases. (Note: Make one entry in total for each manufacturing cost element.)

Job Order Costing 15A - 53 Ex. 177 (Continued) Manufacturing Costs Raw Materials Inventory

Factory Labor

Manufacturing Overhead

Work in Process Inventory

Ans: N/A, LO: 2, 3, 4, Bloom: AN, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 177

(15–20 min.)

(a) 1. Job 210 Job 211

$9,000 + $8,000 + $12,000 $5,000 + $6,000 + $9,000

$29,000 20,000 $49,000

$ 23,000 38,000 66,000 $127,000

Unit cost ($127,000 ÷ 1,500)

$ 84.67

5. Direct materials Direct labor Manufacturing overhead ($9,000 + $36,000) Total cost of work in process

$21,000 26,000 45,000 $92,000

(b) Manufacturing Costs Raw Materials Inventory *Direct materials –$30,000 **Direct labor ***Applied overhead *[($8,500 + $5,500) + ($9,000 + $7,000) = $30,000] **[($10,000 + $20,000) + ($8,000 + $12,000) = $50,000] ***($50,000 x 180% = $90,000)

Factory Labor

Manufacturing Overhead

–$50,000 –$90,000

Work in Process Inventory +$30,000 +50,000 +90,000

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ex. 178 Garner Company begins operations on July 1, 2022. Information from job cost sheets shows the following: Manufacturing Costs Assigned Job No. July August September 100 $12,000 $8,800 101 10,800 9,700 $12,000 102 5,000 103 11,800 6,000 104 5,800 7,000 Job 102 was completed in July. Job 100 was completed in August, and Jobs 101 and 103 were completed in September. Each job was sold for 60% above its cost in the month following completion. Instructions (a) Compute the balance in Work in Process Inventory at the end of July. (b) Compute the balance in Finished Goods Inventory at the end of September. (c) Compute the gross profit for August. Ans: N/A, LO: 2, 4, Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 178 (a)

(b)

(c)

(10–13 min.)

Work in Process Inventory July Job 100 Job 101 Balance, July 31

$12,000 10,800 $22,800

Finished Goods Inventory Job 101 Job 103 Balance, Sept. 30

$32,500 17,800 $50,300

Gross Profit Month Job Number August 102

Sales $8,000

COGS $5,000

Gross Profit $3,000

Ex. 179 The accounting records of Roland Manufacturing Company include the following information: Dec. 31 Jan. 1 Work in process inventory $ 20,000 $ 50,000 Finished goods inventory 120,000 150,000 Direct materials used 350,000 Direct labor 160,000

Manufacturing overhead is applied at a rate of 150% of direct labor cost.

Job Order Costing 15A - 55 Ex. 179

(Cont.)

Instructions Answer the following questions: 1. What is the total of the additions to Work in Process Inventory during the year? 2. What is the amount transferred to Finished Goods Inventory during the year? 3. What is the cost of goods sold? Ans: N/A, LO: 2, 4, Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 179

(10–14 min.)

1. Direct Materials Direct Labor Manufacturing Overhead Applied ($160,000 × 150%) Total additions to Work in Process Inventory

$ 350,000 160,000 240,000 $750,000

2. Beginning balance, Work in Process Inventory Total additions to Work in Process Inventory Less: Ending balance, Work in Process Inventory Transferred to Finished Goods Inventory

$ 50,000 750,000 20,000 $780,000

3. Beginning balance, Finished Goods Inventory Transferred from Work in Process Inventory Less: Ending balance, Finished Goods Inventory Cost of Goods Sold

$150,000 780,000 120,000 $810,000

Direct materials Auditor labor costs Auditor hours

Preston $600 $6,600 88

Lopez $300 $3,700 45

Overhead costs are applied to jobs on the basis of auditor hours, and the predetermined overhead rate is $50 per auditor hour. The Rondelli job is the only incomplete job at the end of November. Actual overhead for the month was $10,500. Instructions (a) Determine the cost of each job. (b) Indicate the balance of the Work in Process Inventory account at the end of November. (c) Calculate the ending balance of the Operating Overhead account for November. Ans: N/A, LO: 2, 4, 5, Bloom: AP, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

15A - 56

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 180

(8 min.)

(a)

Rondelli $ 900 5,900 3,300 $10,100

Direct materials Auditor labor costs Applied overhead Total cost

Preston $ 600 6,600 4,400 $11,600

Lopez $ 300 3,700 2,250 $6,250

(b) The Rondelli job is the only incomplete job, with a cost of $10,100 which is equal to the ending balance in Work in Process Inventory. (c)

Actual overhead Applied overhead Balance

$10,500 9,950 $ 550 (Underapplied)

Ex. 181 Gallagher Company applies manufacturing overhead to jobs on the basis of machine hours used. Overhead costs are estimated to total $425,000 for the year and machine usage is estimated at 125,000 hours. For the current year, $450,000 of manufacturing overhead costs are incurred and 130,000 hours are used. Instructions (a) Compute the predetermined manufacturing overhead rate for the year. (b) What is the amount of under- or overapplied overhead at December 31? (c) Assuming the under- or overapplied overhead for the year is not allocated to inventory accounts, indicate what accounts will be affected and how they will be affected (increase or decrease). Ans: N/A, LO: 3, 5, Bloom: AP, Difficulty: Moderate, Min: 6, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 181

(6 min.)

(a)

$3.40 per machine hour ($425,000 ÷ 125,000).

(b)

($450,000) – ($3.40  130,000 Machine Hours) $450,000 – $442,000 = $8,000 underapplied

(c)

Cost of Goods Sold will be increased and Manufacturing Overhead will be decreased.

$880,000 $910,000 40,000 41,000

The company uses the account Operating Overhead in place of Manufacturing Overhead. .

Job Order Costing 15A - 57 Ex. 182

(Cont.)

Instructions (a) Compute the predetermined overhead rate. (b) Indicate the accounts that will be affected by the application of overhead for the year, the amount, and the direction (increase or decrease). (c) Determine whether operating overhead was under- or overapplied and by what amount. Ans: N/A, LO: 3, 5, Bloom: AP, Difficulty: Moderate, Min: 6, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 182

(6 min.)

(a)

Predetermined overhead rate = Budgeted overhead ÷ Budgeted decorator hours = $880,000 ÷ 40,000 decorator hours = $22 per decorator hour

(b)

Applied Overhead Work in Process Inventory is increased $902,000 (41,000 hrs. x $22) and Operating Overhead is decreased by $902,000.

(c)

Actual overhead Applied overhead Balance

$910,000 902,000 $ 8,000

underapplied

$80,000 $75,000 4,800 5,000

Instructions Compute (a) the predetermined overhead rate and (b) the amount of applied manufacturing overhead. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 183

(4 min.)

(a)

Predetermined overhead rate: $75,000  5,000 = $15 per direct labor hour

(b)

Applied manufacturing overhead: 4,800 × $15 = $72,000

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ex. 184 Landis Company uses a job order cost system in each of its two manufacturing departments. Manufacturing overhead is applied to jobs on the basis of direct labor cost in Department A and on the basis of machine hours in Department B. In establishing the predetermined overhead rates for 2022, the following estimates were made for the year: Department A B Manufacturing overhead $2,100,000 $1,400,000 Direct labor cost 1,500,000 1,200,000 Direct labor hours 100,000 100,000 Machine hours 200,000 400,000 During January, the job cost sheet showed the following costs and production data: Department Direct materials used Direct labor cost incurred Manufacturing overhead incurred Direct labor hours incurred Machine hours incurred

A $195,000 100,000 130,000 8,000 16,000

B $128,000 110,000 135,000 8,400 34,000

Instructions (a) Compute the predetermined overhead rate for each department. (b) Compute the total manufacturing cost assigned to jobs in January in each department. (c) Compute the balance in the Manufacturing Overhead account at the end of January and indicate whether overhead is over- or underapplied. Ans: N/A, LO: 3, 5, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 184

(15–20 min.)

$195,000 100,000 140,000 $435,000

Department B: Direct materials Direct labor cost Manufacturing overhead applied (34,000 hrs. × $3.50) Total manufacturing costs (c)

Dept. A actual overhead Dept. B actual overhead Dept. A applied overhead Dept. B applied overhead .

$128,000 110,000 119,000 $357,000 $130,000 135,000 (140,000) (119,000)

Job Order Costing 15A - 59 Balance (underapplied)

6,000

15A - 60

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ex. 185 Edwards Company applies manufacturing overhead to jobs on the basis of machine hours used. Manufacturing overhead costs are estimated to total $1,800,000 for the current year and machine usage is estimated at 200,000 hours. In January, $186,000 of overhead costs are incurred and 22,000 machine hours are used. For the remainder of the year, $1,940,000 of additional overhead costs are incurred and 214,000 additional machine hours are worked. Instructions (a) Compute the manufacturing overhead rate for the year. (b) What is the amount of over- or underapplied overhead at January 31? (c) What is the amount of over- or underapplied overhead at December 31? Ans: N/A, LO: 3, 5, Bloom: AP, Difficulty: Moderate, Min: 11, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 185

(11–14 min.)

(a)

$9 per machine hour ($1,800,000 ÷ 200,000)

(b)

Incurred Applied ($9 × 22,000) Overapplied overhead

(c)

Incurred ($186,000 + $1,940,000) Applied ($9 × 236,000) Underapplied overhead

$186,000 198,000 $ 12,000 $2,126,000 2,124,000 $ 2,000

Ex. 186 Klinger Company estimates that annual manufacturing overhead costs will be $4,800,000 for 2022. The actual overhead costs at the end of 2022 are $4,980,000. Activity base information for 2022 follows: Activity Base Estimated Actual Direct labor cost $3,000,000 $3,150,000 Direct labor hours 200,000 212,000 Machine hours 150,000 152,000 Instructions (a) Compute the predetermined overhead rate for each activity base. (b) Compute the amount of overhead applied in 2022 for each activity base. (c) Compute the amount of under- or overapplied overhead for 2022 for each activity base. Ans: N/A, LO: 3, 5, Bloom: AP, Difficulty: Moderate, Min: 12, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Job Order Costing 15A - 61 Solution 186

(12–16 min.)

(c) Over- or Underapplied Overhead ($5,040,000 – $4,980,000 = $60,000 Overapplied) ($5,088,000 – $4,980,000 = $108,000 Overapplied)

Overhead applied per machine hour used: 152,000 × $32 = $4,864,000

($4,864,000 – $4,980,000 = $116,000 Underapplied)

Ex. 187 Jensen Manufacturing Company makes hair styling tools. In January 2022, Jensen incurs manufacturing costs of $13,000,000 for direct materials, direct labor, and manufacturing overhead. 20% of the total costs represents overhead applied. The overhead rate is $1 for every $2 of direct labor costs incurred. Inventory balances were: January 1 $300,000 600,000 400,000

Raw materials Work in process Finished goods

January 31 $500,000 400,000 200,000

At the end of January, there was $1,000 of overapplied overhead. Instructions (a) Determine the cost of raw materials purchased in January. (b) Prepare a cost of goods manufactured schedule for January 2022. (c) Compute cost of goods sold for January. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 187 (a)

(15–20 min.)

Overhead applied ($13,000,000 × 20%) Direct labor used ($2 × $2,600,000) Direct materials used ($13,000,000 – $7,800,000)

$2,600,000 5,200,000 5,200,000

Ending raw materials inventory Direct materials used

$ 500,000 5,200,000 5,700,000 300,000 $5,400,000

Less: Beginning raw materials inventory Raw materials purchases .

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

(b)

JENSEN MANUFACTURING COMPANY Cost of Goods Manufactured Schedule For the Month Ended January 31, 2022 ——————————————————————————————————————————— Work in process inventory, January 1 .............................. $ 600,000 Direct materials used ....................................................... $5,200,000 Direct labor ...................................................................... 5,200,000 Manufacturing overhead applied ...................................... 2,600,000 Total manufacturing costs .......................................... 13,000,000 Total cost of work in process ........................................... 13,600,000 Less: Work in process inventory, January 31.................. 400,000 Cost of goods manufactured ............................................ $ 13,200,000 (c)

Finished goods inventory, January 1 ...................................................... Cost of goods manufactured ................................................................... Cost of goods available for sale .............................................................. Less: Finished goods inventory, January 31 ........................................... Cost of goods sold .................................................................................

$ 400,000 13,200,000 13,600,000 200,000 $13,400,000

Ex. 188 The following information is available for Marks Company at December 31, 2022: 1. Inventory balances Finished Goods Work in Process Raw Materials

Beginning of Year $14,000 6,000 10,300

End of Year $10,000 12,000 6,500

2. Additions to Work in Process Inventory during the year were: Direct materials $90,000 Direct labor 60,000 Manufacturing overhead applied 75,000 3. Sales totaled $310,000 for the year. Instructions (a) Prepare a condensed cost of goods manufactured schedule. (b) Prepare an income statement for the year through gross profit. Ans: N/A, LO: 5 Bloom: AP, Difficulty: Moderate, Min: 14, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Job Order Costing 15A - 63 Solution 188

(14–18 min.)

(a)

MARKS COMPANY Cost of Goods Manufactured Schedule For the Year Ended December 31, 2022 Work in process inventory, January 1 Direct materials used Direct labor Manufacturing overhead applied Total manufacturing costs Total cost of work in process Less: Work in process inventory, December 31 Cost of goods manufactured

(b)

6,000

$90,000 60,000 75,000 225,000 231,000 12,000 $219,000

MARKS COMPANY (Partial) Income Statement For the Year Ended December 31, 2022 Sales Cost of Goods Sold Finished Goods Inventory, January 1 Cost of goods manufactured Cost of goods available for sale Less: Finished Goods Inventory, December 31 Cost of goods sold Gross profit

$310,000 $ 14,000 219,000 233,000 10,000 223,000 $ 87,000

COMPLETION STATEMENTS 189. Cost accounting involves the measuring, recording, and reporting of costs. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

190. There are two basic types of cost accounting systems: (1) and (2) system.

system,

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

191. A cost system is appropriate when similar products are continuously produced, whereas a cost system would be more appropriate if the product is custom-made. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

192. In a job order cost system, raw materials purchased are added to the account. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

15A - 64

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

193. The Raw Materials is increased for the cost of

and

labor.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

194. If $20,000 direct materials are requisitioned for a job and $7,000 of indirect materials are requisitioned for general use, the increase to Work in Process Inventory should be for $ . Ans: N/A, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

195. The cost of producing a particular job under a job cost system is accumulated on a record called a . Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

196. Manufacturing overhead is applied to jobs by means of a

rate.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

197. If actual manufacturing overhead was greater than the amount of manufacturing overhead applied to jobs, the Manufacturing Overhead account will have a balance and overhead is said to be . Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

198. At the end of the year, any balance in the Manufacturing Overhead account should be eliminated as an adjustment to . Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Answers to Completion Statements 189. 190. 191. 192. 193. 194. 195. 196. 197. 198.

product and service job order cost, process cost process, job order Raw Materials Inventory direct; indirect 20,000 job cost sheet predetermined overhead positive, underapplied Cost of Goods Sold

Job Order Costing 15A - 65

MATCHING 199.

Match the items in the two columns below by entering the appropriate code letter in the space provided. A. B. C. D. E.

Cost accounting Materials requisition slip Time ticket Cost accounting system Job order cost system

F. G. H. I. J.

Process cost system Job cost sheets Predetermined overhead rate Overapplied overhead Underapplied overhead

1. Used to apply manufacturing overhead to jobs. 2. Measures, records, and reports product costs. 3. Actual manufacturing overhead costs are greater than overhead applied to production. 4. Manufacturing cost accounts are fully integrated into the general ledger. 5. Source document which authorizes issuance of raw materials to production. 6. Appropriate when products have distinguishing and heterogeneous characteristics. 7. Constitutes a subsidiary ledger for Work in Process Inventory. 8. Indicates the number of hours that employees work and the account to be charged. 9. Appropriate when products are similar and are produced continuously. 10. Actual manufacturing overhead costs are less than overhead applied to production. Ans: N/A, LO: 1-5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Answers to Matching 1. 2. 3. 4. 5.

H A J D B

6. 7. 8. 9. 10.

E G C F I

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

SHORT-ANSWER ESSAY QUESTIONS S-A E 200 (a) Distinguish between the two types of cost accounting systems. (b) Can a company use both types of cost accounting systems? Ans: N/A, LO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communications, IMA: Cost Management

Solution 200 (a)

(b)

The two principal types of cost accounting systems are: (1) job order costing and (2) process costing. Under a job order cost system, costs are assigned to each job or batch of goods; at all times each job or batch of goods can be separately identified. A job order cost system measures costs for each completed job, rather than for set time periods. Under a process cost system, product-related costs are accumulated by or assigned to departments or processes for a set period of time. Job order costing lends itself to specific, special-order manufacturing or servicing while process costing is better suited to similar, large-volume products and continuous process manufacturing. A company may use both types of systems. For example, General Motors uses process costing for standard model cars and job order costing for custom-made vehicles.

S-A E 201 A job order cost accounting system is fully integrated into the general ledger of a company. Identify the major general ledger accounts used in a job order cost system. Explain how manufacturing costs flow through these accounts so that inventories may be costed and income determined when goods are sold. Ans: N/A, LO: 1, Bloom: S, Difficulty: Moderate, Min: 5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communications, IMA: Cost Management

Solution 201 When a job order cost accounting system is fully integrated into the general ledger of a company, the major general ledger accounts used are Raw Materials Inventory, Factory Labor, Manufacturing Overhead, Work in Process Inventory, and Finished Goods Inventory. As manufacturing costs are incurred, they are added to the Raw Materials Inventory, Factory Labor, and Manufacturing Overhead accounts. As materials are used, labor is assigned, or overhead is applied, the costs are deductions from these accounts and additions to Work in Process Inventory. When jobs are finished, the costs flow from the Work in Process Inventory account to the Finished Goods Inventory account. When jobs are sold, the costs are transferred to Cost of Goods Sold from Finished Goods Inventory. S-A E 202 Manufacturing overhead items are indirect product costs that cannot be traced to individual products. Explain how manufacturing overhead costs are accumulated and how they are assigned to products in a job order cost system. Ans: N/A, LO: 3, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Communication, IMA: Cost Management

Job Order Costing 15A - 67 Solution 202 As manufacturing overhead costs are incurred, they are added to the Manufacturing Overhead account. As jobs move through the factory, manufacturing overhead costs are applied to specific jobs using the predetermined overhead rate. This rate is computed prior to the beginning of the year by dividing estimated annual overhead costs by estimated annual operating activity (generally expressed as direct labor hours, direct labor cost, or machine hours). The overhead is applied by determining how much activity was expended on a particular job (for example, direct labor hours), and applying the rate to that activity. S-A E 203 Mike Hilyer is confused about under- and overapplied manufacturing overhead. Define the terms for Mike and indicate the balance in the manufacturing overhead account applicable to each term. Ans: N/A, LO: 3, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communications, IMA: Cost Management

Solution 203 Underapplied overhead means that the overhead assigned to production is less than the overhead incurred. Overapplied overhead means than the overhead assigned to production is greater than the overhead incurred. The Manufacturing Overhead account will have a positive balance when overhead is underapplied and a negative balance when overhead is overapplied. S-A E 204

(Ethics)

People Carrier Systems, Inc. (PCS) modifies vans that seat 15–20 people by adding additional safety features or wheelchair ramps. Most of its customers are cities and counties, who use the vans to transport school children, the elderly, or the handicapped. The company has specialized in a no-frills approach, emphasizing safety, high quality, and low cost. The company's president was quoted as saying, "Let the other guys make a van pretty. We get people where they need to go— faster, better, and cheaper than anybody else." The company obtains jobs by being the lowest bidder in a sealed bidding process. Recently, the company was solicited by a top-10 college to submit a bid for a van to be used by its athletic team. Some specialized items were required, such as the school's logo on the outside of the van, and the vinyl seats had to be covered in school colors. The company submitted a bid, and was very surprised to obtain it. When the job was being prepared, the job manager pointed out that several extra costs could result in this job showing a loss. The boss, an ardent supporter of sports in general and this team in particular, told the manager to just record the standard labor and overhead cost for this job. He says that they could use the predetermined rate for specialized jobs, and increase the overhead application rate (used in submitting bids) by 5% for future routine jobs. "After all," he says, "nobody else comes close to our price anyway. This could start a whole new line of business for us." Required: 1. Who are the stakeholders in the decision to increase overhead for routine jobs? 2. Is the decision to subsidize special jobs by increasing the overhead rate on routine jobs ethical? Briefly explain. Ans: N/A, LO: 2, Bloom: S, Difficulty: Moderate, Min: 5, AACSB: Ethics, Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Ethical Conduct, Communication, IMA: Cost Management, Business Applications

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

15A - 68 Solution 204

1. The stakeholders include:  The employees and managers of PCS  Customers who purchase standard vans  Customers who purchase sports vans  Shareholders of PCS 2. The decision could be considered ethical, if the company clearly understands that it is allowing the customers of the standard vans to cover some of the costs of the specialty ones. This might not be a bad decision, especially if the specialty business is only a small fraction of the total business. The company might be compromising its own best interests, however, if it arbitrarily damages relationships with existing customers in order to gain others. It seems undeniable that established customers are preferable to untested ones. While probably ethical, the decision may not be a good one. S-A E 205

(Communication)

Bridal Treasures, Inc. makes custom wedding gowns. The customer selects a pattern for the basic gown, and then selects fabric and trim. Once the design and the materials have been agreed upon, a Statement of Estimated Cost is signed by the company and by the customer. Overhead is applied based on the number of days a gown is in process. Usually, five gowns are being worked on at a time. Therefore, each gown is charged 1/5 of a daily estimated overhead amount. Customer Mary Landon's wedding dress took four days to complete. However, after the first three days had elapsed, Hanna Hunt, a movie personality, suddenly decided to get married, and ordered a very lavish gown. All other work was suspended, and the work on Ms. Landon's dress was delayed six days. The final day of its construction was on the tenth day after it had been begun. Required: You are the accounting manager for Bridal Treasures. Write a memo to the billing department. Instruct them as to the appropriate number of overhead days to charge to Ms. Landon's account. Ans: N/A, LO: 3, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication, IMA: Cost Management, Reporting

Job Order Costing 15A - 69 Solution 205 TO:

Billing Department

FROM: M. Long, Accounting Manager RE:

Overhead billing, Landon account

CHAPTER 16 PROCESS COSTING CHAPTER LEARNING OBJECTIVES 1. Discuss the uses of a process cost system and how it compares to a job order cost system. Companies that mass-produce similar products in a continuous fashion use process cost systems. Once production begins, it continues until the finished product emerges. Each unit of finished product is indistinguishable from every other unit. Job order cost systems are similar to process cost systems in three ways: (1) Both systems track the same cost components—direct materials, direct labor, and manufacturing overhead; (2) Both accumulate cost in the same accounts—Raw Materials Inventory, Factory Labor, and Manufacturing Overhead; and, (3) Both assign accumulated costs to the same accounts— Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold. However, the methods used to assign costs differ significantly. There are four main differences between the two cost systems: (1) A process cost system uses separate work in process inventory accounts for each department or manufacturing process, rather than only one work in process inventory account used in a job order cost system; (2) A process cost system summarizes costs in a production cost report for each department. A job order cost system charges costs to individual jobs and summarizes them in a job cost sheet; (3) Costs are totaled at the end of a time period in a process cost system, but at the completion of a job in a job order cost system; and, (4) A process cost system calculates unit cost as Total manufacturing costs for the period ÷ Equivalent units of production for the period. A job order cost system calculates unit cost as Total cost per job ÷ Units produced. 2. Explain the flow of costs in a process cost system and the journal entries to assign manufacturing costs. A process cost system assigns manufacturing costs for raw materials, labor, and overhead to work in process inventory accounts for various departments or manufacturing processes. It transfers the costs of partially completed units from one department to another as those units move through the manufacturing process. The system transfers the costs of completed work to Finished Goods Inventory. Finally, when inventory is sold, the system transfers the costs to Cost of Goods Sold. Entries to assign the costs of direct materials, direct labor, and manufacturing overhead consist of credits to Raw Materials Inventory, Factory Labor, and Manufacturing Overhead, and debits to Work in Process Inventory for each department. Entries to record the cost of good transferred to another department are a credit to Work in Process Inventory for the department whose work is finished and a debit to the Work in Process Inventory for the department to which the goods are transferred. The entry to record units completed and transferred to the warehouse is a credit to Work in Process Inventory for the department whose work is finished and a debit to Finished Goods Inventory. The entry to record the sale of goods is a credit to Finished Goods Inventory and a debit to Cost of Goods Sold. 3. Compute equivalent units of production. Equivalent units of production measure work done during a period, expressed in fully completed units. Companies use this measure to determine the cost per unit of completed product. Equivalent units are the sum of units completed and transferred out plus equivalent units of ending work in process inventory. .

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

4. Complete the four steps to prepare a production cost report. The four steps to complete a production cost report are as follows. (1) Compute the physical unit flow—that is, the total units to be accounted for; (2) Compute the equivalent units of production; (3) Compute the unit production costs per equivalent units of production; and, (4) Prepare a cost reconciliation schedule, which shows that the total costs accounted for equal the total costs to be accounted for. The production cost report contains both quantity and cost data for a production department. There are four sections in the report: (1) number of physical units, (2) equivalent units determination, (3) unit costs, and (4) cost reconciliation schedule. a

5. Compute equivalent units using the FIFO method. Equivalent units under the FIFO method are the sum of the work performed to (1) finish the units of beginning work in process inventory, if any; (2) complete the units started into production during the period; and, (3) start, but only partially complete, the units in ending work in process inventory.

TRUE-FALSE STATEMENTS 1.

Process cost accounting focuses on the process involved in mass-producing products that are very similar in nature.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Process cost systems are used to apply costs to a specific job, such as the manufacturing of a specialized machine.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

A company that produces motion pictures would likely use a process cost system.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

In a process cost system, costs are tracked through a series of connected manufacturing processes or departments, rather than by individual jobs.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

In a process cost system, total costs are determined at the end of a month or year.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Separate work in process inventory accounts are maintained for each production department or manufacturing process in a process cost system.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: FSA

In a process cost system, direct materials, direct labor and manufacturing overhead are only added in the first production department.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Process Costing 8.

16 - 3

The assignment of the three manufacturing cost components to Work in Process Inventory in a process cost system is the same as in a job order cost system.

Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Fewer materials requisitions are generally required in a process cost system than in a job order cost system.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

10.

In a process cost system, labor costs incurred may be captured on time tickets.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

11.

A primary driver of overhead costs in continuous manufacturing operations is machine time used.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

12.

Equivalent units of production are used to determine the cost per unit of completed products.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

13.

Equivalent units of production measure the work done during a period, expressed in fully completed units.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

14.

Equivalent units of production is the sum of units completed and transferred out plus equivalent units of beginning work in process inventory.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

15.

The weighted-average method of computing equivalent units is a widely used method in practice.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

16.

There are no units in process at the beginning of the period, 1,500 units in process at the end of the period that are 40% complete, and 15,000 units completed and transferred out during the period. Based on this information, there were 14,400 equivalent units of production during the period.

Ans: F, LO: 3, Bloom: AP, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

17.

The first step performed in preparing a production cost report is computing the equivalent units of production.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

18.

Equivalent units of production must be calculated before the unit production costs can be computed.

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

16 - 4

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

19.

The physical units in a department are another name for the equivalent units of production.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Process Costing 20.

16 - 5

Unit material cost is computed by taking total material costs charged added to production for the period and dividing by the physical units in the process during the period.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

21.

When equivalent units of production are different for materials and conversion costs, unit costs are computed for materials, conversion, and total manufacturing.

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

22.

The total manufacturing cost per unit is used in costing the units completed and transferred during the period.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

23.

A production cost report is an internal document for management that shows production quantity and cost data for a particular job.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

24.

Production cost reports provide a basis for evaluating the productivity of a department.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

25.

Companies often use a combination of a process cost and a job order cost system, called operations costing.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

26.

The FIFO method of computing equivalent units is easier to understand and use than the weighted-average method.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Technology and Tools, AICPA PC: None, IMA: Cost Management a

27. The FIFO method of computing equivalent units is conceptually superior to the weightedaverage method. Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Technology and Tools, AICPA PC: None, IMA: Cost Management a

28.

When comparing the FIFO with the weighted-average method of computing equivalent units, the FIFO method provides more current cost information.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Technology and Tools, AICPA PC: None, IMA: Cost Management a

29.

There are no units in ending work in process inventory at the end of the period under the FIFO method of computing equivalent units.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Technology and Tools, AICPA PC: None, IMA: Cost Management a

30.

Companies using the weighted-average method of computing equivalent units do not complete units left over from the previous accounting periods, they start new units.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Technology and Tools, AICPA PC: None, IMA: Cost Management

31.

In continuous process manufacturing, generally once the production begins, it continues until the finished product emerges. .

16 - 6

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Technology and Tools, AICPA PC: None, IMA: Cost Management

32.

One similarity of process cost accounting with job order cost accounting is that both determine total manufacturing costs after each job.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Technology and Tools, AICPA PC: None, IMA: Cost Management

33.

The flow of costs in a process costing system requires that materials be added in one department, labor added in another department and manufacturing overhead in a third department.

Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

34.

When finished goods are sold, the entry to record the cost of goods sold is a debit to Finished Goods Inventory and a credit to Cost of Goods Sold.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: FSA

35.

When there is no beginning work in process inventory and materials are entered at the beginning of the process, equivalent units of materials are the same as the units started into production.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

36.

In order to compute the physical unit flow, a company must first compute unit production costs.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a

37.

Under the FIFO method, it is assumed that the beginning work in process is completed before new work is started.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

MULTIPLE CHOICE QUESTIONS 38.

A process cost accounting system is most appropriate when a. a variety of different products are produced, each one requiring different types of materials, labor, and overhead. b. the focus of attention is on a particular job or order. c. similar products are mass-produced. d. individual products are custom made to the specification of customers.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Applications

39.

A characteristic of products that are mass-produced in a continuous fashion is that a. the products are identical or very similar in nature. b. they are grouped in batches. c. they are produced at the time an order is received. d. their costs are accumulated on job cost sheets.

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Process Costing 40.

16 - 7

A process cost system would be used for all of the following products except a. ramen noodles. b. computer chips. c. music videos. d. energy drinks.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Applications

41.

In a process cost system, a. a Work in Process Inventory account is maintained for each product. b. a materials requisition must identify the job on which the materials will be used. c. a Work in Process Inventory account is maintained for each process. d. one Work in Process Inventory account is maintained for all the processes, similar to a job order cost system.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

42.

Differences between a job order cost system and a process cost system include all of the following except the a. documents used to track costs. b. point at which costs are totaled. c. unit cost computations. d. flow of costs.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Applications

43.

Which of these best reflects a distinguishing factor between a job order cost system and a process cost system? a. The detail at which costs are calculated b. The time period each covers c. The number of work in process inventory accounts d. The manufacturing cost components included

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Applications

44.

Which of the following is a true statement about process cost systems? a. In process cost systems, costs are accumulated but not assigned. b. A process cost system has one work in process inventory account for each process. c. In process cost systems, costs are summarized on job cost sheets. d. Unit costs are not computed in process cost systems.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Applications

45.

Which of the following is correct regarding the number of Work in Process Inventory accounts in job order and process cost systems? a. b. c. d.

Work in process inventory Work in process inventory Work in process inventory Work in process inventory

Job Order several one one several

Process one for each process one one for each process one

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Applications

16 - 8 46.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

In a process cost system, unit costs are determined using a a. numerator of costs of each job. b. denominator of equivalent units of production for the period. c. denominator of units produced for the job. d. denominator of units produced for the day.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

47.

In process cost accounting, manufacturing costs are summarized on a a. job order cost sheet. b. process order cost sheet. c. production cost report. d. manufacturing cost sheet.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

48.

Which of the following manufacturing cost components are incurred in a process cost system? a. Direct materials b. Direct labor c. Manufacturing overhead d. All of these

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

49.

In a process cost system, product costs are summarized a. on job cost sheets. b. on production cost reports. c. after each unit is produced. d. when the products are sold.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

50.

When manufacturing overhead costs are assigned to production in a process cost system, they are debited to a. the Finished Goods Inventory account. b. Cost of Goods Sold. c. a Manufacturing Overhead account. d. a Work in Process Inventory account.

Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: FSA

51.

A product requires processing in two departments, the Baking Department and then, the Packaging Department, before it is completed. Costs completed and transferred out of the Baking Department will be transferred to a. Finished Goods Inventory. b. Cost of Goods Sold. c. Work in Process Inventory—Packaging Department. d. Manufacturing Overhead.

Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: FSA

Process Costing

52.

16 - 9

Which of the following would not appear as a debit in the Work in Process Inventory account of a second department in a two-stage production process? a. Materials used b. Overhead applied c. Labor assigned d. Cost of products transferred out

Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: FSA

53.

Materials requisitions are: a. not used in process costing. b. generally used more frequently in process costing than job order costing. c. generally used less frequently in process costing than job order costing. d. used more frequently by latter stage production departments.

Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

54.

A primary driver of overhead costs in continuous manufacturing operations is a. direct labor dollars. b. direct labor hours. c. machine hours. d. machine maintenance dollars.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

55.

Price Company assigns overhead based on machine hours. The Milling Department logs 2,400 machine hours and Cutting Department shows 4,000 machine hours for the period. If the overhead rate is $5 per machine hour, the entry to assign overhead will show a a. debit to Manufacturing Overhead for $32,000. b. credit to Work in Process Inventory—Cutting Department for $20,000. c. debit to Work in Process Inventory – Milling Department for $20,000. d. credit to Manufacturing Overhead for $32,000.

Ans: D, LO: 2, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: FSA Solution: (2,400 hours x $5) + (4,000 hours x $5) = $32,000 [(Milling hours x Overhead rate) + (Cutting hours x Overhead rate) = Total overhead assigned]

56.

Barnes and Miller Manufacturing is trying to determine the equivalent units for conversion with 10,000 units of ending work in process inventory at 80% completion and 32,000 physical units. There was no beginning work in process inventory in the department. Conversion costs are incurred evenly throughout the entire production period. What are the equivalent units for conversion for the current period? a. 42,000 b. 40,000 c. 8,000 d. 30,000

Ans: D, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: FSA Solution: (10,000 units x 80%) + (32,000 – 10,000) = 30,000 [(Ending WIP units x % complete) + (Physical units – Ending WIP units) = Equivalent units for conversion cost]

16 - 10 57.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e 20,000 units in process that are 70% complete are referred to as a. 20,000 equivalent units of production. b. 8,000 equivalent units of production. c. 14,000 equivalent units of production. d. 6,000 equivalent units of production.

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Solution: 20,000 units x 70% = 14,000 (WIP units x % complete = Equivalent units)

58.

A process with no beginning work in process inventory completed and transferred out 85,000 units during a period and had 50,000 units in the ending work in process inventory that were 30% complete. The equivalent units of production for the period were a. 85,000 equivalent units. b. 135,000 equivalent units. c. 100,000 equivalent units. d. 70,000 equivalent units.

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: (50,000 units x 30%) + 85,000 = 100,000 [(Ending WIP units x % complete) + Units completed and transferred out = Equivalent units]

59.

A department adds materials to a process at the beginning of the process and incurs conversion costs uniformly throughout the process. For the month of January, there were no units in the beginning work in process inventory; 90,000 units were started into production in January; and there were 20,000 units that were 40% complete in the ending work in process inventory at the end of January. What were the equivalent units of production for materials for the month of January? a. 98,000 equivalent units b. 82,000 equivalent units c. 70,000 equivalent units d. 90,000 equivalent units

Ans: D, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Solution: (20,000 units x 100%) + ((90,000 – 20,000) x 100%) = 90,000 [(Ending WIP units x % complete) + ((Units started into production – Ending WIP units) x % complete) = Equivalent units]

60.

A department adds materials to a process at the beginning of the process and incurs conversion costs uniformly throughout the process. For the month of January, there were no units in the beginning work in process inventory; 90,000 units were started into production in January; and there were 20,000 units that were 40% complete in the ending work in process inventory at the end of January. What were the equivalent units of production for conversion costs for the month of January? a. 70,000 equivalent units b. 82,000 equivalent units c. 78,000 equivalent units d. 90,000 equivalent units

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Solution: (20,000 units x 40%) + ((90,000 – 20,000) x 100%) = 78,000 [(Ending WIP units x % complete) + ((Units started into production – Ending WIP units) x % complete) = Equivalent units]

Process Costing 61.

16 - 11

Equivalent units of production are calculated by a. multiplying the percentage of work done by the equivalent units of output. b. dividing physical units by the percentage of work done. c. multiplying the percentage of work done by the physical units. d. dividing equivalent units by the percentage of work done.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

62.

Minor Company had the following department data: Physical Units Work in process inventory, July 1 30,000 Completed and transferred out 165,000 Work in process inventory, July 31 45,000 Materials are added at the beginning of the process. What are the equivalent units of production for materials in July? a. 165,000 b. 180,000 c. 240,000 d. 210,000

Ans: D, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Solution: (45,000 units x 100%) + 165,000 = 210,000 [(Ending WIP units x % complete) + Units completed and transferred out = Equivalent units]

63.

Corsi Company had the following department data: Physical Units Work in process inventory, beginning -0Completed and transferred out 90,000 Work in process inventory, ending 7,000 Materials are added at the beginning of the process. What are the equivalent units of production for materials during the period? a. 90,000 b. 94,000 c. 97,000 d. 83,000

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Solution: (7,000 units x 100%) + 90,000 = 97,000 [(Ending WIP units x % complete) + Units completed and transferred out = Equivalent units]

16 - 12 64.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e Gantner Company had the following department information about physical units and percentage of completion: Physical Units Work in process inventory, May 1 (60% complete) 60,000 Completed and transferred out 180,000 Work in process inventory, May 31 (40% complete) 50,000 If materials are added at the beginning of the production process, what are the equivalent units of production for materials during May? a. 240,000 b. 230,000 c. 224,000 d. 200,000

Ans: B, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Solution: (50,000 units x 100%) + 180,000 = 230,000 [(Ending WIP units x % complete) + Units completed and transferred out = Equivalent units]

65.

It is necessary to calculate equivalent units of production in a department because a. a physical count of units is impossible. b. some units worked on in the department are not fully complete. c. the physical units in the department are always 100% complete. d. at times a department may use a job order cost system and then switch to a process cost system.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

66.

In the month of June, a department had 20,000 units in beginning work in process inventory that were 70% complete. During June, 90,000 units were transferred into production from another department. At the end of June there were 10,000 units in ending work in process inventory that were 40% complete as to conversion. Materials are added at the beginning of the process, while conversion costs are incurred uniformly throughout the process. How many units were transferred out in June? a. 90,000 units b. 80,000 units c. 100,000 units d. 110,000 units

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 20,000 + 90,000 – 10,000 = 100,000 (Beginning WIP units + Units transferred in – Ending WIP units = Units completed and transferred out)

67.

In the month of June, a department had 20,000 units in beginning work in process inventory that were 70% complete. During June, 90,000 units were transferred into production from another department. At the end of June there were 10,000 units in ending work in process inventory that were 40% complete as to conversion. Materials are added at the beginning of the process, while conversion costs are incurred uniformly throughout the process. The equivalent units of production for materials for June were a. 100,000 equivalent units. b. 110,000 equivalent units. c. 114,000 equivalent units. d. 90,000 equivalent units.

Ans: B, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Solution: 20,000 + 90,000 – 10,000 = 100,000; (10,000 units x 100%) + 100,000 = 110,000

Process Costing

16 - 13

[Beginning WIP units + Units transferred in – Ending WIP units = Units transferred out; (Ending WIP units x % complete) + Units completed and transferred out = Equivalent units]

68.

In the month of June, a department had 20,000 units in beginning work in process inventory that were 70% complete. During June, 90,000 units were transferred into production from another department. At the end of June, there were 10,000 units in ending work in process inventory that were 40% complete as to conversion. Materials are added at the beginning of the process, while conversion costs are incurred uniformly throughout the process. The equivalent units of production for conversion costs for June were a. 90,000 equivalent units. b. 104,000 equivalent units. c. 100,000 equivalent units. d. 110,000 equivalent units.

Ans: B, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 20,000 + 90,000 – 10,000 = 100,000; (10,000 units x 40%) + 100,000 = 104,000 [Beginning WIP units + Units transferred in – Ending WIP units = Units transferred out; (Ending WIP units x % complete) + Units completed and transferred out = Equivalent units]

69.

A process with no beginning work in process inventory, completed and transferred out 35,000 units during a period and had 14,000 units in the ending work in process inventory that were 50% complete as to conversion. What are the equivalent units of production for the period for conversion costs? a. 42,000 equivalent units b. 49,000 equivalent units c. 56,000 equivalent units d. 28,000 equivalent units

Ans: A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (14,000 units x 50%) + 35,000 = 42,000 [(Ending WIP units x % complete) + Units completed and transferred = Equivalent units]

70.

A process with 1,600 units of beginning work in process inventory, completed and transferred out 25,000 units during a period. There were 10,000 units in the ending work in process inventory that were 50% complete as to conversion costs. Materials are added 80% at the beginning of the process and 20% when the units are 90% complete. What are the equivalent units of production for the period for material costs? a. 29,000 equivalent units b. 35,000 equivalent units c. 27,000 equivalent units d. 33,000 equivalent units

Ans: D, LO: 3, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (10,000 units x 80%) + 25,000 = 33,000 [(Ending WIP units x % complete) + Units completed and transferred out = Equivalent units]

71.

Hanker Company had the following department data on physical units: Work in process inventory, beginning 3,000 Completed and transferred out 18,000 Work in process inventory, ending 2,400 Materials are added at the beginning of the process. What are the equivalent units of production for materials during the period? a. 18,600 b. 21,000 c. 20,400 d. 15,000 .

16 - 14

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (2,400 units x 100%) + 18,000 = 20,400 [(Ending WIP units x % complete) + Units completed and transferred out = Equivalent units]

72.

Super-Tech Industries had the following department information about physical units and percentage of completion: Physical Units Work in process inventory, June 1 (75%) 8,000 Completed and transferred out 22,000 Work in process inventory, June 30 (50%) 12,000 If materials are added at the beginning of the production process, what are the equivalent units of production for materials during June? a. 32,000 b. 34,000 c. 36,000 d. 28,000

Ans: B, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Solution: (12,000 units x 100%) + 22,000 = 34,000 [(Ending WIP units x % complete) + Units completed and transferred out = Equivalent units]

73.

Gloria Company had no beginning work in process inventory. During the period, 16,000 units were completed and transferred out, and there were 1,200 units of ending work in process inventory. How many units were started into production? a. 17,200 b. 16,000 c. 14,800 d. 1,200.

Ans: A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 0 + X = 16,000 + 1,200; X = 17,200. (Beginning WIP units + Units transferred in – Ending WIP units = Units completed and transferred out)

74.

Cohen Company is trying to determine the equivalent units of production for conversion costs with 5,000 units of ending work in process inventory at 80% completion and 45,000 units that are 100% complete as to materials. There are no beginning units in the department. Materials are added at the beginning of the process, and conversion costs occur evenly throughout the entire production period. What are the equivalent units of production for conversion costs for the current period? a. 50,000 b. 49,000 c. 46,000 d. 44,000

Ans: B, LO: 3, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: FSA Solution: (5,000 units x 80%) + 45,000 = 49,000 [(Ending WIP units x % complete) + Completed units = Equivalent units]

75.

If beginning work in process inventory is 4,000 units, ending work in process inventory is 2,000 units, and the units accounted for equals 15,000 units, how many units were started into production? a. 19,000 b. 17,000 c. 11,000 d. 13,000 .

Process Costing

16 - 15

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 4,000 + X = 15,000; X = 11,000 (Beginning WIP units + Units started = Units accounted for)

76.

The Molding Department of Kennett Company has the following production data: beginning work in process inventory 25,000 units (60% complete as to conversion), started into production 475,000 units, completed and transferred out 450,000 units, and ending work in process inventory 50,000 units (40% complete as to conversion). Assuming that materials are entered at the beginning of the process, equivalent units of production for materials are a. 500,000. b. 425,000. c. 450,000. d. 525,000.

Ans: A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (50,000 units x 100%) + 450,000 = 500,000 [(Ending WIP units x % complete) + Units completed and transferred out = Equivalent units]

77.

The Molding Department of Kennett Company has the following production data: beginning work in process inventory 25,000 units (60% complete as to conversion), started into production 475,000 units, completed and transferred out 450,000 units, and ending work in process inventory 50,000 units (40% complete as to conversion). Assuming that conversion costs are incurred uniformly during the process, the equivalent units of production for conversion costs are a. 500,000. b. 455,000. c. 470,000. d. 450,000.

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (50,000 units x 40%) + 450,000 = 470,000 [(Ending WIP units x % complete) + Units completed and transferred out = Equivalent units]

78.

The Molding Department of Boswell Company has the following production data: beginning work process inventory 40,000 units (60% complete as to conversion), started into production 730,000 units, completed and transferred out 690,000 units, and ending work in process inventory 80,000 units (40% complete as to conversion). Assuming that materials are entered at the beginning of the process, equivalent units of production for materials are a. 770,000. b. 650,000. c. 690,000. d. 810,000.

Ans: A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (80,000 units x 100%) + 690,000 = 770,000 [(Ending WIP units x % complete) + Units completed and transferred out = Equivalent units]

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

79.

The Molding Department of Boswell Company has the following production data: beginning work in process inventory 40,000 units (60% complete as to conversion), started into production 730,000 units, completed and transferred out 690,000 units, and ending work in process inventory 80,000 units (40% complete as to conversion). Assuming that conversion costs are incurred uniformly during the process, the equivalent units of production for conversion costs are a. 770,000. b. 810,000. c. 722,000. d. 650,000.

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (80,000 units x 40%) + 690,000 = 722,000 [(Ending WIP units x % complete) + Units completed and transferred out = Equivalent units]

80.

Crawford Company has the following equivalent units of production for July: materials 20,000 and conversion costs 18,000. Production cost data are: Work in process inventory, July 1 Costs added in July

Materials $ 6,400 50,400

Conversion $ 3,000 42,000

The unit production costs for July are a. b. c. d.

Materials $2.52 2.84 2.52 2.84

Conversion Costs $2.50 2.33 2.33 2.50

Ans: D, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $56,800 ÷ 20,000 = $2.84; $45,000 ÷ 18,000 = $2.50 [(Total materials cost ÷ Equivalent units = Unit cost); (Total conversion cost ÷ Equivalent units = Unit cost)]

81.

In Moyer Company, the Cutting Department had beginning work in process inventory of 6,000 units, completed and transferred out 24,000 units, and had an ending work in process inventory of 3,000 units. How many units were started in production by Moyer during the month? a. 18,000 b. 21,000 c. 24,000 d. 27,000

Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 6,000 + X – 3,000 = 24,000; X = 21,000 (Beginning WIP units + Units transferred in – Ending WIP units = Units transferred out)

Process Costing 82.

16 - 17

In the Shaping Department of Rollins Company the unit materials cost is $5.00 and the unit conversion cost is $3.00. The department completed and transferred out 40,000 units and had 5,000 units in ending work in process inventory which were 20% complete. If all materials are added at the beginning of the process, the total cost to be assigned to the ending work in process inventory is a. $8,000. b. $25,000. c. $28,000. d. $40,000.

Ans: C, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (5,000 units x 100% x $5) + (5,000 units x 20% x $3) = $28,000 [(Ending WIP units x % complete x Unit cost, material) + (Ending WIP units x % complete x Unit cost, conversion) = Total cost of ending WIP]

83.

Holton Company has the following equivalent units of production for July: materials 20,000 and conversion 18,000. Production cost data are: Materials Conversion Work in process inventory, July 1 $ 8,000 $ 3,750 Costs added in July 63,000 52,500 The unit production costs for July are: a. b. c. d.

Materials $3.15 3.55 3.15 3.55

Conversion Costs $3.13 2.92 2.92 3.13

Ans: D, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Solution: $71,000 ÷ 20,000 = $3.55; $56,250 ÷ 18,000 = $3.13 [(Total materials cost ÷ Equivalent units = Unit cost); (Total conversion cost ÷ Equivalent units = Unit cost)]

84.

In Kapler Company, the Cutting Department had beginning work in process inventory of 8,000 units, completed and transferred out 25,000 units, and had an ending work in process inventory of 4,000 units. How many units were started in production by Kapler during the month? a. 17,000 b. 21,000 c. 25,000 d. 29,000

Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 8,000 + X – 4,000 = 25,000; X = 21,000 (Beginning WIP units + Units transferred in – Ending WIP units = Units transferred out)

16 - 18

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

85.

In the Shaping Department of Jenkins Company the unit materials cost is $3.00 and the unit conversion cost is $1.80. The department completed and transferred out 8,000 units and had 2,000 units in ending work in process inventory that were 20% complete as to conversion. If all materials are added at the beginning of the process, the cost to be assigned to ending work in process inventory is a. $1,920. b. $6,000. c. $6,720. d. $9,600.

Ans: C, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Solution: (2,000 units x 100% x $3) + (2,000 units x 20% x $1.80) = $6,720 [(Ending WIP units x % complete x Unit cost, material) + (Ending WIP units x % complete x Unit cost, conversion) = Total cost of ending WIP]

86.

Cinder Company had the following department information for the month: Total materials costs Equivalent units of production for materials Total conversion costs Equivalent units of production for conversion costs

$60,000 10,000 $90,000 20,000

What is the total manufacturing cost per unit? a. $10.50 b. $12.00 c. $4.50 d. $6.00 Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $60,000 ÷ 10,000 = $6.00; $90,000 ÷ 20,000 = $4.50; $6.00 + $4.50 = $10.50 [(Total materials cost ÷ Equivalent units = Unit cost, materials); (Total conversion cost ÷ Equivalent units = Unit cost, conversion); Unit cost, materials + Unit cost, conversion = Unit cost, total manufacturing cost]

87.

Materials costs of $600,000 and conversion costs of $642,600 were charged to a processing department in the month of September. Materials are added at the beginning of the process while conversion costs are incurred uniformly throughout the process. There were no units in beginning work in process inventory, 100,000 units were started into production in September, and there were 8,000 units in ending work in process inventory that were 40% complete as to conversion costs at the end of September. What was the total amount of manufacturing costs assigned to the units completed and transferred out in September? a. $1,143,560 b. $1,173,000 c. $1,242,600 d. $1,151,000

Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $600,000 ÷ 100,000 = $6.00; $642,600 ÷ (92,000 + (8,000 x 40%)) = $6.75; $6.00 + $6.75 = $12.75; $12.75 x 92,000 = $1,173,000 [(Total materials cost ÷ Equivalent units = Unit cost, materials); (Total conversion cost ÷ Equivalent units = Unit cost, conversion); Unit cost, materials + Unit cost, conversion = Unit cost, total manufacturing cost; Unit cost, total manufacturing cost x Units transferred out = Cost units transferred]

Process Costing 88.

16 - 19

Materials costs of $600,000 and conversion costs of $642,600 were charged to a processing department in the month of September. Materials are added at the beginning of the process, while conversion costs are incurred uniformly throughout the process. There were no units in beginning work in process inventory, 100,000 units were started into production in September, and there were 8,000 units in ending work in process inventory that were 40% complete as to conversion costs at the end of September. What was the total amount of manufacturing costs assigned to the 8,000 units in ending work in process inventory? a. $48,000 b. $21,600 c. $40,800 d. $69,600

Ans: D, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Solution: $600,000 ÷ 100,000 = $6.00; $642,600 ÷ (92,000 + (8,000 x 40%)) = $6.75; ($6 x 8,000) + ($6.75 x (8,000 x 40%)) = $69,600 [(Total materials cost ÷ Equivalent units = Unit cost, materials); (Total conversion cost ÷ Equivalent units = Unit cost, conversion); (Unit cost, materials x Ending WIP units) + (Unit cost, conversion x (Ending WIP units x % complete)) = Cost ending WIP]

89.

Charley Company’s Assembly Department has materials cost of $2 per unit and conversion cost of $4 per unit. There are 20,000 units in ending work in process inventory which are 70% complete as to conversion costs and 100% complete as to materials. What is the total cost to be assigned to ending working in process inventory? a. $56,000 b. $96,000 c. $84,000 d. $120,000

Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Solution: (20,000 units x 100% x $2) + (20,000 units x 70% x $4) = $96,000 [(Ending WIP units x % complete x Unit cost, material) + (Ending WIP units x % complete x Unit cost, conversion) = Total cost of ending WIP]

90.

Byrd Company decided to analyze certain costs for June of the current year. Units started into production equaled 14,000 and ending work in process inventory equaled 2,000 units. There was no beginning work in process inventory. What is the conversion cost per unit if ending work in process inventory was 25% complete as to conversion costs and total conversion costs equaled $52,500? a. $3.28 b. $4.38 c. $4.20 d. $3.62

Ans: C, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (2,000 units x 25%) + 12,000 = 12,500; $52,500 ÷ 12,500 = $4.20 [(Ending WIP units x % complete) + Units completed and transferred out = Equivalent units; Total conversion cost ÷ Equivalent units = Unit cost, conversion]

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

91.

Long Company has recently tried to improve its cost analysis for its manufacturing process. Units started into production equaled 6,000 and ending work in process inventory equaled 400 units. Long had no beginning work in process inventory. Conversion costs are applied equally throughout production and materials are applied at the beginning of the process. What is the materials cost per unit if ending work in process inventory was 25% complete as to conversion costs and total materials costs equaled $18,000? a. $3.00 b. $2.95 c. $3.05 d. $2.81

Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (400 units x 100%) + 5,600 = 6,000; $18,000 ÷ 6,000 = $3.00 [(Ending WIP units x % complete) + Units completed and transferred out = Equivalent units; Total materials cost ÷ Equivalent units = Unit cost, materials]

92.

Conversion cost per unit equals $7.00. Total materials costs are $80,000. Equivalent units of production for materials are 20,000. What is the total manufacturing cost per unit? a. $11.00 b. $7.00 c. $4.00 d. $3.00

Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $7.00 + ($80,000 ÷ 20,000) = $11.00 [Unit cost, conversion + (Total materials cost ÷ Equivalent units) = Unit cost, total manufacturing cost]

93.

Physical units to be accounted for are 40,000. Total conversion costs are $158,000. There are 1,000 units in ending work in process inventory which are 50% complete as to conversion costs. What is the conversion cost per unit? a. $4.00 b. $3.95 c. $3.90 d. $4.05

Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (1,000 units x 50%) + 39,000 = 39,500; $158,000 ÷ 39,500 = $4.00 [(Ending WIP units x % complete) + Units completed and transferred out = Equivalent units; Total conversion cost ÷ Equivalent units = Unit cost, conversion]

94.

Madison Industries has equivalent units of production of 8,000 for materials and for conversion costs. Total manufacturing costs are $200,000. Total materials costs are $150,000. What is the conversion cost per unit? a. $2.50 b. $6.25 c. $25.00 d. $5.00

Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($200,000 – $150,000) ÷ 8,000 = $6.25 [(Total manufacturing cost – Total materials cost) ÷ Equivalent units = Unit cost, conversion]

Process Costing 95.

16 - 21

Equivalent units of production for materials total 40,000. There were 32,000 units completed and transferred out. Equivalent units of production for conversion costs equal 36,000. What are the physical units for conversion costs if ending work in process inventory is 50% complete as to conversion costs? a. 36,000 b. 40,000 c. 8,000 d. 32,000

Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (X 100%) + 32,000 = 40,000; X = 8,000 Ending WIP units; 32,000 + 8,000 = 40,000 [(Ending WIP units x % complete) + Units completed and transferred out = Equivalent units; Units completed and transferred out + Ending WIP units = Units accounted for]

96.

If equivalent units of production are 15,000 for conversion costs and units completed and transferred out equal 10,000, what is the stage of completion for the 20,000 units remaining in ending work in process inventory? a. 75% b. 25% c. 10% d. 20%

Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (20,000 x X%) + 10,000 = 15,000; X = 25% [(Ending WIP units x % complete) + Units completed and transferred out = Equivalent units]

97.

In the month of April, a department had 500 units in beginning work in process inventory that were 60% complete as to conversion costs. These units had $60,000 of materials costs and $45,000 of conversion costs. Materials are added at the beginning of the process and conversion costs are added uniformly throughout the process. During April, 10,000 units were completed and transferred out to the finished goods inventory and there were 2,000 units that were 25% complete as to conversion costs in the ending work in process inventory on April 30. During April, manufacturing costs charged to the department were: Materials $1,380,000; Conversion costs $1, 530,000. The cost assigned to the units completed and transferred out to finished goods during April was a. $2,700,000. b. $2,715,000. c. $2,820,000. d. $2,685,000.

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

98.

In the month of April, a department had 500 units in beginning work in process inventory that were 60% complete as to conversion costs. These units had $60,000 of materials costs and $45,000 of conversion costs. Materials are added at the beginning of the process and conversion costs are added uniformly throughout the process. During April, 10,000 units were completed and transferred out to the finished goods inventory and there were 2,000 units that were 25% complete as to conversion costs in the ending work in process inventory on April 30. During April, manufacturing costs charged to the department were: Materials $1,380,000; Conversion costs $1,530,000. The cost assigned to the units in the ending work in process inventory on April 30 was a. $360,000. b. $315,000. c. $240,000. d. $435,000.

Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Solution: ($60,000 + $1,380,000) ÷ (10,000 + 2,000) = $120; ($45,000 + $1,530,000) ÷ (10,000 + (2,000 x 25%)) = $150; ($120 x 2,000) + ($150 x (2,000 x 25%)) = $315,000 [(Total materials cost ÷ Equivalent units = Unit cost, materials); (Total conversion cost ÷ Equivalent units = Unit cost, conversion); (Unit cost, materials x Ending WIP units, materials) + (Unit cost, conversion x Ending WIP units, conversion) = Cost of ending WIP units]

99.

Zibba Company enters materials at the beginning of the process. In January, there was no beginning work in process inventory but there were 200 units in ending work in process inventory. The number of units completed and transferred out equals the number of a. units started. b. units started less 200. c. units started plus 200. d. equivalent units of production.

Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

100.

If there are no units in process at the beginning of the period, then a. the company must be using a job order cost system. b. only one computation of equivalent units of production will be necessary. c. the units started into production will equal the number of units completed and transferred out. d. the units to be accounted for will be equal to the units completed and transferred out plus the units in process at the end of the period.

Ans: D, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

101.

Which of the following is not a necessary step in preparing a production cost report? a. Compute the equivalent units of production. b. Compute the physical unit flow. c. Prepare the job order cost sheet. d. Prepare a cost reconciliation schedule.

Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Process Costing 102.

16 - 23

Honrad Company's Assembly Department has materials cost of $4 per unit and conversion cost of $8 per unit. There are 30,000 units in ending work in process inventory, all of which are 70% complete as to conversion costs. Materials are added at the beginning of the process. What is the total cost to be assigned to the ending work in process inventory? a. $168,000 b. $288,000 c. $253,200 d. $360,000

Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Solution: (30,000 units x 100% x $4) + (30,000 units x 70% x $8) = $288,000 [(Ending WIP units x % complete x Unit cost, material) + (Ending WIP units x % complete x Unit cost, conversion) = Total cost of ending WIP]

103.

In a process cost system, units to be accounted for in a department are equal to the a. number of units started into production or transferred into the department. b. number of units completed and transferred out of the department. c. units in the beginning work in process inventory plus the units started or transferred into the department. d. ending work in process inventory plus the units started or transferred into the department.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

104.

The total units accounted for equals units in a. beginning work in process inventory – units completed and transferred out. b. beginning work in process inventory + ending work in process. c. ending work in process inventory + units completed and transferred out. d. ending work in process inventory – units started into production.

Ans: C, LO: 4, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

105.

The Slicing Department production process shows: Beginning Work in Process Inventory Ending Work in Process Inventory Total units to be accounted for

Units 10,000 50,000 180,000

How many units were started into production in the Slicing Department? a. 190,000. b. 130,000. c. 180,000. d. 170,000. Ans: D, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 10,000 + X = 180,000; X = 170,000 (Beginning WIP units + Units started = Units accounted for)

16 - 24 106.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e Department 1 of a two-department production process shows: Units Beginning Work in Process Inventory 10,000 Ending Work in Process Inventory 50,000 Total units to be accounted for 180,000 How many units were completed and transferred out to Department 2? a. 50,000. b. 130,000. c. 180,000. d. 170,000.

107.

The Assembly Department shows the following information: Units Beginning Work in Process Inventory 20,000 Ending Work in Process Inventory 65,000 Units Completed and Transferred Out 31,000 What is the total units to be accounted for by the Assembly Department? a. 96,000. b. 65,000. c. 85,000. d. 76,000.

108.

The last department in a production process shows the following information at the end of the period: Units Beginning Work in Process Inventory 25,000 Started into Production 240,000 Ending Work in Process Inventory 50,000 How many units were completed and transferred out to finished goods during the period? a. 240,000 b. 265,000 c. 290,000 d. 215,000

Ans: D, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 25,000 + 240,000 = 265,000; 50,000 + X = 265,000; X = 215,000 [(Beginning WIP units + Units started into production = Units accounted for); (Ending WIP + Units started into production = Units completed and transferred out)

Process Costing 109.

16 - 25

A process began the month with 3,000 units in work in process inventory and ended the month with 2,000 units in work in process inventory. If 22,000 units were completed and transferred out of the process during the month, how many units were started into production during the month? a. 21,000 b. 23,000 c. 22,000 d. 20,000

Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 2,000 + 22,000 = 24,000; 3,000 + X = 24,000; X = 21,000 [(Ending WIP units + Units completed and transferred out = Units accounted for); (Beginning WIP units + Units started into production = Units accounted for)]

110.

If 150,000 units are started into production, there was no beginning work in process inventory, and 50,000 units are in process at the end of the period, how many units were completed and transferred out? a. 150,000 b. 50,000 c. 100,000 d. 200,000

Ans: C, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 0 + 150,000 = 150,000; 50,000 + X = 150,000; X = 100,000 [(Beginning WIP units + Units started into production = Units accounted for); (Ending WIP units + Units completed and transferred out = Units accounted for)]

111.

Total units to be accounted for less units in beginning work in process inventory equals a. total units accounted for. b. units completed and transferred out. c. units started into production. d. equivalent units of production.

Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

112.

If 180,000 units are completed and transferred out of a department, there was no beginning work in process inventory, and there are 30,000 units still in process at the end of a period, the number of units that were started into production during the period is a. 210,000. b. 180,000. c. 150,000. d. 30,000.

Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 30,000 + 180,000 = 210,000; 0 + X = 210,000; X = 210,000 [(Ending WIP units + Units completed and transferred out = Units accounted for); (Beginning WIP units + Units started into production = Units accounted for)]

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

113.

A department adds materials at the beginning of the process and incurs conversion costs uniformly throughout the process. For the month of July, there was no beginning work in process inventory; 40,000 units were completed and transferred out; and there were 20,000 units in the ending work in process inventory that were 40% complete as to conversion costs. During July, $120,000 materials costs and $105,000 conversion costs were charged to the department. The unit production costs for materials and conversion costs for July was a. b. c. d.

Materials $2.00 $2.00 $2.50 $3.00

Conversion Costs $1.75 $2.19 $1.75 $2.66

Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($120,000 ÷ (40,000 + 20,000)) = $2; ($105,000 ÷ (40,000 + (20,000 x 40%))) = $2.19 [(Total materials cost ÷ Equivalent units = Unit cost, materials); (Total conversion cost ÷ Equivalent units = Unit cost, conversion)]

114.

Conversion cost per unit equals $6. Total materials cost equals $90,000. Equivalent units of production for materials are 10,000. What is the total manufacturing cost per unit? a. $15 b. $6 c. $12 d. $9

Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($90,000 ÷ 10,000) = $9; $9 + $6 = $15 [(Total materials cost ÷ Equivalent units = Unit cost, materials); Unit cost, materials + Unit cost, conversion = Unit cost, total manufacturing cost]

115.

The following department data are available: Total materials cost Equivalent units of production for materials Total conversion cost Equivalent units of production for conversion costs

$180,000 60,000 $105,000 30,000

What is the total manufacturing cost per unit? a. $3.00 b. $3.50 c. $6.50 d. $7.75 Ans: C, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $180,000 ÷ 60,000 = $3.00; $105,000 ÷ 30,000 = $3.50; $3.00 + $3.50 = $6.50 [(Total materials cost ÷ Equivalent units = Unit cost, materials); (Total conversion cost ÷ Equivalent units = Unit cost, conversion); Unit cost, materials + Unit cost, conversion = Unit cost, total manufacturing cost]

Process Costing 116.

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Byers Company had the following department information for the month: Total materials costs Equivalent units of production for materials Total conversion costs Equivalent units of production for conversion costs

$48,000 10,000 $80,000 20,000

What is the total manufacturing cost per unit? a. $1.40 b. $4.00 c. $4.80 d. $8.80 Ans: D, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $48,000 ÷ 10,000 = $4.80; $80,000 ÷ 20,000 = $4.00; $4.80 + $4.00 = $8.80 [(Total materials cost ÷ Equivalent units = Unit cost, materials); (Total conversion cost ÷ Equivalent units = Unit cost, conversion); Unit cost, materials + Unit cost, conversion = Unit cost, total manufacturing cost]

117.

Physical units accounted for are 160,000. Total conversion costs are $387,100. There are 4,000 units in ending work in process inventory which are 50% complete as to conversion costs. What is the conversion cost per unit? a. $2.45 b. $2.42 c. $2.39 d. $2.36

Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 4,000 + X = 160,000; X = 156,000; $387,100 ÷ (156,000 + (4,000 x 50%)) = $2.45 [Ending WIP units + Units completed and transferred = Units accounted for; (Total conversion cost ÷ Units completed and transferred + (Ending WIP units x % complete)) = Unit cost, conversion]

118.

A department had the following information for the month: Total materials costs Conversion cost per unit Total manufacturing cost per unit

$300,000 $3.00 $5.00

What are the equivalent units of production for materials? a. 150,000 b. 100,000 c. 60,000 d. Cannot be determined Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $5 – $3 = $2; $300,000 ÷ X = $2; X = 150,000 (Total manufacturing cost per unit – Conversion cost per unit = Materials cost per unit; Total materials cost ÷ Equivalent units = Materials cost per unit)

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

119.

Maisley Company decided to analyze certain costs for June of the current year. Units started into production equaled 28,000 and ending work in process inventory equaled 4,000. If there was no beginning work in process inventory, what is the conversion cost per unit if ending work in process inventory was 25% complete as to conversion costs and total conversion costs equaled $140,000? a. $4.40 b. $5.00 c. $5.60 d. $5.83

120.

Materials cost of $1,200,000 and conversion cost of $1,530,000 were charged to a processing department in the month of September. Materials are added at the beginning of the process while conversion costs are incurred uniformly throughout the process. There were no units in beginning work in process inventory, 20,000 units were started into production in September, and there were 5,000 units in ending work in process inventory that were 40% complete as to conversion costs at the end of September. What was the total manufacturing cost assigned to those units that were completed and transferred out during September? a. $2,250,000 b. $3,000,000 c. $2,409,750 d. $2,047,500

Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 0 + 20,000 = 20,000; 5,000 + X = 20,000; X = 15,000; $1,200,000 ÷ (15,000 + 5,000) = $60; ($1,530,000) ÷ (15,000 + (5,000 x 40%)) = $90; $60 + $90 = $150; $150 x 15,000 = $2,250,000 [Beginning WIP units + Units started into production = Units accounted for; Ending WIP units + Units completed and transferred out = Units accounted for; Total materials cost ÷ (Units completed and transferred out + (Ending WIP units x % complete)) = Unit cost, materials; Total conversion cost ÷ (Units completed and transferred out + (Ending WIP units x % complete)) = Unit cost, conversion); Unit cost, materials + Unit cost, conversion = Unit cost, total manufacturing cost; Unit cost, total manufacturing cost x Units completed and transferred = Cost of units completed and transferred out]

121.

Materials cost of $1,200,000 and conversion cost of $1,530,000 were charged to a processing department in the month of September. Materials are added at the beginning of the process while conversion costs are incurred uniformly throughout the process. There were no units in beginning work in process inventory, 20,000 units were started into production in September, and there were 5,000 units in ending work in process inventory that were 40% complete as to conversion costs at the end of September. What was the total manufacturing cost assigned to the 5,000 units in the ending work in process inventory? a. $682,500 b. $750,000 c. $480,000 d. $300,000

Ans: C, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 0 + 20,000 = 20,000; 5,000 + X = 20,000; X = 15,000; $1,200,000 ÷ (15,000 + 5,000) = $60; ($1,530,000) ÷ (15,000 + (5,000 x 40%)) = $90; (5,000 x 100% x $60) + (5,000 x 40% x $90) = $480,000 [Beginning WIP units + Units started into production = Units accounted for; Ending WIP units + Units completed and transferred out = Units accounted for; Total materials cost ÷ (Units completed and transferred out + (Ending WIP units x % complete)) = Unit cost, materials; Total conversion cost ÷ (Units completed and transferred out + (Ending WIP units x % complete)) = Unit cost, conversion); (Ending WIP units x % complete x Unit cost, material) + (Ending WIP units x % complete x Unit cost, conversion) = Total cost of ending WIP]

Process Costing 122.

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Mayer Company has recently tried to improve its cost analysis for its manufacturing process. Units started into production equaled 18,000 and ending work in process inventory equaled 1,200 units. Mayer had no beginning work in process inventory. Conversion costs are applied equally throughout production while materials are applied at the beginning of the process. What is the materials cost per unit if ending work in process inventory was 25% complete as to conversion costs and materials costs totaled $72,000? a. $4.00 b. $4.21 c. $16.00 d. $3.75

Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 0 + 18,000 = 18,000; 1,200 + X = 18,000; X = 16,800; $72,000 ÷ (16,800 + (1,200 x 100%)) = $4 [Beginning WIP units + Units started into production = Units accounted for; Ending WIP units + Units completed and transferred out = Units accounted for; Total materials cost ÷ (Units completed and transferred out + (Ending WIP units x % complete)) = Unit cost, materials]

123.

Madison Industries has equivalent units of production of 8,000 for materials and for conversion costs. Total manufacturing costs are $128,000. Total materials costs are $96,000. What is the conversion cost per unit? a. $2 b. $4 c. $16 d. $3

Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($96,000 ÷ 8,000) = $12; ($128,000 ÷ 8,000) = $16; $16 – $12 = $4 [(Total materials cost ÷ Equivalent units = Unit cost, materials); (Total manufacturing cost ÷ Equivalent units = Unit cost, total manufacturing cost); Unit cost, total manufacturing cost – Unit cost, materials = Unit cost, conversion]

124.

In a process cost system, a production cost report is prepared a. only for the first processing department. b. for all departments in the aggregate. c. for each processing department. d. only for the last processing department.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

125.

A production cost report a. is prepared for each product. b. is prepared from a job cost sheet. c. will show quantity and cost data for a production department. d. will not identify a specific department if more than one department is involved in the production process.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

126.

In the production cost report, the total a. physical units accounted for equals the costs accounted for. b. physical units accounted for equals the units to be accounted for. c. costs charged equals the units to be accounted for. d. costs accounted for equals the costs of the units started into production.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

127. The Cutting Department’s output during the period consisted of 22,000 units completed and transferred out, and 4,000 units in ending work in process inventory that were 25% complete as to materials and conversion costs. Beginning work in process inventory was 2,000 units that were 25% complete as to materials and conversion costs. Under the FIFO method, what are the equivalent units of production for materials? a. 24,300 b. 22,500 c. 25,300 d. 24,000

Ans: B, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 22,000 + (4,000 x .25) - (2,000 x .25) = 22,500 (Units completed and transferred out + (Ending WIP x % complete as to materials) – (Beginning inventory x % complete as to materials)) a

128. The Wrapping Department’s output during the period consisted of 21,000 units completed and transferred out and 900 units in ending work in process inventory that were 75% complete as to materials and conversion costs. Beginning inventory was 1,200 units that were 30% complete as to materials and conversion costs. Under the FIFO method, what are the equivalent units of production for materials? a. 22,035 b. 22,515 c. 21,675 d. 21,315

Ans: D, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 21,000 + (900 x 75%) – (1,200 x 30%) = 21,315 (Units completed and transferred out + (Ending WIP x % complete as to materials) – (Beginning inventory x % complete as to materials)) a

129. Chicotti Company has 6,000 units in beginning work in process inventory that are 30% complete as to conversion costs, 75,000 units completed and transferred out to finished goods, and 2,000 units in ending work in process inventory that are 20% complete as to conversion costs. The beginning and ending work in process inventories are fully complete as to materials costs. What are equivalent units of production for conversion costs if the FIFO method is used? a. 75,400 b. 79,600 c. 71,000 d. 73,600

Ans: D, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 75,000 + (2,000 x 20%) – (6,000 x 30%) = $73,600 (Units completed and transferred out + (Ending WIP x % complete as to conversion costs) – (Beginning work in process x % complete as to conversion costs)) a

130. Chicotti Company has 6,000 units in beginning work in process inventory that are 30% complete as to conversion costs, 75,000 units completed and transferred out to finished goods, and 2,000 units in ending work in process inventory that are 20% complete as to conversion costs. The beginning and ending work in process inventories are fully complete as to materials costs. What are equivalent units of production for materials if the FIFO method is used? a. 75,400 b. 77,000 c. 71,000 d. 73,000

Process Costing

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(Units completed and transferred out + Units in ending WIP – Units in beginning WIP) a

131. Schiller Company has unit costs of $2 for materials and $6 for conversion costs. There are 5,600 units in ending work in process inventory which are 25% complete as to conversion costs and fully complete as to materials cost. What is the total cost assigned to the ending work in process inventory if the FIFO method is used? a. $19,600 b. $44,800 c. $11,200 d. $8,400

Ans: A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 5,600 x .25 x $6 = $8,400; $2 x 5,600 = $11,200; $11,200 + $8,400 = $19,600 (Units in Ending WIP x % complete as to conversion costs x unit cost for conversion costs) + (Units in Ending WIP x unit cost for materials) = Total cost assigned to the ending WIP) a

132. Solis Company uses the FIFO method to compute equivalent units of production. It had 4,000 units in beginning work in process inventory that were 20% complete as to conversion costs and 50% complete as to materials costs, 66,000 units started, and 6,000 units in ending work in process inventory that were 30% complete as to conversion costs, and 80% complete as to materials cost. What are the equivalent units of production for materials under the FIFO method? a. 66,800 b. 66,000 c. 68,800 d. 70,000

Ans: A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (4,000 + 66,000) = 70,000 – 6,000 = 64,000 + (6,000 x 80%) – (4,000 x 50%) = 66,800 (Units in beginning WIP+ Units started into production – Ending WIP+ (Units in ending WIP x % complete as to materials) - (Units in beginning WIP x % complete as to materials) = Equivalent units for materials under the FIFO method) a

133. Special Company had the following department information about physical units and percentage of completion: Physical Units Work in process inventory, May 1 (60% complete) 36,000 Completed and transferred out 85,000 Work in process inventory, May 31 (50% complete) 30,000 Materials are added at the beginning of the production process. Conversion costs are added equally throughout production. What is the total number of equivalent units of production during May for conversion costs if the FIFO method is used? a. 151,000 b. 100,000 c. 78,400 d. 129,400

Ans: C, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (85,000 + (30,000 x 50%) – (36,000 x 60%)) = 78,400 (Units completed and transferred out + (Units in WIP, May 31 x % complete) – (Units WIP, May 1 x % complete) = Total number of equivalent units during May for conversion Costs if FIFO is used)

16 - 32 a

134.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e Hanker Company had the following department data on physical units: Work in process inventory, beginning 2,500 Completed and transferred out 18,000 Work in process inventory, ending 2,000 Materials are added at the beginning of the process. What is the total number of equivalent units of production for materials if the FIFO method is used? a. 18,500 b. 17,500 c. 20,000 d. 15,500

Ans: B, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 18,000 + 2,000 – 2,500 = 17,500 (Units completed and transferred out + Units in WIP, ending – Units in WIP, beginning = Total number of equivalent units for materials if the FIFO method is used)

135.

A process cost system would be used by all of the following except a(n) a. ear bud manufacturer. b. social media consulting company. c. oil company. d. power cord manufacturer.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

136.

Which of the following is considered a difference between a job order cost and a process cost system? a. The manufacturing cost components. b. Documents used to track costs. c. The accumulation of the costs of materials, labor, and overhead. d. The flow of costs.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

137.

The basic similarities between job order cost and process cost systems include all of the following except the a. manufacturing cost components. b. flow of costs. c. point at which costs are totaled. d. accumulation of the costs of materials, labor, and overhead.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

138

Equivalent units of production are a measure of a. units completed and transferred out. b. units transferred out. c. units in ending work in process inventory. d. the work done in a period expressed in fully completed units.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Process Costing 139.

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Total physical units to be accounted for are equal to the units a. started (or transferred) into production. b. started (or transferred) into production plus the units in beginning work in process inventory. c. started (or transferred) into production less the units in beginning work in process inventory. d. completed and transferred out.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

140.

In computing equivalent units, computation. a. units completed and transferred out b. beginning work in process inventory c. ending work in process inventory d. None of these is correct.

is not part of the equivalent units of production

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

141.

In Saint-Simon, Inc., the Assembly Department started into production 60,000 units and completed and transferred out 70,000 units. If beginning work in process inventory was 30,000 units, how many units are in ending work in process inventory? a. 0 b. 10,000 c. 20,000 d. 40,000

Ans: C, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 30,000 + 60,000 = 90,000; X + 70,000 = 90,000; X = 20,000 [Beginning WIP units + Units started into production = Units accounted for; Ending WIP units + Units completed and transferred out = Units accounted for]

142.

The total units to be accounted for is computed by adding a. beginning units in process to units completed and transferred out. b. ending units in process to units started (or transferred) into production. c. beginning units in process to units started (or transferred) into production. d. ending units in process to total units accounted for.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

143.

In the Camria Company, materials are added at the beginning of the process. If there is no beginning work in process inventory but there is an ending work in process inventory, the number of equivalent units of production for materials costs will be a. the same as the units started. b. the same as the units completed. c. less than the units started. d. less than the units completed.

Ans: A, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

144.

For the Assembly Department, unit materials cost is $6 and unit conversion cost is $9. If there are 10,000 units in ending work in process inventory that are 75% complete as to conversion costs, the costs to be assigned to the ending work in process inventory are a. $150,000. b. $127,500. c. $112,500. d. $135,000.

Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (10,000 units x 100% x $6) + (10,000 units x 75% x $9) = $127,500 [(Ending WIP units x % complete x Unit cost, material) + (Ending WIP units x % complete x Unit cost, conversion) = Total cost of ending WIP]

145.

The total costs accounted for in a production cost report equal the a. cost of units completed and transferred out only. b. cost of units started or transferred into production. c. cost of units completed and transferred out plus the cost of ending work in process inventory. d. cost of beginning work in process inventory plus the cost of units completed and transferred out.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

146.

In a production cost report, which one of the following sections is not shown under Costs? a. Unit costs. b. Costs to be accounted for. c. Costs during the period. d. Units accounted for.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

BRIEF EXERCISES BE 147 Tip Top Painting Company has the following production data for January:   

Beginning work in process inventory, 0 units Units completed and transferred out, 35,000 Ending work in process inventory, 10,000 units that are 30% complete for conversion costs

Materials are added only at the beginning of the process. Conversion costs are incurred uniformly throughout the process. Instructions Compute equivalent units of production for both materials and conversion costs. Ans: N/A, LO: 3, 4; Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 147

(4 min.)

QUANTITIES

Physical Units

Units to be accounted for Work in process inventory, 1/1 Started into production .

0 45,000

Equivalent Units of Production Materials Conversion Costs

Process Costing Total units to be accounted for

45,000

Units accounted for Completed and transferred out Work in process inventory, 1/31 Total units accounted for

35,000 10,000 45,000

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35,000 3,000 (10,000 × 30%) 38,000

BE 148 Lowman Painting Company has the following production data for March:   

Beginning work in process inventory, 2,000 units Units completed and transferred out, 42,000 Ending work in process inventory, 15,000 units that are 80% complete for conversion costs

Materials are added only at the beginning of the process. Conversion costs are incurred uniformly throughout the process. Instructions Compute equivalent units of production for both materials and conversion costs. Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 148

(4 min.)

QUANTITIES

Physical Units

Units to be accounted for Work in process inventory, 3/1 Started into production Total units to be accounted for

2,000 55,000 57,000

Units accounted for Completed and transferred out Work in process inventory, 3/31 Total units accounted for

42,000 15,000 57,000

Equivalent Units of Production Materials Conversion Costs

42,000 15,000 57,000

42,000 12,000 (15,000 × 80%) 54,000

BE 149 The Kirkland Department of Delta Company began the month of December with work in process inventory of 4,000 units that are 100% complete as to materials and 30% complete as to conversion costs. Units completed and transferred out are 10,000 units. Ending work in process inventory contains 8,000 units that are 100% complete as to materials and 60% complete as to conversion costs. Materials are added only at the beginning of the process. Conversion costs are incurred uniformly throughout the process. Instructions Compute the equivalent units of production for materials and conversion costs for the month of December. Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 149

(4 min.)

QUANTITIES

Physical Units

Units to be accounted for Work in process inventory, 12/1 Started into production Total units to be accounted for

4,000 14,000 18,000

Units accounted for Completed and transferred out Work in process inventory, 12/31 Total units accounted for

10,000 8,000 18,000

Equivalent Units of Production Materials Conversion Costs

10,000 8,000 18,000

10,000 4,800 (8,000 × 60%) 14,800

BE 150 White Supplies’ total material costs are $30,000 and total conversion costs are $20,000. Equivalent units of production for materials are 10,000, and 5,000 for conversion costs. Instructions Compute the unit costs for materials, conversion costs, and total manufacturing costs for the month. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Process Costing Solution 150

16 - 37

(3 min.)

COSTS Unit costs Costs incurred Equivalent units of production Unit costs

Materials $30,000 10,000 $3.00

Conversion Costs $20,000 5,000 $4.00

Total $50,000 $7.00

BE 151 Apoly Company has the following production data for January. End. Work in Process Inventory Beg. Work in Process Inv.

Units Started into Production

Units

% Complete as to Conversion Cost

-0-

8,500

1,200

30%

Instructions Compute the total units accounted for in January. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 151

(4 min.)

Beginning work in process inventory Started into production Total units to be accounted for

-08,500 8,500

Completed and transferred out Ending work in process inventory Total units accounted for

7,300 1,200 8,500

BE 152 Sandusky Widget Company has the following production data for March. End. Work in Process Inventory

Month March

Beg. Work in Process Inventory

Units Transferred Out

Units

% Complete as to Conversion Cost

1,200

8,100

1,000

20%

Instructions Compute the total units accounted for in March. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 152

(4 min.)

Beginning work in process inventory Started into production Total units to be accounted for

1,200 7,900 9,100

Completed and transferred out Ending work in process inventory Total units accounted for

8,100 1,000 9,100

BE 153 Sequal Company has the following production data for June: units completed and transferred out, 50,000 and ending work in process inventory, 6,000 units that are 100% complete for materials and 30% complete for conversion costs. Unit materials cost is $5 and unit conversion cost is $7. Instructions Determine the costs to be assigned to the units completed and transferred out and the units in ending work in process inventory. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 153

(4 min.)

Units completed and transferred out (50,000 × $12)

$600,000

Work in process inventory, June 30 Materials (6,000 × $5) Conversion costs (6,000 × 30% × $7) Total cost of work in process inventory

$30,000 12,600 $42,600

BE 154 Tomlinson Company has the following production data for May:  Beginning work in process inventory, 0 units  Units started, 62,000  Ending work in process inventory, 5,000 units that are 100% complete for materials and 60% complete for conversion costs  Unit materials cost, $5  Unit conversion cost, $8 Instructions Determine the costs to be assigned to the units completed and transferred out and the number of units in ending work in process inventory. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 154

(4 min.)

Units completed and transferred out (57,000 × $13) Work in process inventory, May 31 Materials (5,000 × $5) Conversion costs (5,000 × 60% × $8) Total cost of work in process inventory .

$741,000 $25,000 24,000 $49,000

Process Costing

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BE 155 Dirt Cleaners, Inc. has the following production data for January: Completed and transferred out Ending work in process inventory

50,000 units 6,000 units

The units in ending work in process inventory are 100% complete for materials and 60% complete for conversion costs. There is no beginning work in process inventory. Materials cost is $4 per unit and conversion costs are $11 per unit. Instructions Determine the costs to be assigned to the units completed and transferred out and the units in ending work in process inventory. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 155

(4 min.)

Cost Reconciliation Schedule Costs accounted for Completed and transferred out (50,000 × $15) Work in process inventory, June 30 Materials (6,000 × $4) Conversion costs (6,000 x 60% x $11) Total costs accounted for

$750,000 $24,000 39,600

63,600 $813,600

BE 156 Total production costs in July for the Sanding Department at Joyful Art in July are $30,000 for materials, $26,000 for labor, and $10,000 for manufacturing overhead. Equivalent units of production are 25,000 for materials and 20,000 for conversion costs. Instructions Compute the unit costs for materials costs, conversion costs and total costs. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 156

(4 min.)

COSTS Unit costs Costs in July Equivalent units of production Unit costs

Materials $30,000 25,000 $1.20

Conversion Costs $36,000 20,000 $1.80

Total $66,000 $3.00

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

BE 157

Tip Top Painting Company has the following production data for March: Beginning work in process inventory, 2,000 units that are 30% complete for conversion costs Units completed and transferred out, 44,000 Units in ending work in process inventory, 9,000 that are 80% complete for conversion costs Materials are added only at the beginning of the process. Conversion costs are incurred uniformly throughout the process. Instructions Compute equivalent units of production for both materials and conversion costs using the FIFO method. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 157

(5 min.)

QUANTITIES

Physical Units

Units to be accounted for Work in process inventory, 3/1 Started into production Total units to be accounted for

2,000 51,000 53,000

Units accounted for Work in process inventory, 3/1 Started and completed Work in process inventory, 3/31 Total units accounted for

2,000 42,000 9,000 53,000

Equivalent Units of Production Materials Conversion Costs

0 42,000 9,000 51,000

1,400 42,000 7,200 50,600

(2,000 × 70%) (9,000 × 80%)

BE 158

The Kirkland Department of Delta Company began the month of December with work in process inventory of 4,000 units that are 100% complete as to materials and 20% complete as to conversion costs. Units completed and transferred out are 12,000 units. Ending work in process inventory contains 2,000 units that are 100% complete as to materials and 60% complete as to conversion costs. Materials are added only at the beginning of the process. Conversion costs are incurred uniformly throughout the process. Instructions Compute equivalent units of production for both materials and conversion costs for the month of December using the FIFO method. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Process Costing a

Solution 158

16 - 41

(5 min.)

QUANTITIES

Physical Units

Units to be accounted for Work in process inventory, 12/1 Started into production Total units to be accounted for

4,000 10,000 14,000

Units accounted for Work in process inventory, 12/1 Started and completed Work in process inventory, 12/31 Total units accounted for

4,000 8,000 2,000 14,000

Equivalent Units of Production Materials Conversion Costs

0 8,000 2,000 10,000

3,200 8,000 1,200 12,400

(4,000 × 80%) (2,000 × 60%)

EXERCISES Ex. 159 Lutz Company produces a product in two departments: (1) Mixing and (2) Finishing. The company uses a process cost accounting system. Lutz had the following transactions during the current month: (a) Purchased materials for $50,000 on account. (b) Direct materials requisitioned for production were: Direct materials Mixing department Finishing department

$20,000 14,000

$44,000 30,000

(e) Manufacturing overhead is applied to the product based on machine hours used in each department: Mixing department—400 machine hours at $30 per machine hour. Finishing department—500 machine hours at $20 per machine hour. (f)

Units costing $56,000 were completed in the Mixing Department and were transferred to the Finishing Department.

(g) Units costing $70,000 were completed in the Finishing Department and were transferred to finished goods. (h) Finished goods costing $40,000 were sold on account for $55,000. Instructions Prepare the journal entries to record the preceding transactions for Lutz Company. .

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 20, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: FSA

Solution 159 (a)

(b)

(c)

(d)

(e)

(f)

(g)

(h)

(18–22 min.)

Raw Materials Inventory .............................................................. Accounts Payable ............................................................... (Purchase of raw materials on account)

50,000

Work in Process—Mixing............................................................. Work in Process—Finishing ......................................................... Raw Materials Inventory...................................................... (To record direct materials used in production)

20,000 14,000

Factory Labor .............................................................................. Factory Wages Payable ...................................................... (To record payroll liability)

74,000

Work in Process—Mixing............................................................. Work in Process—Finishing ......................................................... Factory Labor...................................................................... (To assign factory labor to production)

44,000 30,000

Work in Process—Mixing (400 × $30).......................................... Work in Process—Finishing (500 × $20)...................................... Manufacturing Overhead..................................................... (To assign overhead to production)

12,000 10,000

Work in Process—Finishing ......................................................... Work in Process Inventory—Mixing..................................... (To record transfer of units to the Finishing Department)

56,000

Finished Goods Inventory ............................................................ Work in Process—Finishing ................................................ (To record transfer of units to finished goods)

70,000

Accounts Receivable ................................................................... Sales Revenue.................................................................... (To record sale of finished goods on account)

55,000

Cost of Goods Sold...................................................................... Finished Goods Inventory ................................................... (To record cost of units sold)

40,000

50,000

34,000

74,000

22,000

56,000

70,000

55,000

40,000

Process Costing

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Ex. 160 Sanders Company has two production departments: Fabricating and Finishing. Beginning inventories are: Work in Process Inventory—Fabricating, $6,030; Work in Process Inventory— Finishing, $4,100; and Finished Goods Inventory, $5,600. During the month the following transactions occurred: 1. Purchased $40,000 of raw materials on account. 2. Incurred $75,000 of factory labor. Wages are unpaid. 3. Incurred $50,000 of manufacturing overhead; $40,000 was paid and the remainder is unpaid. 4. Requisitioned direct materials for Fabricating, $10,000 and Finishing, $8,000. 5. Used factory labor for Finishing, $60,000 and Fabricating, $15,000. 6. Assigned $45,000 of overhead based on machine hours used in each department. The Finishing Department used twice as many machine hours as did Fabricating. Instructions Journalize the transactions for the month. Omit explanations. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 12, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: FSA

Solution 160

(12–16 min.)

1. Raw Materials Inventory ................................................................. Accounts Payable ..................................................................

40,000

2. Factory Labor ................................................................................. Factory Wages Payable.........................................................

75,000

3. Manufacturing Overhead ................................................................ Accounts Payable .................................................................. Cash ......................................................................................

50,000

4. Work in Process —Fabricating ....................................................... Work in Process—Finishing ........................................................... Raw Materials Inventory ........................................................

10,000 8,000

5. Work in Process—Fabricating ........................................................ Work in Process—Finishing ........................................................... Factory Labor ........................................................................

15,000 60,000

6. Work in Process—Fabricating ........................................................ Work in Process—Finishing ........................................................... Manufacturing Overhead .......................................................

15,000 30,000

40,000

75,000 10,000 40,000

18,000

75,000

45,000

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ex. 161 The Pasta Factory manufactures spaghetti sauce through two production departments: Cooking and Packaging. For the month of February, the work in process inventory accounts show the following beginning balances and inputs: Cooking Packaging Beginning Work in Process Inventory $ -0$ 6,000 Direct Materials 40,000 26,000 Direct Labor 20,000 9,000 Manufacturing Overhead 30,000 15,000 Costs transferred from Cooking to Packaging 65,000 Instructions Journalize the February transactions that involved the work in process inventory accounts. Omit explanations Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: FSA

Solution 161

(10–15 min.)

Work in Process—Cooking................................................................... Work in Process—Packaging ............................................................... Raw Materials Inventory ..............................................................

40,000 26,000

Work in Process —Cooking.................................................................. Work in Process—Packaging ............................................................... Factory Labor ..............................................................................

20,000 9,000

Work in Process—Cooking................................................................... Work in Process—Packaging ............................................................... Manufacturing Overhead .............................................................

30,000 15,000

Work in Process—Packaging ............................................................... Work in Process—Cooking ..........................................................

65,000

66,000

29,000

45,000 65,000

Ex. 162 Benson Industries uses a process cost system. Products are processed first by Department A and then by Department B before being transferred to the finished goods warehouse. Shown below is the cost information for Department B during the month of October: Costs of units transferred in $120,000 Manufacturing costs added in Department B: Direct materials $50,000 Direct labor 12,000 Manufacturing overhead 19,000 81,000 Total costs charged to Department B in October $201,000 The balance in work in process inventory in Department B at October 1 is $25,000 and it is $30,000 at October 31.

Process Costing

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Ex. 162 (Cont.) Instructions Prepare journal entries to record the following transactions for the month of October (omit explanations): (a) The transfer of production from Department A to B. (b) The manufacturing costs incurred by Department B. (c) The transfer of completed units from Department B to the finished goods warehouse. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: FSA

Solution 162

(8–11 min.)

(a) Work in Process —Dept. B ........................................................... Work in Process—Dept. A .....................................................

120,000

(b) Work in Process—Dept. B ............................................................ Factory Labor ........................................................................ Raw Materials Inventory ........................................................ Manufacturing Overhead .......................................................

81,000

(c) Finished Goods Inventory ($25,000 + $201,000 – $30,000).......... Work in Process—Dept. B .....................................................

196,000

120,000 12,000 50,000 19,000 196,000

Ex. 163 Hardy Company manufactures a single product by a continuous process involving two production departments. The records indicate that $140,000 of direct materials were issued to and $200,000 of direct labor was incurred by Department 1 in the manufacture of the product. The factory overhead rate is $25 per machine hour; machine hours were 5,000 in Department 1. Work in process inventory in the department at the beginning of the period totaled $35,000; and work in process inventory at the end of the period was $25,000. Instructions Prepare entries to record the following transactions (omit explanations): (a) The flow of costs into Department 1 for (1) direct materials (2) direct labor (3) manufacturing overhead (b) The transfer of production costs to Department 2. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 7, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: FSA

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 163

(7–10 min.)

(a)

(1)

(2)

(3)

(b)

Work in Process—Dept. 1 ................................................... Raw Materials Inventory .............................................

140,000

Work in Process—Dept. 1 ................................................... Factory Labor .............................................................

200,000

Work in Process—Dept. 1 ................................................... Manufacturing Overhead (5,000 × $25) ......................

125,000

Work in Process—Dept. 2............................................................ Work in Process—Dept. 1 ...................................................

140,000

200,000

125,000 475,000* 475,000

*$35,000 + $140,000 + $200,000 + $125,000 – $25,000 = $475,000 Ex. 164 Muffy Painting Company has the following production data for March.

Month March

End. Work in Process Inv. Units Completed % Complete as to and Transferred Out Units Conversion Cost 42,000 12,000 75%

Beg. Work in Process Inv. 3,000

Instructions Compute equivalent units of production for March for both materials and conversion costs. Materials are entered at the beginning of the process. Conversion costs are incurred uniformly throughout the process. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 164

(10 min.)

Quantities Units to be accounted for Work in process inventory, 3/1 Started into production Total units to be accounted for Units accounted for Completed and transferred out Work in process inventory, 3/31 Total units accounted for

Physical Units

Equivalent Units of Production Materials Conversion Costs

3,000 51,000 54,000 42,000 12,000 54,000

42,000 12,000 54,000

42,000 9,000 (12,000 × 75%) 51,000

Process Costing

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Ex. 165 The Nitrogen Fixation Department of Tomco Company began the month of December with work in process inventory of 4,000 units that are 100% complete as to materials and 30% complete as to conversion costs. Units completed and transferred out are 12,000 units. Ending work in process inventory contains 10,000 units that are 100% complete as to materials and 40% complete as to conversion costs. All materials are assigned at the beginning of the process. Conversion costs are incurred uniformly throughout the process. Instructions Compute the equivalent units of production for materials and conversion costs for the month of December. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 165

(10 min.)

Quantities Units to be accounted for Work in process inventory,12/1 Started into production Total units to be accounted for Units accounted for Completed and transferred out Work in process inventory,12/31 Total units accounted for

Physical Units

Equivalent Units of Production Materials Conversion Costs

4,000 18,000 22,000 12,000 10,000 22,000

12,000 10,000 22,000

12,000 4,000 16,000

(10,000 × 40%)

Ex. 166

At Crenshaw Company, materials are entered at the beginning of the production process and conversion costs are assigned uniformly throughout the process. Work in process inventories, with the percentage of work done on conversion, and production data for its Painting Department in selected months are as follows:

Month July Sept.

Beg. Work in Process Inv. Percentage Units Completed -0— 2,500 20%

Units Completed and Transferred Out 11,000 9,000

End. Work in Process Inv. Percentage Units Completed 1,500 90% 5,000 70%

Instructions (a) Compute the total units to be accounted for in July. (b) Compute the equivalent units of production for materials and conversion costs for September. Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 166

(10–14 min.)

(a)

(b)

Computation of physical units: Beginning work in process inventory Started into production Total units to be accounted for

July -012,500 12,500

Completed and transferred out Ending work in process inventory Total units accounted for

11,000 1,500 12,500

Computation of equivalent units of production: Units accounted for Completed and transferred out Work in process inventory, 9/30 Total equivalent units

Physical Units 9,000 5,000 14,000

Equivalent Units of Production Materials Conversion Costs 9,000 9,000 5,000 3,500 (5,000×70%) 14,000 12,500

Ex. 167 Watts Company adds materials at the beginning of the process and conversion costs are incurred uniformly throughout the process. Instructions Complete the following calculation of equivalent units of production for materials and conversion costs. Equivalent Units of Production Physical Units Materials Conversion Costs Completed and transferred out

40,000

Ending work in process inventory Materials Conversion costs, 75% complete Total units

12,000

Ans: N/A, LO: 3, 4, Bloom: AN, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 167

(4–7 min.)

Completed and transferred out Ending work in process inventory Materials Conversion costs—75% complete Total units *12,000 ÷ .75

Physical Units 40,000

Equivalent Units of Production Materials Conversion Costs 40,000 40,000

16,000*

56,000

12,000 52,000

Process Costing

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Ex. 168 The general ledger of Oates Company has the following work in process inventory account. WORK IN PROCESS INVENTORY—FINISHING 6/1 6/1 6/30 6/30 6/30

Balance Materials Labor Overhead Balance

8,000 1,800 3,800 2,800 ?

6/30

Transferred out

Production records show that there were 2,000 units in beginning work in process inventory that were 50% complete; 8,000 units started into production, and 4,500 units completed and transferred out. The beginning work in process inventory had conversion costs of $3,150. The units in ending work in process inventory were 60% complete as to conversion costs. Materials are added at the beginning of the process. Instructions Answer the following questions. (a) How many units are in process at June 30? (b) What is the unit conversion cost for June? (c) What is the conversion cost in the June 30 inventory? Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 168

(10–14 min.)

(a)

Work in process, June 1 Started into production Units to be accounted for Less: Completed and transferred out Work in process, June 30

(b)

Conversion costs Completed and transferred out Work in process, June 30 Total

2,000 8,000 10,000 4,500 5,500

Physical Units 4,500 5,500 10,000

Equivalent Units 4,500 3,300 (5,500 × .60) 7,800

Unit conversion cost = $1.25 ($3,150 + $6,600) ÷ 7,800 = $1.25 (c)

Conversion cost in June 30 inventory: 3,300 × $1.25 = $4,125

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ex. 169 The Assembly Department uses a process cost accounting system and the weighted-average cost flow assumption. The department adds materials at the beginning of the process and incurs conversion costs uniformly throughout the process. During July, $190,000 of materials costs and $137,100 in conversion costs were charged to the department. The beginning work in process inventory was $93,000 on July 1, comprised of $80,000 of materials costs and $13,000 of conversion costs. Other data for the month of July are as follows: Beginning work in process inventory, 7/1 Units completed and transferred out Ending work in process inventory, 7/31

25,000 units (40% complete as to conversion costs) 70,000 units 30,000 units (30% complete as to conversion costs)

Instructions Answer the following questions and show computations to support your answers. 1. How many physical units have to be accounted for in July? 2. What are the equivalent units of production for materials and for conversion costs for the month of July? 3. What is the total cost assigned to the 70,000 units that were completed and transferred out of work in process inventory in July? 4. What is the total cost of the July 31 work in process inventory? Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 169

(15–20 min.)

1. Units completed and transferred out Work in process, July 31 Units accounted for

70,000 30,000 100,000

2. Equivalent units of production: Physical Units Completed and transferred out 70,000 Work in process inventory, 7/31 30,000 Total 100,000

Equivalent Units of Production Materials Conversion Costs 70,000 70,000 30,000 9,000* 100,000 79,000

*(30,000 × 30%) 3. Materials cost per unit Conversion cost per unit Total unit cost *($80,000 + $190,000)

$2.70 1.90 $4.60

($270,000* ÷ 100,000 units) ($150,100** ÷ 79,000 units)

**($13,000 + $137,100)

Total cost assigned to units completed and transferred out: 70,000 × $4.60 = $322,000 4. Total cost of July 31 work in process inventory: (30,000 × $2.70) + (9,000 × $1.90) = $98,100

Process Costing

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Ex. 170 The Finishing Department of Edwards Company has the following production and cost data for July: 1. Completed and transferred out, 8,000 units 2. Ending work in process inventory, 2,000 units that are 40% complete as to conversion costs 3. Materials added, $30,000; conversion costs incurred, $17,600 Materials are entered at the beginning of the process. Conversion costs are incurred uniformly during the process. Instructions (a) Compute the equivalent units of production for materials and conversion costs for the month of July. (b) Compute unit costs and prepare a cost reconciliation schedule. Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 170

(15–20 min.)

(a) Completed and transferred out Work in Process Inventory, 7/31 Total

Physical Units 8,000 2,000 10,000

Equivalent Units of Production Materials Conversion Costs 8,000 8,000 2,000 800* 10,000 8,800

*(2,000 × 40%) (b)

Materials cost per unit Conversion cost per unit

$3 2 $5

($30,000 ÷ 10,000 units) ($17,600 ÷ 8,800 units)

Cost Reconciliation Schedule Costs accounted for Completed and transferred out (8,000 × $5) Work in process inventory, 7/31 Materials (2,000 × $3) Conversion costs (800 × $2) Total costs accounted for

$40,000 $6,000 1,600

7,600 $47,600

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

$305,000 $120,000 50,000 25,000

Instructions Answer the following questions and show the computations that support your answers. 1. What are the equivalent units of production for materials and conversion costs in the Fabricating Department for the month of March? 2. What are the costs assigned to the units in ending work in process inventory? 3. What are the costs assigned to the units completed and transferred out during March? Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 171

(15–20 min.)

1. Equivalent units of production:

Physical Units Completed and transferred out 50,000 Work in process inventory, 3/31 25,000 Total 75,000

Equivalent Units of Production Materials Conversion Costs 50,000 50,000 25,000 10,000* 75,000 60,000

*(25,000 × 40%) 2.

Materials unit cost Conversion unit cost Total unit cost *($145,000 + $305,000)

$6.00 2.50 $8.50

($450,000* ÷ 75,000 units) ($150,000** ÷ 60,000 units)

**[($175,000 – $145,000) + $120,000]

Costs assigned to work in process inventory, March 31 Materials costs $150,000 (25,000 units × $6.00) Conversion costs 25,000 (10,000 units × $2.50) Total $175,000 3. Costs assigned to units completed and transferred out: 50,000 × $8.50 = $425,000

Process Costing

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Ex. 172

Given below are the production data for Department No. 1 for the first month of operation: Costs charged to Department 1: Direct Materials $12,000 Labor 2,600 Overhead 15,900 During this first month of operations, 4,000 units were started into production; 3,500 units were completed and transferred out; and the remaining 500 units are 100% completed with respect to materials and 40% complete with respect to conversion costs. Instructions Compute the following: (a) Unit materials cost (b) Equivalent units of production for conversion costs (c) Unit conversion cost (d) Total cost of 500 units in process at end of month (e) Total cost of 3,500 units completed and transferred out Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Hard, Min: 14, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 172

(14–18 min.)

(a)

Unit materials cost: $12,000 ÷ 4,000 equivalent units of production for materials = $3.00.

(b)

Equivalent units of production for conversion costs: 3,500 completed + (40% × 500) = 3,700 equivalent units of production for conversion costs.

(c)

Unit conversion cost: ($2,600 + $15,900) ÷ 3,700 equivalent units of production = $5.00.

(d)

Total cost of 500 units in work in process inventory: Materials, 500 × $3.00 = $1,500 Conversion costs, 200 × $5.00 = 1,000 Total $2,500

(e)

Total cost of 3,500 units completed and transferred out: 3,500 × ($3.00 + $5.00) = $28,000.

Ex. 173 The ledger of Kinsler Company has the following work in process inventory account. 5/1 5/1 5/31 5/31 5/31

Balance Materials Labor Overhead Balance

Work in Process Inventory—Painting 5,300 5/31 Transferred out 7,740 4,110 2,470 ?

Production records show that there were 700 units in the beginning work in process inventory that are 30% complete, 3,800 units started, and 4,000 units completed and transferred out. The beginning work in process inventory had materials cost of $3,060 and conversion costs of $2,240.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

16 - 54

The units in ending work in process inventory were 40% complete as to conversion costs. Materials are entered at the beginning of the painting process. Ex. 173 (Cont.) Instructions (a) How many units are in process at May 31? (b) What is the unit materials cost for May? (c) What is the unit conversion cost for May? (d) What is the total cost of units completed and transferred out in May? (e) What is the cost of the May 31 inventory? Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 173 (a)

(10 min.)

Work in process inventory, May 1 Started into production Total units to be accounted for Less: Completed and transferred out Work in process inventory, May 31

(b) Units completed and transferred out Work in process, May 31 500  100% 500  40%

Work in process, May 1 Costs added Total materials cost

700 3,800 4,500 4,000 500 Equivalent Units of Production Materials Conversion Costs 4,000 4,000 500 4,500

200 4,200

Direct Materials $ 3,060 7,740 $10,800

Conversion Costs $2,240 6,580 $8,820

$10,800 ÷ 4,500 = $2.40 (c)

$8,820 ÷ 4,200 = 2.10

(d)

Completed and transferred out (4,000  4.50) $18,000

(e)

Work in process Materials (500  $2.40) Conversion costs (200  $2.10)

$1,200 420 $1,620

Process Costing

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Ex. 174 The Cutting Department of Sanderson Company has the following production and cost data for July. Production 1. Completed and transferred out 15,000 units 2. Ending work in process inventory, 5,000 units that are 60% complete as to conversion costs and 100% complete as to materials at July 31.

Costs Beginning work in process inventory Materials Labor Manufacturing overhead

-070,000 21,600 25,200

Materials are entered at the beginning of the process. Conversion costs are incurred uniformly during the process. Instructions (a) Determine the equivalent units of production for (1) materials and (2) conversion costs. (b) Compute unit costs and prepare a cost reconciliation schedule. Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 174

(8 min.)

Units completed and transferred out Work in process, July 31 5,000  100% 5,000  60%

Materials 15,000 5,000 20,000

(b)

Conversion Costs 15,000

3,000 18,000

Materials: $70,000 ÷ 20,000 = $3.50 Conversion costs: ($21,600 + $25,200) ÷ 18,000 = $2.60 Costs accounted for Completed and transferred out (15,000  $6.10) Work in process, July 31 Materials (5,000  $3.50) Conversion costs (3,000  $2.60) Total costs accounted for

$ 91,500 $17,500 7,800

25,300 $116,800

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

16 - 56 Ex. 175

Wilkinson Company has gathered the following information. Units in beginning work in process inventory Units started into production Units in ending work in process inventory Percent complete for conversion costs in ending work in process inventory Costs incurred: Direct materials Direct labor Overhead

-054,000 10,000 60% $ 81,000 $ 99,000 $131,000

Instructions (a) Compute equivalent units of production for materials and for conversion costs. (b) Determine the unit costs of production. (c) Show the assignment of costs to units completed and transferred out and in process. Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 175

(8 min.)

(a)

Materials: 44,000 + 10,000= 54,000 Conversion costs: 44,000 + (10,000  60%) = 50,000

(b)

Materials: $81,000/54,000 = $1.50 Conversion costs: ($99,000 + $131,000)/50,000 = $4.60

(c)

Units completed and transferred out: 44,000  $6.10 = $268,400 Units in ending work in process inventory: 10,000  $1.50 = $15,000 6,000  $4.60 = 27,600 $42,600

Process Costing

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Ex. 176 Carlton Company has gathered the following information Units in beginning work in process inventory Units started into production Units in ending work in process inventory Percent complete for conversion costs in ending work in process inventory

25,000 115,000 30,000 40%

Costs (For units in Beg. Work in Process and Started into Production): Direct materials $175,000 Direct labor $235,400 Overhead $191,600 Materials are added at the beginning of the process. Instructions (a) Compute equivalent units of production for materials and for conversion costs. (b) Determine the unit costs of production. (c) Show the assignment of costs to units completed and transferred out and to those still in process. Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 176

(8 min.)

(a)

Materials: 110,000(1) + 30,000 = 140,000 Conversion costs: 110,000 + (30,000  40%) = 122,000 (1) 25,000 + 115,000 – 30,000

(b)

Materials: $175,000/140,000 = $1.25 Conversion costs: ($235,400 + $191,600)/122,000 = $3.50

(c)

Units completed and transferred out: 110,000  $4.75 = $522,500 Units in ending work in process inventory: 30,000  $1.25 = $37,500 12,000  $3.50 = 42,000 $79,500

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ex. 177 The Polishing Department of Estaban Company has the following production and manufacturing cost data for September. Materials are entered at the beginning of the process. Production: Beginning work in process inventory 2,000 units that are 100% complete as to materials and 40% complete as to conversion costs; units started during the period are 48,000, ending work in process inventory of 6,000 units 30% complete as to conversion costs. Manufacturing costs: Beginning work in process inventory costs, comprised of $18,000 of materials and $13,000 of conversion costs; materials costs added in Polishing during the month, $202,000 labor and overhead applied in Polishing during the month $178,300 and $312,500 respectively. Instructions (a) Compute the equivalent units of productions for materials and conversion costs for the month of September. (b) Compute the unit costs for materials and conversion costs for the month. (c) Determine the costs to be assigned to the units completed and transferred out and in process. Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Moderate, Min: 14, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 177

(14–18 min.)

(a) Work in process, September 1 Units started into production

Units completed and transferred out Work in process, September 30

Physical Units 2,000 48,000 50,000 44,000 6,000 50,000

Units completed and transferred out Work in process 6,000  100% 6,000  30%

Materials 44,000

Equivalent Units Conversion Costs 44,000

6,000 50,000

(b)

Materials Work in process inventory, September 1 Direct materials ..................................

$ 18,000

Costs added to production during September ................................ Total materials cost...................................

202,000 $220,000

1,800 45,800

Process Costing

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$220,000  50,000 = $4.40 (Materials cost per unit) Solution 177 (Cont.) Conversion Costs Work in process inventory, September 1 Conversion costs ...............................

$ 13,000

Costs added to production during September Conversion costs ................................ Total conversion costs ................................

490,800 $503,800

$503,800  45,800 = $11.00 (c)

Costs accounted for Completed and transferred out (44,000  $15.40) Work in process inventory, September 30 Materials (6,000  $4.40) .......................... Conversion costs (1,800  11.00) ............. Total costs accounted for..........................

$677,600 $26,400 19,800

46,200 $723,800

Ex. 178 Grey Building Supplies' total materials costs are $30,000 and total conversion costs are $33,000. Equivalent units of production for materials are 10,000, and 5,000 for conversion costs. Instructions Compute the unit costs for materials, conversion costs, and total manufacturing costs for the month. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 6, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 178

(6–8 min.)

COSTS Unit Costs Costs incurred Equivalent units Unit costs

Materials $30,000 10,000 $ 3.00

Conversion Costs $33,000 5,0 00 $ 6.60

Total $63,000 $

9.60

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

16 - 60 Ex. 179

Glazer, Inc. has the following production data for June: Completed and transferred out Ending work in process inventory

50,000 units 5,000 units

The units in work in process inventory are 100% complete for materials and 60% complete for conversion costs. Materials costs are $3 per unit and conversion costs are $6 per unit. Instructions Determine the costs to be assigned to the units completed and transferred out and the units in ending work in process. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 179

(8 min.)

Cost Reconciliation Schedule Costs accounted for Completed and transferred out (50,000 × $9) Work in process inventory, June 30 Materials (5,000 × $3) $15,000 Conversion costs (3,000* × $6) 18,000 Total costs accounted for *(5,000 × 60%)

$450,000 33,000 $483,000

Ex. 180 Production costs chargeable to the Sanding Department in July in Magnum Company are $30,000 for materials, $17,000 for labor, and $13,000 for manufacturing overhead. Equivalent units of production are 30,000 for materials and 20,000 for conversion costs. Instructions Compute the unit costs for materials and conversion costs. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 6, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 180

(6-8 min.)

COSTS Unit Costs Costs in July Equivalent units Unit costs

Materials $30,000 30,000 $1.00

Conversion Costs $30,000 20,000 $1.50

Total $60,000 $2.50

Process Costing

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Ex. 181 Mayer Company uses a process cost system. The Molding Department adds materials at the beginning of the process and conversion costs are incurred uniformly throughout the process. Work in process inventory on May 1 was 75% complete and work in process inventory on May 31 was 60% complete as to conversion costs. Instructions Complete the Production Cost Report for the Molding Department for the month of May using the above information and the information below. MAYER COMPANY Molding Department Production Cost Report For the Month Ended May 31, 2022 QUANTITIES Units to be accounted for Work in process, May 1 Started into production Total units to be accounted for

Physical Units

Units accounted for Completed and transferred out Work in process, May 31 Total units accounted for

COSTS Unit costs Costs in May Equivalent units of production Unit costs

Equivalent Units of Production Materials Conversion Costs

8,000 32,000 40,000 35,000 5,000 40,000

Materials $140,000 $

Conversion Costs $161,500 $

Costs to be accounted for Work in process, May 1 Started into production Total costs to be accounted for Cost Reconciliation Schedule Costs accounted for Completed and transferred out Work in process, May 31 Materials Conversion costs Total costs accounted for

Total $301,500 $

$ 60,000 241,500 $301,500

$ $ $301,500

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 12, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 181

(12–16 min.) MAYER COMPANY Molding Department Production Cost Report For the Month Ended May 31, 2022

QUANTITIES Units to be accounted for Work in process, May 1 Started into production Total units to be accounted for

Equivalent Units of Production Materials Conversion Costs

Physical Units 8,000 32,000 40,000

Units accounted for Completed and transferred out 35,000 Work in process, May 31 5,000 Total units accounted for 40,000 COSTS Unit costs Costs in May Equivalent units of production Unit costs

35,000 5,000 40,000

Materials $140,000 40,000 $3.50

35,000 3,000 (5,000 × 60%) 38,000

Conversion Costs $161,500 38,000 $4.25

Costs to be accounted for Work in process, May 1 Started into production Total costs to be accounted for Cost Reconciliation Schedule Costs accounted for Completed and transferred out (35,000 × $7.75) Work in process, May 31 Materials (5,000 × $3.50) Conversion costs (3,000 × $4.25) Total costs accounted for

Total $301,500 $7.75

$ 60,000 241,500 $301,500

$271,250 $17,500 12,750

30,250 $301,500

Ex. 182 Baker Winery manufactures a fine wine in two departments, Fermenting and Bottling. In the Fermenting Department, grapes are aged in casks for a period of 30 days. In the Bottling Department, the wine is bottled and then sent to the finished goods warehouse. Labor and overhead are incurred uniformly through both processes. Materials are entered at the beginning of both processes. Cost and production data for the Fermenting Department for December 2022 are presented below: Cost data: Beginning work in process inventory Materials Conversion costs Total costs .

$ 37,000 ($30,000 of materials cost) 390,000 116,000 $543,000

Process Costing Ex. 182

16 - 63

(cont.)

Production data Beginning work in process inventory (gallons) Gallons started into production Ending work in process inventory (gallons)

5,000 (40% as to conversion costs) 79,000 8,000 (75% as to conversion costs)

Instructions (a) Compute the equivalent units of production. (b) Determine the unit production costs. (c) Determine the costs to be assigned to units completed and transferred out and ending work in process inventory. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 17, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 182

(17–25 min.)

(a) Physical Units Completed and transferred out 76,000* End. work in process inv. 8,000 Total 84,000

Equivalent Units of Production Materials Conversion Costs 76,000 76,000 8,000 6,000 (8,000 × 75%) 84,000 82,000

*(5,000 + 79,000) – 8,000 (b) Unit Production Costs: Materials Conversion costs Total unit cost *($30,000 + $390,000)

$5.00 ($420,000* ÷ 84,000) 1.50 ($123,000** ÷ 82,000) $6.50 **[($37,000 – $30,000) + $116,000]

(c) Costs assigned to units completed and transferred out and ending work in process inventory: Total Costs Assigned Completed and transferred out (76,000 × $6.50) $494,000 Ending work in process inventory Materials (8,000 × $5) $40,000 Conversion costs (6,000 × $1.50) 9,000 49,000 $543,000 Ex. 183 The Assembly Department of Nitz Company has the following production and cost data at the end of May, 2022, its first period of operations. Production: 30,000 units started into production; 25,000 units completed and transferred out and 5,000 units 100% completed as to materials and 40% completed as to conversion costs. Manufacturing Costs: Materials added at beginning of process, $90,000; labor, $75,000; overhead $60,000. Instructions Prepare a production cost report for the month of May. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 22, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 183

(22–30 min.) NITZ COMPANY Assembly Department—Production Cost Report For the Month Ended May 31, 2022 Equivalent Units of Production Physical Units Materials Conversion Costs

QUANTITIES Units to be accounted for Work in process inventory, May 1 Started into production Total units to be accounted for

0 30,000 30,000

Units accounted for Completed and transferred out Work in process inventory, May 31 Total units accounted for

25,000 5,000 30,000

25,000 2,000 27,000

COSTS Unit costs Costs in May Equivalent units of production Unit costs

Materials $90,000 30,000 $ 3.00

Conversion Costs $135,000 27,000 $5.00

Total $225,000

Costs to be accounted for Work in process, May 1 Started into production Total costs to be accounted for Cost Reconciliation Schedule Costs accounted for Completed and transferred out (25,000 × $8) Work in process inventory, May 31 Materials (5,000 × $3) Conversion Costs (2,000 × $5) Total costs accounted for

$8 $ 0 225,000 $225,000

$200,000 $15,000 10,000

25,000 $225,000

Ex. 184 Romero Company—Perth Division is a new state of the art production facility that manufactures landing gears for airplanes. The September 30 ending work in process inventory is comprised of labor and overhead and is approximately 60% complete as to conversion costs. All materials are assumed to be 100% complete. Total materials costs during the period totaled $840,000. Instructions As the new plant accountant, you are asked to complete the production cost report which appears as follows:

Process Costing Ex. 184

16 - 65

(cont.) ROMERO COMPANY—Perth Division Assimilation Department Production Cost Report For the Month Ended September 30, 2022

QUANTITIES Physical Units Units to be accounted for Work in process inventory, 9/1 300 Started into production 1,100 Total units to be accounted for 1,400 Units accounted for Completed and transferred out Work in process inventory, 9/30 Total units accounted for COSTS Unit Costs Costs in September Equivalent units of production Unit costs

900 500 1,400

Materials $840,000 $

Equivalent Units Materials Conversion Costs

900 500 1,400

Conversion Costs Total $ $1,104,000 $

220

Costs to be accounted for Work in process inventory, 9/1 Started into production Total costs to be accounted for Cost Reconciliation Schedule Costs accounted for Completed and transferred out Work in process inventory, 9/30 Materials Conversion costs Total costs accounted for

900

$ 243,400 $

$ $ 66,000 $1,104,000

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 184

(10-15 min.) ROMERO COMPANY—Perth Division Assimilation Department Production Cost Report For the Month Ended September 30, 2022

QUANTITIES Physical Units Units to be accounted for Work in process inventory, 9/1 300 Started into production 1,100 .

Equivalent Units of Production Materials Conversion Costs

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Total units to be accounted for

1,400

Process Costing Solution 184

16 - 67

(Cont.)

Units accounted for Completed and transferred out Work in process inventory, 9/30 Total units accounted for

900 500 1,400

COSTS Unit Costs Costs in September Equivalent units of production Unit costs

Materials $840,000 1,400 $600

900 500 1,400

900 300 1,200

Conversion Costs $264,000 1,200 $220

Costs to be accounted for Work in process inventory, 9/1 Started into production Total costs to be accounted for

Total $1,104,000 $820

$ 243,400 860,600 $1,104,000

Cost Reconciliation Schedule Costs accounted for Completed and transferred out (900 × $820) Work in process inventory, 9/30 Materials (500 × $600) Conversion costs (300 × $220) Total costs accounted for

$ 738,000 $300,000 66,000

366,000 $1,104,000

Ex. 185

At Oxley Company, materials are entered at the beginning of each process. The company uses the FIFO method for process costing. Work in process inventories, with the percentage of work done on conversion, and production data for its Finishing Department for March are as follows:

Month March

Beg. Work in Process Inv. Percentage Units Completed 2,100 60%

Units Completed and Transferred Out 21,500

End. Work in Process Inv. Percentage Units Completed 750 80%

Instructions (a) Compute the physical units for March. (b) Compute the equivalent units of production for materials and conversion costs for March. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

Solution 185

(5–7 min.)

(a) Computation of physical units: Beginning work in process inventory Started into production Total units to be accounted for

2,100 20,150 22,250

Completed and transferred out Ending work in process inventory Total units accounted for

21,500 750 22,250

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

(Cont.)

Solution 185

(b) Computation of equivalent units: Units accounted for Physical Units Work in process inventory, 3/1 2,100 Started and completed 19,400 Work in process inventory, 3/30 750 Total equivalent units 22,250

Equivalent Units of Production Materials Conversion Costs 0 840 (2,100 × 40%) 19,400 19,400 750 600 (750 × 80%) 20,150 20,840

Ex. 186

Taco Ranch uses a process cost system and the FIFO cost flow assumption. Production begins in the Crafting Department where materials are added at the beginning of the process and conversion costs are incurred uniformly throughout the process. On November 1, the beginning work in process inventory consisted of 10,000 units, which were 60% complete and had a cost of $266,000, $140,000 of which were materials costs. During November, the following occurred: Materials added Conversion costs incurred Units completed and transferred out in November Units in ending work in process inventory, 11/30 (20% complete as to conversion costs)

$315,000 $67,500 55,000 25,000

Instructions Answer the following questions and show the computations that support your answers: (a) What are the equivalent units of production for materials and conversion costs in the Crafting Department for the month of November? (b) What are the costs assigned to the units in ending work in process inventory? (c) What are the costs assigned to units completed and transferred out during November? Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

Solution 186

(10–12 min.)

(a) Equivalent units of production: Physical Units Work in process, November 1 10,000 Started and completed 45,000 Work in process, November 30 25,000 Total 80,000 (b) Materials unit cost Conversion unit cost Total unit cost

$4.50 1.25 $5.75

Costs to be accounted for Work in process, November 1 Started in production Total costs to be accounted for

Equivalent Units of Production Materials Conversion Costs 0 4,000 (10,000 × 40%) 45,000 45,000 25,000 5,000 (25,000 × 20%) 70,000 54,000

($315,000 ÷ 70,000 units) ($67,500 ÷ 54,000 units)

$266,000 382,500 $648,500

Process Costing a

Solution 186

16 - 69

(cont.)

Costs assigned to work in process inventory, November 30 Materials costs $112,500 (25,000 units × $4.50) Conversion costs 6,250 (5,000 units × $1.25) Total $118,750 (c) Costs assigned to units completed and transferred out: Completed and transferred out Work in Process, November 1 Cost to complete beginning work in process inventory Total costs Units started and completed Total costs completed and transferred out

$266,000 5,000* 271,000 258,750** $529,750

*(4,000 × $1.25) ** (45,000 × $5.75)

COMPLETION STATEMENTS 187.

Process cost systems are used to accumulate costs for similar products that are in a fashion.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Cost Management

188.

Separate accounts are maintained for each production department or manufacturing process in a process cost system.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

189.

In a process cost system, manufacturing costs are summarized in a report for each department.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

190.

A primary driver of overhead costs in continuous manufacturing operations is .

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

191.

Equivalent units of production measure the work done during the period, expressed in fully units.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

192.

Unit production costs are expressed in terms of

units of production.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

193.

If a processing department has 27,000 units in process at the beginning of the period, completes and transfers out 90,000 and has 18,000 units in process at the end of the period, then the number of units started into production during the period was units. .

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

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Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

194. A cost reconciliation schedule is prepared to assign total costs to units and to the units in the work in process inventory.

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

195.

The production cost report is an internal document that shows production quantity and for a production department.

Ans: N/A, LO: 2, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Answers to Completion Statements 187. 188. 189. 190. 191.

mass-produced, continuous work in process inventory production cost machine hours completed

192. equivalent 193. 81,000 194. Completed and transferred out, ending 195. cost data

MATCHING 196.

Match the items in the two columns below by entering the appropriate code letter in the space provided. A. B. C. D.

Total manufacturing cost per unit Equivalent units of production Total units accounted for Production cost report

E. F. G. H.

Cost reconciliation schedule Units completed and transferred out Unit production costs Physical units

A summary of both production quantity and cost data for a production department.

Shows that the total costs accounted for equal the total costs to be accounted for.

Work done during a period expressed in fully completed units.

Costs expressed in terms of equivalent units of production.

Actual units to be accounted for during a period, irrespective of any work performed.

Units completed and transferred out during the period plus units in ending work in process inventory.

Unit materials costs plus unit conversion costs.

Total units accounted for minus units in ending work in process inventory.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Answers to Matching 1. D 2. E

5. H 6. C .

Process Costing 3. B 4. G

16 - 71

7. A 8. F

SHORT-ANSWER ESSAY QUESTIONS S-A E 197 Why do some companies need a cost accounting system while others do not? What are the determining characteristics or factors that influence the type of cost accounting system that is appropriate for a company? Ans: N/A, LO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Governance Perspective, AICPA FN: Decision Making, AICPA PC: Project Management, IMA: Business Economics

Solution 197 Companies need a cost accounting system only if they need to measure, record, and report the costs of manufacturing products. A merchandising company purchases, rather than manufactures, goods for resale so does not need a cost accounting system. The two basic types of cost accounting systems are job order costing and process costing. A job order cost system is appropriate when production consists of batches of unique products (jobs). A process cost system is used to apply costs to similar products that are mass-produced in a continuous fashion. S-A E 198 The production cost report summarizes the activities that have taken place in a department or process over a period of time. Identify the major types of information found on a production cost report, and indicate who in the business organization uses this type of information and for what purpose the information is used. Ans: N/A, LO: 4, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 198 The types of information found in a production cost report are units to be accounted for and units accounted for, unit costs, and costs to be accounted for and costs accounted for. Production cost reports provide a basis for evaluating the productivity of a department and so are used by production managers. In addition, the cost data can be used by middle management to assess whether unit costs and total costs are reasonable. When the quantity and cost data are compared with predetermined goals, top management can also ascertain whether current performance is meeting planned objectives. Of course, the information in the report is also used for recordkeeping and income determination by the accounting department. S-A E 199 Your roommate is curious about the features of process cost accounting. Identify and explain the distinctive features for your roommate. Ans: N/A, LO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Governance Perspective, AICPA FN: Decision Making, AICPA PC: Project Management, IMA: Business Economics

Solution 199 The features of process costing are: (1) separate work in process inventory accounts for each process, (2) production cost reports, (3) product costs computed for each accounting period, and (4) unit costs computed based on total manufacturing costs.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

16 - 72 S-A E 200

What purposes are served by a production cost report? Ans: N/A, LO: 4, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

(Ethics)

Dolly's Dream Homes, Inc. manufactures doll houses in a continuous process. Various customizing features and furnishings are added at the end of the process to create the various models that are sold. The basic design and floor plans of all the houses are identical, however. During the most recent month, the lumber used in trimming the houses was inadvertently recorded as direct materials. At month end, when the error was discovered, Susie Rief, the accountant, was told by the accounting manager, Karen Tate, not to bother with correcting the error, because the dollar amount of the error was not "worth it." Susie believes that the dollar amount is not as important as the quality of the reports. She wonders whether she would be committing an unethical act if she were to make the changes anyway, despite her superior's telling her not to. Required: 1. Who are the stakeholders in this situation? 2. Was it unethical for the company to ask that the error not be corrected? Explain briefly. 3. Would it be unethical for Susie to correct the error? Explain briefly. Ans: N/A, LO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Professional Behavior, IMA: Business Economics

Solution 201 1. The stakeholders include:  Susie Rief and Karen Tate  Dolly's Dream Homes  possibly the present customer, or future customers 2. The company was not unethical in asking that the error not be corrected because it was too small in dollar amount to be considered material. In fact, ignoring small errors improves efficiency. 3. Susie would be failing in the obedience due to her superior if she went ahead and corrected the error. Whether it would be a serious fault depends upon how easily the error could be corrected. The superior probably would not care, either way, if the dollar amount is small and the correction procedure is minor. However, just letting the matter drop might be better.

CHAPTER 16A PROCESS COSTING CHAPTER LEARNING OBJECTIVES 1. Discuss the uses of a process cost system and how it compares to a job order cost system. Companies that mass-produce similar products in a continuous fashion use process cost systems. Once production begins, it continues until the finished product emerges. Each unit of finished product is indistinguishable from every other unit. Job order cost systems are similar to process cost systems in three ways: (1) Both systems track the same cost elements—direct materials, direct labor, and manufacturing overhead. (2) Both accumulate cost in the same accounts—Raw Materials Inventory, Factory Labor, and Manufacturing Overhead. (3) Both assign accumulated costs to the same accounts— Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold. However, the method of assigning costs differs significantly. There are four main differences between the two cost systems: (1) A process cost system uses separate Work in Process accounts for each department or manufacturing process, rather than only one work in process account used in a job order cost system. (2) A process cost system summarizes costs in a production cost report for each department. A job order cost system charges costs to individual jobs and summarizes them in a job cost sheet. (3) Costs are totaled at the end of a time period in a process cost system, but at the completion of a job in a job cost system. (4) A process cost system calculates unit cost as: Total manufacturing costs for the period ÷ Equivalent units produced during the period. A job order cost system calculates unit cost as: Total cost per job ÷ Units produced. 2. Explain the flow of costs in a process cost system and how to record the assignment of manufacturing costs. A process cost system assigns manufacturing costs for raw materials, labor, and overhead to work in process accounts for various departments or manufacturing processes. It transfers the costs of partially completed units from one department to another as those units move through the manufacturing process. The system transfers the costs of completed work to Finished Goods Inventory. Finally, when inventory is sold, the system transfers the costs to Cost of Goods Sold. To assign the costs of raw materials, labor, and overhead, decrease Raw Materials Inventory, Factory Labor, and Manufacturing Overhead, and increase Work in Process Inventory for each department. To record the cost of goods transferred to another department, decrease Work in Process for the department whose work is finished and increase Work in Process Inventory for the department to which the goods are transferred. To record units completed and transferred out to the warehouse, decrease Work in Process Inventory for the department whose work is finished and increase Finished Goods Inventory. To record the sale of goods, decrease Finished Goods Inventory and increase Cost of Goods Sold. 3. Compute equivalent units. Equivalent units of production measure work done during a period, expressed in fully completed units. Companies use this measure to determine the cost per unit of completed product. Under the weighted-average method, equivalent units are the sum of units completed and transferred out plus equivalent units of ending work in process.

16A - 2

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

4. Complete the four steps to prepare a production cost report. The four steps to complete a production cost report are as follows.(1) Compute the physical unit flow—that is, the total units to be accounted for. (2) Compute the equivalent units of production separately for direct materials and conversion costs. (3) Compute the unit production costs, expressed in terms of equivalent units of production. (4) Prepare a cost reconciliation schedule, which shows that the total costs accounted for equals the total costs to be accounted for. The production cost report contains both quantity and cost data for a production department. There are four sections in the report: (1) number of physical units, (2) equivalent units determination, (3) unit costs, and (4) cost reconciliation schedule. a

5. Compute equivalent units using the FIFO method. Equivalent units under the FIFO method are the sum of the work performed to (1) finish the units of beginning work in process inventory, if any; (2) complete the units started into production during the period; and (3) start, but only partially complete, the units in ending work in process inventory.

TRUE-FALSE STATEMENTS 1.

Process cost systems focus on the process involved in mass-producing products that are very similar in nature.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Process cost systems are used to apply costs to a specific job, such as the manufacturing of a specialized machine.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

A company that produces YouTube videos would likely use a process cost system.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

In a process cost system, costs are tracked through a series of connected manufacturing processes or departments rather than by individual jobs.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

In a process cost system, total costs are determined at the end of a month or year.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Separate work in process inventory accounts are maintained for each production department or manufacturing process in a process cost system.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: FSA

In a process cost system, direct materials, direct labor, and manufacturing overhead are only added in the first production department.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

The assignment of the three manufacturing cost elements to Work in Process Inventory in a process cost system is the same as in a job order cost system. .

Process Costing 16A - 3 Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Fewer materials requisitions are generally required in a process cost system than in a job order cost system.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

10.

In a process cost system, labor costs incurred may be captured on time tickets.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

11.

A primary driver of overhead costs in continuous manufacturing operations is machine time used.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

12.

Equivalent units of production are used to determine the cost per unit of completed products.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

13.

Equivalent units of production measure the work done during a period, expressed in fully completed units.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

14.

Equivalent units of production is the sum of units completed and transferred out plus equivalent units of beginning work in process inventory.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

15.

The weighted-average method of computing equivalent units is a commonly used method in practice.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

16.

Ans: F, LO: 3, Bloom: AP, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

17.

The first step performed in preparing a production cost report is computing the equivalent units of production.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

18.

Equivalent units of production must be calculated before the unit production costs can be computed.

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

19.

The physical units in a department are another name for the equivalent units of production. .

16A - 4

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

20.

Unit material cost is computed by taking total material costs added to the department for the period and dividing it by the physical units in the process during the period.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

21.

When equivalent units of production are different for materials and conversion costs, unit costs are computed for materials, conversion, and total manufacturing.

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

22.

The total manufacturing cost per unit is used in costing the units completed and transferred out during the period.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

23.

A production cost report is an internal document for management that shows production quantity and cost data for a particular job.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

24.

Production cost reports provide a basis for evaluating the productivity of a department.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

25.

Companies often use a combination of a process cost and a job order cost system, called operations costing.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

26.

The FIFO method of calculating equivalent units is easier to understand and use than the weighted-average method.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

27.

The FIFO method of calculating equivalent units is conceptually superior to the weightedaverage method.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

28.

When comparing the FIFO with the weighted-average method of calculating equivalent units, the FIFO method provides more current cost information.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

29.

There are no units in ending Work in Process Inventory at the end of the period under the FIFO method of calculating equivalent units.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

30.

Companies using the weighted-average method to calculate equivalent units do not complete units left over from the previous accounting periods, they start new units.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Process Costing 16A - 5 31.

In continuous process manufacturing, generally once the production begins, it continues until the finished product emerges.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

32.

One similarity of process cost systems and job order cost systems is that both determine total manufacturing costs after each job.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

33.

The flow of costs in a process cost system requires that materials be added in one department, labor added in another department and manufacturing overhead in a third department.

Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

34.

When finished goods are sold, cost of goods sold is recorded as an increase to Finished Goods Inventory and a decrease to Cost of Goods Sold.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

35.

When there is no beginning Work in Process Inventory and materials are entered at the beginning of the process, equivalent units of materials are the same as the units started into production.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

36.

In order to compute the physical unit flow, a company must first compute unit production costs.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

37.

Under the FIFO method of computing equivalent units, it is assumed that the beginning Work in Process Inventory is completed before new work is started.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

MULTIPLE CHOICE QUESTIONS 38.

A process cost system is most appropriate when a. a variety of different products are produced, each one requiring different types of materials, labor, and overhead. b. the focus of attention is on a particular job or order. c. similar products are mass-produced. d. individual products are custom made to the specification of customers.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

39.

16A - 6

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

40.

A process cost system would be used for all of the following products except a. instant ramen noodles. b. portable phone chargers. c. music videos. d. energy drinks.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

41.

In a process cost system, a. a work in process inventory account is maintained for each product. b. a materials requisition must identify the job on which the materials will be used. c. a work in process inventory account is maintained for each process. d. one work in process inventory account is maintained for all the processes, similar to a job order cost system.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

42.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

43.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Process Costing 16A - 7 44.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

45.

Which of the following is correct regarding cost systems? a. b. c. d.

Work in process account Work in process account Work in process account Work in process account

Job Order several one one several

Process one for each process one one for each process one

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

46.

In a process cost system, unit costs are determined using a a. numerator of costs of each job. b. denominator of equivalent units produced during the period. c. denominator of equivalent units produced for the job. d. denominator of equivalent units produced for the day.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

47.

In a process cost system, manufacturing costs are summarized on a a. job order cost sheet. b. process order cost sheet. c. production cost report. d. manufacturing cost sheet.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Cost Management

48.

Which of the following manufacturing cost elements are incurred in a process cost system? a. Direct materials b. Direct labor c. Manufacturing overhead d. All of these answer choices.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

49.

In a process cost system, product costs are summarized a. on job order cost sheets. b. on production cost reports. c. after each unit is produced. d. when the products are sold.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Cost Management

50.

When manufacturing overhead costs are assigned to production in a process cost system, they increase a. the Finished Goods Inventory account. .

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

b. Cost of Goods Sold. c. a Manufacturing Overhead account. d. a Work in Process Inventory account. Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

51.

A product requires processing in two departments, the Baking Department and then the Packaging Department, before it is completed and transferred out. Costs transferred out of the Baking Department will be transferred to a. Finished Goods Inventory. b. Cost of Goods Sold. c. Work in Process—Packaging Department. d. Manufacturing Overhead.

Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

52.

Which of the following would not appear as an increase to the work in process account of a second department in a two-stage production process? a. Materials used b. Overhead applied c. Labor assigned d. Cost of products transferred out

Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

53.

Materials requisitions are a. not used in process costing. b. generally used more frequently in process costing than job order costing. c. generally used less frequently in process costing than job order costing. d. used more frequently by latter stage production departments.

Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

54.

A primary driver of overhead costs in continuous manufacturing operations is a. direct labor dollars. b. direct labor hours. c. machine hours. d. machine maintenance dollars.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

55.

Price Company assigns overhead based on machine hours. The Milling Department logs 2,400 machine hours and the Cutting Department shows 4,000 machine hours for the period. If the overhead rate is $5 per machine hour, the entry to assign overhead will show a(n) a. increase to Manufacturing Overhead for $32,000. b. decrease to Work in Process —Cutting Department for $20,000. c. increase to Work in Process for $20,000. d. decrease to Manufacturing Overhead for $32,000.

Ans: D, LO: 2, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (2,400 hours x $5) + (4,000 hours x $5) = $32,000 [(Milling hours x Overhead rate) + (Cutting hours x Overhead rate) = Total overhead assigned]

56.

Barnes and Miller Manufacturing is trying to determine the equivalent units for conversion costs with 10,000 units of ending Work in Process Inventory at 80% completion and 32,000 physical units. There are no units in beginning Work in Process Inventory. Conversion costs .

Process Costing 16A - 9 occur evenly throughout the entire production period. What are the equivalent units for conversion costs for the current period? a. 42,000. b. 40,000. c. 8,000. d. 30,000. Ans: D, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (10,000 units x 80%) + (32,000 – 10,000) = 30,000 [(Ending WIP units x % complete) + (Physical units – Ending WIP units) = Equivalent units for conversion cost]

57.

20,000 units in a process that are 70% complete are equal to a. 20,000 equivalent units of production. b. 8,000 equivalent units of production. c. 14,000 equivalent units of production. d. 6,000 equivalent units of production.

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 20,000 units x 70% = 14,000 (WIP units x % complete = Equivalent units)

58.

A process with no beginning work in process, completed and transferred out 85,000 units during a period and had 50,000 units in the ending work in process that were 30% complete. The equivalent units of production for the period were a. 85,000 equivalent units. b. 135,000 equivalent units. c. 100,000 equivalent units. d. 70,000 equivalent units.

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (50,000 units x 30%) + 85,000 = 100,000 [(Ending WIP units x % complete) + Units completed and transferred out = Equivalent units]

59.

A department adds raw materials to a process at the beginning of the process and incurs conversion costs uniformly throughout the process. For the month of January, there were no units in the beginning work in process; 90,000 units were started into production in January; and there were 20,000 units that were 40% complete as to conversion costs in the ending work in process at the end of January. What were the equivalent units of production for materials for the month of January? a. 98,000 equivalent units b. 82,000 equivalent units c. 70,000 equivalent units d. 90,000 equivalent units

Ans: D, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (20,000 units x 100%) + ((90,000 – 20,000) x 100%) = 90,000 [(Ending WIP units x % complete) + ((Units started into production – Ending WIP units) x % complete) = Equivalent units]

60.

A department adds raw materials to a process at the beginning of the process and incurs conversion costs uniformly throughout the process. For the month of January, there were no units in the beginning work in process; 90,000 units were started into production in January; and there were 20,000 units that were 40% complete as to conversion costs in the ending work in process at the end of January. What were the equivalent units of production for conversion costs for the month of January? a. 70,000 equivalent units b. 82,000 equivalent units .

16A - 10

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

c. 78,000 equivalent units d. 90,000 equivalent units Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (20,000 units x 40%) + ((90,000 – 20,000) x 100%) = 78,000 [(Ending WIP units x % complete) + ((Units started into production – Ending WIP units) x % complete) = Equivalent units]

Process Costing 16A - 11 61.

Equivalent units are calculated by a. multiplying the percentage of work done by the equivalent units of output. b. dividing physical units by the percentage of work done. c. multiplying the percentage of work done by the physical units. d. dividing equivalent units by the percentage of work done.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

62.

Minor Company had the following department data: Physical Units Work in Process Inventory, July 1 30,000 Completed and transferred out 165,000 Work in Process Inventory, July 31 45,000 Materials are added at the beginning of the process. What are equivalent units for materials in July? a. 165,000. b. 180,000. c. 240,000. d. 210,000.

Ans: D, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (45,000 units x 100%) + 165,000 = 210,000 [(Ending WIP units x % complete) + Units completed and transferred out = Equivalent units]

63.

Corsi Company had the following department data: Physical Units Work in Process Inventory, beginning -0Completed and transferred out 90,000 Work in Process Inventory, ending 7,000 Materials are added at the beginning of the process. What are equivalent units for materials during the period? a. 90,000. b. 94,000. c. 97,000. d. 83,000.

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (7,000 units x 100%) + 90,000 = 97,000 [(Ending WIP units x % complete) + Units completed and transferred out = Equivalent units]

64.

Gantner Company had the following department information about physical units and percentage of completion: Physical Units Work in Process Inventory, May 1 (60%) 60,000 Completed and transferred out 180,000 Work in Process Inventory, May 31 (40%) 50,000 If materials are added at the beginning of the production process, are equivalent units for materials for the month of May? a. 240,000. b. 230,000. c. 224,000. d. 200,000. .

16A - 12

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ans: B, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (50,000 units x 100%) + 180,000 = 230,000 [(Ending WIP units x % complete) + Units completed and transferred out = Equivalent units]

Process Costing 16A - 13 65.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

66.

In the month of June, a department had 20,000 units in beginning work in process inventory that were 70% complete. During June, 90,000 units were transferred into production from another department. At the end of June, there were 10,000 units in ending work in process that were 40% complete as to conversion costs. Materials are added at the beginning of the process while conversion costs are incurred uniformly throughout the process. How many units were completed and transferred out of the process in June? a. 90,000 units b. 80,000 units c. 100,000 units d. 110,000 units

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 20,000 + 90,000 – 10,000 = 100,000 (Beginning WIP units + Units transferred in – Ending WIP units = Units transferred out)

67.

In the month of June, a department had 20,000 units in beginning work in process that were 70% complete. During June, 90,000 units were transferred into production from another department. At the end of June there were 10,000 units in ending work in process that were 40% complete as to conversion costs. Materials are added at the beginning of the process while conversion costs are incurred uniformly throughout the process. The equivalent units of production for materials for June were a. 100,000 equivalent units. b. 110,000 equivalent units. c. 114,000 equivalent units. d. 90,000 equivalent units.

Ans: B, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Cost Management Solution: 20,000 + 90,000 – 10,000 = 100,000; (10,000 units x 100%) + 100,000 = 110,000 [Beginning WIP units + Units transferred in – Ending WIP units = Units transferred out; (Ending WIP units x % complete) + Units completed and transferred out = Equivalent units]

68.

In the month of June, a department had 20,000 units in beginning work in process that were 70% complete. During June, 90,000 units were transferred into production from another department. At the end of June there were 10,000 units in ending work in process that were 40% complete as to conversion costs. Materials are added at the beginning of the process while conversion costs are incurred uniformly throughout the process. The equivalent units of production for conversion costs for June were a. 90,000 equivalent units. b. 104,000 equivalent units. c. 100,000 equivalent units. d. 110,000 equivalent units.

Ans: B, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 20,000 + 90,000 – 10,000 = 100,000; (10,000 units x 40%) + 100,000 = 104,000 [Beginning WIP units + Units transferred in – Ending WIP units = Units transferred out; (Ending WIP units x % complete) + Units completed and transferred out = Equivalent units]

16A - 14 69.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

A process with no beginning work in process, completed and transferred out 35,000 units during a period and had 14,000 units in the ending work in process that were 50% complete as to conversion costs. What are the equivalent units of production for the period for conversion costs? a. 42,000 equivalent units b. 49,000 equivalent units c. 56,000 equivalent units d. 28,000 equivalent units

Ans: A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (14,000 units x 50%) + 35,000 = 42,000 [(Ending WIP units x % complete) + Units completed and transferred out = Equivalent units]

70.

A process with 1,600 units of beginning work in process, completed and transferred out 25,000 units during a period. There were 10,000 units in the ending work in process that were 50% complete as to conversion costs. Materials are added 80% at the beginning of the process and 20% when the units are 90% complete. What are the equivalent units of production for the period for material costs? a. 29,000 equivalent units b. 35,000 equivalent units c. 27,000 equivalent units d. 33,000 equivalent units

Ans: D, LO: 3, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (10,000 units x 80%) + 25,000 = 33,000 [(Ending WIP units x % complete) + Units completed and transferred out = Equivalent units]

71.

Hanker Company had the following department data on physical units: Work in Process Inventory, beginning Completed and transferred out Work in Process Inventory, ending

3,000 18,000 2,400

Materials are added at the beginning of the process. What are equivalent units for materials during the period? a. 18,600 b. 21,000 c. 20,400 d. 15,000 Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (2,400 units x 100%) + 18,000 = 20,400 [(Ending WIP units x % complete) + Units completed and transferred out = Equivalent units]

72.

Super-Tech Industries had the following department information about physical units and percentage of completion: Physical Units Work in Process Inventory, 6/1 (75% complete as to conversion costs) 8,000 Completed and transferred out 22,000 Work in Process Inventory, 6/30 (50% complete as to conversion cost) 12,000 If materials are added at the beginning of the production process, are equivalent units for materials during June? a. 30,000 b. 34,000 c. 36,000 .

Process Costing 16A - 15 d. 28,000 Ans: B, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Cost Management Solution: (12,000 units x 100%) + 22,000 = 34,000 [(Ending WIP units x % complete) + Units completed and transferred out = Equivalent units]

73.

Ans: A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 0 + X – 1,200 = 16,000; X = 17,200 (Beginning WIP units + Units transferred in – Ending WIP units = Units completed and transferred out)

74.

Cohen Company is calculating the equivalent units for conversion costs for a period in which the company had 5,000 units of ending work in process at 80% completion as to conversion costs and 45,000 units that were completed and transferred out. There are no units in beginning work in process in the department. Materials are added at the beginning of the process and conversion costs occur evenly throughout the entire production period. What are the equivalent units of production for conversion costs for the period? a. 50,000 b. 49,000 c. 46,000 d. 44,000

75.

If beginning work in process is 4,000 units, ending work in process inventory is 2,000 units, and the units accounted for equals 15,000 units, what number of units must have been started into production? a. 19,000 b. 17,000 c. 11,000 d. 13,000

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 4,000 + X = 15,000; X = 11,000 (Beginning WIP units + Units started = Units accounted for)

76.

The Molding Department of Kennett Company has the following production data: beginning work in process inventory 25,000 units (60% complete as to conversion costs), started into production 475,000 units, completed and transferred out 450,000 units, and ending work in process inventory 50,000 units (40% complete as to conversion costs). Assuming materials are entered at the beginning of the process, equivalent units for materials are a. 500,000. b. 425,000. c. 450,000. d. 525,000.

Ans: A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (50,000 units x 100%) + 450,000 = 500,000 [(Ending WIP units x % complete) + Units completed and transferred out = Equivalent units]

16A - 16

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Process Costing 16A - 17 77.

The Molding Department of Kennett Company has the following production data: beginning work in process inventory 25,000 units (60% complete as to conversion costs), started into production 475,000 units, completed and transferred out 450,000 units, and ending work in process inventory 50,000 units (40% complete as to conversion costs). Assuming conversion costs are incurred uniformly during the process, the equivalent units for conversion costs are a. 500,000. b. 455,000. c. 470,000. d. 450,000.

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (50,000 units x 40%) + 450,000 = 470,000 [(Ending WIP units x % complete) + Units completed and transferred out = Equivalent units]

78.

The Molding Department of Boswell Company has the following production data: beginning work process 40,000 units (60% complete as to conversion costs), started into production 730,000 units, completed and transferred out 690,000 units, and ending work in process 80,000 units (40% complete as to conversion costs). Assuming materials are entered at the beginning of the process, equivalent units for materials are a. 770,000. b. 650,000. c. 690,000. d. 810,000.

Ans: A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (80,000 units x 100%) + 690,000 = 770,000 [(Ending WIP units x % complete) + Units completed and transferred out = Equivalent units]

79.

The Molding Department of Boswell Company has the following production data: beginning work process 40,000 units (60% complete as to conversion costs), started into production 730,000 units, completed and transferred out 690,000 units, and ending work in process 80,000 units (40% complete as to conversion costs). Assuming conversion costs are incurred uniformly during the process, the equivalent units for conversion costs are a. 770,000. b. 810,000. c. 722,000. d. 650,000.

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (80,000 units x 40%) + 690,000 = 722,000 [(Ending WIP units x % complete) + Units completed and transferred out = Equivalent units]

80.

Crawford Company has the following equivalent units of production for July: materials 20,000 and conversion costs 18,000. Production cost data are: Work in Process Inventory, July 1 Costs added in July The unit production costs for July are: a. b. c.

Materials $2.52 2.84 2.52 .

Conversion Costs $2.50 2.33 2.33

Materials $ 6,400 50,400

Conversion $ 3,000 42,000

16A - 18 d.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e 2.84

2.50

Ans: D, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $56,800 ÷ 20,000 = $2.84; $45,000 ÷ 18,000 = $2.50 [(Total materials cost ÷ Equivalent units = Unit cost); (Total conversion cost ÷ Equivalent units = Unit cost)]

81.

In Moyer Company, the Cutting Department had beginning work in process of 6,000 units, completed and transferred out 24,000 units, and had an ending work in process of 3,000 units. How many units were started into production by Moyer during the month? a. 18,000. b. 21,000. c. 24,000. d. 27,000.

Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 6,000 + X – 3,000 = 24,000; X = 21,000 (Beginning WIP units + Units transferred in – Ending WIP units = Units transferred out)

82.

In the Shaping Department of Rollins Company, the unit materials cost is $5.00 and the unit conversion cost is $3.00. The department completed and transferred out 40,000 units and had 5,000 units in ending work in process 20% complete as to conversion costs. If all materials are added at the beginning of the process, the total cost to be assigned to the ending work in process is a. $8,000. b. $25,000. c. $28,000. d. $40,000.

Ans: C, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (5,000 units x 100% x $5) + (5,000 units x 20% x $3) = $28,000 [(Ending WIP units x % complete x Unit cost, material) + (Ending WIP units x % complete x Unit cost, conversion) = Total cost of ending WIP]

83.

Holton Company has the following equivalent units of production for July: materials 20,000 and conversion 18,000. Production cost data are: Work in Process Inventory, July 1 Costs added in July

Materials $ 8,000 63,000

Conversion $ 3,750 52,500

The unit production costs for July are

a. b. c. d.

Materials $3.15 3.55 3.15 3.55

Conversion Costs $3.13 2.92 2.92 3.13

Ans: D, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $71,000 ÷ 20,000 = $3.55; $56,250 ÷ 18,000 = $3.13 [(Total materials cost ÷ Equivalent units = Unit cost); (Total conversion cost ÷ Equivalent units = Unit cost)]

84.

In Kapler Company, the Cutting Department had beginning work in process of 8,000 units, completed and transferred out 25,000 units, and had an ending work in process of 4,000 units. How many units were started into production by Kapler during the month? a. 17,000 .

Process Costing 16A - 19 b. 21,000 c. 25,000 d. 29,000 Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 8,000 + X – 4,000 = 25,000; X = 21,000 (Beginning WIP units + Units transferred in – Ending WIP units = Units transferred out)

16A - 20 85.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

In the Shaping Department of Jenkins Company the unit materials cost is $3.00 and the unit conversion cost is $1.80. The department completed and transferred out 8,000 units and had 2,000 units in ending work in process which were 20% complete as to conversion costs. If all materials are added at the beginning of the process, the total cost to be assigned to the ending work in process inventory is a. $1,920. b. $6,000. c. $6,720. d. $9,600.

Ans: C, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Cost Management Solution: (2,000 units x 100% x $3) + (2,000 units x 20% x $1.80) = $6,720 [(Ending WIP units x % complete x Unit cost, material) + (Ending WIP units x % complete x Unit cost, conversion) = Total cost of ending WIP]

86.

$60,000 10,000 $90,000 20,000

What is the total manufacturing cost per unit? a. $10.50 b. $12.00 c. $4.50 d. $6.00 Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $60,000 ÷ 10,000 = $6.00; $90,000 ÷ 20,000 = $4.50; $6.00 + $4.50 = $10.50 [(Total materials cost ÷ Equivalent units = Unit cost, materials); (Total conversion cost ÷ Equivalent units = Unit cost, conversion); Unit cost, materials + Unit cost, conversion = Unit cost, total manufacturing cost]

87.

Materials costs of $600,000 and conversion costs of $642,600 were charged to a processing department in the month of September. Materials are added at the beginning of the process, while conversion costs are incurred uniformly throughout the process. There were no units in beginning work in process, 100,000 units were started into production in September, and 8,000 units in ending work in process that were 40% complete as to conversion costs at the end of September. What was the total amount of manufacturing costs assigned to the units that were completed and transferred out of the processing department in September? a. $1,058,920 b. $1,173,000 c. $1,242,600 d. $1,151,000

Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $600,000 ÷ 100,000 = $6.00; $642,600 ÷ (92,000 + (8,000 x 40%)) = $6.75; $6.00 + $6.75 = $12.75; $12.75 x 92,000 = $1,173,000 [(Total materials cost ÷ Equivalent units = Unit cost, materials); (Total conversion cost ÷ Equivalent units = Unit cost, conversion); Unit cost, materials + Unit cost, conversion = Unit cost, total manufacturing cost; Unit cost, total manufacturing cost x Units completed and transferred out = Cost of units completed and transferred out]

Process Costing 16A - 21 88.

Materials costs of $600,000 and conversion costs of $642,600 were charged to a processing department in the month of September. Materials are added at the beginning of the process, while conversion costs are incurred uniformly throughout the process. There were no units in beginning work in process, 100,000 units were started into production in September, and 8,000 units in ending work in process that were 40% complete as to conversion costs at the end of September. What was the total amount of manufacturing costs assigned to the 8,000 units in ending work in process inventory? a. $99,040 b. $91,600 c. $40,800 d. $69,600

Ans: D, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Cost Management Solution: $600,000 ÷ 100,000 = $6.00; $642,600 ÷ (92,000 + (8,000 x 40%)) = $6.75; ($6 x 8,000) + ($6.75 x (8,000 x 40%)) = $69,600 [(Total materials cost ÷ Equivalent units = Unit cost, materials); (Total conversion cost ÷ Equivalent units = Unit cost, conversion); (Unit cost, materials x Ending WIP units) + (Unit cost, conversion x (Ending WIP units x % complete)) = Cost ending WIP]

89.

Charley Company’s Assembly Department has materials cost of $2 per unit and conversion cost of $4 per unit. There are 20,000 units in ending work in process which are 70% complete as to conversion costs and 100% complete as to materials. What are total costs to be assigned to ending work in process inventory? a. $56,000 b. $96,000 c. $84,000 d. $120,000

Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Cost Management Solution: (20,000 units x 100% x $2) + (20,000 units x 70% x $4) = $96,000 [(Ending WIP units x % complete x Unit cost, material) + (Ending WIP units x % complete x Unit cost, conversion) = Total cost of ending WIP]

90.

Byrd Company decided to analyze certain costs for June of the current year. Units started into production equaled 14,000 and ending work in process equaled 2,000 units. If there was no beginning work in process, what is the conversion cost per unit if ending work in process was 25% complete as to conversion costs and total conversion costs equaled $52,500? a. $3.28 b. $4.38 c. $4.20 d. $3.62

Ans: C, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (2,000 units x 25%) + 12,000 = 12,500; $52,500 ÷ 12,500 = $4.20 [(Ending WIP units x % complete) + Units completed and transferred out = Equivalent units; Total conversion cost ÷ Equivalent units = Unit cost, conversion]

91.

Long Company has recently tried to improve its analysis for its manufacturing process. Units started into production equaled 6,000 and ending work in process equaled 400 units. Long had no beginning work in process. Conversion costs are applied equally throughout production and materials are added at the beginning of the process. What is the materials cost per unit if ending work in process was 25% complete as to conversion costs and total materials costs equaled $18,000? a. $3.00 b. $2,95 c. $3.05 d. $2.81 .

16A - 22

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (400 units x 100%) + 5,600 = 6,000; $18,000 ÷ 6,000 = $3.00 [(Ending WIP units x % complete) + Units completed and transferred out = Equivalent units; Total materials cost ÷ Equivalent units = Unit cost, materials]

92.

Conversion cost per unit equals $7.00. Total materials costs is $80,000. Equivalent units of production are 20,000. What is the total manufacturing cost per unit? a. $11.00 b. $7.00 c. $4.00 d. $3.00

Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $7.00 + ($80,000 ÷ 20,000) = $11.00 [Unit cost, conversion + (Total materials cost ÷ Equivalent units) = Unit cost, total manufacturing cost]

93.

Physical units are 40,000. Total conversion costs are $158,000. There are 1,000 units in ending work in process inventory that are 50% complete as to conversion costs. What is the conversion cost per unit? a. $4.00 b. $3.95 c. $4.05 d. $3.95

Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (1,000 units x 50%) + 39,000 = 39,500; $158,000 ÷ 39,500 = $4.00 [(Ending WIP units x % complete) + Units completed and transferred out = Equivalent units; Total conversion cost ÷ Equivalent units = Unit cost, conversion]

94.

Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($200,000 – $150,000) ÷ 8,000 = $6.25 [(Total manufacturing cost – Total materials cost) ÷ Equivalent units = Unit cost, conversion]

95.

Equivalent units of production for materials total 40,000. There were 32,000 units completed and transferred out. Equivalent units of production for conversion costs were 36,000. What are the physical units for conversion costs if ending work in process inventory is 50% complete as to conversion costs? a. 36,000 b. 40,000 c. 8,000 d. 32,000

Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (X x 100%) + 32,000 = 40,000; X = 8,000 Ending WIP units; 32,000 + 8,000 = 40,000 [(Ending WIP units x % complete) + Units completed and transferred out = Equivalent units; Units out + Ending WIP units = Units accounted for]

96.

If equivalent units are 15,000 for conversion costs and 10,000 units were completed and transferred out, what is the stage of for the 20,000 units remaining in ending work in process inventory? a. 75% .

Process Costing 16A - 23 b. 25% c. 10% d. 20% Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (20,000 x X%) + 10,000 = 15,000; X = 25% [(Ending WIP units x % complete) + Units completed and transferred out = Equivalent units]

16A - 24 97.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

At the beginning of April, a department had 500 units in Work in Process Inventory that were 60% complete as to conversion costs. These units had $60,000 of materials costs and $45,000 of conversion costs. Materials are added at the beginning of the process and conversion costs are added uniformly throughout the process. During April, 10,000 units were completed and transferred to Finished Goods Inventory and there were 2,000 units that were 25% complete as to conversion costs in Work in Process Inventory on April 30. During April, manufacturing costs charged to the department were: Materials $1,380,000; Conversion costs $1,530,000. The cost assigned to the units completed and transferred out to Finished Goods Inventory during April was a. $2,700,000. b. $2,715,000. c. $2,820,000. d. $2,685,000.

98.

At the beginning of April, a department had 500 units in Work in Process Inventory that were 60% complete as to conversions costs. These units had $60,000 of materials costs and $45,000 of conversion costs. Materials are added at the beginning of the process and conversion costs are added uniformly throughout the process. During April, 10,000 units were completed and transferred out to Finished Goods Inventory and there were 2,000 units that were 25% as to conversion costs complete in Work in Process Inventory on April 30. During April, manufacturing costs charged to the department were: Materials $1,380,000; Conversion costs $1,530,000. The cost assigned to the units in the ending Work in Process Inventory was a. $360,000. b. $315,000. c. $240,000. d. $435,000.

Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Cost Management Solution: ($60,000 + $1,380,000) ÷ (10,000 + 2,000) = $120; ($45,000 + $1,530,000) ÷ (10,000 + (2,000 x 25%)) = $150; ($120 x 2,000) + ($150 x (2,000 x 25%)) = $315,000 [(Total materials cost ÷ Equivalent units = Unit cost, materials); (Total conversion cost ÷ Equivalent units = Unit cost, conversion); (Unit cost, materials x Ending WIP units, materials) + (Unit cost, conversion x Ending WIP units, conversion) = Cost of ending WIP units]

99.

Zibba Company enters materials at the beginning of the process. In January, there was no beginning work in process, but there were 200 units in the ending work in process inventory. The number of units completed and transferred out equals the number of a. units started. b. units started less 200. c. units started plus 200. d. equivalent units.

Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Process Costing 16A - 25 100.

If there are no units in process at the beginning of the period, then a. the company must be using a job order cost system. b. only one computation of equivalent units of production will be necessary. c. the units started into production will equal the number of units completed and transferred out. d. the units to be accounted for will equal the units completed and transferred out and the units in process at the end of the period.

Ans: D, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

101.

Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Cost Management

102.

Honrad Company's Assembly Department has materials cost of $4 per unit and conversion cost of $8 per unit. There are 30,000 units in ending work in process which are 70% complete as to conversion costs. Materials are added at the beginning of the process. What are the total costs to be assigned to the ending work in process inventory? a. $168,000 b. $288,000 c. $253,200 d. $360,000

Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Cost Management Solution: (30,000 units x 100% x $4) + (30,000 units x 70% x $8) = $288,000 [(Ending WIP units x % complete x Unit cost, material) + (Ending WIP units x % complete x Unit cost, conversion) = Total cost of ending WIP]

103.

In a process cost system, units to be accounted for in a department are equal to the a. number of units started into production or transferred into the department. b. number of units transferred out of the department. c. units in the beginning work in process inventory plus the units started into production or transferred into the department. d. ending work in process inventory plus the units started into production or transferred into the department.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

104.

The total units accounted for equals units in a. beginning Work in Process Inventory – units completed and transferred out. b. beginning Work in Process Inventory + ending Work in Process Inventory. c. ending Work in Process Inventory + units completed and transferred out. d. ending Work in Process Inventory – units started into production.

Ans: C, LO: 4, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Cost Management

16A - 26 105.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

The Slicing Department production process shows: Beginning Work in Process Inventory Ending Work in Process Inventory Total units to be accounted for

Units 10,000 50,000 180,000

How many units were started into production in the Slicing Department? a. 190,000 b. 130,000 c. 180,000 d. 170,000 Ans: D, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 10,000 + X = 180,000; X = 170,000 (Beginning WIP units + Units started into production = Units accounted for)

106.

Department 1 of a two-department production process reports: Units Beginning Work in Process Inventory 10,000 Ending Work in Process Inventory 50,000 Total units to be accounted for 180,000 How many units were completed and transferred out to Department 2? a. 50,000 b. 130,000 c. 180,000 d. 170,000

107.

The Assembly Department reports the following information: Units Beginning Work in Process Inventory 20,000 Ending Work in Process Inventory 65,000 Units Completed and Transferred Out 31,000 What are the total units to be accounted for by the Assembly Department? a. 96,000 b. 65,000 c. 85,000 d. 76,000

Process Costing 16A - 27 108.

The last department in a production process shows the following information at the end of the period: Units Beginning Work in Process Inventory 25,000 Started into Production 240,000 Ending Work in Process Inventory 50,000 How many units were completed and transferred out to Finished Goods Inventory during the period? a. 240,000 b. 265,000 c. 290,000 d. 215,000

Ans: D, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 25,000 + 240,000 = 265,000; 50,000 + X = 265,000; X = 215,000 [(Beginning WIP units + Units started into production = Units accounted for); (Ending WIP + Units completed and transferred out = Units accounted for)]

109.

A process began the month with 3,000 units in the beginning work in process inventory and ended the month with 2,000 units in the ending work in process inventory. If 22,000 units were completed and transferred out of the process during the month, how many units were started into production during the month? a. 21,000 b. 23,000 c. 22,000 d. 20,000

Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 2,000 + 22,000 = 24,000; 3,000 + X = 24,000; X = 21,000 [(Ending WIP units + Units completed and transferred out = Units accounted for); (Beginning WIP units + Units started into production = Units accounted for)]

110.

Ans: C, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 0 + 150,000 = 150,000; 50,000 + X = 150,000; X = 100,000 [(Beginning WIP units + Units started into production = Units accounted for); (Ending WIP units + Units completed and transferred out = Units accounted for)]

111.

Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

16A - 28 112.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

If 180,000 units are completed and transferred out of a department, there was no beginning work in process inventory, and there are 30,000 units in process at the end of the period, the number of units that were started into production during the period is a. 210,000. b. 180,000. c. 150,000. d. 30,000.

Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 30,000 + 180,000 = 210,000; 0 + X = 210,000; X = 210,000 [(Ending WIP units + Units completed and transferred out = Units accounted for); (Beginning WIP units + Units started into production = Units accounted for)]

113.

Materials $2.00 $2.00 $2.50 $3.00

Conversion Costs $1.75 $2.19 $1.75 $2.66

Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($120,000 ÷ (40,000 + 20,000)) = $2; ($105,000 ÷ (40,000 + (20,000 x 40%))) = $2.19 [(Total materials cost ÷ Equivalent units = Unit cost, materials); (Total conversion cost ÷ Equivalent units = Unit cost, conversion)]

114.

Conversion cost per unit equals $6. Total materials cost equal $90,000. Equivalent units for materials are 10,000. What is the total manufacturing cost per unit? a. $15 b. $6 c. $12 d. $9

Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($90,000 ÷ 10,000) = $9; $9 + $6 = $15 [(Total materials cost ÷ Equivalent units = Unit cost, materials); Unit cost, materials + Unit cost, conversion = Unit cost, total manufacturing cost]

115.

The following department data are available: Total materials costs Equivalent units of production for materials Total conversion costs Equivalent units of production for conversion costs

$180,000 60,000 $105,000 30,000

Process Costing 16A - 29 [(Total materials cost ÷ Equivalent units = Unit cost, materials); (Total conversion cost ÷ Equivalent units = Unit cost, conversion); Unit cost, materials + Unit cost, conversion = Unit cost, total manufacturing cost]

16A - 30 116.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

$48,000 10,000 $80,000 20,000

What is the total manufacturing cost per unit? a. $4.26 b. $10.40 c. $8.53 d. $8.80 Ans: D, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $48,000 ÷ 10,000 = $4.80; $80,000 ÷ 20,000 = $4.00; $4.80 + $4.00 = $8.80 [(Total materials cost ÷ Equivalent units = Unit cost, materials); (Total conversion cost ÷ Equivalent units = Unit cost, conversion); Unit cost, materials + Unit cost, conversion = Unit cost, total manufacturing cost]

117.

Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 4,000 + X = 160,000; X = 156,000; $387,100 ÷ (156,000 + (4,000 x 50%)) = $2.45 [Ending WIP units + Units completed and transferred out = Units accounted for; (Total conversion cost ÷ Units completed and transferred out + (Ending WIP units x % complete)) = Unit cost, conversion]

118.

A department had the following information for the month: Total materials costs Conversion cost per unit Total manufacturing cost per unit

$300,000 $3.00 $5.00

What are the equivalent units of production for materials? a. 150,000 b. 100,000 c. 60,000 d. Cannot be determined from the information provided Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $5 – $3 = $2; $300,000 ÷ X = $2; X = 150,000 (Total manufacturing cost per unit – Conversion cost per unit = Materials cost per unit; Total materials cost ÷ Equivalent units = Materials cost per unit)

119.

Ans: C, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Process Costing 16A - 31 Solution: 0 + 28,000 = 28,000; 4,000 + X = 28,000; X = 24,000; $140,000 ÷ (24,000 + (4,000 x 25%)) = $5.60 [Beginning WIP units + Units started = Units accounted for; Ending WIP units + Units completed and transferred out = Units accounted for; (Total conversion cost ÷ Units completed and transferred out + (Ending WIP units x % complete)) = Unit cost, conversion]

16A - 32 120.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Materials costs of $1,200,000 and conversion costs of $1,530,000 were charged to a processing department in the month of September. Materials are added at the beginning of the process while conversion costs are incurred uniformly throughout the process. There were no units in beginning work in process inventory, 20,000 units were started into production in September, and there were 5,000 units in ending work in process inventory that were 40% complete as to conversion costs at the end of September. What was the total amount of manufacturing costs assigned to the units that were completed and transferred out of the process in September? a. $2,250,000. b. $3,000,000. c. $2,409,750. d. $2,047,500.

Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 0 + 20,000 = 20,000; 5,000 + X = 20,000; X = 15,000; $1,200,000 ÷ (15,000 + 5,000) = $60; ($1,530,000) ÷ (15,000 + (5,000 x 40%)) = $90; $60 + $90 = $150; $150 x 15,000 = $2,250,000 [Beginning WIP units + Units started into production = Units accounted for; Ending WIP units + Units completed and transferred out = Units accounted for; Total materials cost ÷ (Units completed and transferred out + (Ending WIP units x % complete)) = Unit cost, materials; Total conversion cost ÷ (Units completed and transferred out + (Ending WIP units x % complete)) = Unit cost, conversion); Unit cost, materials + Unit cost, conversion = Unit cost, total manufacturing cost; Unit cost, total manufacturing cost x Units completed and transferred out = Cost of units completed and transferred out]

121.

Materials costs of $1,200,000 and conversion costs of $1,530,000 were charged to a processing department in the month of September. Materials are added at the beginning of the process while conversion costs are incurred uniformly throughout the process. There were no units in beginning work in process inventory, 20,000 units were started into production in September, and there were 5,000 units in ending work in process inventory that were 40% complete as to conversion costs at the end of September. What was the total amount of manufacturing costs assigned to the 5,000 units in the ending Work in process inventory? a. $682,500. b. $750,000. c. $480,000. d. $300,000.

Ans: C, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 0 + 20,000 = 20,000; 5,000 + X = 20,000; X = 15,000; $1,200,000 ÷ (15,000 + 5,000) = $60; ($1,530,000) ÷ (15,000 + (5,000 x 40%)) = $90; (5,000 x 100% x $60) + (5,000 x 40% x $90) = $480,000 [Beginning WIP units + Units started into production = Units accounted for; Ending WIP units + Units completed and transferred out = Units accounted for; Total materials cost ÷ (Units completed and transferred out + (Ending WIP units x % complete)) = Unit cost, materials; Total conversion cost ÷ (Units completed and transferred out + (Ending WIP units x % complete)) = Unit cost, conversion); (Ending WIP units x % complete x Unit cost, material) + (Ending WIP units x % complete x Unit cost, conversion) = Total cost of ending WIP]

122.

Mayer Company has recently tried to improve its analysis for its manufacturing process. Units started into production this month was 18,000 and ending work in process inventory was 1,200 units. Mayer had no beginning work in process inventory. Conversion costs are applied equally throughout production and materials are applied at the beginning of the process. What is the materials cost per unit if ending work in process inventory was 25% complete as to conversion costs and total materials costs equaled $72,000? a. $4.00 b. $4.21 c. $16.00 d. $3.75

Process Costing 16A - 33 [Beginning WIP units + Units started into production = Units accounted for; Ending WIP units + Units completed and transferred out = Units accounted for; Total materials cost ÷ (Units completed and transferred out + (Ending WIP units x % complete)) = Unit cost, materials]

123.

Madison Industries has equivalent units of 8,000 for materials and for conversion costs. Total manufacturing costs are $128,000. Total materials costs are $96,000. What is the conversion cost per unit? a. $2 b. $4 c. $16 d. $3

Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($96,000 ÷ 8,000) = $12; ($128,000 ÷ 8,000) = $16; $16 – $12 = $4 [(Total materials cost ÷ Equivalent units = Unit cost, materials); (Total manufacturing cost ÷ Equivalent units = Unit cost, total manufacturing cost); Unit cost, total manufacturing cost – Unit cost, materials = Unit cost, conversion]

124.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Cost Management, Reporting

125.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Cost Management, Reporting

126.

In the production cost report, the total a. physical units accounted for equals the costs accounted for. b. physical units accounted for equals the physical units to be accounted for. c. costs charged equals the units to be accounted for. d. costs accounted for equals the costs of the units started into production.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Cost Management, Reporting a

127. The Cutting Department’s output during the period consists of 22,000 units completed and transferred out, and 4,000 units in ending work in process inventory that were 25% complete as to materials and conversion costs. Beginning work in process inventory was 2,000 units that were 25% complete as to materials and conversion costs. Under the FIFO method, what are the equivalent units of production for materials? a. 24,300 b. 22,500 c. 25,300 d. 24,000

Ans: B, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 22,000 + (4,000 x .25) − (2,000 x .25) = 22,500 (Units completed and transferred out + (Ending Work in Process Inventory x % complete as to materials) – (Beginning inventory x % complete as to materials))

16A - 34

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

a128. The Wrapping Department’s output during the period consists of 21,000 units completed and transferred out, and 900 units in ending work in process inventory that were 75% complete as to materials and conversion costs. Beginning work in process inventory was 1,200 units that were 30% complete as to materials and conversion costs. Under the FIFO method, what are the equivalent units of production for materials? a. 22,035 b. 22,515 c. 21,675 d. 21,315 Ans: D, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 21,000 + (900 x .75) – (1,200 x .30) = 21,315 (Units completed and transferred out + (Ending Work in Process Inventory x % complete as to materials) – (Beginning inventory x % complete as to materials)) a

129. Chicotti Company had 6,000 units in beginning Work in Process Inventory that were 30% complete as to conversion costs, 75,000 units completed and transferred to finished Goods Inventory, and 2,000 units in ending Work in Process Inventory that were 20% complete as to conversion costs. The beginning and ending work in process inventories are fully complete as to materials costs. What are the equivalent units of production for conversion costs if the FIFO method is used? a. 75,400 b. 79,600 c. 71,000 d. 73,600

Ans: D, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 75,000 + (2,000 x .20) – (6,000 x .30) = 73,600 (Units completed and transferred out + (Ending Work in Process Inventory x % complete as to conversion costs) – (Beginning Work in Process Inventory x % complete as to conversion costs)) a

130. Chicotti Company had 6,000 units in beginning Work in Process Inventory that were 30% complete as to conversion costs, 75,000 units completed and transferred out to Finished Goods Inventory, and 2,000 units in ending Work in Process Inventory that were 20% complete as to conversion costs. The beginning and ending work in process inventories are fully complete as to materials costs. What are the equivalent units for materials if the FIFO method is used? a. 75,400 b. 77,000 c. 71,000 d. 73,000

Ans: C, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 75,000 + 2,000 – 6,000 = 71,000 (Units completed and transferred out to Finished Goods Inventory + Units in ending Work in Process Inventory – Units in beginning Work in Process Inventory) a

131. Schiller Company has unit costs of $2 for materials and $6 for conversion costs. There are 5,600 units in ending work in process that are 25% complete as to conversion costs and fully complete as to materials cost. What is the total cost assigned to the ending work in process inventory if the FIFO method is used? a. $19,600 b. $44,800 c. $11,200 d. $8,400

Ans: A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Process Costing 16A - 35 Solution: 5,600 x .25 x $6 = $8,400; $2 x 5,600 = $11,200; $11,200 + $8,400 = $19,600 (Units in ending Work in Process Inventory x % complete as to conversion costs x unit cost for conversion costs) + (Units in ending Work in Process Inventory x unit cost for materials) = Total cost assigned to the ending work in process inventory)

16A - 36

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

132. Solis Company uses the FIFO method to compute equivalent units. It has 4,000 units in beginning work in process inventory that are 20% complete as to conversion costs and 50% complete as to materials costs. There were 66,000 units started and 6,000 units in ending work in process inventory that were 30% complete as to conversion costs, and 80% complete as to materials cost. What are the equivalent units of production for materials under the FIFO method? a. 66,800 b. 66,000 c. 68,800 d. 70,000

Ans: A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (4,000 + 66,000) = 70,000 – 6,000 = 64,000 + (6,000 x .80) – (4,000 x .50) = 66,800 (Units in beginning Work in Process Inventory + Units started – Ending Work in Process Inventory + (Units in ending Work in Process Inventory x % complete as to materials) − (Units in beginning Work in Process Inventory x % complete as to materials) = equivalent units for materials under the FIFO method) a

133. Special Company had the following department information about physical units and percentage of completion: Physical Units Work in Process Inventory, 5/1 (60%) 36,000 Completed and transferred out 85,000 Work in Process Inventory, 5/31 (50%) 30,000 Materials are added at the beginning of the production process. Conversion costs are added equally throughout production. What are the equivalent units of production in May for conversion costs if the FIFO method is used? a. 151,000 b. 100,000 c. 78,400 d. 129,400

Ans: C, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (85,000 + (30,000 * .50) – (36,000 * .60)) = 78,400 (Completed and transferred out + (Work in Process Inventory, May 31 x % complete) – (Work in Process Inventory, May 1 x % complete) = Equivalent units of production in May for conversion costs if FIFO is used) a

134.

Hanker Company had the following department data on physical units: Work in Process Inventory, beginning Completed and transferred out Work in Process Inventory, ending

2,500 18,000 2,000

Materials are added at the beginning of the process. What are the equivalent units of production for materials if the FIFO method is used? a. 18,500 b. 17,500 c. 20,000 d. 15,500 Ans: B, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 18,000 + 2,000 – 2,500 = 17,500 (Completed and transferred out + Work in Process Inventory, ending – Work in Process Inventory, beginning = Equivalent units of production for materials if the FIFO method is used)

135.

A process cost system would be used by all of the following except a(n) a. cereal manufacturer. b. social media consulting company. c. oil company. .

Process Costing 16A - 37 d. lawn mower manufacturer. Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

136.

Which of the following is considered a difference between a job order cost and a process cost system? a. The manufacturing cost elements b. Documents used to track costs c. The accumulation of the costs of materials, labor, and overhead d. The flow of costs

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

137.

The basic similarities between job order cost and process cost systems include all of the following except the a. manufacturing cost elements. b. flow of costs. c. point at which costs are totaled. d. accumulation of the costs of materials, labor, and overhead.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

138

Equivalent units of production are a measure of a. units completed and transferred out. b. units stared into production and transferred out. c. units in ending work in process inventory. d. the work done in a period expressed in fully completed units.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

139.

Total physical units to be accounted for are equal to the units a. started (or transferred) into production. b. started (or transferred) into production plus the units in beginning work in process. c. started (or transferred) into production less the units in beginning work in process. d. completed and transferred out.

Ans: B, LO: 4 Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

140.

In computing equivalent units, equation. a. units transferred out b. beginning Work in Process Inventory c. ending Work in Process Inventory d. None of these is correct.

is not part of the equivalent units of production

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

141.

In Saint-Simon, Inc., the Assembly Department started into production 60,000 units and completed and transferred out 70,000 units. If beginning Work in Process Inventory was 30,000 units, how many units are in ending Work in Process Inventory? a. 0 b. 10,000 c. 20,000 d. 40,000 .

16A - 38

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ans: C, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 30,000 + 60,000 = 90,000; X + 70,000 = 90,000; X = 20,000 [Beginning WIP units + Units started into production = Units accounted for; Ending WIP units + Units completed and transferred out = Units accounted for]

Process Costing 16A - 39 142.

The total units to be accounted for is computed by adding a. beginning units in process to units completed and transferred out. b. ending units in process to units started into production. c. beginning units in process to units started into production. d. ending units in process to total units accounted for.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

143.

In the Camria Company, materials are entered at the beginning of the process. If there is no beginning work in process inventory, but there is an ending work in process inventory, the number of equivalent units for materials costs will be a. the same as the units started. b. the same as the units completed and transferred out. c. less than the units started into production. d. less than the units completed and transferred out.

Ans: A, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

144.

For the Assembly Department, unit materials cost is $6 and unit conversion cost is $9. If there are 10,000 units in ending work in process inventory that are 75% complete as to conversion costs and 100% complete as to materials cost, the costs to be assigned to the ending work in process inventory are a. $150,000. b. $127,500. c. $112,500. d. $135,000.

Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (10,000 units x 100% x $6) + (10,000 units x 75% x $9) = $127,500 [(Ending WIP units x % complete x Unit cost, material) + (Ending WIP units x % complete x Unit cost, conversion) = Total cost of ending WIP]

145.

The total costs accounted for in a production cost report equals the a. cost of units completed and transferred out only. b. cost of units started into production. c. cost of units completed and transferred out plus the cost of ending work in process inventory. d. cost of beginning work in process inventory plus the cost of units completed and transferred out.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Cost Management, Reporting

146.

In a production cost report, which one of the following sections is not shown under Costs? a. Unit costs b. Costs to be accounted for c. Costs during the period d. Units accounted for

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

16A - 40

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

BRIEF EXERCISES BE 147 Tip Top Painting Company has the following production data for January:   

Beginning Work in Process Inventory, 0 units Units completed and transferred out, 35,000 Units in ending Work in Process Inventory, 10,000 that are 30% complete for conversion costs

Materials are added only at the beginning of the process. Instructions Compute equivalent units of production for both materials and conversion costs. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 147

(4 min.)

QUANTITIES

Physical Units

Units to be accounted for Work in Process Inventory, 1/1 Started into production Total units

0 45,000 45,000

Units accounted for Completed and transferred out Work in process, 1/31 Total units

35,000 10,000 45,000

Materials

Equivalent Units Conversion Costs

35,000 10,000 45,000

35,000 3,000 (10,000 × 30%) 38,000

BE 148 Lowman Painting Company has the following production data for March:   

Beginning Work in Process Inventory, 2,000 units Units transferred out, 42,000 Ending Work in Process Inventory, 15,000 units that are 80% complete for conversion costs

Process Costing 16A - 41 Solution 148

(4 min.)

QUANTITIES

Physical Units

Units to be accounted for Work in process, March 1 Started into production Total units

2,000 55,000 57,000

Units accounted for Completed and transferred out Work in process, March 31 Total units

42,000 15,000 57,000

Equivalent Units Materials Conversion Costs

42,000 15,000 57,000

42,000 12,000 (15,000 × 80%) 54,000

BE 149 The Kirkland Department of Delta Company began the month of December with beginning Work in Process Inventory of 4,000 units that are 100% complete as to materials and 30% complete as to conversion costs. Units completed and transferred out are 10,000 units. Ending Work in Process Inventory contains 8,000 units that are 100% complete as to materials and 60% complete as to conversion costs. Instructions Compute the equivalent units of production for materials and conversion costs for the month of December. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 149

(4 min.)

QUANTITIES

Physical Units

Units to be accounted for Work in process, December 1 Started into production Total units

4,000 14,000 18,000

Units accounted for Completed and transferred out Work in process, December 31 Total units

10,000 8,000 18,000

Equivalent Units Materials Conversion Costs

10,000 8,000 18,000

10,000 4,800 (8,000 × 60%) 14,800

BE 150 White Supplies’ total material costs are $30,000 and total conversion costs are $20,000. Equivalent units of production for materials are 10,000 units and 5,000 units for conversion costs. Instructions Compute the unit costs for materials, conversion costs, and total manufacturing costs for the month. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

16A - 42

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 150

(3 min.)

COSTS Unit costs Costs incurred

Materials $30,000

Equivalent units of production

Conversion Costs $20,000

10,000

Unit costs

Total $50,000

5,000

3.00

4.00

$7.00

BE 151 Apoly Company has the following production data for January. Ending Work in Process Beginning Work in Process

Units Started into Production

Units

% Complete as to Conversion Cost

-0-

8,500

1,200

30%

Instructions Compute the physical units for January. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 151

(4 min.)

Beginning Work in Process Inventory Started into production Total units to be accounted for

-08,500 8,500

Completed and transferred out Ending Work in Process Inventory Total units accounted for

7,300 1,200 8,500

BE 152 Saint George Widget Company has the following production data for March. Ending Work in Process Month

Beginning Work in Process

Units Transferred Out

Units

% Complete as to Conversion Cost

March

1,200

8,100

1,000

20%

Instructions Compute the physical units for March. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Process Costing 16A - 43 Solution 152

(4 min.)

Beginning Work in Process Inventory Started into production Total units to be accounted for

1,200 7,900 9,100

Completed and transferred out Ending Work in Process Inventory Total units accounted for

8,100 1,000 9,100

BE 153 Sequal Company has the following production data for June: Units completed and transferred out Ending Work in Process Inventory

50,000 6,000 units that are 100% complete for materials and 30% complete for conversion costs.

Unit materials cost is $5 and unit conversion cost is $7. Instructions Determine the costs to be assigned to the units transferred out and the units in ending Work in Process Inventory. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 153

(4 min.)

Units transferred out (50,000 × $12) Work in Process Inventory, June 30 Materials (6,000 × $5) Conversion costs (6,000 × 30% × $7) Total cost of Work in Process Inventory

$600,000 $30,000 12,600 $42,600

BE 154 Tomlinson Company has the following production data for May:  Beginning Work in Process Inventory, 0 units  Units started into production, 62,000  Ending Work in Process Inventory, 5,000 units that are 100% complete for materials and 60% complete for conversion costs  Unit materials cost, $5  Unit conversion cost, $8 Instructions Determine the costs to be assigned to the units completed and transferred out and the units in ending Work in Process Inventory. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

16A - 44

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 154

(4 min.)

Units completed and transferred out (57,000 × $13)

$741,000

Work in Process Inventory, May 31 Materials (5,000 × $5) Conversion costs (5,000 × 60% × $8) Total cost of ending Work in Process Inventory

$25,000 24,000 $49,000

BE 155 Dirt Cleaners, Inc. has the following production data for January: Completed and transferred out Ending work in process inventory

50,000 units 6,000 units

The units in ending work in process inventory are 100% complete for materials and 60% complete for conversion costs. There is no beginning work in process inventory. Materials cost is $4 per unit and conversion costs are $11 per unit. Instructions Determine the costs to be assigned to the units completed and transferred out and the units in ending work in process inventory. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 155

(4 min.)

Cost Reconciliation Schedule Costs accounted for Completed and transferred out (50,000 × $15) Work in Process Inventory, June 30 Materials (6,000 × $4) Conversion costs (3,600* × $11) Total costs *(6,000 x 60%)

$750,000 $ 24,000 39,600

63,600 $813,600

BE 156 Production costs chargeable to the Sanding Department in July for Joyful Art are $30,000 for materials, $26,000 for labor, and $10,000 for manufacturing overhead. Equivalent units of production are 25,000 for materials and 20,000 for conversion costs. Instructions Compute the unit costs for materials and conversion costs. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 156

(4 min.)

COSTS Unit costs Costs in July Equivalent units of production Unit costs .

Materials $30,000 25,000 $1.20

Conversion Costs $36,000 20,000 $1.80

Total $66,000 $3.00

Process Costing 16A - 45 a

BE 157

Tip Top Painting Company has the following production data for March:  Beginning Work in Process Inventory, 2,000 units, which are 30% complete for conversion costs  Units completed and transferred out, 44,000  Units in ending Work in Process Inventory, 9,000, 80% complete for conversion costs Materials are added only at the beginning of the process. Instructions Compute equivalent units of production for both materials and conversion costs using the FIFO method. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

Solution 157

(5 min.)

QUANTITIES

Physical Units

Units to be accounted for Work in process, March 1 Started into production Total Units

2,000 51,000 53,000

Units accounted for Work in process, March 1 Started and completed Work in process, March 31 Total units

2,000 42,000 9,000 53,000

Materials

Equivalent Units Conversion Costs

0 42,000 9,000 51,000

1,400 42,000 7,200 50,600

(2,000 × 70%) (9,000 × 80%)

BE 158

The Kirkland Department of Delta Company began the month of December with beginning work in process inventory of 4,000 units that are 100% complete as to materials and 20% complete as to conversion costs. Units transferred out are 12,000 units. Ending work in process inventory includes 2,000 units that are 100% complete as to materials and 60% complete as to conversion costs. Instructions Compute equivalent units of production for both materials and conversion costs for the month of December using the FIFO method. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

16A - 46 a

Solution 158

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e (5 min.)

QUANTITIES

Physical Units

Units to be accounted for Work in process, December 1 Started into production Total Units

4,000 10,000 14,000

Units accounted for Work in process, December 1 Started and completed Work in process, December 31 Total units

4,000 8,000 2,000 14,000

Materials

Equivalent Units Conversion Costs

0 8,000 2,000 10,000

3,200 8,000 1,200 12,400

(4,000 × 80%) (2,000 × 60%)

EXERCISES Ex. 159 Lutz Company produces a product in two departments: (1) Mixing and (2) Finishing. The company uses a process cost system. Lutz had the following transactions during the current month: (a) Purchased raw materials for $50,000. (b) Raw materials requisitioned for production were: Direct materials Mixing department $20,000 Finishing department 14,000 (c) Incurred factory labor costs of $74,000. (d) Factory labor used: Mixing department $44,000 Finishing department 30,000 (e) Manufacturing overhead is applied to the product based on machine hours used in each department: Mixing department—400 machine hours at $30 per machine hour. Finishing department—500 machine hours at $20 per machine hour. (f) Units costing $56,000 were completed in the Mixing Department and were transferred out to the Finishing Department. (g) Units costing $70,000 were completed in the Finishing Department and were transferred out to Finished Goods Inventory. (h) Finished goods costing $40,000 were sold.

Test Bank for Managerial Accounting, Ninth Edition Ex. 159

3 - 47

(Cont.)

Instructions Record the preceding transactions for Lutz Company using the format below. Manufacturing Costs Raw Materials Inventory

Factory Labor

Manufacturing Overhead

Work in Process – Mixing

Work in Process – Finishing

Finished Goods Inventory

Cost of Goods Sold

(a) (b) (c) (d) (e) (f) (g) (h)

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 20, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

3 - 48

Test Bank for Managerial Accounting, Ninth Edition

Solution 159

(18–22 min.)

Raw Materials Inventory (a) Purchased raw materials

+$50,000

(b) Direct materials used

–34,000

(c) Factory labor incurred (d) Factory labor assigned (e) Manufacturing overhead applied (f) Transferred to Finishing Dept. (g) Transferred to Finished Goods Inventory

Factory Labor

Manufacturing Costs Work in Work in Manufacturing Process – Process – Overhead Mixing Finishing

+$20,000

+$14,000

+44,000

+30,000

+12,000

+10,000

–56,000

+56,000

Finished Goods Inventory

Cost of Goods Sold

+$74,000 –74,000 –$22,000

–70,000

(h) Cost of goods sold

+$70,000

–40,000

+$40,000

Process Costing

3A - 49

Ex. 160 Sanders Company has two production departments: Fabricating and Finishing. Beginning inventories are: Work in Process—Fabricating, $6,030; Work in Process—Finishing, $4,100; and Finished Goods Inventory, $5,600. During the month the following transactions occurred: 1. Purchased $40,000 of raw materials. 2. Incurred $75,000 of factory labor. 3. Incurred $50,000 of manufacturing overhead. 4. Requisitioned materials for Fabricating, $10,000 and Finishing, $8,000. 5. Assigned factory labor for Finishing, $60,000 and Fabricating, $15,000. 6. Assigned $45,000 of overhead based on machine hours used in each department. The Finishing Department used twice as many machine hours as did Fabricating. Instructions Enter beginning balances and record the transactions for the month using the following format . Manufacturing Costs Raw Materials Inventory

Factory Labor

Beginning balances

Manufacturin g Overhead

Work in Process – Fabricating +$6,030

Work in Process – Finishing +$4,100

Finished Goods Inventory +$5,600

Cost of Goods Sold

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 12, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

3 - 50

Test Bank for Managerial Accounting, Ninth Edition

Solution 160 (12–16 min.) Manufacturing Costs Raw Materials Inventory Beginning balances 1. Purchased raw materials 2. Incurred factory labor 3. Manufacturing overhead incurred 4. Direct materials used 5. Factory labor assigned 6. Manufacturing overhead applied

Factory Labor

Manufacturing Overhead

Work in Process – Fabricating +$6,030

Work in Process – Finishing +$4,100

+10,000

+8,000

+15,000

+60,000

*+15,000

*+30,000

+$40,000 +$75,000 +$50,000

–18,000 –75,000 –45,000

*x= Fab. Dept.; 2x = Finish. Dept.; x + 2x = $45,000; 3x = $45,000; x = $15,000; 2x = $30,000

Finished Goods Inventory +$5,600

Cost of Goods Sold

Process Costing

3A - 51

Ex. 161 The Pasta Factory manufactures spaghetti sauce through two production departments: Cooking and Packaging. For the month of February, the work in process accounts show the following balances and increases: Cooking Packaging Beginning Work in Process Inventory $ -0$ 6,000 Direct Materials 40,000 26,000 Factory Labor 20,000 9,000 Overhead 30,000 15,000 Costs transferred in 65,000 Instructions Enter beginning balances and record the February transactions that involved the Work in Process Inventory accounts, using format below. Manufacturing Costs

Raw Materials Inventory

Factory Labor

Manufacturing Overhead

Work in Process – Cooking

Work in Process – Packaging

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

3 - 52

Test Bank for Managerial Accounting, Ninth Edition

Solution 160 (12–16 min.) Manufacturing Costs

Raw Materials Inventory

Factory Labor

Manufacturing Overhead

Beginning balances Direct materials used

–$66,000 –$29,000

Factory labor assigned Manufacturing overhead assigned Transferred from Cooking to Packaging

–$45,000

Work in Process – Cooking

Work in Process – Packaging $0

+$6,000

+40,000

+26,000

+20,000

+9,000

+30,000

+15,000

–65,000

+65,000

Process Costing

3A - 53

Ex. 162 Benson Industries uses a process cost system. Products are processed first by Department A, then by Department B, before being transferred to the finished goods warehouse. Shown below is the cost information for Department B during the month of October: Costs of units transferred in Manufacturing costs added in Department B: Direct materials Direct labor Manufacturing overhead Total costs charged to Department B in October

$120,000 $50,000 12,000 19,000

81,000 $201,000

The cost of work in process in Department B at October 1 is $25,000, and the cost of work in process at October 31 is $30,000. Instructions Using the format below, record for the month of October: (a) The transfer of production from Department A to B. (b) The manufacturing costs incurred by Department B. (c) The transfer of completed units from Department B to the Finished Goods Inventory warehouse. Manufacturing Costs Raw Materials Inventory

Factory Labor

Manufacturing Overhead

Work in Process – Dept. A

Work in Process – Dept. B

Finished Goods Inventory

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

3 - 54

Test Bank for Managerial Accounting, Ninth Edition

Solution 160 (12–16 min.)

Raw Materials Inventory

Factory Labor

Manufacturing Costs Work in Process – Manufacturing Dept. A Overhead

(a) Transferred from Dept. A to Dept. B (b) Manufacturing costs assigned to Dept. B (c) Transferred to Finished Goods Inv.

–$120,000

–$50,000

–$12,000

–$19,000

Work in Process – Dept. B +$120,000

+81,000

*–$196,000

*$25,000 + $201,000 − $30,000

Finished Goods Inventory

+$196,000

Process Costing

3A - 55

Ex. 163 Hardy Company manufactures a single product by a continuous process that involves two production departments. The records indicate that $140,000 of direct materials were issued to and $200,000 of direct labor was incurred by Department 1 in the manufacture of the product during the current period. The factory overhead rate is $25 per machine hour; machine hours were 5,000 in Department 1 during the current period. Work in process in the department at the beginning of the period totaled $35,000; and work in process at the end of the period was $25,000. Instructions Using the format below, record (a) The flow of costs into Department 1 for (1) direct materials (2) direct labor (3) overhead (b) The transfer of production costs to Department 2. Manufacturing Costs Raw Materials Inventory

Factory Labor

Manufacturing Overhead

Work in Process – Dept. 1

Work in Process – Dept. 2

Beginning balance

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 7, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

3 - 56

Test Bank for Managerial Accounting, Ninth Edition

Solution 160 (12–16 min.) Manufacturing Costs Raw Materials Inventory

Factory Labor

Manufacturing Overhead

Beginning balance

Work in Process – Dept. 1 +$35,000

Work in Process – Dept. 2

(a)(1) Direct materials used –$140,000

+140,000

(a)(2) Direct labor assigned –$200,000 (a)(3) Manufacturing overhead assigned (b) Transferred from Dept. 1 to Dept. 2

+200,000 –$125,000

+125,000 *–475,000

*$35,000 + $140,000 + $200,000 + $125,000 – $25,00

+$475,000

Test Bank for Managerial Accounting, Ninth Edition

3 - 57

Ex. 164 Muffy Painting Company has the following production data for March.

Beginning Units Month Work in Process Transferred Out March 3,000 42,000

Ending Work in Process % Complete as to Units Conversion Cost 12,000 75%

Instructions Compute equivalent units of production for March for both materials and conversion costs. Materials are entered at the beginning of the process. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 164

(10 min.)

Quantities Units to be accounted for Work in process, March 1 Started into production Total units

Physical Units

Equivalent Units Materials Conversion Costs

3,000 51,000 54,000

Units accounted for Completed and transferred out 42,000 Work in process, March 31 12,000 Total units 54,000

42,000 12,000 54,000

42,000 9,000 (12,000 × 75%) 51,000

Ex. 165 The Nitrogen Fixation Department of Tomco Company began the month of December with work in process of 4,000 units that were 100% complete as to materials and 30% complete as to conversion costs. Units completed and transferred out during the month were 12,000 units. Ending work in process inventory contains 10,000 units that are 100% complete as to materials and 40% complete as to conversion costs. Instructions Compute the equivalent units of production for materials and conversion costs for the month of December. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 165

(10 min.)

Quantities Physical Units Units to be accounted for Work in process, December 1 4,000 Started into production 18,000 Total units 22,000 Units accounted for Completed and transferred out Work in process, December 31 Total units .

12,000 10,000 22,000

Equivalent Units Materials Conversion Costs

12,000 10,000 22,000

12,000 4,000 16,000

(10,000 × 40%)

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Test Bank for Managerial Accounting, Ninth Edition

Ex. 166

At Crenshaw Company, materials are entered at the beginning of each process. Work in process inventories, with the percentage of work done on conversion, and production data for its Painting Department in selected months are as follows:

Month July Sept.

Beginning Work In Process Percentage Units Completed -0— 2,500 20%

Units Completed and Transferred Out 11,000 9,000

Ending Work In Process Percentage Units Completed 1,500 90% 5,000 70%

Instructions (a) Compute the physical units for July. (b) Compute the equivalent units of production for materials and conversion costs for September. Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 166 (a)

(b)

(10–14 min.)

COMPUTATION OF PHYSICAL UNITS Beginning Work in Process Started into production Total units to be accounted for

July -012,500 12,500

Transferred out Ending Work in Process Total units accounted for

11,000 1,500 12,500

COMPUTATION OF EQUIVALENT UNITS Units accounted for Physical Units Completed and transferred out 9,000 Work in Process, Sept. 30 5,000 Total equivalent units of production 14,000

Equivalent Units Materials Conversion Costs 9,000 9,000 5,000 3,500 (5,000 × .70) 14,000 12,500

Ex. 167 Watts Company adds materials at the beginning of the process and conversion costs are incurred uniformly throughout the process. Instructions Complete the following calculation of equivalent units for materials and conversion costs. Physical Units Completed and transferred out Ending Work in Process Inventory Materials Conversion costs, 75% complete Total units .

Equivalent Units Materials Conversion Costs

40,000

12,000

Process Costing

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Ans: N/A, LO: 3, 4, Bloom: AN, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 167

(4–7 min.)

Completed and transferred out Ending Work in Process Inventory Materials Conversion costs—75% complete Total units

Physical Units 40,000 16,000*

Equivalent Units Materials Conversion Costs 40,000 40,000 16,000* 56,000

12,000 52,000

*12,000 ÷ .75 Ex. 168 Oates Company’s Work in Process – Finishing account shows the following activity. Work in Process – Finishing 6/1 Balance 6/30 Direct materials 6/30 Direct labor 6/30 Applied overhead 6/30 Transferred out 6/30 Balance

+$8,000 +1,800 +3,800 +2,800 ? ?

Production records show that there were 2,000 units in beginning Work in Process Inventory, 50% complete as to conversion costs; 8,000 units started into production, and 4,500 units completed and transferred out. The beginning Work in Process Inventory had conversion costs of $3,150. Conversion costs of $6,600 were added during the period. The units in ending inventory were 60% complete as to conversion costs. Materials are added at the beginning of the process. Instructions Answer the following questions. (a) How many units are in process at June 30? (b) What is the unit conversion cost for June? (c) What is the conversion cost in the June 30 work in process inventory? Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 168

(10–14 min.)

(a)

Work in Process Inventory, June 1 Started into production Units to be accounted for Less: Completed and transferred out Work in Process Inventory, June 30

(b)

Conversion costs Physical Units Completed and transferred out 4,500 Work in Process Inventory, June 30 5,500 Total 10,000 .

2,000 8,000 10,000 4,500 5,500 Equivalent Units 4,500 3,300 (5,500 × .60) 7,800

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Test Bank for Managerial Accounting, Ninth Edition

Unit conversion cost = $1.25 ($3,150 + $6,600) ÷ 7,800 = $1.25 (c) Conversion cost in June 30 work in process inventory: 3,300 × $1.25 = $4,125 Ex. 169 The Assembly Department uses a process cost accounting system and a weighted-average cost flow assumption. The department adds materials at the beginning of the process and incurs conversion costs uniformly throughout the process. During July, $190,000 of materials costs and $137,100 in conversion costs were charged to the department. The beginning work in process inventory was $93,000 on July 1, comprised of $80,000 of materials costs and $13,000 of conversion costs. Other data for the month of July are as follows: 25,000 units 70,000 units 30,000 units

Beginning work in process inventory, 7/1 Units completed and transferred out Ending work in process inventory, 7/31

(40% complete) (30% complete)

Instructions Answer the following questions and show computations to support your answers. 1. How many physical units have to be accounted for in July? 2. What are the equivalent units of production for materials and for conversion costs for the month of July? 3. What is the total cost assigned to the 70,000 units that were completed and transferred out of work in process in July? 4. What is the total cost of the July 31 work in process inventory? Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 169

(15–20 min.)

1. Units completed and transferred out Work in Process Inventory, July 31 Units to be accounted for

70,000 30,000 100,000

2. Equivalent units of production:

Completed and transferred out Work in Process, July 31 Total

Physical Units 70,000 30,000 100,000

Equivalent Units Materials Conversion Costs 70,000 70,000 30,000 9,000* 100,000 79,000

*(30,000 × .30) 3. Materials cost per unit Conversion cost per unit Total unit cost *($80,000 + $190,000)

$2.70 $1.90 $4.60

($270,000* ÷ 100,000 units) ($150,100** ÷ 79,000 units)

**($13,000 + $137,100)

Total cost assigned to units completed and transferred out: 70,000 × $4.60 = $322,000 4. Total cost of July 31 work in process inventory: (30,000 × $2.70) + (9,000 × $1.90) = $98,100 .

Process Costing

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Ex. 170 The Finishing Department of Edwards Company has the following production and cost data for July, its first month of operation: 1. Completed and transferred out, 8,000 units 2. Ending Work in Process Inventory, 2,000 units that are 40% complete as to conversion costs 3. Materials added, $30,000; conversion costs incurred, $17,600 Materials are entered at the beginning of the process. Conversion costs are incurred uniformly during the process. Instructions (a) Compute the equivalent units of production for materials and conversion costs for the month of July. (b) Compute unit costs and prepare a cost reconciliation schedule. Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 170

(15–20 min.)

(a) Physical Units Completed and transferred Out 8,000 Work in Process Inventory, July 31 2,000 Total 10,000

Equivalent Units Materials Conversion Costs 8,000 8,000 2,000 800* 10,000 8,800

*(2,000 × .40) (b)

Materials cost per unit Conversion cost per unit

$3 2 $5

($30,000 ÷ 10,000 units) ($17,600 ÷ 8,800 units)

Cost Reconciliation Schedule Costs accounted for Completed and transferred out (8,000 × $5) Work in Process Inventory, July 31 Materials (2,000 × $3) $6,000 Conversion costs (800 × $2) 1,600 Total costs

$40,000

7,600 $47,600

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Test Bank for Managerial Accounting, Ninth Edition

Ex. 171 Massey Corporation uses a process cost system and the weighted-average cost flow assumption. Production begins in the Fabricating Department where materials are added at the beginning of the process and conversion costs are incurred uniformly throughout the process. On March 1, the beginning work in process inventory consisted of 20,000 units which were 60% complete and had a cost of $175,000, $145,000 of which were materials costs. During March, the following occurred: Materials added: $305,000 Conversion costs incurred: $120,000 Units completed and transferred out in March: 50,000 Units in ending work in process inventory (40% complete as to conversion costs): 25,000 Instructions Answer the following questions and show the computations that support your answers. 1. What are the equivalent units of production for materials and conversion costs in the Fabricating Department for the month of March? 2. What are the costs assigned to the ending work in process inventory on March 31? 3. What are the costs assigned to units completed and transferred out during March? Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 171

(15–20 min.)

1. Equivalent units of production: Physical Units Completed and transferred out 50,000 Work in process, March 31 25,000 Total 75,000

Equivalent Units Materials Conversion Costs 50,000 50,000 25,000 10,000* 75,000 60,000

*(25,000 × .40) 2.

Materials unit cost Conversion unit cost Total unit cost *($145,000 + $305,000)

$6.00 2.50 $8.50

($450,000* ÷ 75,000 units) ($150,000** ÷ 60,000 units)

**[($175,000 – $145,000) + $120,000]

Costs assigned to Work in Process Inventory, March 31 Materials costs $150,000 (25,000 units × $6.00) Conversion costs 25,000 (10,000 units × $2.50) Total $175,000 3. Costs assigned to units completed and transferred out: 50,000 × $8.50 = $425,000

Process Costing

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Ex. 172 Given below are the production data for Department No. 1 for the first month of operation: Costs charged to Department 1: Materials Labor Overhead

$12,000 2,600 15,900

During this first month of operations, 4,000 units were started into production; 3,500 units were completed and transferred out; and the remaining 500 units are 100% completed with respect to materials and 40% complete with respect to conversion costs. Instructions Compute the following: (a) Unit materials cost (b) Equivalent units for conversion costs (c) Unit conversion cost (d) Total cost of 500 units in process at end of month (e) Total cost of 3,500 units transferred out Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Hard, Min: 14, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 172

(14–18 min.)

(a)

Unit materials cost: $12,000 ÷ 4,000 equivalent units for materials = $3.00.

(b)

Equivalent units for conversion costs: 3,500 completed + (40% × 500) = 3,700 equivalent units of conversion costs.

(c)

Unit conversion cost: ($2,600 + $15,900) ÷ 3,700 equivalent units = $5.00.

(d)

Total cost of 500 units in Work in Process Inventory Materials, 500 × $3.00 = $1,500 Conversion costs, 200 × $5.00 = 1,000 Total $2,500

(e)

Total cost of 3,500 transferred out units: 3,500 × ($3.00 + $5.00) = $28,000.

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Test Bank for Managerial Accounting, Ninth Edition

Ex. 173 Kinsler Company’s Work in Process – Painting account shows the following activity. Work in Process – Painting 5/1 Balance 5/31 Direct materials

+$5,300 +7,740

5/31 Direct labor 5/31 Applied overhead 5/31 Transferred out 5/31 Balance

+4,110 +2,470 ? ?

Production records show that there were 700 units in the beginning work in process inventory that were 30% complete as to conversion costs, 3,800 units started into production, and 4,000 units completed and transferred out. The beginning work in process inventory had materials cost of $3,060 and conversion costs of $2,240. The units in ending working process inventory were 40% complete as to conversion costs. Materials are entered at the beginning of the painting process. Instructions (a) How many units are in process at May 31? (b) What is the unit materials cost for May? (c) What is the unit conversion cost for May? (d) What is the total cost of units completed and transferred out in May? (e) What is the cost of the May 31 work in process inventory? Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 173 (a)

(10 min.)

Work in Process Inventory, May 1 Started into production Total units to be accounted for Less: Completed and transferred out Work in Process Inventory, May 31

700 3,800 4,500 4,000 500

(b) Units completed and transferred out Work in Process Inventory, May 31 500  100% 500  40%

Work in Process Inventory, May 1 Costs added Total materials cost .

Materials 4,000

Equivalent Units Conversion Costs 4,000

500 4,500

200 4,200

Direct Materials $3,060 7,740 $10,800

Conversion Costs $2,240 6,580 $8,820

Process Costing

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$10,800 ÷4,500 = $2.40 Solution 173 (Cont’d.) (c)

$8,820 ÷ 4,200 = $2.10

(d)

Completed and transferred out (4,000 $4.50)

(e)

Work in Process Inventory Materials (500  $2.40) Conversion costs (200  $2.10)

$18,000

$1,200 420 $1,620

Ex. 174 The Cutting Department of Sanderson Company has the following production and cost data for July. Production 1. Completed and transferred out: 15,000 units 2. Ending work in process: 5,000 units that are 60% complete as to conversion costs and 100% complete as to materials

Costs Beginning work in process Materials Labor Manufacturing overhead

-070,000 21,600 25,200

Materials are entered at the beginning of the process. Conversion costs are incurred uniformly during the process. Instructions (a) Determine the equivalent units of production for (1) materials and (2) conversion costs. (b) Compute unit costs and prepare a cost reconciliation schedule. Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 174

(8 min.)

(a) Units completed and transferred out Work in Process Inventory, July 31 5,000  100% 5,000  60%

Materials 15,000 5,000 20,000

Conversion Costs 15,000

3,000 18,000

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Test Bank for Managerial Accounting, Ninth Edition

Solution 174

(Cont’d.)

(b)

Materials: $70,000 ÷20,000 = $3.50 Conversion costs: ($21,600 + $25,200) ÷ 18,000 = $2.60 Costs accounted for Completed and transferred out (15,000  $6.10) Work in Process Inventory, July 31 Materials (5,000  $3.50) Conversion costs (3,000  $2.60) Total costs

$ 91,500 $17,500 7,800

25,300 $116,800

Ex. 175 Wilkinson Company has gathered the following information. Units in beginning work in process inventory Units started into production Units in ending work in process inventory Percent complete for conversion costs in ending work in process inventory Costs incurred: Direct materials Direct labor Overhead

-054,000 10,000 60% $ 81,000 $ 99,000 $131,000

Instructions (a) Compute equivalent units of production for materials and for conversion costs. (b) Determine the unit costs of production. (c) Show the assignment of costs to units completed and transferred out and those still in process. Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 175 (a)

(8 min.)

Materials: 44,000 + 10,000= 54,000 Conversion costs: 44,000 + (10,000 60%) = 50,000

(b)

Materials: $81,000/54,000 = $1.50 Conversion costs: ($99,000 + $131,000)/50,000 = $4.60

(c)

Units completed and transferred out: 44,000  $6.10 = $268,400 Units in ending Work in Process Inventory: 10,000  $1.50

$15,000

6,000  $4.60

27,600 $42,600

Process Costing

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Test Bank for Managerial Accounting, Ninth Edition

25,000 115,000 30,000 40% $175,000 $235,400 $191,600

Materials are added at the beginning of the process. Instructions (a) Compute equivalent units of production for materials and for conversion costs. (b) Determine the unit costs of production. (c) Show the assignment of costs to units completed and transferred out and those still in process. Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 176

(8 min.)

(a)

Materials: 110,000(1) + 30,000 = 140,000 Conversion costs: 110,000 + (30,000 40%) = 122,000 (1) 25,000 + 115,000 – 30,000

(b)

Materials: $175,000/140,000 = $1.25 Conversion costs: ($235,400 + $191,600)/122,000 = $3.50

(c)

Units transferred out: 110,000  $4.75 = $522,500 Units in ending Work in Process Inventory: 30,000  $1.25 $37,500 12,000  $3.50 42,000 $79,500

Process Costing

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$202,000

Labor costs incurred: Overhead applied:

$178,300 $312,500

Instructions (a) Compute the equivalent units of productions for materials and conversion costs for the month of September. (b) Compute the unit costs for materials and conversion costs for the month. (c) Determine the costs to be assigned to the units completed and transferred out and those still in process. Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Moderate, Min: 14, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 177

(14–18 min.)

(a) Work in Process Inventory, 9/1 Units started into production

Units completed and transferred out Work in Process Inventory, 9/30

Units completed and transferred out Work in Process Inventory 6,000  100% 6,000  30%

Physical Units 2,000 48,000 50,000 44,000 6,000 50,000

Materials 44,000 6,000 50,000

Equivalent Units Conversion Costs 44,000

1,800 45,800

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Test Bank for Managerial Accounting, Ninth Edition

Solution 177 (Cont.) (b)

Materials Work in Process Inventory, September 1 Direct materials ..................................

$ 18,000

Costs added to production during September................................................. 202,000 Total materials cost ................................................... $220,000 $220,000  50,000 = $4.40 (Materials cost per unit) Conversion Costs Work in Process Inventory, September 1 Conversion costs ...............................

$ 13,000

Costs added to production during September Conversion costs .............................................. 490,800 Total conversion costs.............................................. $503,800 $503,800  45,800 = $11.00 (Conversion cost per unit) (c)

Costs accounted for Completed and transferred out (44,000  $15.40) $677,600 Work in Process Inventory, September 30 Materials (6,000  $4.40) ......................... $26,400 Conversion costs (1,800  11.00)........................... 19,800 46,200 Total costs......................................................................................... $723,800

Ex. 178 Grey Building Supplies' total materials costs are $30,000 and total conversion costs are $33,000. Equivalent units of production for materials are 10,000, and 5,000 for conversion costs. Instructions Compute the unit costs for materials, conversion costs, and total manufacturing costs for the month. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 6, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 178

(6–8 min.)

COSTS Unit Costs Costs incurred Equivalent units Unit costs

Materials $30,000 10,000 $3.00

Conversion Costs $33,000 5,000 $6.60

Total $63,000 $9.60

Process Costing

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Ex. 179 Glazer, Inc. has the following production data for June: Completed and transferred out Ending Work in Process Inventory

50,000 units 5,000 units

The units in ending Work in Process Inventory are 100% complete for materials and 60% complete for conversion costs. Materials costs are $3 per unit and conversion costs are $6 per unit. Instructions Determine the costs to be assigned to the units transferred out and the units in ending Work in Process Inventory. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 179

(8 min.)

Cost Reconciliation Schedule Costs accounted for Completed and transferred out (50,000 × $9) Work in Process Inventory, June 30 Materials (5,000 × $3) $15,000 Conversion costs (3,000* × $6) 18,000 Total costs *(5,000 × 60%)

$450,000 33,000 $483,000

Ex. 180 Production costs chargeable to the Sanding Department in July in Magnum Company were $30,000 for materials, $17,000 for labor, and $13,000 for manufacturing overhead. Equivalent units of production are 30,000 for materials and 20,000 for conversion costs. Instructions Compute the unit costs for materials and conversion costs. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 6, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 180 (6-8 min.) COSTS Unit Costs Costs in July Equivalent units Unit costs

Materials $30,000 30,000 $1.00

Conversion Costs $30,000 20,000 $1.50

Total $60,000 $2.50

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Test Bank for Managerial Accounting, Ninth Edition

Ex. 181 Mayer Company uses a process cost system. The Molding Department adds materials at the beginning of the process and conversion costs are incurred uniformly throughout the process. Work in Process Inventory on May 1 was 75% complete as to conversion costs and Work in Process Inventory on May 31 was 60% complete for conversion costs. Instructions Complete the Production Cost Report for the Molding Department for the month of May using the above information and the information below. MAYER COMPANY Molding Department Production Cost Report For the Month Ended May 31, 2022 QUANTITIES Units to be accounted for Work in process, May 1 Started into production Total units

Physical Units

Units accounted for Completed and transferred out Work in process, May 31 Total units COSTS Unit costs Costs in May Equivalent units Unit costs

Equivalent Units Conversion Costs

8,000 32,000 40,000 35,000 5,000 40,000

Materials $140,000 $

Costs to be accounted for Work in process, May 1 Started into production Total costs Cost Reconciliation Schedule Costs accounted for Completed and transferred out Work in process, May 31 Materials Conversion costs Total costs

Materials

Conversion Costs $161,500 $

Total $301,500 $

$ 60,000 241,500 $301,500 $ $ $301,500

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 12, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Cost Management, Reporting

Process Costing Solution 181

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(12–16 min.) MAYER COMPANY Molding Department Production Cost Report For the Month Ended May 31, 2022

QUANTITIES Units to be accounted for Work in process, May 1 Started into production Total units

Physical Units

Materials

Equivalent Units Conversion Costs

8,000 32,000 40,000

Units accounted for Completed and transferred out 35,000 Work in process, May 31 5,000 Total units 40,000 COSTS Unit costs Costs in May Equivalent units Unit costs

35,000 5,000 40,000

Materials $140,000 40,000 $ 3.50

35,000 3,000 (5,000 × 60%) 38,000

Conversion Costs $161,500 38,000 $ 4.25

Costs to be accounted for Work in process, May 1 Started into production Total costs Cost Reconciliation Schedule Costs accounted for Completed and transferred out (35,000 × $7.75) Work in process, May 31 Materials (5,000 × $3.50) Conversion costs (3,000 × $4.25) Total costs

Total $301,500 $

7.75

$ 60,000 241,500 $301,500

$271,250 $ 17,500 12,750

30,250 $301,500

Ex. 182 Baker Winery manufactures a fine wine in two departments, Fermenting and Bottling. In the Fermenting Department, grapes are aged in casks for a period of 30 days. In the Bottling Department, the wine is bottled and then sent to the finished goods warehouse. Labor and overhead are incurred uniformly through both processes. Materials are entered at the beginning of both processes. Cost and production data for the Fermenting Department for December 2022 are presented below: Cost data Beginning work in process inventory Materials Conversion costs Total costs .

$ 37,000 ($30,000 of materials cost) 390,000 116,000 $543,000

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Test Bank for Managerial Accounting, Ninth Edition

Ex. 182

(cont.)

Production data Beginning Work in Process Inventory (gallons) 5,000 (40% complete as to conversion costs) Gallons started into production 79,000 Ending Work in Process Inventory (gallons) 8,000 (75% complete as to conversion costs) Instructions (a) Compute the equivalent units of production. (b) Determine the unit production costs. (c) Determine the costs to be assigned to units completed and transferred out and those in ending Work in Process Inventory. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 17, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 182

(17–25 min.)

(a) Physical Units Completed and transferred out 76,000* Ending work in process 8,000 Total 84,000

Equivalent Units Materials Conversion Costs 76,000 76,000 8,000 6,000 (8,000 × .75) 84,000 82,000

*(5,000 + 79,000) – 8,000 (b) Unit Production Costs: Materials Conversion costs Total unit cost *($30,000 + $390,000)

$5.00 ($420,000* ÷ 84,000) 1.50 ($123,000** ÷ 82,000) $6.50 **[($37,000 – $30,000) + $116,000]

(c) Costs assigned to units transferred out and ending Work in Process Inventory: Total Costs Assigned Completed and transferred out (76,000 × $6.50) $494,000 Ending Work in Process Inventory Materials (8,000 × $5) $40,000 Conversion costs (6,000 × $1.50) 9,000 49,000 $543,000 Ex. 183 The Assembly Department of Nitz Company has the following production and cost data at the end of May, 2022, its first month of operations. Production:

30,000 units started into production; 25,000 units completed and transferred out and 5,000 units 100% completed as to materials and 40% complete as to conversion costs.

Manufacturing Costs: Materials added at beginning of process, $90,000; labor, $75,000; overhead $60,000. Instructions Prepare a production cost report for the month of May. .

Process Costing

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Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 22, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Cost Management, Reporting

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Test Bank for Managerial Accounting, Ninth Edition

Solution 183

(22–30 min.) NITZ COMPANY Assembly Department—Production Cost Report For the Month Ended May 31, 2022

Physical Units

Equivalent Units Materials Conversion Costs

QUANTITIES Units to be accounted for Work in Process Inventory, May 1 Started into production Total units

0 30,000 30,000

Units accounted for Completed and transferred out Work in Process Inventory, May 31 Total units accounted for

25,000 5,000 30,000

25,000 2,000 27,000

COSTS Unit costs Costs in May Equivalent units of production Unit costs

Materials $90,000 30,000 $3.00

Conversion Costs $135,000 27,000 $5.00

Total $225,000

Costs to be accounted for Work in Process Inventory, May 1 Started into production Total costs Cost Reconciliation Schedule Costs accounted for Completed and transferred out (25,000 × $8) Work in Process Inventory, May 31 Materials (5,000 × $3) Conversion Costs (2,000 × $5) Total costs

$8.00 $ 0 225,000 $225,000

$200,000 $15,000 10,000

25,000 $225,000

Ex. 184 Romero Company—Perth Division is a state of the art production facility that manufactures landing gears for airplanes. The 500 units in the September 30 work in process inventory are 60% complete for conversion costs. Materials are assumed to be 100% complete. Total materials costs during the period totaled $840,000. Instructions As the new plant accountant, you are asked to complete the production cost report which appears as follows:

Process Costing Ex. 184

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(cont.) ROMERO COMPANY—Perth Division Assimilation Department Production Cost Report For the Month Ended September 30, 2022

QUANTITIES Physical Units Units to be accounted for Work in process, September 1 300 Started into production 1,100 Total units 1,400 Units accounted for Completed and transferred out Work in process, September 30 Total units COSTS Unit Costs Costs in September Equivalent units of production Unit costs

900 500 1,400

Materials $840,000 $

Equivalent Units Materials Conversion Costs

900 500 1,400

Conversion Costs Total $ $1,104,000 $

220

Costs to be accounted for Work in process, Sept. 1 Started into production Total costs Cost Reconciliation Schedule Costs accounted for Completed and transferred out Work in Process Inventory, September 30: Materials Conversion costs Total costs

900

$ 243,400 $

$ $ 66,000 $1,104,000

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Cost Management, Reporting

3A - 78

Test Bank for Managerial Accounting, Ninth Edition

Solution 184

(10-15 min.) ROMERO COMPANY—Perth Division Assimilation Department Production Cost Report For the Month Ended September 30, 2022

QUANTITIES Physical Units Units to be accounted for Work in Process Inventory, 9/1 300 Started into production 1,100 Total units 1,400 Units accounted for Completed and transferred out Work in process, 9/30 Total units

900 500 1,400

COSTS Unit Costs Costs in September Equivalent units Unit costs

Materials $840,000 1,400 $600

Equivalent Units Materials Conversion Costs

900 500 1,400

900 300 1,200

Conversion Costs $264,000 1,200 $220

Costs to be accounted for Work in Process Inventory, 9/1 Started into production Total costs

Total $1,104,000 $820 $ 243,400 860,600 $1,104,000

Cost Reconciliation Schedule Costs accounted for Completed and transferred out (900 × $820) Work in Process Inventory, 9/30: Materials (500 × $600) Conversion costs (300 × $220) Total costs

$ 738,000 $300,000 66,000

366,000 $1,104,000

Ex. 185

Month March

Beginning Work in Process Percentage Units Completed 2,100 60%

Units Completed and Transferred Out 21,500

Ending Work in Process Percentage Units Completed 750 80%

Instructions (a) Compute the physical units for March. (b) Compute the equivalent units of production for materials and conversion costs for March. .

Process Costing

3A - 79

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

Solution 185

(5–7 min.)

(a) COMPUTATION OF PHYSICAL UNITS Beginning Work in Process Inventory 2,100 Started into production 20,150 Total units to be accounted for 22,250 Completed and transferred out Ending Work in Process Inventory Total units accounted for

21,500 750 22,250

(b) COMPUTATION OF EQUIVALENT UNITS Units accounted for Physical Units Work in process, March 1 2,100 Started and completed 19,400 Work in process, March 30 750 Total equivalent units 22,250

Equivalent Units Materials Conversion Costs 0 840 (2,100 × .40) 19,400 19,400 750 600 (750 × .80) 20,150 20,840

Ex. 186

Taco Ranch uses a process cost system and the FIFO cost flow assumption. Production begins in the Crafting Department where materials are added at the beginning of the process and conversion costs are incurred uniformly throughout the process. On November 1, the work in process inventory consisted of 10,000 units that were 60% complete as to conversion costs and had a cost of $266,000, $140,000 of which were materials costs. During November, the following occurred: Materials added Conversion costs incurred Units completed and transferred out in November Units in ending work in process, November 30 (20% complete)

$315,000 $67,500 55,000 25,000

Instructions Answer the following questions and show the computations that support your answers: (a) What are the equivalent units of production for materials and conversion costs in the Crafting Department for the month of November? (b) What are the costs assigned to the Work in Process Inventory on November 30? (c) What are the costs assigned to units completed and transferred out during November? Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

3A - 80

Test Bank for Managerial Accounting, Ninth Edition

(10–12 min.)

Solution 186

$4.50 1.25 $5.75

Costs to be accounted for Work in process, November 1 Started in production Total costs

Equivalent Units Materials Conversion Costs 0 4,000 (10,000 × .40) 45,000 45,000 25,000 5,000 (25,000 × .20) 70,000 54,000

($315,000 ÷70,000 units) ($67,500 ÷54,000 units)

$266,000 382,500 $648,500

Costs assigned to Work in Process Inventory, November 30 Materials costs $112,500 (25,000 units × $4.50) Conversion costs 6,250 (5,000 units × $1.25) Total $118,750 (c) Costs assigned to units completed and transferred out: Completed and transferred out Work in Process Inventory, November 1 $266,000 Cost to complete beginning work in process 5,000 Total costs 271,000 Units started and completed 258,750 Total costs for units completed and transferred out $529,750

(4,000 × $1.25) (45,000 × $5.75)

Process Costing

3A - 81

COMPLETION STATEMENTS 187.

Process cost systems are used to apply costs to similar products that are in a fashion.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

188.

Separate accounts are maintained for each production department or manufacturing process in a process cost system.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Cost Management

189.

In a process cost system, manufacturing costs are summarized in a report for each department.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Cost Management

190.

A primary driver of overhead costs in continuous manufacturing operations is .

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Cost Management

191.

Equivalent units of production measure the work done during the period, expressed in fully units.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

192.

Unit production costs are expressed in terms of

units of production.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

193.

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

194.

A cost reconciliation schedule is prepared to assign total costs to units and to the units in the work in process inventory.

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Cost Management, Reporting

195.

The production cost report is an internal document that shows production quantity and for a production department.

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Cost Management, Reporting

Answers to Completion Statements 187. 188. 189. 190. 191.

mass-produced, continuous Work in Process Inventory production cost machine hours completed

192. 193. 194. 195.

equivalent 81,000 transferred out, ending cost data

3A - 82

Test Bank for Managerial Accounting, Ninth Edition

MATCHING 196.

Match the items in the two columns below by entering the appropriate code letter in the space provided. A. B. C. D.

Total manufacturing cost per unit Equivalent units of production Total units accounted for Production cost report

E. F. G. H.

Cost reconciliation schedule Units transferred out Unit production costs Physical units

A summary of both production quantity and cost data for a production department.

Shows that the total costs accounted for equal the total costs to be accounted for.

Work done during a period expressed in fully completed units.

Costs expressed in terms of equivalent units of production.

Actual units to be accounted for during a period, irrespective of any work performed.

Units transferred out during the period plus units in ending work in process inventory.

Unit materials costs plus unit conversion costs.

Total units accounted for minus units in ending work in process inventory.

Ans: N/A, LO: 1-4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Cost Management

Answers to Matching 1. 2. 3. 4.

D E B G

5. 6. 7. 8.

H C A F

Process Costing

3A - 83

SHORT-ANSWER ESSAY QUESTIONS S-A E 197 Why do some companies need a cost accounting system while others do not? What are the determining characteristics or factors that influence the type of cost accounting system that is appropriate for a company? Ans: N/A, LO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA FC: Reporting, AICPA PC: Communication, IMA: Cost Management

Solution 197 Companies need a cost accounting system only if they need to measure, record, and report the costs of manufacturing products or providing services. The two basic types of cost accounting systems are job order costing and process costing. A job order cost system is appropriate when production consists of batches of unique products (jobs). A process cost system is used to apply costs to similar products that are mass-produced in a continuous fashion. S-A E 198 The production cost report summarizes the activities that have taken place in a department or process over a period of time. Identify the major types of information found on a production cost report, and indicate who in the business organization uses this type of information and for what purpose the information is used. Ans: N/A, LO: 4, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA FC: Reporting, AICPA PC: None, IMA: Cost Management, Reporting

Solution 198 The types of information found in a production cost report are units to be accounted for and units accounted for, unit costs, and costs to be accounted for and costs accounted for. Production cost reports provide a basis for evaluating the productivity of a department and so are used by production managers. In addition, the cost data can be used by middle management to assess whether unit costs and total costs are reasonable. When the quantity and cost data are compared with predetermined goals, top management can also ascertain whether current performance is meeting planned objectives. Of course, the information in the report is also used for recordkeeping and income determination by the accounting department. S-A E 199 Your roommate is curious about the features of process cost accounting. Identify and explain the distinctive features for your roommate. Ans: N/A, LO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA FC: Reporting, AICPA PC: Communication, IMA: Cost Management

Solution 199 The features of process costing are: (1) separate Work in Process Inventory accounts for each process, (2) production cost reports, (3) product costs computed for each accounting period, and (4) unit costs computed based on total manufacturing costs.

3A - 84

Test Bank for Managerial Accounting, Ninth Edition

S-A E 200 What purposes are served by a production cost report? Ans: N/A, LO: 4, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA FC: Reporting, AICPA PC: Communication, IMA: Cost Management, Reporting

Solution 200 The production cost report provides the basis for evaluating: (1) the productivity of a department, (2) whether unit and total costs are reasonable, and (3) whether management's predetermined production and cost goals are being met. S-A E 201 (Ethics) Dolly's Dream Homes, Inc. manufactures doll houses in a continuous process. Various customizing features and furnishings are added at the end of the process to create the various models that are sold. The basic design and floor plans of all the houses are identical, however. During the most recent month, the lumber used in trimming the houses was inadvertently recorded as direct materials. At month end, when the error was discovered, Susie Rief, the accountant, was told by the accounting manager, Karen Tate, not to bother with correcting the error, because the dollar amount of the error was not "worth it." Susie believes that the dollar amount is not as important as the quality of the reports. She wonders whether she would be committing an unethical act if she were to make the changes anyway, despite her superior's telling her not to. Required: 1. Who are the stakeholders in this situation? 2. Was it unethical for the company to ask that the error not be corrected? Explain briefly. 3. Would it be unethical for Susie to correct the error? Explain briefly. Ans: N/A, LO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA FC: Reporting, AICPA PC: Professional Behavior, IMA: Business Applications

CHAPTER 17 ACTIVITY-BASED COSTING CHAPTER LEARNING OBJECTIVES 1.

Discuss the difference between traditional costing and activity-based costing. A traditional costing system assigns overhead to products on the basis of predetermined plantwide or departmentwide rates such as direct labor or machine hours. An ABC system allocates overhead to identified activity cost pools and then assigns costs to products using related cost drivers that measure the activities (resources) consumed. The development of an activity-based costing system involves the following four steps. (1) Identify and classify the major activities involved in the manufacture of specific products and allocate overhead to cost pools. (2) Identify the cost driver that has a strong correlation to the costs accumulated in each cost pool and total estimated annual cost driver usage. (3) Compute the activity-based overhead rate for each cost pool. (4) Assign overhead costs to products using the overhead rates determined for each cost pool and each product’s use of each cost driver.

Apply activity-based costing to a manufacturer. To identify activity cost pools, a company must perform an analysis of each operation or process, documenting and timing every task, action, or transaction. Cost drivers identified for assigning activity cost pools must (a) accurately measure the actual consumption of the activity by the various products and (b) have related data easily available. The overhead allocated to each activity cost pool is divided by the estimated use of cost drivers to determine the activity-based overhead rate for each pool. Overhead is assigned to products by multiplying a particular product’s use of a cost driver by the activity-based overhead rate. This is done for each activity cost pool and then summed.

Explain the benefits and limitations of activity-based costing. Features of ABC that make it a more accurate product costing system include (1) the increased number of cost pools used to assign overhead (including use of the activity-level hierarchy), (2) the enhanced control over overhead costs (including identification of non-value-added activities), and (3) the better management decisions it makes possible. The limitations of ABC are (1) the higher analysis and measurement costs that accompany multiple activity centers and cost drivers, and (2) the necessity still to assign some costs arbitrarily.

Apply activity-based costing to service industries. The overall objective of using ABC in service industries is no different than for manufacturing industries—that is, improved costing of services performed (by job, service, contract, or customer). The general approach to costing is the same: analyze operations, identify activities, accumulate overhead costs by activity cost pools, and identify and use cost drivers to assign the cost pools to the services.

5. Explain just-in-time (JIT) processing. JIT is a processing system dedicated to having on hand the right materials and products just at the time they are needed, thereby reducing the amount of inventory and the time inventory is held. One of the principal accounting effects is that one account, Raw and In-Process Inventory, replaces both the raw materials and work in process inventory accounts.

17 - 2 Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

TRUE-FALSE STATEMENTS 1.

Traditional costing systems use multiple predetermined overhead rates.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Traditionally, overhead has been assigned based on direct labor cost or direct labor hours.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Current trends in manufacturing include less direct labor and more overhead.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Activity-based costing allocates overhead to multiple activity cost pools and assigns the cost pools to products using cost drivers.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

A cost driver does not generally have a direct cause-effect relationship with the resources consumed.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

The first step in activity-based costing is to assign overhead costs to products using cost drivers.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

To achieve accurate costing, a high degree of correlation must exist between the cost driver and the actual consumption of the activity cost pool.

Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Low-volume products often require more special handling than high-volume products.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

When overhead is properly assigned in ABC, it will usually decrease the unit cost of highvolume products.

Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

10.

ABC leads to enhanced control over overhead costs.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

11.

ABC usually results in less appropriate management decisions.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

12.

ABC is generally costlier to implement than traditional costing.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Activity-Based Costing 17 - 3 13.

ABC eliminates all arbitrary cost allocations.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

14.

ABC is particularly useful when product lines differ greatly in volume and manufacturing complexity.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

15.

ABC is particularly useful when overhead costs are an insignificant portion of total costs.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

16.

Activity-based management focuses on reducing costs and improving processes.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

17.

Any activity that increases the cost of producing a product is an value-added activity.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

18.

Engineering design is an value-added activity.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

19.

Non-value-added activities increase the cost of a product but not its perceived value.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

20.

Machining is a non-value-added activity.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

21.

Not all activities labeled nonessential are totally wasteful nor can they be totally eliminated.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

22.

Plant management is a batch-level activity.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

23.

Painting is a product-level activity.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

24.

The overall objective of using ABC in a service firm is the same that it is in a manufacturer.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

25.

What sometimes makes implementation of activity-based costing difficult in service industries is that a smaller proportion of overhead costs are company-wide costs.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

26.

The same general approach to identifying activities, activity cost pools, and cost drivers is used by a service company as by a manufacturing company. .

17 - 4 Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

27.

Just-in-time strives to eliminate inventories by using a pull approach.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

28.

Quality control is less important in just-in-time than in traditional manufacturing philosophies.

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

29.

Inventory storage costs are reduced in just-in-time processing.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

30.

Rework costs typically increase in just-in-time processing.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

MULTIPLE CHOICE QUESTIONS 31.

Which of the following is not typical of traditional costing systems? a. Use of a single predetermined overhead rate. b. Use of direct labor hours or direct labor cost to assign overhead. c. Assumption of correlation between direct labor and incurrence of overhead cost. d. Use of multiple cost drivers to allocate overhead.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

32.

In traditional costing systems, overhead is generally applied based on a. direct labor. b. machine hours. c. direct material dollars. d. units of production.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

33.

An activity that has a direct cause-effect relationship with the resources consumed is a(n) a. cost driver. b. overhead rate. c. cost pool. d. product activity.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Activity-Based Costing 17 - 5 34.

Which best describes the flow of overhead costs in an activity-based costing system? a. Overhead costs � direct labor cost or hours � products b. Overhead costs � products c. Overhead costs � activity cost pools � cost drivers � products d. Overhead costs � machine hours � products

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

35.

The costs that are easiest to trace directly to products are a. direct materials and direct labor. b. direct labor and overhead. c. direct materials and overhead. d. none of the above; all three costs are equally easy to trace to the product.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

36.

Often the most difficult part of computing accurate unit costs is determining the proper amount of to assign to each product, service, or job. a. direct materials b. direct labor c. overhead d. direct materials and direct labor

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

37.

Predetermined overhead rates in traditional costing are often based on a. direct labor cost for job order costing and machine hours for process costing. b. machine hours for job order costing and direct labor cost for process costing. c. multiple bases for job order costing and direct labor cost for process costing. d. multiple bases for both job order costing and process costing.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

38.

Direct labor is sometimes the appropriate basis for assigning overhead cost to products. It is appropriate to use direct labor when which of the following is true? (1) Direct labor constitutes a significant part of total product cost. (2) A high correlation exists between direct labor and changes in the amount of overhead costs. a. b. c. d.

(1) only (2) only Either (1) or (2) Both (1) and (2)

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

39.

Advances in computerized systems, technological innovation, global competition, and automation have changed the manufacturing environment drastically by a. increasing direct labor costs and increasing overhead costs. b. increasing direct labor costs and decreasing overhead costs. c. decreasing direct labor costs and decreasing overhead costs. d. decreasing direct labor costs and increasing overhead costs.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

17 - 6 Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e 40.

Activity-based costing a. allocates overhead to activity cost pools and then assigns the activity cost pools to products and services by means of cost drivers. b. accumulates overhead in one cost pool and then assigns the overhead to products and services by means of a cost driver. c. assigns activity cost pools to products and services and then allocates overhead back to the activity cost pools. d. allocates overhead directly to products and services based on activity levels.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

41.

The costs associated with ordering materials, setting up machines, assembling products, and inspecting products are examples of a. cost drivers. b. activity pools. c. direct labor costs. d. nonmanufacturing activities.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

42.

Which cost driver would an “Ordering and Receiving Materials” cost pool most likely have? a. machine hours b. number of setups c. number of purchase orders d. number of inspection tests

Ans: C, LO: 2, Bloom: K, Difficulty: Moderate, Min: 3, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

43.

Hartley Company produces two products, Flower and Planter. Flower is a high-volume item totaling 20,000 units annually. Planter is a low-volume item totaling only 6,000 units per year. Flower requires one hour of direct labor for completion, while each unit of Planter requires 2 hours. Therefore, total annual direct labor hours are 32,000 (20,000 + 12,000). Estimated annual manufacturing overhead costs are $960,000. Hartley uses a traditional costing system and assigns overhead based on direct labor hours. Each unit of Planter would be assigned overhead of a. $30.00. b. $36.91. c. $60.00. d. need more information to compute.

Ans: C, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $960,000 / 32,000 = $30; $30 x 2 = $60.00 ((Estimated Annual manufacturing overhead costs / total annual direct labor hours) x Required hours = Assigned overhead of each unit of Planter)

Activity-Based Costing 17 - 7 44.

Reynoso Corporation manufactures titanium and aluminum tennis racquets. Reynoso’s total overhead costs consist of assembly costs and inspection costs. The following information is available regarding activity cost pools, estimated use of activities per product, and total estimated overhead costs: Activity Cost Pools Assembly Inspections

Titanium 500 mach. hrs. 350 2,100 labor hrs.

Aluminum 500 mach. hrs. 150 1,900 labor hrs.

Total Cost $60,000 $100,000

Reynoso is considering switching from one overhead rate based on labor hours to activitybased costing. Total overhead costs assigned to titanium racquets computed using a single overhead rate are a. $80,000. b. $84,000. c. $100,000. d. $112,000. Ans: B, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($60,000 + $100,000) / (2,100 + 1,900) = $40 x 2,100 = $84,000 (Total Cost: Assembly + Total Cost: Inspections) / (Labor hours: Titanium + Labor hours: Aluminum)) x Titanium labor hours = Total overhead costs assigned to titanium racquets)

45.

Titanium 500 mach. hrs. 350 2,100 labor hrs.

Aluminum 500 mach. hrs. 150 1,900 labor hrs.

Total Cost $60,000 $100,000

Reynoso is considering switching from one overhead rate based on labor hours to activitybased costing. If activity-based costing is used, what amount of assembly cost is assigned to titanium racquets? a. $21,000 b. $30,000 c. $31,500 d. $42,000 Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $60,000 / (500 + 500) = $60; $60 x 500 = $30,000 (Total Cost: Assembly / (Machine hours: Titanium + Machine hours: Aluminum)) x Machine hours: Titanium = Assembly cost of titanium racquets

17 - 8 Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e Reynoso Corporation manufactures titanium and aluminum tennis racquets. Reynoso’s total overhead costs consist of assembly costs and inspection costs. The following information is available regarding activity cost pools, estimated use of activities per product, and total estimated overhead costs:

46.

Activity Cost Pools Assembly Inspections

Titanium 500 mach. hrs. 350 2,100 labor hrs.

Aluminum 500 mach. hrs. 150 1,900 labor hrs.

Total Cost $60,000 $100,000

Reynoso is considering switching from one overhead rate based on labor hours to activitybased costing. Using activity-based costing, what amount of inspections cost is assigned to titanium racquets? a. $30,000 b. $37,500 c. $38,375 d. $52,500 Ans: D, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $75,000 / (350 + 150) = $150; $150 x 350 = $52,500 (Total Cost: Inspections / (Total Inspections: Titanium + Total Inspections: Aluminum)) x Total Inspections: Titanium = Inspection cost assigned to titanium racquets)

47.

Tidwell Industries has the following overhead costs and cost drivers. Direct labor hours are estimated at 100,000 for the year. The following information is available regarding activity cost pools, cost drivers, total estimated overhead costs, and estimated use of activities per product:

Activity Cost Pool Ordering and Receiving Machine Setup Machining Assembly Inspection

Cost Driver Orders Setups Machine hours Parts Inspections

Est. Overhead $ 120,000 297,000 1,500,000 1,200,000 300,000

Cost Driver Activity 500 orders 450 setups 125,000 MH 1,000,000 parts 500 inspections

If overhead is applied using traditional costing based on direct labor hours, the overhead application rate is a. $9.60. b. $12.00. c. $15.00. d. $34.17. Ans: D, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($120,000 + $297,000 + $1,500,000 + $1,200,000 + $300,000) / 100,000 = $34.17 (Total Estimated Overhead / Total Direct Labor hours = Overhead Application Rate using Traditional costing based on direct labor hours)

Activity-Based Costing 17 - 9 48.

Cost Driver Orders Setups Machine hours Parts Inspections

Est. Overhead $ 120,000 297,000 1,500,000 1,200,000 300,000

Cost Driver Activity 500 orders 450 setups 125,000 MH 1,000,000 parts 500 inspections

If overhead is applied using activity-based costing, the overhead application rate for ordering and receiving is a. $1.20 per direct labor hour. b. $240 per order. c. $0.12 per part. d. $6,834 per order. Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution: $120,000 / 500 = $240 (Estimated Overhead: Ordering and Receiving / Orders = Overhead application rate for ordering and receiving)

49.

The last step in activity-based costing is to a. assign overhead costs to products using the overhead rate determined for each cost pool. b. compute the activity-based overhead rate per cost driver. c. identify and classify the activities involved in the manufacture of specific products, and allocate overhead to cost pools. d. identify the cost driver that has a strong correlation to the activity cost pool.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

50.

The first step in activity-based costing is to a. assign overhead costs to products using the overhead rate determined for each cost pool. b. compute the activity-based overhead rate per cost driver. c. identify and classify the activities involved in the manufacture of specific products, and allocate overhead to cost pools. d. identify the cost driver that has a strong correlation to the activity cost pool.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

51.

The process of creating a well-designed activity-based costing system starts with a. identifying the activity-cost pools. b. computing the activity-based overhead rate. c. assigning overhead costs to products. d. analyzing the activities performed to manufacture a product or perform a service.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

17 - 10 Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e 52.

Which of the following is not an example of an activity cost pool? a. Setting up machines b. Machining c. Inspecting d. Machine hours

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management.

53.

An example of an activity cost pool is a. machine hours. b. setting up machines. c. number of setups. d. number of inspections.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

54.

Estimated costs for activity cost pools and other item(s) are as follows: Machining Assembling Advertising Inspecting and testing

$500,000 200,000 450,000 175,000

Total estimated manufacturing overhead is a. $700,000. b. $875,000. c. $1,150,000. d. $1,325,000. Ans: B, LO: 2, Bloom: AP, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($500,000 + 200,000 + $175,000) = $875,000 (Machining + Assembling + Inspecting and testing = Total estimated overhead)

55.

An example of a cost which would not be assigned to a manufacturing overhead activity cost pool is a. indirect salaries. b. freight-out. c. depreciation on manufacturing equipment. d. factory supplies.

Ans: B, LO: 2, Bloom: K, Difficulty: Moderate, Min: 3, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

56.

One of Matheny Company’s activity cost pools is inspection which has estimated overhead costs of $200,000. Matheny produces throw rugs (700 inspections) and area rugs (1,300 inspections). What amount of the inspecting activity cost pool should be assigned to throw rugs? a. $70,000. b. $100,000. c. $107,692. d. $200,000.

Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $200,000 / (700 + 1,300) = $100 x 700 = $70,000 ((Estimated overhead / (Inspections: throw rugs + Inspections: area rugs)) x Inspections: throw rugs = Inspecting cost pool assigned to throw rugs)

Activity-Based Costing 17 - 11 57.

Which of the following would be an appropriate cost driver for the machining activity cost pool? a. Machine setups b. Purchase orders c. Machine hours d. Inspections

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

58.

Which of the following would be an appropriate cost driver for the purchasing activity cost pool? a. Machine setups b. Purchase orders c. Machine hours d. Inspections

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

59.

An activity-based overhead rate is computed as follows: a. actual overhead divided by actual use of cost drivers. b. estimated overhead divided by actual use of cost drivers. c. actual overhead divided by estimated use of cost drivers. d. estimated overhead divided by estimated use of cost drivers.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

60.

Use of activity-based costing will result in the development of a. one overhead rate based on direct labor hours. b. one plantwide activity-based overhead rate. c. multiple activity-based overhead rates. d. no overhead rates; overhead rates are not used in activity-based costing.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

61.

To use activity-based costing, it is necessary to know the a. cost driver for each activity cost pool. b. estimated use of cost drivers per activity. c. estimated use of cost drivers per product. d. all of the above.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

62.

To assign overhead costs to each product, the company a. multiplies the activity-based overhead rates per cost driver by the number of cost drivers used per product. b. multiplies the overhead rate by the number of direct labor hours used on each product. c. assigns the cost of each activity cost pool in total to one product line. d. multiplies the rate of cost drivers per estimated cost for the cost pool by the estimated cost for each cost pool.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

17 - 12 Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e 63.

As compared to a low-volume product, a high-volume product a. usually requires less special handling. b. is usually responsible for more overhead costs per unit. c. requires relatively more machine setups. d. requires use of direct labor hours as the primary cost driver to ensure proper allocation of overhead.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

64.

Assigning overhead using ABC will usually a. decrease the cost per unit for low volume products as compared to a traditional overhead allocation. b. increase the cost per unit for low volume products as compared to a traditional overhead allocation. c. provide less accurate cost per unit for low volume products than will traditional costing. d. result in the same cost per unit for low volume products as does traditional costing.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

65.

Companies that switch to ABC often find that they have been a. overpricing some products. b. possibly losing market share to competitors. c. sacrificing profitability by underpricing some products. d. All of these answers are correct.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

66.

As compared to high-volume products, low-volume products a. require more special handling. b. require less machine setups. c. are frequently responsible for less overhead costs. d. None of these answers are correct.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

67.

For its inspecting cost pool, Ellsworth, Inc. Estimated overhead cost of $400,000 and 4,000 inspections. The actual overhead cost for that cost pool was $480,000 for 5,000 inspections. The activity-based overhead rate used to assign the costs of the inspecting cost pool to products is a. $80 per inspection. b. $96 per inspection. c. $100 per inspection. d. $120 per inspection.

Ans: C, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $400,000 / 4,000 = $100 (Estimated overhead / Estimated inspections = Activity-based overhead rate used to assign the costs of the inspecting cost pool)

Activity-Based Costing 17 - 13 68.

Boswell Company manufactures two products, Regular and Supreme. Boswell’s estimated overhead costs consist of machining, $3,000,000; and assembling, $1,500,000. Information on the estimated use of the cost driver by the two products is as follows: Regular Supreme Direct labor hours 10,000 15,000 Machine hours 10,000 30,000 Number of parts 90,000 160,000 Overhead applied to Regular using traditional costing using direct labor hours is a. $1,290,000. b. $1,800,000. c. $1,620,000. d. $2,250,000.

Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($3,000,000 + $1,500,000) / (10,000 + 15,000) = $180 x 10,000 = $1,800,000 (Overhead Costs: Machining + Overhead Costs: Assembling) / (Direct labor hours: Regular + Direct labor hours: Supreme) x Direct labor hours: Regular = Overhead applied to Regular using traditional costing using direct labor hours)

69.

Boswell Company manufactures two products, Regular and Supreme. Boswell’s estimated overhead costs consist of machining, $3,000,000; and assembling, $1,500,000. . Information on the estimated use of the cost driver by the two products is as follows: Regular Supreme Direct labor hours 10,000 15,000 Machine hours 10,000 30,000 Number of parts 90,000 160,000 Overhead applied to Supreme using traditional costing using direct labor hours is a. $1,290,000. b. $1,620,000. c. $2,700,000. d. $3,375,000.

Ans: C, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($3,000,000 + $1,500,000) / (10,000 + 15,000) = $180 x 15,000 = $2,700,000 (Overhead costs: Machining + Overhead costs: Assembling) / (Direct labor hours: Regular + Direct labor hours: Supreme) x Direct labor hours: Supreme = Overhead applied to Supreme using traditional costing using direct labor hours)

70.

Boswell Company manufactures two products, Regular and Supreme. Boswell’s estimated overhead costs consist of machining, $3,000,000; and assembling, $1,500,000. Information on the estimated use of the cost driver by the two products is as follows: Regular Supreme Direct labor hours 10,000 15,000 Machine hours 10,000 30,000 Number of parts 90,000 160,000 Overhead applied to Regular using activity-based costing is a. $1,290,000. b. $1,800,000. c. $2,700,000. d. $3,210,000.

Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $3,000,000 / (10,000 + 30,000) = $75 x 10,000 = $750,000; ($1,500,000 / (90,000 + 160,000) = $6 x 90,000 = $540,000; $750,000 + $540,000 = $1,290,000 ((Overhead cost: Machining / (Machine hours: Regular + Machine hours: Supreme) x Machine hours: Regular) + ((Overhead costs: Assembling / (Number of Parts: Regular: Number of Parts: Supreme) x Number of Parts: Regular) = Overhead applied to Regular using activity-based costing)

17 - 14 Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e 71.

Boswell Company manufactures two products, Regular and Supreme. Boswell’s estimated overhead costs consist of machining, $3,000,000; and assembling, $1,500,000. Information on the estimated use of the cost driver by the two products is as follows: Regular Supreme Direct labor hours 10,000 15,000 Machine hours 10,000 30,000 Number of parts 90,000 160,000 Overhead applied to Supreme using activity-based costing is a. $1,290,000. b. $1,800,000. c. $2,700,000. d. $3,210,000.

Ans: D, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $3,000,000 / (10,000 + 30,000) = $75 x 30,000 = $2,250,000; ($1,500,000 / (90,000 + 160,000) = $6 x 160,000 = $960,000; $2,250,000 + $960,000 = $3,210,000 ((Overhead cost: Machining / (Machine hours: Regular + Machine hours: Supreme) x Machine hours: Supreme) + ((Overhead costs: Assembling / (Number of Parts: Regular: Number of Parts: Supreme) x Number of Parts: Supreme) = Overhead applied to Supreme using activity-based costing)

72.

Peters, Inc. produces 3 products: P1, Q2, and R3. P1 requires 400 purchase orders, Q2 requires 600 purchase orders, and R3 requires 1,000 purchase orders. Peters has identified an ordering and receiving activity cost pool with allocated overhead of $240,000 for which the cost driver is purchase orders. Direct labor hours used on each product are 50,000 for P1, 40,000 for Q2, and 110,000 for R3. What amount of ordering and receiving overhead is assigned to each product if ABC is used? P1 Q2 R3 a. $80,000 $80,000 $80,000 b. $60,000 $48,000 $132,000 c. $48,000 $72,000 $120,000 d. $54,000 $60,000 $126,000

Ans: C, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $240,000 / (400 + 600 + 1,000) = $120; $120 x 400 = $48,000 (P1); $120 x 600 = $72,000 (P2); $120 x 1,000 = $120,000 (P3) (Allocated overhead / total purchase orders) x purchase orders: P1 = P1 Ordering and Receiving overhead assigned; (Allocated overhead / total purchase orders) x purchase orders: Q2 = Q2 Ordering and Receiving overhead assigned; (Allocated overhead / total purchase orders) x purchase orders: R3 = R3 Ordering and Receiving overhead assigned)

73.

Kiner Co. computed an activity-based overhead rate for machining costs ($500,000) of $5 per machine hour. Machining costs are driven by machine hours. If computed based on direct labor hours, the activity-based overhead rate for machining costs would be $10 per direct labor hour. The company produces two products, Cape and Chap. Cape requires 60,000 machine hours and 20,000 direct labor hours, while Chap requires 40,000 machine hours and 30,000 direct labor hours. Using activity-based costing, the machining overhead cost assigned to each product is Cape Chap a. $200,000 $300,000 b. $750,000 $250,000 c. $266,667 $233,333 d. $300,000 $200,000

Ans: D, LO: 2, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $500,000 / (60,000 + 40,000) = $5; $5 x 60,000 = $300,000 (Cape); $5 x 40,000 = $200,000 (Chap) (Overhead: Machining Costs / Total Machine hours) x Machine Hours: Cape = Machining Costs Assigned to Cape; (Overhead: Machining Costs / Total Machine hours) x Machine Hours: Chap) = Machining cost assigned to Chap)

Activity-Based Costing 17 - 15 74.

Noland Company manufactures two models of its banjo, the Basic and the Luxury. The Basic model requires 10,000 direct labor hours and the Luxury requires 30,000 direct labor hours. The company produces 3,400 units of the Basic model and 600 units of the Luxury model each year. The company inspects one Basic for every 100 produced, and inspects one Luxury for every 10 produced. The company expects to incur $112,800 of total inspecting overhead costs this year. What amount of the inspecting costs should be allocated to the Basic model using ABC? a. $28,200 b. $40,800 c. $56,400 d. $95,880

Ans: B, LO: 2, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $112,800 / (3,400 / 100) + (600 / 10) = $1,200; $1,200 x (3,400/100) = $40,800 (Total Inspecting costs / (Units Inspected: Basic + Units Inspected: Luxury) x Units Estimated: Basic = Inspecting cost allocated to the Basic Model using ABC)

75.

Ben Gordon, Inc. manufactures two products, wheels and seats. The company has estimated its overhead in the assembling department to be $660,000. The company produces 300,000 wheels and 600,000 seats each year. Each wheel uses 2 parts, and each seat uses 3 parts. What amount of the assembly overhead cost should be allocated to wheels? a. $165,000 b. $220,000 c. $264,000 d. $282,856

Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $660,000 / ((300,000 x 2) + 600,000 x 3) = .275 x 300,000 x 2 = $165,000 (Estimated Overhead for Assembly / Number of Parts for Wheels and Seats) x Number of wheels = Assembly overhead allocated to wheels)

76.

Windsor Co. estimates that it will incur $1,050,000 of overhead costs each year in its three main departments, machining ($600,000), inspections ($300,000), and packing ($150,000). The machining department works 4,000 hours per year, there are 600 inspections per year, and the packing department packs 1,000 orders per year. Information about Windsor’s two products and their estimated use of cost drivers is as follows: Machining hours Inspections Orders packed Direct labor hours

Product X 1,000 100 350 1,700

Product Y 3,000 500 650 1,800

If traditional costing based on direct labor hours is used, how much overhead will be assigned to Product X? a. $252,501 b. $363,462 c. $510,000 d. $525,000 Ans: C, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $1,050,000 / (1,700 + 1,800) = $300; $300 x 1,700 = $510,000 ((Total Overhead / Total Direct labor hours) x Product X Direct labor hours = Overhead assigned to Product X)

17 - 16 Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e 77.

Windsor Co. estimates that it will incur $1,050,000 of overhead costs each year in its three main departments, machining ($600,000), inspections ($300,000) and packing ($150,000). The machining department works 4,000 hours per year, there are 600 inspections per year, and the packing department packs 1,000 orders per year. Information about Windsor’s two products and their estimated use of cost drivers is as follows: Machining hours Inspections Orders packed Direct labor hours

Product X 1,000 100 350 1,700

Product Y 3,000 500 650 1,800

If ABC is used, how much overhead will be assigned to Product X? a. $252,500 b. $363,462 c. $510,000 d. $525,000 Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $600,000 / 4,000 = $150 x 1,000 = $150,000; $300,000 / 600 = $500 x 100 = $50,000; $150,000 / 1,000 = $150 x 350 = $52,500; $150,000 + $50,000 + 52,500 = $252,500 ((Machining Overhead / Total Machine Hours) x Product X Machine Hours) + ((Inspections Overhead / Total Inspections) x Product X Inspections) + (Packing Overhead / Total orders packed) x Product X Orders packed) = Overhead assigned to Product X)

78.

A company incurs $4,050,000 of overhead each year across three departments: Ordering and Receiving, Mixing, and Testing. The company prepares 2,000 purchase orders, works 50,000 mixing hours, and performs 1,500 tests per year in producing 200,000 drums of product Goo and 600,000 drums of product Slime. The following data are available: Activity Cost Pools Estimated Use of Driver Ordering and Receiving 2,000 Mixing 50,000 Testing 1,500

Cost $1,200,000 1,500,000 1,350,000

Production information product Goo is as follows: Activity Cost Pools Estimated Use of Driver Ordering and Receiving 400 Mixing 20,000 Testing 500 If ABC is used, what amount of overhead will be assigned to Goo? a. $1,012,500 b. $1,290,000 c. $1,582,146 d. $2,025,000 Ans: B, LO: 2, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $1,200,000 / 2,000 = $600 x 400 = $240,000; $1,500,000 / 50,000 = $30 x 20,000 = $600,000; $1,350,000 / 1,500 = $900 x 500 = $450,000; $240,000 + $600,000 + $450,000 = $1,290,000 ((Order and Receiving Overhead / Total Purchase Orders) x Estimated use of Purchase Orders for Goo) + ((Mixing Overhead / Total Mixing Hours) x Use of Mixing Hours for Goo) + (Testing Overhead / Total Number of Test) x Use of Testing for Goo) = Overhead Assigned to Goo)

Activity-Based Costing 17 - 17 79.

Cost $1,200,000 1,500,000 1,350,000

Production information product Slime is as follows: Activity Cost Pools Estimated Use of Driver Department Use of Driver Ordering and Receiving 1,600 Mixing 30,000 Testing 1,000 If ABC is used, what amount of overhead will be assigned to Slime? a. $2,025,000 b. $2,467,851 c. $2,760,000 d. $3,037,500 Ans: C, LO: 2, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $1,200,000 / 2,000 = $600 x 1,600 = $960,000; $1,500,000 / 50,000 = $30 x 30,000 = $900,000; $1,350,000 / 1,500 = $900 x 1,000 = $900,000; $960,000 + $900,000 + $900,000 = $2,760,000 ((Order and Receiving Overhead / Total Purchase Orders) x Use of Purchase Orders for Slime) + ((Mixing Overhead / Total Mixing Hours) Use of Mixing Hours for Slime) + (Testing Overhead / Total Number of Test) x Use of Testing for Slime) = Overhead Assigned to Slime)

80.

One of Stine Company’s activity cost pools is machine setups with estimated overhead of $360,000. Stine produces sparklers (400 setups) and lighters (600 setups). How much of the machine setup cost pool should be assigned to sparklers? a. $360,000 b. $144,000 c. $180,000 d. $216,000

Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $360,000 / 1,000 = $360 x 400 = $144,000 ((Estimated Overhead of Machine Setups / Total Setups) x Sparklers setups = Machine setup cost pool assigned to sparklers)

81.

Which would be an appropriate cost driver for the ordering and receiving activity cost pool? a. Machine setups b. Purchase orders c. Machine hours d. Inspections

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

82.

As compared to a high-volume product, a low-volume product a. usually requires less special handling. b. is usually responsible for more overhead costs per unit. c. requires relatively fewer machine setups. d. requires use of direct labor hours as the primary cost driver to ensure proper allocation of overhead. .

17 - 18 Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

83.

Identifying and classifying activities is the a. last step under ABC. b. first step under ABC. c. second step under ABC. d. None of these answers is correct.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

84.

Zimmerman Company manufactures two products, Board 12 and Case 165. Zimmerman’s overhead costs consist of setting up machines, $2,400,000; machining, $5,400,000; and inspecting, $1,800,000. Information on the two products and their estimated use of cost drivers is as follows: Board 12 Case 165 Direct labor hours 15,000 25,000 Machine setups 600 400 Machine hours 24,000 26,000 Inspections 800 700 Overhead assigned to Board 12 using traditional costing using direct labor hours is a. $3,600,000. b. $4,800,000. c. $5,010,000. d. $5,760,000.

Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($2,400,000 + $5,400,000 + $1,800,000) = $9.600,000 / (15,000 + 25,000) = $240; $240 x 15,000 = $3,600,000 ((Total Est. Overhead Costs / Total Est. Direct Labor Hours) x Board 12 Direct labor hours = Overhead applied to Board 12 using traditional costing)

85.

Zimmerman Company manufactures two products, Board 12 and Case 165. Zimmerman’s overhead costs consist of setting up machines, $2,400,000; machining, $5,400,000; and inspecting, $1,800,000. Information on the two products and their estimated use of cost drivers is as follows Board 12 Case 165 Direct labor hours 15,000 25,000 Machine setups 600 400 Machine hours 24,000 26,000 Inspections 800 700 Overhead assigned to Case 165 using traditional costing using direct labor hours is a. $3,840,000. b. $4,800,000. c. $5,010,000. d. $6,000,000.

Ans: D, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($2,400,000 + $5,400,000 + $1,800,000) = $9.600,000 / (15,000 + 25,000) = $240; $240 x 25,000 = $6,000,000 ((Total Overhead / Total Direct Labor Hours) x Case 165 Direct Labor Hours = Overhead applied to Case 165 using traditional costing )

Activity-Based Costing 17 - 19 86.

Zimmerman Company manufactures two products, Board 12 and Case 165. Zimmerman’s overhead costs consist of setting up machines, $2,400,000; machining, $5,400,000; and inspecting, $1,800,000. Information on the two products and their estimated use of cost drivers is as follows: Board 12 Case 165 Direct labor hours 15,000 25,000 Machine setups 600 400 Machine hours 24,000 26,000 Inspections 800 700 Overhead assigned to Board 12 using activity-based costing is a. $3,600,000. b. $4,800,000. c. $4,992,000. d. $5,760,000.

Ans: C, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($2,400,000 / (600 + 400) = $2,400 x 600 = $1,440,000; $5,400,000 / (24,000 + 26,000) = $108 x 24,000 = $2,592,000; $1,800,000 / (800 + 700) = $1,200 x 800 = $960,000; $1,440,000 + $2,592,000 + $960,000 = $4,992,000 ((Setup Machines Overhead / Machine Setups) x Board 12 Machine Setups) + ((Machining / Total Machine Hours) x Board 12 Machine Hours) + (Inspecting Overhead / Total inspections) x Board 12 Inspections) = Overhead applied to Board 12 using activity-based costing)

87.

Zimmerman Company manufactures two products, Board 12 and Case 165. Zimmerman’s overhead costs consist of setting up machines, $2,400,000; machining, $5,400,000; and inspecting, $1,800,000. Information on the two products and their estimated use of cost drivers is as follows: Board 12 Case 165 Direct labor hours 15,000 25,000 Machine setups 600 400 Machine hours 24,000 26,000 Inspections 800 700 Overhead assigned to Case 165 using activity-based costing is a. $3,840,000. b. $4,800,000. c. $4,992,000. d. $6,000,000.

Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($2,400,000 / (600 + 400) = $2,400 x 400 = $960,000; $5,400,000 / (24,000 + 26,000) = $108 x 26,000 = $2,808,000; $1,800,000 / (800 + 700) = $1,200 x 700 = $840,000; $960,000 + $2,808,000 + $840,000 = $4,608,000 ((Setup Machines Overhead / Machine Setups) x Case 165 Machine Setups) + ((Machining / Total Machine Hours) x Case 165 Machine Hours) + (Inspecting Overhead / Total inspections) x Case 165 Inspections) = Overhead applied to Case 165 using activity-based costing)

17 - 20 Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e 88.

Thomsen Computer Company produces three products: Earth, Wind, and Fire. Earth requires 80 machine setups, Wind requires 60 setups, and Fire requires 180 setups. Thomsen has identified an activity cost pool with estimated overhead of $960,000 for which the cost driver is machine setups. How much overhead is assigned to each product? a. b. c. d.

Earth $320,000 $200,000 $240,000 $180,000

Wind $320,000 $150,000 $180,000 $320,000

Fire $320,000 $450,000 $540,000 $460,000

Ans: C, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $960,000 / (80 + 60 + 180) = $3,000 x 80 = $240,000 (Earth); $3,000 x 60 = $180,000 (Wind); $3000 x 180 = $540,000 (Fire) ((Est. Overhead / Total machine Set-ups) x Earth: Machine Set-ups = Overhead Assigned to Earth; (Allocated Overhead / Total machine Set-ups) x Wind: Machine Set-ups = Overhead Assigned to Wind; (Allocated Overhead / Total machine Set-ups) x Fire: Machine Set-ups = Overhead Assigned to Fire)

89.

Hale Company manufactures two models of its couch, the Mini and the Maxi. The Mini model requires 10,000 direct labor hours and the Maxi model requires 40,000 direct labor hours. The company produces 4,000 units of the Mini model and 1,000 units of the Maxi model each year. The company produces the Mini model in batch sizes of 200, while it produces the Maxi model in batch sizes of 100. The company estimated that it will incur $360,000 of total setup costs this year. What amount of the setup costs are assigned to the Mini model using ABC? a. $240,000 b. $180,000 c. $72,000 d. $300,000

Ans: A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $360,000 / (4,000 / 200) + (1,000 / 100) = $12,000 x (4,000 / 200) = $240,000 ((Total Setup costs / Total Batches) x Mini model Batches = Setup costs allocated to the mini model using ABC costing)

90.

Nott Company manufactures two products, pillows and comforters. The company has estimated its overhead in the order-processing department to be $600,000. The company produces 50,000 pillows and 80,000 comforters each year. Pillow production requires 25,000 machine hours, comforter production requires 50,000 machine hours. The company places raw materials orders 10 times per month (2 times for raw materials for pillows and the remainder for raw materials for comforters). What amount of the order processing overhead should be assigned to comforters using ABC? a. $300,000 b. $400,000 c. $369,232 d. $480,000

Ans: D, LO: 2, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $600,000 / (10 x 12) = 5,000; 5,000 x 8 x 12 = $480,000 (Order-processing overhead / Total Raw materials orders) x Comforters Raw Materials orders = Order processing overhead allocated to comforters)

Activity-Based Costing 17 - 21 91.

Foxx Company estimates that it will incur $480,000 overhead costs each year in its three main departments, setup ($30,000), machining ($330,000), and packing ($120,000). The setup department performs 40 setups per year, the machining department works 5,000 hours per year, and the packing department packs 500 orders per year. Information about Foxx’s two products and their estimated use of cost drivers is as follows:

Number of setups Machining hours Orders packed Number of products manufactured

Product A1 20 1,000 150 600

Product B1 20 4,000 350 400

If machining hours are used as a base under traditional costing, what amount of overhead is assigned to Product A1 each year? a. b. c. d.

$96,000 $240,000 $165,000 $144,000

Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $480,000 / (1,000 + 4,000) = $96 x 1,000 = $96,000 (Total Est. Overhead / Total Est. Machining Hours) x Product A1 = Overhead assigned to Product A1)

92.

Number of setups Machining hours Orders packed Number of products manufactured

Product A1 20 1,000 150 600

Product B1 20 4,000 350 400

Using ABC, how much overhead is assigned to Product A1 each year? a. $240,000 b. $363,000 c. $ 96,000 d. $117,000 Ans: D, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $30,000 / (20 + 20) = $750 x 20 = $15,000; $330,000/ (1,000 + 4,000) = $66 x 1,000 = $66,000; $120,000 / (150 + 350) = $240 x 150 = $36,000; $15,000 + $66,000 + $36,000 = $117,000 (((Setup Overhead / Total number of set-ups) x Product A1 number of setups) + ((Machining Overhead / Total Machine Hours) x Product A1 Machine Hours) + ((Packing overhead / Total orders packed) x Product A1 Orders packed) = Overhead assigned to Product A1)

17 - 22 Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e 93.

Foxx Company estimated that it will incur $480,000 overhead costs each year in its three main departments, setup ($30,000), machining ($330,000), and packing ($120,000). The setup department performs 40 setups per year, the machining department works 5,000 hours per year, and the packing department packs 500 orders per year. Information about Foxx’s two products and their estimated use of cost drivers is as follows:

Number of setups Machining hours Orders packed Number of products manufactured

Product A1 20 1,000 150 600

Product B1 20 4,000 350 400

Using ABC, how much overhead is assigned to Product B1 each year? a. $240,000 b. $192,000 c. $363,000 d. $384,000 Ans: C, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $30,000 / (20 + 20) = $750 x 20 = $15,000; $330,000/ (1,000 + 4,000) = $66 x 4,000 = $264,000; $120,000 / (150 + 350) = $240 x 350 = $84,000; $15,000 + $264,000 + $84,000 = $363,000 (((Setup Overhead / Total number of set-ups) x Product B1 number of setups) + ((Machining Overhead / Total Machine Hours) x Product B1 Machine Hours) + ((Packing overhead / Total orders packed) x Product B1 Orders packed) = Overhead assigned to Product B1)

94.

A company estimates that it will incur $3,600,000 of overhead each year in three departments: Processing, Packaging, and Testing. The company performs 800 processing transactions, 200,000 packaging transactions, and 2,000 tests per year in producing 400,000 drums of product Oil and 600,000 drums of product Sludge. The following data are available: Activity Cost Pool Processing Packaging Testing

Estimated Use of Driver 800 200,000 2,000

Estimated Overhead $1,500,000 1,500,000 600,000

Production information for the two products is as follows: Activity Cost Pool Processing Packaging Testing

Oil Estimated Use of Driver 300 120,000 1,600

Sludge Estimated Use of Driver 500 80,000 400

The amount of overhead assigned to Oil using ABC is a. $1,800,000. b. $1,942,500. c. $1,657,500. d. $1,380,000. Ans: B, LO: 2, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($1,500,000 / 800) = $1,875 x 300 = $562,500; $1,500,000 / 200,000 = $7.5 x 120,000 = $900,000; $600,000 / 2,000 = $300 x 1,600 - $480,000; $562,500 + $900,000 + $480,000 = $1,942,500 ((Processing Overhead / Processing Transactions) x Processing Transactions for Oil) + ((Packaging Overhead / Packaging Transactions) x Packing Transactions for Oil) + ((Testing Overhead / Tests per year) x Tests for Oil) = Overhead assigned to Oil using ABC)

Activity-Based Costing 17 - 23 95.

Estimated Use of Driver 800 200,000 2,000

Estimated Overhead $1,500,000 1,500,000 600,000

Production information for the two products is as follows: Activity Cost Pool Processing Packaging Testing

Oil Estimated Use of Driver 300 120,000 1,600

Sludge Estimated Use of Driver 500 80,000 400

The amount of overhead assigned to Sludge using ABC is a. $1,800,000. b. $1,657,500. c. $1,942,500. d. $1,380,000. Ans: B, LO: 2, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($1,500,000 / 800) = $1,875 x 500 = $937,500; $1,500,000 / 200,000 = $7.5 x 80,000 = $600,000; $600,000 / 2,000 = $300 x 400 - $120,000; $937,500 + $600,000 + $120,000 = $1,657,500 ((Est. Processing Overhead / Est. Processing Transactions) x Processing Transactions for Sludge) + ((Est. Packaging Overhead / Est. Packaging Transactions) x Packing Transactions for Sludge) + ((Testing Overhead / Tests per year) x Tests for Sludge) = Overhead assigned to Sludge using ABC)

96.

Younger, Inc. manufactures recliners for the hotel industry. It has two products, the Heater and the Massager. Total overhead is estimated to be $3,160,000. The company plans to manufacture 400 Heaters and 100 Massagers this year. In manufacturing the recliners, the company performs 600 material moves for the Heater and 400 for the Massager; it processes 900 purchase orders for the Heater and 700 for the Massager; and the company’s employees work 1,400 direct labor hours on the Heater product and 3,400 on the Massager. Younger’s total estimated material handling costs are $2,000,000 and its total estimated processing costs are $1,160,000. Using ABC, how much overhead would be assigned to the Heater product? a. $1,580,000 b. $1,852,500 c. $1,307,500 d. $2,238,332

Ans: B, LO: 2, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($2,000,000 / (600 + 400) = $2,000 x 600 = $1,200,000; $1,160,000 / (900 + 700) = $725 x 900 = $652,500; $1,200,000 + $652,500 = $1,852,500 ((Material handling Costs / Material Moves) x Material moves for Heater) + ((Total processing costs / Purchase orders processed) x Purchase order processed for Heater) = Overhead assigned to Heater product)

17 - 24 Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e 97.

Which of the following is a limitation of activity-based costing? a. More cost pools b. Less control over overhead costs c. Poorer management decisions d. Some arbitrary allocations continue

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

98.

Which of the following factors would suggest that a should company should consider switching to activity-based costing? a. Product lines similar in volume and manufacturing complexity. b. Overhead costs constitute a significant portion of total costs. c. The manufacturing process has been stable. d. Production managers use data provided by the existing system.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

99.

Which of the following is true of activity-based costing? a. More cost pools b. Same base as traditional costing c. Less costly to use d. Eliminates arbitrary allocations

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

100.

The primary benefits of ABC include that it provides a. better management decisions. b. enhanced control over overhead costs. c. more accurate product costing. d. all of these are primary benefits of ABC.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

101.

Which of the following is not a benefit of activity-based costing? a. More accurate product costing b. Enhanced control over overhead costs c. Better management decisions d. Less costly to use

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

102.

Each of the following is a limitation of activity-based costing except that a. it can be expensive to use. b. it is more complex than traditional costing. c. more cost pools are used. d. some arbitrary allocations continue.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Activity-Based Costing 17 - 25 103.

The presence of any of the following factors would suggest a switch to ABC except when a. product lines differ greatly in volume. b. overhead costs constitute a minor portion of total costs. c. the manufacturing process has changed significantly. d. production managers are ignoring data provided by the existing system.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

104.

Which of the following is a limitation of activity-based costing? a. More cost pools b. Less control over overhead costs c. ABC can be expensive to implement d. Poorer management decisions

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

105.

Which of the following is true about activity-based costing? a. Less cost pools b. Same base as traditional costing c. More costly to use d. Eliminates arbitrary allocations

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

106.

Each of the following is a limitation of activity-based costing except that a. it can be expensive to use. b. it decreases control over overhead costs c. it is complex and can be difficult to understand d. some arbitrary allocations continue.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

107.

The presence of any of the following factors would suggest a switch to ABC except when a. product lines differ greatly in volume. b. overhead costs constitute a major portion of total costs. c. the manufacturing process has changed significantly. d. production managers are using data provided by the existing system

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

108.

Activity-based costing uses a. one plantwide pool and a single cost driver. b. departmental pools and a single cost driver. c. numerous cost pools and numerous cost drivers. d. one plantwide pool and numerous cost drivers

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

17 - 26 Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e 109.

Which of the following statements is false? a. ABC can weaken control over overhead costs. b. Under ABC, companies can trace many overhead costs directly to activities. c. ABC allows some indirect costs to be identified as direct costs. d. managers become more aware of their responsibility to control the activities that generate costs.

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

110.

Which of the following is a value-added activity? a. Inventory storage b. Machining c. Building maintenance d. Bookkeeping

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

111.

Which of the following is a value-added activity? a. Inventory control b. Inspections c. Packaging d. Repair of machines

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

112.

Which of the following is a non-value-added activity? a. Inventory control b. Machining c. Assembly d. Painting

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

113.

Which of the following is a non-value-added activity? a. Painting b. Finishing c. Packaging d. Building maintenance

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

114.

An example of a non-value-added activity in a service enterprise is a. providing legal research. b. delivering packages. c. consulting. d. bookkeeping.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Activity-Based Costing 17 - 27 115.

An example of a value-added activity in a service enterprise is a. performing landscaping services. b. reception. c. billing. d. ordering supplies.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

116.

Non-value-added activities a. should be minimized or eliminated. b. involve those activities that are essential to a company’s operations. c. increase both the cost and perceived value of a product. d. cannot be differentiated from value-added activities.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

117.

Value-added activities a. increase the perceived worth of a product or service to customers. b. involve those activities that are essential to a company’s operations. c. include engineering design, machining, and assembly. d. all of the above.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

118.

Which of the following is a value-added activity? a. Engineering design b. Machinery repair c. Inventory storage d. Inspections

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

119.

Which of the following is a non-value-added activity? a. Engineering design b. Machining c. Inspection d. Packaging

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

120.

An example of a non-value-added activity in a service enterprise is a. taking appointments. b. traveling. c. advertising. d. all of these are non-value-added activities.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

121.

Value-added activities a. should be minimized or eliminated. b. involve those activities that are necessary to a company’s operations. c. add cost to a product without affecting selling price. d. cannot be differentiated from non-value-added activities.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

17 - 28 Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e 122.

All of the following are examples of value-added activities in a service company except a. delivering packages by a delivery service. b. ordering supplies. c. performing surgery. d. providing legal research for legal services.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

123.

Which of the following is not a facility-level activity? a. Plant management b. Product design c. Personnel administration d. Training

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

124.

Which of the following is not a product-level activity? a. Product design b. Engineering changes c. Inventory management d. Equipment setups

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

125.

Which of the following is not a batch-level activity? a. Engineering changes b. Equipment setups c. Inspection d. Materials handling

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

126.

Which of the following is not a unit-level activity? a. Purchase ordering b. Assembling c. Painting d. Sewing

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

127.

Which of the following is a batch-level activity? a. Plant management b. Product design c. Equipment setups d. Assembling

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

128.

Which of the following is not a facility-level activity? a. Plant depreciation b. Property taxes c. Engineering changes d. Utilities .

Activity-Based Costing 17 - 29 Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

129.

Which of the following is not a product-level activity? a. Product design b. Engineering changes c. Material handling d. Inventory management

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

130.

Which of the following is not a batch-level activity? a. Purchase ordering b. Equipment setups c. Inspection d. Assembling

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

131.

Which of the following is not a unit-level activity? a. Drilling b. Cutting c. Sanding d. Inspecting

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

132.

Which of the following is a unit-level activity? a. Painting b. Purchase ordering c. Inspection d. Material handling

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

133.

Which of the following is a batch-level activity? a. Assembling b. Product design c. Engineering changes d. Purchase ordering

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

134.

Which of the following is a product-level activity? a. Equipment setups b. Product design c. Property taxes d. Utilities

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

135.

Which of the following is a facility-level activity? a. Engineering changes b. Product design c. Property taxes d. Inspection .

17 - 30 Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

136.

Activities required to support or sustain an entire production process are called a. unit-level activities. b. batch-level activities. c. product-level activities. d. facility-level activities.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

137.

Which would be a cost driver for a facility-level activity? a. Number of setups b. Number of product designs c. Square footage d. Number of purchase orders

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

138.

Activity-based costing has been found to be useful in each of the following service industries except a. airlines. b. railroads. c. hotels. d. ABC has been useful in all of these industries.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

139.

Activity-based costing is used in Service industries a. Yes b. Yes c. No d. No

Manufacturing industries No Yes Yes No

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

140.

In service industries a. activities cannot be labeled as value-added or non-value-added. b. the overall objective of ABC is different than in manufacturing industries. c. a larger proportion of overhead costs are company-wide costs. d. activity cost pools cannot be identified.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

141.

Activity-based costing can be used by a. accounting firms. b. law firms. c. consulting firms. d. all of the above.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Activity-Based Costing 17 - 31 142.

Baxter Accounting Services estimates for next year revenues of $3,000,000, direct labor of $600,000, and overhead of $1,050,000. Under traditional costing, overhead is applied to audit jobs using the rate of a. 35% of revenues. b. 20% of revenues. c. 56% of direct labor. d. 175% of direct labor.

Ans: D, LO: 4, Bloom: AP, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $1,050,000 / 600,000 = 1.75 or 175% of direct labor (Estimated Overhead / Estimated Direct Labor = Overhead rate applied to job)

143.

Audit $50,000 40,000 200

Tax $100,000 10,000 800

Overhead assigned to audit services using traditional costing using direct labor cost as the base is a. $150,000. b. $180,000. c. $270,000. d. $300,000. Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($300,000 + $150,000) / ($50,000 + $100,00) = $3 x $50,000 = $150,000 ((Total overhead / Total Direct labor Costs) x Direct labor cost for Audit = Overhead assigned to audit services)

144.

Audit $50,000 40,000 200

Tax $100,000 10,000 800

Overhead assigned to tax services using traditional costing using direct labor cost as the base is a. $150,000. b. $180,000. c. $270,000. d. $300,000. Ans: D, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($300,000 + $150,000) / ($50,000 + $100,000) = $3 x $100,000 = $300,000 ((Total Est. Est. Direct labor Costs) x Direct labor cost for Audit = Overhead assigned to tax services)

17 - 32 Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e 145.

Gant Accounting performs two types of services, Audit and Tax. Gant’s estimated overhead costs consist of computer support, $300,000; and legal support, $150,000. Information on the two services and their estimated use of cost drivers is as follows: Audit Tax Direct labor cost $50,000 $100,000 CPU minutes 40,000 10,000 Legal hours used 200 800 Overhead assigned to audit services using activity-based costing is a. $150,000. b. $180,000. c. $270,000. d. $300,000.

Ans: C, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $300,000 / (40,000 + 10,000) = $6 x 40,000 = $240,000; $150,000 / (200 + 800) = $150 x 200 = $30,000; $240,000 + $30,000 = $270,000 (((Est. Computer support / Total Est. CPU Minutes) x CPU Minutes for Audit Services) + (Est. (Legal Support / Total Est. Legal Hours) x Legal Hours Used for Audit Services) = Overhead assigned to Audit Services)

146.

Gant Accounting performs two types of services, Audit and Tax. Gant’s estimated overhead costs consist of computer support, $300,000; and legal support, $150,000. Information on the two services and their estimated use of cost drivers is as follows: Audit Tax Direct labor cost $50,000 $100,000 CPU minutes 40,000 10,000 Legal hours used 200 800 Overhead assigned to tax services using activity-based costing is a. $150,000. b. $180,000. c. $270,000. d. $300,000.

Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $300,000 / (40,000 + 10,000) = $6 x 10,000 = $60,000; $150,000 / (200 + 800) = $150 x 800 = $120,000; $60,000 + $120,000 = $180,000 (((Est. Computer support / Total Est. CPU Minutes) x CPU Minutes for Tax Services) + ((Est. Legal Support / Total Est. Legal Hours) x Legal Hours Used for Tax Services) = Overhead applied to Tax Services)

147.

Gant Accounting performs two types of services, Audit and Tax. Gant’s estimated overhead costs consist of computer support, $300,000; and legal support, $150,000. Information on the two services and their estimated use of cost drivers is as follows: Audit Tax Direct labor cost $50,000 $100,000 CPU minutes 40,000 10,000 Legal hours used 200 800 Gant Accounting performs tax services for Cathy Lane. Direct labor cost is $1,200; 600 CPU minutes were used; and 1 legal hour was used. What is the total cost of the Lane job using ABC? a. $3,600 b. $3,750 c. $5,400 d. $4,950

Ans: D, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $300,000 / (40,000 + 10,000) = $6 x 600 = $3,600; $150,000 / (200 + 800) = $150 x 1 = $150; $1,200 + $3,600 + $150 = $4,950

Activity-Based Costing 17 - 33 ((Direct Labor cost + ((Computer support / Total CPU Minutes) x CPU Minutes for Cathy Lane Tax Services) + ((Legal Support / Total Legal Hours Used) x Legal Hours Used for Cathy Lane for Tax Services) = Total cost of the Lane job using ABC)

148.

Activity-based costing has been found to be useful in each of the following service industries except a. banks. b. hospitals. c. telephone companies. d. ABC has been useful in any of these industries.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

149.

What sometimes makes implementation of ABC difficult in service industries? a. the labeling of activities as value-added b. identifying activities, activity cost plus, and cost drivers c. that a larger proportion of overhead costs are company-wide costs d. attempting to reduce or eliminate non-value-added activities

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

150.

All of the following statements are correct except that a. activity-based costing has been widely adopted in service industries. b. the objective of ABC in service firms is different than it is in a manufacturing firm. c. a larger proportion of overhead costs are company-wide costs in service industries. d. the general approach to identifying activities and activity cost pools is the same in a service company as in a manufacturing company.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

151.

The use of activity-based costing in service industries a. has the same objective as in manufacturing. b. results in improved costing of services provided. c. uses cost pools to assign overhead. d. all of these.

Ans: D, LO: 4, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

152.

Just-in-time processing a. requires a less-skilled workforce. b. results in a push approach. c. minimizes inventory storage and waiting time. d. all of these.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

153.

An element of just-in-time processing is a. dependable suppliers who are willing to deliver on short notice. b. a multi-skilled workforce. c. a total quality control system. d. all of these.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

17 - 34 Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e a

154.

Which of the following is not a benefit of just-in-time processing? a. Control of significant inventory balances b. Enhanced product quality c. Reduction of rework costs d. Production cost savings

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

155.

Which account is used in just-in-time processing? a. Raw Materials Inventory b. Work-in-Process Inventory c. Merchandise Inventory d. Raw and In-Process Inventory

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

156.

Under just-in-time processing, all of the following are received or completed “just in time” except a. finished goods. b. raw materials. c. subassembly parts. d. supplies.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

157.

Just-in-time processing a. requires a less-skilled workforce. b. results in higher inventory amounts. c. eliminates the push approach. d. all of the above.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

158.

Just-in-time processing a. results in the opposite of a just-in-case philosophy. b. results in a pull approach. c. minimizes inventory storage and waiting time. d. all of the above.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

159.

An important element of just-in-time processing is a. dependable suppliers who are willing to deliver on short notice. b. a specialized workforce. c. less emphasis on a quality control system. d. all of the above.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Activity-Based Costing 17 - 35 a

160.

Which of the following is a limitation of just-in-time processing? a. Significant reduction of manufacturing inventories b. Less emphasis on product quality c. Higher production costs d. None of the above

Ans: D, LO: 5, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

161.

Which of the following accounts is not used in just-in-time processing? a. Accounts Payable b. Work-in-Process Inventory c. Finished Goods Inventory d. Raw and In-Process Inventory

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

162.

In the pull approach associated with JIT, a. subassembly parts are manufactured and stored just in case they are needed later in the manufacturing process. b. Finished goods are completed and stored in case rush customer orders are received. c. the manufacturing process begins with a customer placing an order. d. None of the above.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

17 - 36 Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

BRIEF EXERCISES BE 163 Speedy Access Services Inc. leases access to high-speed computers to small businesses. It provides the following information for the year: Overhead cost Computer hours Direct labor hours

Estimated $2,200,000 100,000 200,000

Actual $2,100,000 90,000 180,000

Overhead is applied on the basis of computer hours. Instructions a. Compute the predetermined overhead rate. b. Determine the amount of overhead applied for the year. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 163

(5 min.)

a. $2,200,000 ÷ 100,000 = $22 per computer hour. b. 90,000 computer hours X $22 per computer hour = $1,980,000 overhead applied BE 164 Bark Manufacturing has three activities in its manufacturing process: machine setups, machining, and inspections. Estimated annual overhead cost for each activity is $80,000, $162,500, and $28,000, respectively. The Estimated annual use in each department is 1,000 setups, 12,500 machine hours, and 875 inspections. Instructions Compute the overhead rate for each activity. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 164

(5 min.)

Machine setups Machining Inspections

$80,000 ÷ 1,000 = $80 per setup $162,500 ÷ 12,500 = $13 per machine hour $28,000 ÷ 875 = $32 per inspection

Activity-Based Costing 17 - 37 BE 165 Fine Industries uses activity-based costing to assist management in setting prices for the company’s three major product lines. The following information is available: Activity Cost Pool Cutting Stitching Inspections Packing

Estimated Overhead $900,000 8,000,000 2,800,000 800,000

Estimated Use of Cost Driver per Activity 25,000 labor hours 320,000 machine hours 160,000 labor hours 64,000 finished goods units

Instructions Compute the activity-based overhead rates. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 165

(5 min.)

Estimated Activity Cost Pool Overhead Cutting $ 900,000 Stitching 8,000,000 Inspections 2,800,000 Packing 800,000

Estimated Use of Cost Driver per Activity 25,000 labor hours 320,000 machine hours 160,000 labor hours 64,000 finished units

Activity-Based Overhead Rates $36.00 per labor hour $25.00 per machine hour $17.50 per labor hour $12.50 per finished unit

BE 166 Tunes & More, Inc. manufactures speakers and receivers and uses activity-based costing. The following information is available: Activity Cost Pool Ordering Soldering Inspecting Packing

Estimated Overhead $168,000 192,000 900,000 840,000

Estimated Use of Cost Driver per Activity 24,000 orders 64,000 machine hours 120,000 labor hours 56,000 boxes

Solution 166

(5 min.)

Activity Cost Pool Ordering Soldering Inspecting Packing

Estimated Overhead $168,000 192,000 900,000 840,000 .

Estimated Use of Cost Driver per Activity 24,000 orders 64,000 machine hours 120,000 labor hours 56,000 boxes

Activity-Based Overhead Rates $ 7.00 per order $ 3.00 per machine hour $ 7.50 per labor hour $15.00 per box

17 - 38 Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e BE 167 Eaton Tires manufactures tires for dune buggies and has two different products, nubby tires and smooth tires. The company produces 5,000 nubby tires and 10,000 smooth tires each year and incurs $172,000 of overhead costs. The following information is available: Activity Materials handling Machine setups Quality inspections

Total Cost $60,000 55,000 57,000

Cost Driver Number of requisitions Number of setups Number of inspections

For the nubby tires, the company has 400 requisitions, 200 setups, and 200 inspections. The smooth tires require 600 requisitions, 300 setups, and 400 inspections. Instructions Determine the overhead rate for each activity. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Easy, Min: 5-10, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 167

(5 – 10 min.)

The overhead rates are: Activity Materials handling Machine setups Quality inspections

Overhead $60,000 55,000 57,000

Estimated Use of Cost Drivers 1,000 500 600

Overhead Rate $ 60/req. $110/setup $ 95/insp.

BE 168 The legal firm of West, Green, and Ink uses ABC to allocate its overhead costs. The firm has identified the following activity cost pools: A. Direct labor employee benefits. B. Printing and photocopying. C. Secretarial support. D. Client support. E. Recruiting and training. F. Computer support. G. Liability insurance Instructions Match each cost pools with the appropriate cost driver listed below. 1. Revenue billed. 2. CPU minutes. 3. Number of pages. 4. Direct labor cost. 5. Number of clients. 6. Number of recruits. 7. Direct professional hours. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 3, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Activity-Based Costing 17 - 39

Solution 168 1. G 2. F 3. B 4. A

(3 min.)

5. D 6. E 7. C

BE 169 Greer Company provides architectural services for mall development companies. The following data are available for the current year. Activity Cost Pool Secretarial support Direct labor benefits Printing and copying Computer support Liability insurance

Estimated Overhead $220,000 200,000 30,000 250,000 140,000

Estimated Use of Cost Driver per Activity 25,000 professional hours $500,000 direct labor cost 20,000 pages 50,000 minutes $2,800,000 billed revenue

Instructions Compute the activity-based overhead rate for each cost pool. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Easy, Min: 4, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 169

(4 min.) Estimated Overhead $220,000 200,000 30,000 250,000 140,000

Activity Cost Pool Secretarial support Direct labor benefits Printing and copying Computer support Liability insurance

Estimated Use of Activity-Based Cost Driver per Activity = Overhead Rates 25,000 professional hours $8.80 per prof. hour $500,000 direct labor cost $.40 per DL Dollar 20,000 pages $1.50 per page 50,000 minutes $5 per minute $2,800,000 billed revenue $.05 per Rev. $

BE 170 Hops, Inc. manufactures several types of microbrew beers. Hops has identified the following activities: a. Inventory control e. Machine setups b. Purchasing f. Brewing c. Receiving g. Packing and shipping d. Employee training Instructions Classify each activity as value-added or non-value-added. Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

17 - 40 Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 170 a. b. c. d. e. f. g.

(5 min.)

Activity Inventory control Purchasing Receiving Employee training Machine setups Brewing Packing and shipping

Classification Non-value-added Non-value-added Non-value-added Non-value-added Non-value-added Value-added Value-added

BE 171 Milner Services is considering the installation of activity-based costing. The following activities are performed daily by staff consultants: (1) consulting with clients, (2) staff meetings, (3) on-site supervision, (4) meals, (5) entertaining prospective clients, and (6) training client personnel. Instructions Classify these activities as value-added or non-value-added. Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 171

(3 min.)

Value-added Activities include: (1) Consulting with clients, (3) On-site supervision, and (6) Training client personnel. Non-value-added Activities include: (2) Staff meetings, (4) Meals, and (5) Entertaining prospective clients.

EXERCISES Ex. 172 Hayward Industries manufactures dining chairs and tables. The following information is available regarding the two products and their estimated use of cost drivers: Dining Chairs 200 250 2,600

Machine setups Inspections Labor hours

Tables 600 470 2,400

Estimated Cost $48,000 $72,000

Hayward is considering switching from one overhead rate based on labor hours to ABC. Instructions Perform the following analyses for these two components of overhead: a. Compute total machine setups and inspection costs assigned to each product, using a single overhead rate. b. Compute total machine setups and inspection costs assigned to each product, using activitybased costing. c. Comment on your findings. Ans: N/A, LO: 1, 2, Bloom: AP, Difficulty: Hard, Min: 8-12, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Activity-Based Costing 17 - 41 Solution 172

(8 – 12 min.)

a. Single overhead rate ($48,000 + $72,000) ÷ 5,000 = $24 per labor hour Dining chairs: Tables:

2,600 × $24 2,400 × $24

$ 62,400 57,600 $120,000

b. Activity-based costing Machine setups: $48,000 ÷ 800 = $60 per setup Inspections:

$72,000 ÷ 720 = $100 per inspection

Dining chairs: (200 × $60) + (250 × $100) Tables: (600 × $60) + (470 × $100)

$ 37,000 83,000 $120,000

c. The use of activity-based costing resulted in the allocation of less overhead cost to dining chairs and more overhead cost to tables. The change in cost allocation reflects a more accurate allocation based on cause and effect. Ex. 173 Randel Manufacturing has five activity cost pools and two products (a budget tape vacuum and a deluxe tape vacuum). Information is presented below: Est. Use of Cost Drivers Activity Cost Pools Cost Driver Est. Overhead Budget Deluxe Ordering and Receiving Orders $ 130,000 600 400 Machine Setup Setups 297,000 500 400 Machining Machine hours 1,000,000 150,000 100,000 Assembly Parts 1,600,000 1,200,000 800,000 Inspection Inspections 300,000 550 450 Instructions Compute the overhead cost per unit for each product. Production is 700,000 units of Budget and 200,000 units of Deluxe. Round your answer to the nearest cent. Ans: N/A, LO: 1, 2, Bloom: AP, Difficulty: Hard, Min: 15-20, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 173

(15 – 20 min.)

Activity Cost Pools Ordering & Receiving Machine Setup Machining Assembly Inspection

Est. Overhead ÷ $ 130,000 297,000 1,000,000 1,600,000 300,000

Total Est. Activity = 1,000 orders 900 setups 250,000 mach. hours 2,000,000 parts 1,000 inspections

Overhead Rate $130 per order $330 per setup $4 per machine hour $.80 per part $300 per inspection

17 - 42 Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e Solution 173

(cont’d) Budget

Cost Activity Cost Pools Driver × Ordering & Receiving 600 Machine Setup 500 Machining 150,000 Assembly 1,200,000 Inspection 550

Rate $130 330 4 .80 300

Cost = Assigned $ 78,000 165,000 600,000 960,000 165,000 $1,968,000 ÷ 700,000 $2.81 per unit

Deluxe Cost Cost Driver × Rate = Assigned 400 $130 $ 52,000 400 330 132,000 100,000 4 400,000 800,000 .80 640,000 450 300 135,000 $1,359,000 ÷ 200,000 $6.80 per unit

Ex. 174 Horton, Reiser, and Associates, a law firm, employs ABC. The following Estimated data for each of the activity cost pools is provided for 2022: Activity Cost Pools Researching legal issues Preparing legal documents Meeting with clients

Estimated Estimated Use of Overhead Cost Drivers per Activity $ 31,500 900 research hours 480,000 30,000 pages 1,760,000 8,800 professional hours

During 2022, the firm worked 660 research hours, 10,000 professional hours, and prepared 25,000 document pages. Instructions Compute the total overhead applied during the year 2022. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 174

(3 min.)

Estimated Estimated Use of Activity Cost Pools Overhead Cost Drivers per Activity 900 research hours Researching legal issues $ 31,500 30,000 pages Preparing legal documents 480,000 8,800 prof. hours Meeting with clients 1,760,000

Cost Drivers 660 research hours 25,000 document pages 10,000 professional hours

Overhead Rates $35/research hour $16/page $200/professional hour

Activity-Based Overhead Rates $35 per res. hour $16 per page $200 per prof. hour

Total Overhead Assigned $ 23,100 400,000 2,000,000 $2,423,100

Activity-Based Costing 17 - 43 Ex. 175 Nancy Lake owns a small department store in a metropolitan area. For twenty years, the accountant has assigned overhead to the various departments—Women’s Apparel, Men’s Apparel, Cosmetics, Housewares, Shoes, and Electronics—based on the basis of employee hours worked. Nancy Lake’s daughter, who is an accounting student at a local university, has suggested her mother should consider using activity-based costing (ABC). In an attempt to implement ABC, Nancy Lake and her daughter have identified the following activities. Instructions Determine a cost driver for each of the activities listed below. Cost Pool

Cost Driver

a. Placing orders b. Stocking merchandise c. Waiting on customers d. Janitorial and maintenance e. Training employees f.

Administrative

g. Advertising and Marketing h. Accounting and Legal Services i.

Wrapping packages

Ans: N/A, LO: 2, Bloom: K, Difficulty: Moderate, Min: 6-9, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 175

(6 – 9 min.)

Cost Pool

Cost Driver

a. Placing orders

number of orders; volume of individual orders

b. Stocking merchandise

number of orders; dollar volume of orders

c. Waiting on customers

number of customers; dollar volume of sales

d. Janitorial and Maintenance

square feet occupied; traffic through area

e. Training employees

total number of employees; number of new employees

number of employees; dollar volume of business

Administrative

g. Advertising and Marketing

number of ad campaigns

h. Accounting and Legal Services

dollar volume of sales

number of packages

Wrapping packages

17 - 44 Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e Ex. 176 A list of possible cost drivers is presented below: Code A Engineering hours B Setups C Machine hours

Code D Number of subassemblies E Boxes F Orders

Instructions For each of the following activity cost pools, select the most appropriate cost driver: Code

Cost Pool 1. Machine setup 2. Ordering and receiving 3. Packaging and shipping 4. Engineering design 5. Machining 6. Assembly

Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 4-6, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 176

(4 – 6 min.)

1. B 2. F 3. E

4. A 5. C 6. D

Ex. 177 Identify appropriate cost drivers for the following activity cost pools: 1. Human resources 2. Security 3. Receiving 4. Data processing Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 3-5, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 177 1. 2. 3. 4.

(3 – 5 min.)

Number of employees, number of hires Square footage Shipments received; pounds received Lines printed, CPU minutes, storage units

Activity-Based Costing 17 - 45 Ex. 178 Two of the activity cost pools for Molina Company are (a) machining ($325,000) and (b) inspections ($42,000). Possible cost drivers are direct labor hours (2,550), machine hours (12,500), square footage (2,000), and number of inspections (200). Instructions Compute the overhead rate for each activity using the most relevant cost driver. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Easy, Min: 4-6, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 178

(4 – 6 min.)

(a)

Machining:

$325,000 12,500 machine hours

= $26 per machine hour

(b)

Inspections:

$42,000 200 inspections

= $210 per inspection

Ex. 179 Sutton Industries produces two models of televisions, Standard and Luxury. It sells 100,000 Standard televisions and 15,000 Luxury televisions annually. Sutton switched from traditional costing to activity-based costing and discovered that the cost assigned to Luxury televisions increased so dramatically that the Luxury was now only marginally profitable. Instructions Give a probable explanation for this shift. Ans: N/A, LO: 2, Bloom: E, Difficulty: Easy, Min: 4-6, AACSB: Communication, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Cost Management

Solution 179

(4 – 6 min.)

Low-volume products often require more special handling, such as more machine setups and inspections, than high-volume products. Also, the overhead costs assigned to the low-volume product are often disproportionately high when traditional allocation base such as direct labor hours are used. Ex. 180 Compute activity-based cost rates from the following Estimated data for Upton Golf Co.: Activity Cost Pool Designing Machining Packing

Estimated Overhead $2,550,000 525,000 620,000

Estimated Cost Driver 75,000 designer hours 21,000 machine hours 31,000 labor hours

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Easy, Min: 3-5, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 180

(3 – 5 min.)

Designing Machining Packing

($2,550,000 ÷ 75,000) ($525,000 ÷ 21,000) ($620,000 ÷ 31,000)

= $34 per designer hour = $25 per machine hour = $20 per labor hour

17 - 46 Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e EX. 181 We Store It Company rents storage units of various sizes to individuals and companies. The following activities have been identified as activity cost pools for accumulating overhead and assigning it to rental services provided. (a) repairs, (b) customer setups, (c) employee training, (d) supplies ordering, (e) temperature/humidity control, (f) security, and (g) cleaning. Instructions For each activity, identify a cost driver that might be used to assign overhead costs. Ans: N/A, LO: 4, Bloom: C, Difficulty: Easy, Min: 2-4, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 181

(2–4 min.)

(a) Number of repairs (b) Number of customer setups (c) Number of employees (d) Number of supply orders (e) Number of kilowatt hours of electricity (f) Square footage (g) Number of units cleaned Ex. 182 American Delights manufactures a wide variety of holiday and seasonal decorative items. American’s activity-based costing overhead rates are: Purchasing Storing Machining Supervision

$380 per order $2 per square foot/days $100 per machine hour $5 per direct labor hour

The Snow Man project involved 3 purchase orders, 4,000 square feet/days, 60 machine hours, and 40 direct labor hours. The cost of direct materials on the job was $19,000 and the direct labor rate is $30 per hour. Instructions Determine the total cost of the Snow Man project. Ans: N/A, LO: 2, 3, Bloom: AP, Difficulty: Moderate, Min: 5-7, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 182

(5 – 7 min.)

Direct materials Direct labor (40 × $30) Factory overhead Purchasing (3 × $380) Storing (4,000 × $2) Machining (60 × $100) Supervision (40 × $5) Total cost

$19,000 1,200 $1,140 8,000 6,000 200

15,340 $35,540

Activity-Based Costing 17 - 47 Ex. 183 Label the following costs as value-added (VA) or non-value-added (NVA): 1. Engineering design 2. Machine repair 3. Inventory storage 4. Machining 5. Assembly 6. Painting 7. Inspections 8. Packaging Ans: N/A, LO: 3, 4, Bloom: C, Difficulty: Easy, Min: 3-5, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 183 1. 2. 3. 4.

(3 – 5 min.)

VA NVA NVA VA

5. 6. 7. 8.

VA VA NVA VA

Ex. 184 The Parton and Sons law firm uses activity-based costing. Classify these activities as valueadded or non-value-added: 1. Taking appointments 2. Reception 3. Meeting with clients 4. Bookkeeping 5. Court time 6. Meeting with opposing attorneys 7. Billing 8. Advertising Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 3-5, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 184 1. 2. 3. 4.

(3 – 5 min.)

Non-value-added Non-value-added Value-added Non-value-added

5. 6. 7. 8.

Value-added Value-added Non-value-added Non-value-added

17 - 48 Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e Ex. 185 Merando Manufacturing Company manufactures small tools. Classify each of the following activity costs of the tool company as either unit-level, batch-level, product-level, or facility-level: 1. Plant management 2. Drilling 3. Painting 4. Machine setups 5. Product design 6. Cutting 7. Inspection 8. Inventory management Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 4-6, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 185 1. 2. 3. 4.

(4 – 6 min.)

Facility Unit Unit Batch

5. 6. 7. 8.

Product Unit Batch Product

Ex. 186 Castleman, Inc. designs, prints, and delivers advertising copy for companies throughout the tristate area. Sometimes this entails designing and printing a single copy and other times multiple copies of the same advertisement. Listed below are typical activity costs: (a) Printer ink. (b) Paper (c) Depreciation on equipment (d) Machine setup costs (e) Designing (f) Supervisory salaries (g) Ordering materials (h) Delivery (i) Building insurance (j) Printing Instructions Classify each of these activities as either unit-level, batch-level, product-level, or facility-level. Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 3-5, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Activity-Based Costing 17 - 49 Solution 186

(3–5 min.)

(a) Unit- or batch-level (b) Unit- or batch-level (c) Unit-level (d) Batch-level (e) Product-level (f) Facility-level (g) Batch- or product-level (h) Unit- or batch-level (i) Facility-level (j) Unit- or batch-level Ex. 187 Jayson Woods, PSC is an architectural firm that uses activity-based costing. The three activity cost pools used by Jayson Woods are: Salaries and Wages, Travel Expense, and Plan Reproduction Expense. The firm has provided the following information concerning activity and costs: Salaries and wages Travel expense Plan reproduction expense Total

Salaries and wages Travel expense Plan reproduction expense

$430,000 100,000 120,000 $650,000 Estimated Use of Cost Driver per Service Project Business Assignment Development Other 60% 30% 10% 40% 40% 20% 35% 40% 25%

Instructions Calculate the total cost to be allocated to the (a) Project Assignment, (b) Business Development, and (c) Other activity cost pools. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 6-9, AACSB: Analytic, AICPA BB: Strategic Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 187

(6 – 9 min.)

(a) Project Assignment Salaries and wages $258,000 Travel expense 40,000 Plan reproduction expense 42,000 Total $340,000

Activity Cost Pools (b) (c) Business Development Other $129,000 $43,000 40,000 20,000 48,000 30,000 $217,000 $93,000

Total $430,000 100,000 120,000 $650,000

17 - 50 Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

COMPLETION STATEMENTS 188.

In traditional costing systems, direct labor cost is often used for the assignment of all .

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

189.

A resources consumed.

is any activity that has a direct cause-effect relationship with the

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

190.

In activity-based costing, overhead costs are allocated to then assigned to products.

and

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

191.

The number of receiving activity cost pool.

is an appropriate cost driver for the ordering and

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

192.

The primary benefit of activity-based costing is

product costing.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

193.

When product lines differ greatly in volume and manufacturing complexity, a switch from traditional costing to will result in more accurate product costing.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

194.

Some customers.

increase the perceived worth of a product or service to

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

195.

In the hierarchy of activity levels, the four levels are , and .

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

196.

Equipment setups are a

-level activity.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

197.

A primary objective of inventories.

processing is to eliminate all manufacturing

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

198.

Dependable suppliers, a multi-skilled workforce, and a necessary elements of just-in-time processing.

are

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Activity-Based Costing 17 - 51 Answers to Completion Statements 188. 189. 190. 191. 192. 193. 194. 195. 196. a 197. a 198.

overhead costs cost driver activity cost pools purchase orders more accurate activity-based costing value-added activities unit, batch, product, facility batch just-in-time total quality control system

MATCHING 199. Match the items in the two columns below by entering the appropriate code letter in the space provided. A. B. C. D. E.

Pull approach Cost driver Facility-level activity Unit-level activity Activity-based costing

F. G. H. I. J.

Just-in-time processing Batch-level activity Product-level activity Non-value-added activity Value-added activity

1. Allocates overhead to multiple activity cost pools, then assigns the activity cost pools to products. 2. An activity that has a direct cause-effect relationship with the resources consumed. 3. Increases the value of a product or service to customers. 4. Should be eliminated or reduced. 5. Plant management. 6. Engineering changes. 7. Equipment setups. 8. Assembling. 9. Primary objective is to eliminate all manufacturing inventories. 10. Used to initiate manufacturing under JIT processing. Ans: N/A, LO: 1-5, Bloom: K, Difficulty: Easy, Min: 4-6, AACSB: Reflective, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Answers to Matching 1. 2. 3. 4. 5.

E B J I C

6. 7. 8. 9. 10. .

H G D F A

17 - 52 Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

SHORT-ANSWER ESSAY QUESTIONS S-A E 200 Delany Company uses a traditional costing system. Management is considering switching to an activity-based costing system. What steps must Delany take in initiating an activity-based costing system? Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 2-5, AACSB: Communication, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Cost Management

Solution 200 Delany Company must first identify the major activities that pertain to the manufacture of specific products, then allocate manufacturing overhead to activity cost pools. Next, Delany must identify the cost drivers that accurately measure each activity’s contribution to the finished product and compute activity-based overhead rates for each pool. Finally, the manufacturing overhead costs for each activity pool must be assigned to products, using the activity-based overhead rates. S-A E 201 Feather, Inc. produces phasers (sales of 200,000 units per year) and force field enhancers (sales of 25,000 units per year). If Feather switches from traditional costing to activity-based costing, what is the likely effect on overhead assigned to the two products? Ans: N/A, LO: 3, Bloom: E, Difficulty: Moderate, Min: 3-6, AACSB: Communication, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Cost Management

Solution 201 When overhead is properly assigned in ABC, it will usually increase the unit cost of low-volume products like the force field enhancers. This is because low-volume products often require more special handling, such as machine setups and inspections, than high-volume products. Also, overhead costs incurred by low-volume products often are disproportionate to a traditional allocation base. S-A E 202 What are the conditions that would indicate to the management of a firm that they should switch from traditional costing to activity-based costing in order to achieve more accurate product costing? Ans: N/A, LO: 3, Bloom: K, Difficulty: Moderate, Min: 3-6, AACSB: Communication, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Cost Management

Solution 202 The presence of one or more of the following conditions indicates ABC as the superior costing system: 1) Product lines differ greatly in volume and manufacturing complexity. 2) Product lines are numerous and diverse, and they require differing degrees of support services. 3) Overhead costs constitute a significant portion of total costs. 4) The manufacturing process or the number of products has changed significantly. 5) Production or marketing managers are ignoring data provided by the existing system and are instead using alternative data when pricing or making other product decisions.

Activity-Based Costing 17 - 53 S-A E 203 Describe how the application of ABC to service companies is the same as its application to manufacturing companies. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 2-5, AACSB: Communication, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Cost Management

Solution 203 The overall objective of ABC in service companies is the same as that for manufacturing companies; improved costing of services provided. The general approach to costing is also the same: analyze operations, identify activities, assign overhead costs to activity cost pools, and identify and use cost drivers to allocate the cost pools to the services.

CHAPTER 18 COST-VOLUME-PROFIT

CHAPTER LEARNING OBJECTIVES 1. Explain variable, fixed, and mixed costs and the relevant range. Variable costs are costs that vary in total directly and proportionately with changes in the activity index. Fixed costs are costs that remain the same in total regardless of changes in the activity index. The relevant range is the range of activity in which a company expects to operate during a year. It is important in CVP analysis because the behavior of costs is assumed to be linear throughout the relevant range. Mixed costs change in total but not proportionately with changes in the activity level. For purposes of CVP analysis, mixed costs must be classified into their fixed and variable components. 2. Apply the high-low method to determine the components of mixed costs. Determine the variable costs per unit by dividing the change in total costs at the highest and lowest levels of activity by the difference in activity at those levels. Then, determine fixed costs by subtracting total variable costs from the amount of total costs at either the highest or lowest level of activity. 3. Prepare a CVP income statement to determine contribution margin. The five components of CVP analysis are (1) volume or level of activity, (2) unit selling prices, (3) variable costs per unit, (4) total fixed costs, and (5) sales mix. Contribution margin is the amount of revenue remaining after deducting variable costs. It is identified in a CVP income statement, which classifies costs as variable or fixed. It can be expressed as a total amount, as a per unit amount, or as a ratio. 4. Compute the break-even point using three approaches. The break-even point can be (a) computed from a mathematical equation, (b) computed by using a contribution margin technique, and (c) derived from a CVP graph. 5. Determine the sales required to earn target net income and determine margin of safety. The general equation for required sales is: Sales - Variable costs - Fixed costs = Target net income. Two other equations are (1) Sales in units = (Fixed costs + Target net income) ÷ Unit contribution margin, and (2) Sales in dollars = (Fixed costs + Target net income) ÷ Contribution margin ratio. Margin of safety is the difference between actual or expected sales and sales at the breakeven point. The equations for margin of safety are (1) Actual (expected) sales – Break-even sales = Margin of safety in dollars, and (2) Margin of safety in dollars ÷ Actual (expected) sales = Margin of safety ratio.

18 - 2

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

TRUE-FALSE STATEMENTS 1.

An activity index identifies the activity that has a causal relationship with a particular cost.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Unit variable cost remains constant at various levels of activity.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Fixed costs remain constant in total and on a per unit basis at various levels of activity.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

If the volume of activity increases, all costs will increase.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

If the activity index decreases, total variable costs will decrease proportionately.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Changes in the level of activity will cause unit variable costs and unit fixed costs to change in opposite directions.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

In CVP analysis, both variable and fixed costs are assumed to have a linear relationship within the relevant range of activity.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

The relevant range of activity is the activity level where the firm will earn a net income.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Total costs do not change within the relevant range of activity.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

10.

The high-low method is used to classify mixed costs into variable and fixed components.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

11.

A mixed cost has both selling and administrative cost components.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

12.

The fixed cost component of a mixed cost is the cost of having a service available.

Ans: T, LO: 1, 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

13.

For planning purposes, mixed costs are generally grouped with fixed costs.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Cost-Volume-Profit 14.

18 - 3

The difference between the costs at the high and low levels of activity represents the fixed cost component of a mixed cost.

Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

15.

When applying the high-low method, the unit variable cost of a mixed cost is calculated before the fixed cost component.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

16.

One assumption of CVP analysis is that all costs can be classified as either variable or fixed.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

17.

In CVP analysis, the term “cost” includes manufacturing costs as well as selling and administrative expenses.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

18.

The contribution margin is the amount of revenue remaining after deducting cost of goods sold.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

19.

The unit contribution margin is the amount that each unit sold contributes to the recovery of fixed costs and profit.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

20.

The contribution margin ratio is calculated by multiplying the unit contribution margin by the unit selling price.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

21.

Both variable and fixed costs are included in calculating the contribution margin.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

22.

A CVP income statement reports the contribution margin instead of gross profit.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

23.

Break-even point in sales dollars is the point at which total sales revenue equals total variable costs.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

24.

Break-even point in sales dollars is the point at which total sales revenue equals total fixed costs.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

25.

The break-even point in sales dollars is equal to the fixed costs plus net income.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

18 - 4

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

26.

If the unit contribution margin is $1 and sales are 10,000 units above the break-even point, then net income will be $10,000.

Ans: T, LO: 4, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($1 x 10,000 = $10,000) (Unit contribution Margin x Unit Sales beyond the Break-even point = Net Income)

27.

A target net income is calculated by taking actual sales minus the margin of safety.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

28.

Target net income is the income objective for a company or an individual product line.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

29.

The margin of safety in dollars is the difference between sales revenue at the break-even point and sales revenue at a determined activity level.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

30.

The margin of safety in dollars is the difference between the total contribution margin and total fixed costs.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

31.

The activity level is represented by an activity index such as direct labor hours, units of output, or sales dollars.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

32.

The trend in most companies is toward more variable costs and fewer fixed costs.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

33.

For purposes of CVP analysis, mixed costs must be classified into their fixed and variable components.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

34.

A contribution margin ratio of 40% means that 60 cents of each sales dollar is available to cover fixed costs and to produce a profit.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Decision Analysis

35.

A cost-volume-profit graph shows the amount of net income or loss at each level of sales.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

36.

If unit variable costs are 70% of the unit selling price, fixed costs are $290,000 and target net income is $70,000, required sales are $1,200,000.

Ans: T, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $70,000 + $290,000 = $360,000; $360,000 / (1- .70) = $1,200,000 (Net Income + Fixed Costs) / (1 – Variable cost % of sales) = Required Sales

37.

The margin of safety ratio is equal to the margin of safety in dollars divided by the actual or expected sales. .

Cost-Volume-Profit

18 - 5

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

MULTIPLE CHOICE QUESTIONS 38.

For an activity base to be useful in cost behavior analysis, a. the activity should always be stated in dollars. b. there should be a correlation between changes in the level of activity and changes in costs. c. the activity should always be stated in terms of units. d. the activity level should be constant over a period of time.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

39.

A variable cost is a cost that a. varies per unit at every level of activity. b. occurs at various times during the year. c. varies in total in proportion to changes in the level of activity. d. may or may not be incurred, depending on management's discretion.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

40.

A cost that remains constant per unit at various levels of activity is a a. variable cost. b. fixed cost. c. mixed cost. d. manufacturing cost.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

41.

Two costs at Bradshaw Company appear below for specific months of operation. Month September October September October

Delivery costs Utilities

Amount $40,000 55,000 $84,000 126,000

Units Produced 40,000 60,000 40,000 60,000

Which type of costs are these? a. Delivery costs and utilities are both variable costs. b. Delivery costs and utilities are both mixed costs. c. Utilities are a mixed cost and delivery costs are a variable cost. d. Delivery costs are a mixed cost and utilities are a variable cost. Ans: D, LO: 1, Bloom: AN, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

42.

An increase in the level of activity will have the following effects on unit costs for variable and fixed costs: Unit Variable Cost Unit Fixed Cost a. Increases Decreases b. Remains constant Remains constant c. Decreases Remains constant d. Remains constant Decreases

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

18 - 6

43.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

A fixed cost is a cost which a. varies in total with changes in the level of activity. b. remains constant per unit with changes in the level of activity. c. varies inversely in total with changes in the level of activity. d. remains constant in total with changes in the level of activity.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

44.

Fixed costs generally do not include a. property taxes. b. direct labor. c. supervisory salaries. d. depreciation on buildings and equipment.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

45.

The increased use of automation and decreased use of labor in companies has caused a trend towards an increase in a. both variable and fixed costs. b. fixed costs and a decrease in variable costs. c. variable costs and a decrease in fixed costs. d. variable costs and no change in fixed costs.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: None, AICPA FC: Technology and Tools, AICPA PC: None, IMA: Cost Management

46.

Cost behavior analysis is the determination of how a firm's costs a. relate to competitors' costs. b. relate to general price level changes. c. respond to changes in the level of business activity. d. respond to changes in the gross national product.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

47.

Cost behavior analysis applies to a. retailers. b. wholesalers. c. manufacturers. d. all entities.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

48.

If a firm increases its activity level, a. costs should remain the same. b. most costs will rise. c. no costs will remain the same. d. some costs will change while others will remain constant.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Cost-Volume-Profit 49.

18 - 7

The activity that causes changes in the behavior of costs is referred to as the activity a. index. b. multiplier. c. component. d. correlation.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

50.

Cost activity indexes can help classify costs as a. temporary. b. permanent. c. variable. d. transient.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

51.

Which of the following is not a cost classification? a. Mixed b. Multiple c. Variable d. Fixed

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

52.

If the activity level increases by 10%, total variable costs will a. remain the same. b. increase by more than 10%. c. decrease by less than 10%. d. increase by 10%.

Ans: D, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

53.

Which of the following costs are variable? Cost 10,000 Units 30,000 Units 1. $100,000 $300,000 2. 40,000 240,000 3. 90,000 90,000 4. 50,000 150,000 a. 1 and 2 b. 1 and 4 c. only 1 d. only 2

Ans: B, LO: 1, Bloom: AN, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

54.

Changes in activity levels have a(n) a. positive b. offsetting c. inverse d. neutral

effect on fixed costs per unit.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

18 - 8 55.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Which of the following is not a fixed cost? a. Direct materials b. Depreciation c. Lease charge d. Property taxes

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

56.

Why is identification of the relevant range important? a. Identification of the relevant range is required under GAAP. b. Cost behavior outside of the relevant range is not linear, which distorts CVP analysis. c. The relevant range directly impacts the quantity of units of product a customer buys. d. The relevant range is a cost that is incurred by a company that must be accounted for.

Ans: B, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

57.

The relevant range of activity refers to the a. geographical areas where the company plans to operate. b. activity level where all costs are curvilinear. c. levels of activity over which the company expects to operate. d. level of activity where all costs are constant.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

58.

Which of the following is not a plausible explanation of why variable costs often behave in a curvilinear fashion? a. Labor specialization b. Overtime wages c. Total variable costs are constant within the relevant range d. Availability of quantity discounts

Ans: C, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: None, AICPA PC: None, IMA: Cost Management

59.

Firms operating at 100% capacity a. are common. b. are the exception rather than the rule. c. have no fixed costs. d. have no variable costs.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

60.

The relevant range is also known as the a. practical range. b. activity range. c. activity index, d. production index.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

61.

The range over which a company expects to operate is known as the a. mixed range. b. fixed range. c. variable range. d. relevant range. .

Cost-Volume-Profit

18 - 9

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

62.

When graphed, fixed costs that behave in a curvilinear fashion resemble a(n) a. S-curve. b. inverted S-curve. c. straight line. d. stair-step pattern.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

63.

A graph of variable costs that behave in a curvilinear fashion will a. approximate a straight line within the relevant range. b. be sharply kinked on both sides of the relevant range. c. be downward sloping. d. be a stair-step pattern.

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

64.

Sunset & Vine Wine Bar, a seasonal business, collected the following information for specific months of operation. Server labor costs Cleaning costs

Month September February September February

Amount $5,600 2,400 $2,640 1,360

Hours Open 280 120 280 120

Which type of cost behavior do the server labor and cleaning costs exhibit? a. Server labor costs and cleaning costs are both variable costs. b. Server labor costs and cleaning are both mixed costs. c. Cleaning costs are a mixed cost and server labor costs are a variable cost. d. Server labor costs are a mixed cost and cleaning costs are a variable cost. Ans: C, LO: 1, Bloom: AN, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

65.

Wimer’s Wine Bar is a popular happy hour spot. The business typically employs three or four servers per shift. Megan Wimer is considering purchasing automated wine dispensers that will dispense 1.5-ounce, 3-ounce, and 5-ounce pours of a variety of wines. Each dispenser can pour four types of wine. This move toward greater automation will likely a. increase both variable and fixed costs. b. increase fixed costs and decrease variable costs. c. increase variable costs and decrease fixed costs. d. increase variable costs with no change in fixed costs.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: None, AICPA FC: Technology and Tools, AICPA PC: None, IMA: Cost Management

66.

Because of a lack of global competition, Halyard Health is currently operating at 100% capacity. This suggests that a. the company will likely not make a profit. b. the company is operating outside of its relevant range. c. the company’s total fixed costs will decline. d. the company’s total variable costs will decline.

Ans: B, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

18 - 10 67.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Abita Juice Company collected the following production data for the past quarter: Month March April May

Units Produced 4,800 3,900 3,300

Total Cost $198,000 171,000 148,500

If Abita uses the high-low method to project costs for the next quarter, what total cost equation will the company use? a. Total cost = $49,500 + ($30/unit x Quantity) b. Total cost = $39,600 + ($33/unit x Quantity) c. Total cost = $0 + ($135/unit x Quantity) d. Total cost = $29,700 + ($36/unit x Quantity) Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($198,000 – $148,500) / (4,800 – 3,300) = $33; $148,500 - ($33 x 3,300) = $39,600 (High: Total Cost – Low: Total Cost) / (High: Units Produced – Low: Units Produced) = Unit variable Cost; Low: Total Cost – (Unit Variable Cost x Low: Units Produced) = Total Fixed Cost)

68.

Abita Juice Company collected the following production data for the past quarter: Month March April May

Bottles Produced 4,800 3,900 3,300

Total Cost $198,000 171,000 148,500

If Abita uses the high-low method to project costs for the next quarter, what will total costs be if planned production is 13,200 bottles? a. $425,700 b. $475,200 c. $569,250 d. $594,000 Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($198,000 – $148,500) / (4,800 – 3,300) = $33; $148,500 - ($33 x 3,300) = $39,600; ($33 x 13,200) + $39,600 = $475,200 (High: Total Cost – Low: Total Cost) / (High: Units Produced – Low: Units Produced) = Unit Variable Cost; Low: Total Cost – (Unit Variable Cost Low: Units Produced) = Total Fixed Cost): (Unit Variable Cost x Units Produced) +Total Fixed Cost = Total Cost

69.

Valle Crucis Cabins has 7 units for rent. In July, all units were rented for all 31 days of the month. The July utility bill was $2,340. In February, 5 cabins were rented for 10 days each. The February utility bill was $670. In April, 6 cabins were rented for 14 days each and the monthly utility bill was $980. Use the high-low method to determine the estimated fixed cost component of the company’s utility bill. a. $0 b. $134 c. $170 d. $670

Ans: C, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution:7 x 31 for July and 5x10 for February= 217 days; ($2,340 – $670) / (217 days – 50 days) = $1,670 / 167 days = $10/ day; $2,340 – ($10 x 217 days) = $170 (High Activity: Total Cost – Low Activity: Total Cost) / (High Activity – Low Activity) = Variable cost per day; High Activity: Total Cost – ((Variable Cost per day) X High Activity)) = Fixed Cost Component

18 11 Frazier Manufacturing Company collected the following production data for the past month: Cost-Volume-Profit

70.

Units Produced 1,600 1,300 1,500 1,100

Total Cost $66,000 57,000 67,500 49,500

If the high-low method is used, what is the monthly total cost equation? a. Total cost = $13,200 + ($33/unit x Quantity) b. Total cost = $16,500 + ($30/unit x Quantity) c. Total cost = $0 + ($45/unit x Quantity) d. Total cost = $9,900 + ($36/unit x Quantity) Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($66,000 - $49,500) / (1,600 – 1,100) = $33; $49,500 - ($33 x 1,100) = $13,200 (High: Total Cost – Low: Total Cost) / (High: Units Produced – Low: Units Produced) = Unit Variable Cost; Low: Total Cost – (Unit Variable Cost x Low: Units Produced) = Total Fixed Cost)

71.

A mixed cost contains a. a variable component and a fixed component. b. both selling and administrative costs. c. both retailing and manufacturing costs. d. both operating and nonoperating costs.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

72.

At the high level of activity in November, 7,000 machine hours were used and power costs were $18,000. In April, a month of low activity, 2,000 machine hours were used and power costs were $9,000. Using the high-low method, the estimated fixed cost component of power costs is a. $18,000. b. $9,000. c. $5,400. d. $12,600.

Ans: C, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($18,000 - $9,000) / (7,000 – 2,000) = $9,000 / 5,000 = $1.80; $18,000 – ($1.80 x 7,000) = $5,400 (High Activity: Total Cost – Low Activity: Total Cost) / (High Activity: Machine Hours – Low Activity: Machine Hours) = Unit Variable Cost; High Activity: Total Cost – ((Unit Variable Cost) X High Activity: Machine Hours)) = Fixed Cost Component

18 - 12

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

73.

Gibble Company’s high and low levels of activity last year was 60,000 units of product produced in May and 20,000 units produced in November. Machine maintenance costs were $156,000 in May and $60,000 in November. Using the high-low method, determine an estimate of total maintenance cost for a month in which production is expected to be 45,000 units. a. $135,000 b. $144,000 c. $117,000 d. $120,000

Ans: D, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($156,000 - $60,000) / (60,000 – 20,000) = ($96,000 / 40,000) = $2.40; $156,000 – ($2.40 x 60,000) = $12,000; ($2.40 x 45,000) + $12,000 =$120,000. (High: Machine Maintenance Costs – Low: Machine Maintenance Costs) / (High: Units Produced – Low: Units Produced) = Unit Variable Cost; High: Machine Maintenance Costs – ((Unit Variable Cost x High: Units Produced) = Total Fixed Cost; (Unit Variable Cost x units produced) + Total fixed costs = Total maintenance cost

74.

Which of the following is not true about a mixed cost? a. It consists of both fixed and variable cost components. b. It increases in proportion to increases in the level of activity. c. A company will still incur some costs if the level of activity is zero. d. A company will incur no costs if the level of activity is zero.

Ans: D, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

75.

Which of the following is least likely to be a mixed cost? a. Car rental fee b. Electricity c. Depreciation d. Telephone expense

Ans: C, LO:1 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

76.

In using the high-low method, the fixed cost a. is determined by subtracting the total cost at the high level of activity from the total cost at the low activity level. b. is determined by adding the total variable cost to the total cost at the low activity level. c. is determined before the unit variable cost. d. may be determined by subtracting the total variable cost from the total cost at either the low or high activity level.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

77.

If Quality Airline cuts its domestic fares by 20%, a. fixed costs will decrease. b. profit will increase by 20%. c. a profit can only be earned by decreasing the quantity of flights. d. profits can be maintained either by increasing the quantity of passengers or by decreasing the unit variable costs.

Ans: D, LO: 2, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

18 13 In applying the high-low method to the following data set, which two months should be used in the calculation? Cost-Volume-Profit

78.

Month January February March April a. b. c. d.

Miles 80,000 50,000 70,000 90,000

Total Cost $192,000 160,000 188,000 260,000

January and February January and April February and April February and March

Ans: C, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: High: April (90,000 miles); Low: February (50,000 miles)

79.

In applying the high-low method to the following data set, what is the unit variable cost? Month January February March April a. b. c. d.

Miles 80,000 50,000 70,000 90,000

Total Cost $192,000 160,000 188,000 260,000

$2.88 $2.50 $3.20 Cannot be determined from the information given.

Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($260,000 - $160,000) / (90,000 – 50,000) = $2.50 (High: Total Cost - Low: Total Cost) / (High: Miles - Low: Miles) =Unit variable cost

80.

In applying the high-low method to the following data set, what is the fixed cost component? Month January February March April a. b. c. d.

Miles 80,000 50,000 70,000 90,000

Total Cost $192,000 160,000 188,000 260,000

$35,000 $72,000 $28,000 $100,000

Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($260,000 - $160,000) / (90,000 – 50,000) = $2.50; $260,000 – ($2.50 x 90,000) = $35,000 (High: Total Cost - Low: Total Cost) / (High: Miles - Low: Miles) = Unit variable cost; High: Total Cost – ((Unit variable cost) x High: Miles) = Fixed Cost

18 - 14 81.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

For analysis purposes, the high-low method of determining the fixed and variable components of a mixed cost usually produces a(n) a. reasonable estimate. b. precise estimate. c. overstated estimate. d. understated estimate.

Ans: A, LO: 2, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

82.

The high-low method of determining the fixed and variable components of a mixed cost is criticized because it a. is not a graphical method. b. is a mathematical method. c. ignores much of the available data by concentrating on only the most extreme points. d. doesn't provide reasonable estimates.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

83.

The high-low method can be used to analyze a. fixed costs. b. mixed costs. c. variable costs. d. conversion costs.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

84.

Portman Company's activity for the first three months of 2022 are as follows: Machine Hours 2,100 2,600 2,900

January February March

Electrical Cost $4,800 $5,800 $6,400

Using the high-low method, what is the variable cost per machine hour? a. $2.00 b. $3.00 c. $2.26 d. $1.78 Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($6,400 - $4,800) / (2,900 – 2,100) = $2.00 (High: Electrical – Low: Electrical) / (High: Machine Hours - Low: Machine Hours) = Cost per machine hour

18 15 Ponszko Nursery used high and low data from June and July to determine its variable cost of $12 per unit. Additional information follows: Cost-Volume-Profit

85.

Month June July

Units produced 2,000 1,000

Total costs $32,000 20,000

If the company produces 2,300 units in August, what is its expected total cost? a. $8,000 b. $39,600 c. $27,600 d. $35,600 Ans: D, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $32,000 - ($12 x 2,000) = $8,000; (2,300 x $12) + $8,000 = $35,600 (High: Total Cost – (Unit Variable Cost x High: Units produced) = Total Fixed Cost; (Unit Variable Cost x units) + Total Fixed Cost = Total expected cost

86.

In CVP analysis, the term "cost" a. includes only manufacturing costs. b. refers to cost of goods sold. c. includes manufacturing costs as well as selling and administrative expenses. d. excludes all fixed manufacturing costs.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

87.

Which one of the following is not an assumption of CVP analysis? a. All units produced are sold. b. All costs are variable costs. c. The sales mix remains constant. d. The behavior of costs and revenues is linear within the relevant range.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

88.

CVP analysis does not consider the a. level of activity. b. fixed cost per unit. c. unit variable cost. d. sales mix.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

89.

Which of the following is not an underlying assumption of CVP analysis? a. Changes in activity are the only factors that affect costs. b. Cost classifications are reasonably accurate. c. The beginning inventory is larger than the ending inventory. d. The sales mix is constant.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

18 - 16 90.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e CVP analysis is not important in a. calculating depreciation expense. b. setting unit selling prices. c. determining the product mix. d. utilizing production facilities efficiently to maximize profitability.

Ans: A, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

91.

To which management function is CVP analysis most applicable? a. Planning b. Motivating c. Directing d. Controlling

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

92.

Hollis Industries produces flash drives for computers, which it sells for $20 each. Each flash drive costs $13 of variable costs to make. During April, 1,000 drives were sold. Fixed costs for March were $2 per unit for a total of $1,000 for the month. What is the contribution margin ratio? a. 25% b. 35% c. 65% d. 75%

Ans: B, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($20 - $13) / $20 = .35 or 35% (Unit selling price – Unit variable cost) / Unit selling price = Contribution margin ratio

93.

Contribution margin a. is always the same as gross profit margin. b. excludes variable selling costs from its calculation. c. is calculated by subtracting total manufacturing costs per unit from sales revenue per unit. d. equals sales revenue minus variable costs.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

94.

If a company had a contribution margin of $1,000,000 and a contribution margin ratio of 40%, total variable costs must have been a. $1,500,000. b. $600,000. c. $2,500,000. d. $400,000.

Ans: A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $1,000,000 / .40 = $2,500,000; $2,500,000 - $1,000,000 = $1,500,000 (Contribution Margin / Contribution Margin Ratio = Total Sales; Total Sales – Contribution Margin = Total Variable Costs)

Cost-Volume-Profit

95.

18 - 17

Which of the following would not be an acceptable way to express the concept of contribution margin? a. Sales minus variable costs b. Sales minus unit costs c. Unit selling price minus unit variable costs d. Unit contribution margin divided by unit selling price

Ans: B, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

96.

A company has a unit contribution margin of $120 and a contribution margin ratio of 40%. What is the unit selling price? a. $200 b. $300 c. $48 d. Cannot be determined from the information provided.

Ans: B, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $120 / .40 = $300 (Unit Contribution Margin / Contribution Ratio = Unit Selling Price

97.

Sales are $500,000 and variable costs are $330,000. What is the contribution margin ratio? a. 52% b. 34% c. 66% d. Cannot be determined because amounts are not expressed per unit.

Ans: B, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($500,000 - $330,000) / $500,000 = .34 or 34% ((Sales – Variable Costs) / Sales = Contribution Margin Ratio)

98.

Dunbar Manufacturing’s variable costs are 30% of sales revenue. The company is contemplating an advertising campaign that will cost $55,000. If sales are expected to increase $100,000, by how much will the company's net income increase? a. $45,000 b. $70,000 c. $30,000 d. $15,000

Ans: D, LO: 3, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $100,000 x (1- .30) = $70,000; $70,000 - $55,000 = $15,000 (Sale Increase x (1 – Variable Cost % of Sales) = Contribution Margin; Contribution Margin – Advertising Campaign = Net Income Increase)

99.

Weatherspoon Company has a product with a unit selling price of $200, the unit variable cost is $110, and the total monthly fixed costs are $300,000. What is Coastal Carolina’s contribution margin ratio? a. 45% b. 55% c. 150% d. 182%

18 - 18

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

100.

Armstrong Industries has a contribution margin of $240,000 and a contribution margin ratio of 30%. What are the company’s total variable costs? a. $72,000 b. $560,000 c. $168,000 d. $800,000

Ans: B, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($240,000 / .30) = $800,000; $800,000 - $240,000 = $560,000 (Contribution Margin / Contribution Margin Ratio) = Total Sales: Total Sales - Contribution Margin = Total Variable Costs)

101.

If Zehms, Inc. has a unit contribution margin of $30 and a contribution margin ratio of 60%, what is the unit selling price? a. $50 b. $75 c. $18 d. $48

Ans: A, LO: 3, Bloom: AP, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $30 / .60 = $50 (Unit contribution margin / Contribution margin ratio) = Unit selling price

102.

A division of Borderland Enterprises sold 200,000 financial calculators during August, 2022. The division compiled the following information: Sales Variable costs: Materials Order processing Billing labor Selling expenses Total variable costs Fixed costs

$2,000,000 $380,000 150,000 110,000 60,000 700,000 1,000,000

What is the unit contribution margin? a. $1.00 b. $3.50 c. $8.50 d. $6.50 Ans: D, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: (($2,000,000 / 200,000) – ($700,000/ 200,000)) = $6.50 ((Sales / Units sold) – (Total variable costs / Units sold)) = Unit contribution margin)

103.

At the break-even point of 2,000 units, variable costs are $165,000, and fixed costs are $96,000. What is the unit selling price? a. $130.50 b. $82.50 c. $48.00 d. Not enough information

Ans: A, LO: 3, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $96,000 + $165,000 = $261,000; $261,000 / 2,000 = $130.50 ((Fixed costs + Variable costs) / Break-even point in units = Unit selling price)

Cost-Volume-Profit

104.

18 - 19

The following information is available for Wade Corp.: Sales Cost of goods sold

$580,000 390,000

Total fixed expenses Total variable expenses

$150,000 360,000

A CVP income statement would report a. gross profit of $190,000. b. contribution margin of $430,000. c. gross profit of $220,000. d. contribution margin of $220,000. Ans: D, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($580,000 - $360,000) = $220,000 (Sales – Total Variable Expenses = Contribution Margin)

105.

Which of the following is the true statement? a. In a CVP income statement, costs and expenses are classified only by function. b. The CVP income statement is prepared for both internal and external use. c. The CVP income statement reports the contribution margin instead of gross profit. d. In a traditional income statement, costs and expenses are classified as either variable or fixed.

Ans: C, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

106.

The equation which reflects the format of a CVP income statement is a. Sales = Cost of goods sold + Operating expenses + Net income. b. Sales + Fixed costs = Variable costs + Net income. c. Sales – Variable costs + Fixed costs = Net income. d. Sales – Variable costs – Fixed costs = Net income.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

107.

The CVP income statement a. is distributed internally and externally. b. classifies costs by functions. c. discloses contribution margin in the body of the statement. d. will reflect a different net income than the traditional income statement.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

108.

During March, O’Malley Company sold 100,000 units for $13 per unit. Fixed costs were $350,000 and net income was $250,000. What would be reported as variable expenses in the company’s CVP income statement for March? a. $600,000. b. $700,000. c. $950,000. d. $1,050,000.

Ans: B, LO: 3, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $250,000 + $350,000 = $600,000; ($100,000 x $13) – $600,000 = $700,000 (Unit selling price x units) - (Net income + Fixed costs) = Variable expenses

18 - 20

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

109.

Hope Cosmetics Company produces tinted SPF 100 moisturizer that it sells for $120 each. Each bottle costs $12 of variable costs to make. During the most recent quarter, 1,200 bottles of moisturizer were manufactured and sold. Fixed costs for the quarter were $21 per unit for a total of $25,200. What is the company’s contribution margin ratio? a. 10% b. 12% c. 21% d. 90%

Ans: D, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($120 – $12) / $120 = .90 or 90% (Unit selling price – Unit variable cost) / Unit selling price = CM ratio)

110.

Better Drinks Company sells insulated plastic tumblers with a unit contribution margin of $12 and a contribution margin ratio of 60%. During the past month, the company sold 4,500 units and total fixed costs were $27,500. What is the unit selling price? a. $20.00 b. $19.20 c. $27.50 d. $30.00

Ans: A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $12 / .60 = $20 (Unit Contribution Margin / CM Ratio = Unit Selling price)

111.

Better Drinks Company sells insulated plastic tumblers with a unit contribution margin of $12 and a contribution margin ratio of 60%. During the past month, the company sold 4,500 units and total fixed costs were $27,500. How much sales revenue did the company generate during the month? a. $60,000 b. $86,400 c. $90,000 d. $135,000

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $12 / .60 = $20 unit selling price; $20 x $4,500 = $90,000 (Unit Contribution Margin / Contribution Ratio = Unit Selling price)

112.

During the past year, Helios Lighting had a total contribution margin of $10,000,000. If the company’s contribution margin ratio was 32%, total variable costs for the period were a. $10,000,000. b. $21,250,000 c. $22,000,000. d. $32,000,000.

Ans: B, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $10,000,000 / .32 = $31,250,000; $31,250,000 - $10,000,000 = $21,250,000 (Contribution Margin / Contribution Margin Ratio = Total Sales; Total Sales – Contribution Margin = Total Variable Costs)

Cost-Volume-Profit

113.

18 - 21

Reveal Technologies sells indoor high-resolution security cameras with a unit selling price of $90, a unit contribution margin of $54, and a contribution margin ratio of 60%. The company projects total fixed costs for the next year to be $3,348,000. How many units must the company sell to break even? a. 5,580 b. 54,000 c. 62,000 d. 37,200

Ans: C, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $3,348,000 / $54 = 62,000 units Total fixed costs / Unit CM = Break-even point in units

114.

Off-Road RK Ramblers Inc. produces small lightweight camping trailers with rear kitchen facilities. The company’s fixed costs are $900,000 per year and its variable costs are 55% of the unit selling price of $16,000.What is the company’s break-even point in sales dollars? a. $900,000 b. $1,636,363 c. $2,000,000 d. $2,900,000

Ans: C, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $900,000 / (1 - .55) = $2,000,000 (Fixed Costs/CM Ratio = Break-even point in Sales Dollars

115.

Off-Road RK Ramblers, Inc., produces small lightweight camping trailers with rear kitchen facilities. The company’s fixed costs are $900,000 per year and its variable costs are 55% of the unit selling price of $16,000.How many campers must the company sell to earn a net income of $180,000? a. 123 b. 150 c. 164 d. 2,000

Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($900,000 + $180,000) / (1-.55) = $2,400,000/ $16,000 = 150 (Fixed Costs + Net Income) / (CM Ratio) = Break-even Sales Dollars; Sales dollars/ Unit Selling Price = Units for Target Net Income

116.

A company has total fixed costs of $240,000 and a contribution margin ratio of 20%. The total sales dollars necessary to break even are a. $960,000. b. $1,200,000. c. $300,000. d. $288,000.

Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($240,000 / .20) = $1,200,000 (Total Fixed Costs / Contribution Margin Ratio) = Break-even point in Sales Dollars

18 - 22

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

117.

A company sells a product that has a unit selling price of $5, unit variable cost of $3, and total fixed costs of $240,000. The quantity of units the company must sell to break even is a. 120,000 units. b. 48,000 units. c. 480,000 units. d. 80,000 units.

Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $240,000 / ($5.00 - $3.00) = 120,000 units (Total fixed costs / (Unit selling price – unit variable cost) = Break-even point in units

118.

The break-even point in sales dollars is where a. total sales equal total variable costs. b. total contribution margin equals total fixed costs. c. total variable costs equal total fixed costs. d. total sales equal total fixed costs.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

119.

The break-even point in sales units cannot be determined by a. computing it from a mathematical equation. b. computing it using the contribution margin. c. reading the prior year's financial statements. d. deriving it from a CVP graph.

Ans: C, LO: 4, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

120.

Select the correct statement concerning the cost-volume-profit graph at the right: a. The point identified by "B" is the breakeven point in sales dollars b. Line F is the variable cost line. c. At point B, profits equal total costs. d. Line E is the total cost line.

Ans: D, LO: 4, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

121.

Fixed costs are $900,000 and the unit variable costs are 75% of the unit selling price. What is the break-even point in sales dollars? a. $2,100,000 b. $2,700,000 c. $3,600,000 d. $1,200,000

Ans: C, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $900,000/(1 - .75) = $3,600,000 Fixed Costs/CM Ratio = Break-even point in sales dollars

Cost-Volume-Profit

122.

18 - 23

Fixed costs are $3,000,000 and the unit contribution margin is $150. What is the breakeven point? a. $7,500,000 b. $20,000,000 c. 7,500 units d. 20,000 units

Ans: D, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $3,000,000 / $150 = 20,000 units (Fixed Costs/ Unit CM = Break-even point in units)

123.

Nelson’s Manufacturing has the following data: Unit variable costs are 60% of the unit selling price. The contribution margin ratio is 40%. The unit contribution margin is $500. Total fixed costs are $500,000. Which of the following does not express the break-even point in sales dollars? a. $500,000 + .60X = X b. $500,000 + .40X = X c. $500,000 ÷ $500 = X d. $500,000 ÷ .40 = X

Ans: B, LO: 4, Bloom: C, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: Total fixed costs / Unit contribution margin = Break-even point in sales dollars

124.

A CVP graph does not include a a. variable cost line. b. fixed cost line. c. sales line. d. total cost line.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

125.

Boswell Company reported the following information for the current year: Sales (50,000 units) $1,000,000, direct materials and direct labor $500,000, other variable costs $50,000, and fixed costs $360,000. What is Boswell’s contribution margin ratio? a. 68% b. 45% c. 32% d. 55%

Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($500,000 + $50,000) / $1,000,000 = .55; (1 - .55) = .45 or 45% ((Variable Costs / Sales = Variable % of Sales; (1 - Variable % of Sales) = Contribution Margin Ratio)

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

126.

Boswell Company reported the following information for the current year: Sales (50,000 units) $1,000,000, direct materials and direct labor $500,000, other variable costs $50,000, and fixed costs $360,000. What is Boswell’s break-even point in units? a. 32,728 b. 36,000 c. 51,112 d. 56,250

Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($1,000,000 - $550,000) = $450,000 / 50,000 = $9; $360,000 / $9 = 40,000 (Fixed Costs / Unit contribution margin = Break-even point in units)

127.

Watauga River Corporation manufactures entry-level fly rods for $50 per unit. The fixed costs are $525,000 and the unit variable costs are 60% of the unit selling price. As a result of new automated equipment, it is anticipated that fixed costs will increase by $125,000 and unit variable costs will be 50% of the unit selling price. The new break-even point in sales units is: a. 26,250 b. 26,000 c. 25,750 d. 21,000

Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($525,000 + $125,000) / (50 x .50) = 26,000 (Total Fixed Costs / (Unit selling price x CM Ratio) = break-even point in units

128.

Sol, Inc. manufactures and sells solar chargers for $60 each. Variable costs are $40 per unit, and fixed costs total $120,000. What amount of sales revenue is needed by Sol to break even? a. $160,000. b. $300,000. c. $360,000. d. $480,000.

Ans: C, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $120,000 / (($60 - $40) / $60) = $360,000 (Fixed Costs / Contribution Margin Ratio = Sales dollars needed to break even)

129.

Sol, Inc. manufactures and sells solar chargers for $60 each. Variable costs are $40 per unit, and fixed costs total $120,000. How many solar chargers must Sol sell to earn a net income of $280,000? a. 20,000 b. 7,000 c. 15,000 d. 26,000

Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($120,000 + $280,000) / ($60 - $40) = 20,000 (Fixed Costs + Net Income) / (Unit selling Price – Unit Variable Costs) = Units to earn net income)

Cost-Volume-Profit

130.

18 - 25

Gal Manufacturing sells a product for $50 per unit. The fixed costs are $840,000 and the unit variable costs are 60% of the unit selling price. As a result of new automated equipment, it is anticipated that fixed costs will increase by $200,000 and unit variable costs will be 50% of the unit selling price. The new break-even point in sales units is a. 42,000. b. 41,600. c. 41,200. d. 33,600.

Ans: B, LO: 4, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($840,000 + $200,000) / ($50 x .50) = 41,600 ((Total fixed costs + Increase in Fixed costs)/ Unit contribution margin = new break-even point in units)

131.

Pasca, Inc. is planning to sell 900,000 units for $1.50 per unit. The contribution margin ratio is 20%. If Pasca will break even at this sales volume, what are the company’s fixed costs? a. $270,000. b. $630,000. c. $900,000. d. $1,020,000.

Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: (900,000 x $1.50) x .20 = $270,000 ((Unit selling price x units) x Contribution margin ratio = Contribution Margin; Contribution Margin = Fixed Costs)

132.

April Industries sells a product with a unit contribution margin of $12, fixed costs of $223,200, and sales for the current year of $300,000. What is April’s break-even point? a. 13,800 units b. $76,800 c. 18,600 units d. 6,400 units

Ans: C, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($223,200 / $12) = 18,600 units (Fixed costs / Unit Contribution margin = Break-even point in units)

133.

Kaplan, Inc. produces flash drives for computers, which it sells for $27 each. The variable cost to make each flash drive is $13. During April, 700 drives were sold. Fixed costs for April were $2 per unit for a total of $1,400 for the month. What is the company’s monthly breakeven point in sales dollars? a. $1,908 b. $2,700 c. $14,000 d. $8,400

Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($27- $13) / $27= .5185; 1,400 / .5185= $2,700 (Fixed costs / Contribution margin ratio = Monthly break-even point in dollars

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

134.

Vintage Wines has fixed costs of $20,000 per year. Its warehouse sells wine with unit variable costs of 80% of its unit selling price. How much in sales does Vintage need to break even per year? a. $36,000 b. $24,000 c. $25,000 d. $100,000

Ans: D, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $20,000 / (1 - .80) = $100,000 (Fixed costs / Contribution Margin Ratio = Break-even point in sales dollars)

135.

Bruno & Court is a nonprofit organization that captures stray deer bewildered within residential communities. Fixed costs are $20,000. The variable cost of capturing each deer is $10. Bruno & Court is funded by a local philanthropic organization in the amount of $64,000 for 2022. How many deer can Bruno & Court capture during 2022? a. 4,400 b. 6,400 c. 8,400 d. 4,000

Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($64,000 - $20,000) / $10 = 4,400 ((Funding – Fixed Costs) / Unit Variable Cost = Deer Captured)

136.

At the break-even point of 2,000 unit sales, variable costs are $55,000, and fixed costs are $35,000. What is the unit selling price? a. $45.00 b. $55.00 c. $17.50 d. $27.50

Ans: A, LO: 4, Bloom: C, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($35,000 + $55,000) / 2,000 = $45.00 (Fixed costs + Variable Costs) / Break-Even point in units = Unit Selling Price)

137.

Variable costs for Abbey, Inc. are 25% of sales. Its unit selling price is $100. If Abbey sells one unit more than its break-even point, how much will profit increase? a. $75 b. $25 c. $50 d. $400

Ans: A, LO: 5, Bloom: AP, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $100 x (1 - .25) = $75;$75 x 1 = $75. (Unit selling price x (1 - Variable cost % of sales) = Unit CM x 1 Unit = Profit increase

138.

A company requires $1,700,000 in sales to meet its net income target. Its contribution margin is 30% and fixed costs are $300,000. What is the company’s target net income? a. $510,000 b. $390,000 c. $700,000 d. $210,000

Ans: D, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Cost-Volume-Profit

18 - 27

Solution: $1,700,000 = ($300,000 + x) / .30; x = $210,000 (Sales to meet net income target = (Fixed costs + Target net income (x)) / CM ratio)

139.

Montoya Manufacturing has fixed costs of $3,000,000 and variable costs are 40% of sales. What are the required sales if Montoya desires net income of $300,000? a. $5,500,000 b. $5,000,000 c. $8,250,000 d. $7,500,000

Ans: A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($3,000,000 + $300,000) / (1-.40) = $5,500,000 (Fixed Costs + Net Income)/ Contribution Margin Ratio = Required Sales for Target Net Income

140.

Aero, Inc. requires sales of $2,000,000 to cover its fixed costs of $600,000 and to earn net income of $500,000. What percentage is its variable costs of sales? a. 25% b. 45% c. 30% d. 55%

Ans: B, LO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $2,000,000 = ($600,000 + $500,000) / x; x = Contribution Margin Ratio = .55; 1 - .55 = .45 or 45% (Required Sales = (Fixed Costs + Target Net Income) / Contribution Margin Ratio; 1 - Contribution Margin Ratio = Variable Cost Percentage))

141.

Julie Moon Manufacturing produces eco-friendly wooden hairbrushes. The unit selling price is $20 and the unit variable costs are $8 per brush. Fixed costs per month are $4,800. If Julie Moon sells 30 more units beyond its break-even point in July, how much does profit increase as a result? a. $360 b. $600 c. $240 d. $1,200

Ans: A, LO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($20 - $8) x 30 = $360 ((Unit selling price- Unit variable cost) x Units beyond break-even point = Profit increase

142.

Hayduke Corporation reported the following results from the sale of 5,000 units in May: sales $300,000, variable costs $180,000, fixed costs $90,000, and net income $30,000. Assume that Hayduke increases its unit selling price by 5% on June 1. How many units will have to be sold in June to maintain the same level of net income? a. 4,444 b. 4,600 c. 4,750 d. 5,000

Ans: A, LO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($90,000 + $30,000) / (($300,000 / 5,000) x 1.05) – ($180,000 / 5,000)) = 4,444 (Fixed costs + Net income) / (Adj unit selling price – Unit Variable Cost) = Units to be sold to meet same level of net income

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

143.

Kane, Inc. produces flash drives for computers, which it sells for $20 each. Each flash drive costs $6 of variable costs to make. During March, 1,000 drives were sold. Fixed costs for March were $5.60 per unit for a total of $5,600 for the month. If unit variable costs decrease by 10%, what will happen to the break-even point in units per month for Kane? a. It is 10% higher than the original break-even point in sales units. b. It decreases about 16 units. c. It decreases about 40 units. d. It depends on the quantity of units the company expects to produce and sell.

Ans: B, LO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $5,600 / ($20 - $6) = 400 (Before); $5,600 / ($20 – ($6 x. 90)) = 384 (after); 400 – 384 = 16 units (Fixed costs / Unit contribution margin = Break-even point in units)

144.

Reliable Manufacturing wants to sell a sufficient quantity of products to earn a profit of $100,000. If the unit selling price is $10, unit variable cost is $8, and total fixed costs are $200,000, how many units must be sold to earn income of $100,000? a. 150,000 units b. 100,000 units c. 37,500 units d. 1,500,000 units

Ans: A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($200,000 + $100,000) / ($10 - $8) = 150,000 units (Fixed costs + Target net income) / Unit contribution margin = Units to be sold to earn target net income)

145.

What volume of sales dollars is required to earn a target income of $240,000 if total fixed costs are $300,000 and the contribution margin ratio is 40%? a. $900,000 b. $600,000 c. $1,350,000 d. $990,000

Ans: C, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($300,000 + $240,000) / .40 = $1,350,000 ((Fixed costs + Target net income) / CM ratio = Sales dollars required to earn a target net income)

146.

Boyer Industries has fixed costs of $600,000 and variable costs are 60% of sales. How much sales revenue will Boyer report when its net income equals $60,000? a. $1,650,000 b. $1,100,000 c. $1,560,000 d. $996,000

Ans: A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($600,000 + $60,000) / (1 - .60) = $1,650,000 (Fixed Costs + Target Net Income / Contribution Margin Ratio = Sales required for Target Net Income

Cost-Volume-Profit

147.

18 - 29

Murphy Cord Company produces replacement adapter power charger cords that it sells for $20 each. Each power charger cord costs $6 of variable costs to make. During April, 700 power charger cords were sold. Fixed costs for April were $4 per unit for a total of $2,800 for the month. How much will Murphy’s operating income increase for each $1,000 increase in monthly revenue? a. $700 b. $500 c. $600 d. Not enough information to determine the answer.

Ans: A, LO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution; ($20 - $6) / $20 = .70; $1,000 x .70 = $700 (Unit contribution margin / Unit selling price = Contribution margin ratio; Contribution margin ratio x Increase in revenue = Increase in operating income)

148.

Kodachrome Inc. produces two models of instant digital cameras: Model 24 has sales of 500 units with a contribution margin of $40 each; Model 26 has sales of 350 units with a contribution margin of $50 each. If sales of Model 26 increase by 100 units and sales of Model 24 decrease by 50 units, how much will the company’s profit change? a. $3,000 increase b. $7,000 increase c. $6,500 increase d. $5,000 decrease

Ans: A, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $50 x 100 = $5,000; $40 x 50 = $2,000; $5,000 - $2,000 = $3,000 (Unit contribution margin for Model 26 x Model 26 increase in sales units) = Profit change for Model 26 (Increase)

149.

Wendy Industries produces only one product. Monthly fixed expenses are $12,000, monthly unit sales are 4,000, and the unit contribution margin is $10. What is monthly net income? a. $40,000 b. $52,000 c. There is not enough information to determine the answer. d. $28,000

Ans: D, LO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: 4,000 = ($12,000 + x) / $10; x = $28,000 (Monthly unit sales = Fixed costs + Net income (x) / Unit contribution margin)

150.

A company desires to sell a sufficient quantity of products to earn a profit of $400,000. If the unit selling price is $20, unit variable cost is $12, and total fixed costs are $800,000, how many units must be sold to earn net income of $400,000? a. 225,000 units b. 150,000 units c. 120,000 units d. 90,000 units

Ans: B, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($800,000 + $400,000) / ($20 - $12) = 150,000 units (Total fixed costs + Target net income) / Unit contribution margin = Quantity of units that must be sold to earn net income)

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

151.

Stephanie Inc. sells its product for $40. The variable costs are $18 per unit. Fixed costs are $16,000. The company is considering the purchase of an automated machine that will result in a $2 reduction in unit variable costs and an increase of $5,000 in fixed costs. Which of the following is true about the company’s break-even point in sales units? a. It will remain unchanged. b. It will decrease. c. It will increase. d. It cannot be determined from the information provided.

Ans: C, LO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $16,000 / ($40 - $18) = 727; $16,000 + $5,000 / ($40 – $18 + $2) = 875 (Fixed cost / (Unit selling price – Unit variable cost) = break-even point in units)

152.

What volume of sales dollars is required to earn a target net income of $200,000 if total fixed costs are $250,000 and the contribution margin ratio is 40%? a. $625,000 b. $1,012,500 c. $1,125,000 d. $750,000

Ans: C, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($250,000 + $200,000) / .40 = $1,125,000 ((Fixed Costs + Net Income) / Contribution margin ratio = Sales required to earn a target net income

153.

The following monthly data are available for Lumberyard Company which produces only one product: Unit selling price, $42; Unit variable expenses, $14; Total fixed expenses, $42,000; Actual sales for the month of June, 3,000 units. What is the company’s margin of safety in dollars for June? a. $42,000 b. $63,000 c. $84,000 d. $1,500

Ans: B, LO: 5, Bloom: AP, Difficulty: Hard Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $42,000 / (($42 - $14) / $42) = $63,000; (3,000 x $42) - $63,000 = $63,000 (Break-even point in sales dollars = Fixed cost / Contribution margin ratio; Actual sales – Break-even point in sales dollars = Margin of safety in dollars

154.

Danny’s Lawn Equipment has actual sales of $800,000 and a break-even point in sales dollars of $520,000. How much is its margin of safety ratio? a. 35% b. 46% c. 54% d. 65%

Ans: A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($800,000 - $520,000) / $800,000 = .35 or 35% (Actual Sales – Break-even point in Sales dollars) / Actual Sales = Margin of Safety Ratio)

Cost-Volume-Profit

155.

18 - 31

The following monthly data are available for Seasons Company, which produces only one product: Unit selling price, $42; Unit variable expenses, $14; Total fixed expenses, $42,000; Actual sales for the month of June, 4,000 units. What is the company’s margin of safety in dollars for June? a. $70,000 b. $105,000 c. $63,000 d. $2,500

Ans: B, LO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $42,000 / ($42- $14)/ $42) = $63,000; (4,000 x $42) - $63,000 = $105,000 (Actual Sales – Break-Even point in Sale Dollars = Margin of Safety in dollars)

156.

The amount by which actual or expected sales exceeds the break-even point in sales dollars is referred to as the a. contribution margin. b. unanticipated profit. c. margin of safety in dollars. d. target net income.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

157.

In evaluating the margin of safety, the a. break-even point in sales dollars is not relevant. b. higher the margin of safety ratio, the greater the margin of safety. c. higher the dollar amount, the lower the margin of safety. d. higher the margin of safety ratio, the lower the fixed costs.

Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

158.

Within the relevant range, the unit variable cost a. differs at each activity level. b. remains constant at each activity level. c. increases as production increases. d. decreases as production increases.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

159.

An example of a mixed cost is a. direct materials. b. supervisory salaries. c. utility costs. d. property taxes.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

160.

Restin Company’s maintenance costs are a mixed cost. At the low level of activity (80 direct labor hours), maintenance costs are $600. At the high level of activity (200 direct labor hours), maintenance costs are $1,100. Using the high-low method, what is the unit variable cost and the total fixed cost for maintenance? a. b. c. d.

Unit Variable Cost $4.17 $4.17 $5.50 $5.50

Total Fixed Cost $267 $500 $220 $400

Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($1,100 - $600) / (200 - 80) = $4.17; $1,100 - (200 x $4.17) = $267 (High: Maintenance Cost – Low: Maintenance Cost) / (High: Direct labor hours – Low: Direct labor hours) = Unit Variable Cost; High: Total Cost – (Unit Variable Cost x High: direct labor hours) = Total Fixed Cost

161.

Cost-volume-profit analysis includes all of the following assumptions except a. the behavior of costs is curvilinear throughout the relevant range. b. costs can be classified accurately as either variable or fixed. c. changes in activity are the only factors that affect costs. d. all units produced are sold.

Ans: A, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

162.

The contribution margin ratio increases when a. fixed costs increase. b. fixed costs decrease. c. variable costs as a percentage of sales decrease. d. variable costs as a percentage of sales increase.

Ans: C, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

163.

Contribution margin is a. the amount of revenue remaining after deducting fixed costs. b. available to cover fixed costs and contribute to income for the company. c. sales less fixed costs. d. unit selling price less unit fixed costs.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

164.

Chung, Inc. sells 100,000 wrenches for $24 per unit. Fixed costs are $700,000 and net income is $500,000. What should be reported as variable expenses in the CVP income statement? a. $1,080,000 b. $1,200,000 c. $1,900,000 d. $1,700,000

Ans: B, LO: 3, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: (100,000 x $24) – ($500,000 + $700,000) = $1,200,000 (Total Sales – (Net Income + Fixed Costs) = Variable Expenses

Cost-Volume-Profit 165.

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Sweet Manufacturing is planning to sell 400,000 hammers for $6 per unit. The contribution margin ratio is 20%. If Sweet will break even at this level of sales, what are the fixed costs? a. $480,000 b. $1,120,000 c. $1,600,000 d. $1,920,000

Ans: A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: (400,000 x $6) = x / .20; x = $480,000 Sales dollars to break-even = Fixed costs / CM ratio

166.

At the break-even point, a. sales revenues equal total variable costs. b. contribution margin equals total variable costs. c. contribution margin equals total fixed costs. d. sales revenues equal total fixed costs.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

167.

Wilton Co. reported the following results from the sale of 5,000 boxes of deluxe hair color in May: sales $200,000, variable costs $120,000, fixed costs $60,000, and net income $20,000. Assume that Wilton increases the unit selling price of its product by 10% on June 1. How many boxes will have to be sold in June to maintain the same level of net income? a. 4,000 b. 4,300 c. 4,500 d. 5,000

Ans: A, LO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($60,000 + $20,000) / (($200,000 / 5,000) x 1.10) – ($120,000/ 5,000)) = 4,000 units (Fixed Cost + Net Income) / (Adj Unit Selling Price – Unit Variable Cost) = Units to maintain Net Income)

168.

Required sales in dollars to meet a target net income is computed by dividing a. fixed costs plus target net income by the unit contribution margin. b. variable costs plus target net income by the unit contribution margin. c. fixed costs plus target net income by the contribution margin ratio. d. total costs plus target net income by the contribution margin ratio.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

169.

Bolton Industries had actual sales of $1,000,000 when the break-even point in sales dollars was $600,000. What is the margin of safety ratio? a. 40% b. 33% c. 60% d. 67%

Ans: A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($1,000,000 - $600,000) / $1,000,000 =40 or 40% (Actual Sales - Break-even point in Sales Dollars) / Actual Sales = Margin of Safety ratio)

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

170.

During the first quarter of the year, Blanko Industries generated sales revenue of $1,200,000 on sales of 50,000 units of its wireless ear buds. The break-even point in sales units is 30,000 units. What is the company’s margin of safety ratio? a. 12% b. 20% c. 32% d. 40%

Ans: D, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $1,200,000/ 50,000 = $24 unit selling price; $24 x 30,000 = $720,000; ($1,200,000 - $720,000) / $1,200,000 =.40 or 40% (Actual Sales - Break-even point in Sales Dollars) / Actual Sales = Margin of Safety ratio)

171.

Acme Industries manufactures recyclable bags at a variable cost of $.20 per unit. The company earned sales revenue of $13,500,000 during 2022 on the sale of 27,000,000 bags. If the break-even point in sales dollars was $9,000,000, what is the margin of safety ratio? a. 25% b. 33% c. 50% d. 66%

Ans: B, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($13,500,000 - $9,000,000) / $13,500,000 = .33 or 33% (Actual Sales - Break-even point in Sales Dollars) / Actual Sales = Margin of Safety ratio)

Cost-Volume-Profit

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BRIEF EXERCISES BE 172 Dollywood Corporation accumulates the following data concerning a mixed cost, using miles as the activity level. Miles Driven Total Cost Miles Driven Total Cost January 10,000 $16,500 March 9,000 $12,500 February 8,000 $14,500 April 7,000 $12,000 Instructions Compute the unit variable costs and fixed costs using the high-low method for this mixed cost. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 172

(4 min.)

$16,500 − $12,000 ————————— = $1.50 = Unit variable cost per mile 10,000 − 7,000 $1.50 (10,000) + FC = $16,500 Fixed cost = $1,500 Or $1.50 (7,000) + FC = $12,000 Fixed cost = $1,500 BE 173 Sandman Company makes 2 products, sleep masks and sleep socks. Additional information follows: Units

Sleep Masks Sleep Socks 4,000 2,500

Sales Variable costs Fixed costs Net income

$60,000 36,000 9,000 $15,000

$25,000 7,000 9,000 $9,000

Profit per unit

$3.75

$3.60

Instructions Sandman has unlimited demand for both products. Therefore, which product should the company encourage its salespeople to emphasize? Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 173

(5 min.)

Unit contribution margin: Sleep Masks: Sleep Socks:

[$60,000 – $36,000] ÷ 4,000 = $6 [$25,000 – $7,000] ÷ 2,500 = $7.20

Sandman should encourage its sales people to sell more sleep socks due to the higher unit contribution margin. BE 174 Determine the missing amounts. Unit Selling Price

Unit Variable Costs

$300 $600 E.

$165 C. F.

1. 2. 3.

Unit Contribution Margin A. $150 $440

Contribution Margin Ratio B. D. 40%

Ans: N/A, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 6, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 174

(6 min.)

A. $300 – $165 = $135 B. $135 ÷ $300 = 45% C. $600 – $150 = $450 D. $150 ÷ $600 = 25% E. $440 ÷ 40% = $1,100 F. If 40% = CM ratio, then 60% = variable cost percentage; $1,100 × 60% = $660 Or $1,100 – $440 = $660 BE 175 Kipling Company has sales of $1,500,000 for the first quarter of 2022. In making the sales, the company incurred the following costs and expenses. Product costs Selling expenses Administrative expenses

Variable $500,000 100,000 80,000

Fixed $550,000 75,000 67,000

Instructions Calculate the company’s net income under CVP for 2022. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 175

(4 min.)

$1,500,000 − [$500,000 + $100,000 + $80,000] − [$550,000 + $75,000 + $67,000] = $128,000

Cost-Volume-Profit

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BE 176 Hu Co. has fixed costs totaling $165,000. Its unit contribution margin is $1.50 and the unit selling price is $5.50. Instructions Compute the company’s break-even point in units. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 176

(3 min.)

$1.50X – $165,000 = 0 X = 110,000 units BE 177 Barkable Bakery sells boxes of dog treats each with a variable cost percentage of 35%. Its fixed costs are $54,600 per year. Instructions Determine the annual volume of sales dollars that Barkable needs to generate to break even. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 177

(3 min.)

Contribution margin ratio = 100% – 35% = 65% .65x – $54,600 = 0 X = $84,000 of sales dollars BE 178 Cannon Co. has a product with a unit selling price of $500, unit variable cost of $300, and fixed costs of $240,000. Instructions Compute the company’s break-even point in sales units and sales dollars. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 178

(4 min.)

$500X − $300X − $240,000 = 0 BEP in units = X = 1,200 units BEP in dollars = 1,200 units × $500 = $600,000

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

BE 179 Oakbrook, Inc. reported actual sales of $2,000,000 and fixed costs of $350,000. The contribution margin ratio is 25%. Instructions Compute the company’s margin of safety in dollars and the margin of safety ratio. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 179

(4 min.)

BEP in sales dollars: $350,000 ÷ 25% = $1,400,000 Margin of safety in dollars: $2,000,000 − $1,400,000 = $600,000 Margin of safety ratio: $600,000 ÷ $2,000,000 = 30% BE 180 The following monthly data are available for Fortner Industries. The company produces only one product that it sells for $18 each. Its unit variable costs are $8 and its total fixed expenses are $17,000. Actual sales for May totaled 2,000 units. Instructions Compute the margin of safety in dollars for the company for May. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 180

(4 min.)

BEP in units: $18X – $8X – $17,000 = 0 BEP in units = X = 1,700 units Units at current sales level = 2,000 Margin of safety in dollars = (2,000 – 1,700) × $18 = $5,400 Sales can drop by $5,400 before the company incurs a loss BE 181 At the break-even point, a company sells 1,200 widgets. The unit selling price is $6 per widget, unit variable cost is $2 per widget, and unit fixed cost is $4 per widget. Instructions If it sells 200 additional widgets, determine the company’s incremental profit. Solution 181

(4 min.)

Incremental profit = 200 × ($6 – $2) = $800 Ans: N/A, LO: 3, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Cost-Volume-Profit

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EXERCISES Ex. 182 Sandburg Manufacturing manufactures a single product. Annual production costs incurred in the manufacturing process are shown below for the production of 2,000 units. The company’s Utilities and Maintenance costs are mixed costs. The fixed portions of these costs are $300 and $200, respectively. Costs Incurred Production in Units Production Costs a. Direct Materials b. Direct Labor c. Utilities d. Rent e. Indirect Labor f. Supervisory Salaries g. Maintenance h. Depreciation

2,000

4,000

$6,000 16,000 1,000 3,000 4,200 1,500 1,000 2,500

? ? ? ? ? ? ? ?

Instructions Calculate the expected costs to be incurred when production is 4,000 units. Use your knowledge of cost behavior to determine which of the other costs are fixed or variable. Ans: N/A, LO: 1, 2, Bloom: AP, Difficulty: Moderate, Min: 12, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 182

(12–18 min.) Costs Incurred

Production in Units Production Costs a. Direct Materials b. Direct Labor c. Utilities d. Rent e. Indirect Labor f. Supervisory Salaries g. Maintenance h. Depreciation a. b. c.

Variable Variable Mixed

d. e. f. g.

Fixed Variable Fixed Mixed

2,000

4,000

$6,000 16,000 1,000 3,000 4,200 1,500 1,000 2,500

$12,000 32,000 1,700 3,000 8,400 1,500 1,800 2,500

$6,000 ÷ 2,000 = $3.00 per unit; 4,000 × $3.00 = $12,000 $16,000 ÷ 2,000 = $8.00 per unit; 4,000 × $8.00 = $32,000 $1,000 – $300 = $700; $700 ÷ 2,000 = $.35 per unit of variable costs; 4,000 × $.35 = $1,400 + $300 (fixed) = $1,700 $3,000 $4,200 ÷ 2,000 = $2.10 per unit; 4,000 × $2.10 = $8,400 $1,500 $1,000 – $200 = $800 variable portion; $800 ÷ 2,000 = $.40 4,000 × $.40 = $1,600 + $200 (fixed portion) = $1,800 .

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

$2,500

Fixed

Ex. 183 Bill Braddock is considering opening a Fast ‘n Clean Car Service Center. He estimates that the following costs will be incurred during his first year of operations: Rent $9,200, Depreciation on equipment $7,000, Salaries $16,400, Motor oil $2.00 per quart. He estimates that each oil change will require 5 quarts of oil. Oil filters will cost $3.00 each. He must also pay The Fast ‘n Clean Corporation a franchise fee of $1.10 per oil change since he will operate the business as a franchise. In addition, utility costs are expected to vary with the quantity of oil changes as follows: Quantity of Oil Changes 4,000 6,000 9,000 12,000 14,000

Utility Costs $6,000 7,300 9,600 12,600 15,000

Bill Braddock anticipates that he can provide the oil change service with a filter at $25 each. Instructions (a) Using the high-low method, determine the unit variable costs and total fixed costs. (b) Determine the break-even point in quantity of oil changes and sales dollars. (c) Without regard to your answers in parts (a) and (b), determine the oil changes required to earn a net income of $20,000, assuming fixed costs are $32,000 and the unit contribution margin is $8. Ans: N/A, LO: 1, 2, 4 ,5, Bloom: AP, Difficulty: Hard, Min: 19, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 183 (a)

(19–24 min.)

Separation of mixed costs:

($15,000 – $6,000) $9,000 Change in cost/Change in quantity: ————————— = ——— = $.90 per oil change (14,000 – 4,000) 10,000 Variable costs: Oil (5 quarts × $2.00) Filter Franchise fee Utility costs (variable) Total variable

$10.00 3.00 1.10 .90 $15.00

Fixed costs: Rent Depreciation Salaries Utility costs Total

*$6,000 – (4,000 × .90) = $2,400 (b) (1) Break-even point in oil changes: Fixed costs Unit contribution margin

$35,000 = 3,500 oil changes $10.00*

(2) Break-even sales point in dollars: Fixed costs .

$35,000

= $87,500

$9,200 7,000 16,400 2,400* $35,000

Cost-Volume-Profit Contribution margin ratio

Solution 183

.40

(Cont.)

*Unit selling price (a) Unit variable cost Unit contribution margin (b) Contribution margin ratio (b) ÷ (a) (c)

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Fixed costs + Net income Unit contribution margin

$25 15 $10 40% $32,000 + $20,000 $8

= 6,500 oil changes

Ex. 184 Jane Botosan operates a bed and breakfast hotel in a resort area near Lake Michigan. Depreciation on the hotel is $60,000 per year. Jane employs a maintenance person at an annual salary of $41,000 and a cleaning person at an annual salary of $24,000. Real estate taxes are $10,000 per year. The rooms rent at an average price of $60 per person per night including breakfast. Other costs are laundry and cleaning service at a cost of $10 per person per night and the cost of food, which is $5 per person per night. Instructions (a) Determine the quantity of rentals and the sales revenue Jane needs to break even using the contribution margin technique. (b) If the current level of rentals is 4,000, by what percentage can rentals decrease before Jane has to worry about having a net loss? (c) Jane is considering upgrading the breakfast service to attract more business and increase prices. This will cost an additional $3 for food costs per person per night. She feels she can increase the room rate to $68 per person per night. Determine the quantity of rentals and the sales revenue Jane needs to break even if the changes are made. Ans: N/A, LO: 1, 3, 4, 5, Bloom: AN, Difficulty: Hard, Min: 22, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 184 (a)

(22–27 min.)

Variable costs per person per night: Laundry and cleaning $10 Breakfast 5 Total variable $15

Fixed costs: Depreciation Maintenance Cleaning Real estate tax Total fixed

Break-even point in rentals: Fixed costs Contribution margin per person per night *Unit selling price Unit variable cost Unit contribution margin .

= $60 15 $45

$135,000 $45*

= 3,000 rentals

$60,000 41,000 24,000 10,000 $135,000

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 184

(Cont.)

Break-even point in dollars: Fixed costs Contribution margin ratio

$135,000 75%**

= $180,000

**Unit contribution margin (a) $45 Unit selling price (b) $60 Contribution margin ratio (a) ÷ (b) = 75% (b)

Margin of safety in dollars:

Actual rentals - Break-even point in rentals Actual rentals (c)

(4,000 – 3,000) =

= 25% 4,000

Variable costs per person per night: Laundry and cleaning $10.00 Breakfast 8.00 Total variable $18.00

Fixed costs: Depreciation Maintenance Cleaning Real estate tax Total fixed

$60,000 41,000 24,000 10,000 $135,000

Break-even point in rentals: Fixed costs Contribution margin per person per night *Unit selling price Unit variable cost Unit contribution margin

$135,000 $50*

= 2,700 rentals

$68 18 $50

Break-even point in sales dollars: 2,700 × $68 = $183,600 Ex. 185 Corris Co. accumulates the following data concerning a mixed cost, using miles as the activity level. Miles Driven Total Cost January 10,000 $17,000 February 8,000 13,500 March 9,000 14,400 April 7,000 12,500 Instructions Compute the unit variable costs and fixed costs using the high-low method for this mixed cost. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Cost-Volume-Profit Solution 185

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(5 min.)

$17,000 – $12,500 10,000 – 7,000

= $1.50 = Variable cost per mile

($1.50 x 10,000) + Fixed cost = $17,000 Fixed cost = $2,000 Ex. 186 Moresan Co. gathered the following information on power costs and factory machine usage for the last six months: Month Power Cost Factory Machine Hours January $24,400 13,900 February 30,400 17,600 March 29,000 16,800 April 22,340 13,200 May 19,900 11,600 June 16,900 8,600 Instructions Using the high-low method of analyzing costs, answer the following questions and show computations to support your answers. (a)

What is the estimated unit variable costs per factory machine hour?

(b)

What is the estimated fixed power cost each month?

(c)

If it is estimated that 10,000 factory machine hours will be run in July, what is the expected total power cost for July?

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 186 (a)

(10–15 min.)

Variable power cost per factory machine hour:

$30,400 – $16,900 17,600 – 8,600

$13,500 9,000

= $1.50 per factory machine hour

(b) Monthly fixed power cost: Total costs Less: Variable costs 17,600 × $1.50 8,600 × $1.50 Total fixed costs (c)

High (February) $30,400

Estimated total power costs for July: Variable cost (10,000 × $1.50) Fixed cost Total estimated power cost .

Low (June) $16,900

26,400 $4,000

$15,000 4,000 $19,000

12,900 $4,000

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ex. 187 The Bradshaw Law Office has the following monthly telephone records and costs: Calls 2,000 1,500 2,200 2,500 2,300 1,700

Costs $2,400 2,000 2,600 2,800 2,700 2,200

Instructions Identify the unit variable cost and the fixed cost using the high-low method. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 187

(10–15 min.)

High calls minus low calls: 2,500 – 1,500 = 1,000 Change in cost: $2,800 – $2,000 = $800 $800 ÷ 1,000 = $.80 variable cost per call High $2,800

Total Cost Less: Variable costs 2,500 × $.80 1,500 × $.80 Total fixed costs

Low $2,000

2,000 $ 800

1,200 $ 800

Ex. 188 Determine the missing amounts. Unit Selling Price 1. $300 2. $600 3. E

Unit Variable Costs $210 C F

Unit Contribution Margin A $210 $360

Contribution Margin Ratio B D 30%

Ans: N/A, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 188 A. B. C. D. E. F.

(10 min.)

$300 – $210 = $90 $90 ÷ $300 = 30% $600 – $210 = $390 $210 ÷ $600 = 35% $360 ÷30% = $1,200 If 30% = CM ratio, then 70% = variable cost percentage $1,200×70% = $840

Cost-Volume-Profit

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Ex. 189 Henderson Farms reports the following results for the month of November: Sales (10,000 units) Variable costs Contribution margin Fixed costs Net income

$600,000 420,000 180,000 110,000 $ 70,000

Management is considering the following independent courses of action to increase net income. 1. Increase unit selling price by 5% with no change in total variable costs. 2. Reduce variable costs to 66 2 3 % of sales. 3. Reduce fixed costs by $10,000. Instructions If maximizing net income is the objective, which is the best course of action? Ans: N/A, LO: 3, Bloom: E, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 189

(15–20 min.)

1. Current unit selling price is: $600,000 ÷ 10,000 units = $60 Increase $60 by 5%:$60 × 1.05 = $63 Revised sales Variable costs Contribution margin Fixed costs Net income

$630,000 420,000 210,000 110,000 $100,000

2. Sales Variable costs (reduce variable costs to 66 2 3 % of sales) Contribution margin Fixed costs Net income

$600,000 400,000 200,000 110,000 $ 90,000

3. Sales Variable costs Contribution margin Fixed costs (reduce fixed costs by $10,000) Net income

$600,000 420,000 180,000 100,000 $ 80,000

Increasing the unit selling price will increase net income from $70,000 to $100,000. Option (2) will increase net income to only $90,000, and Option (3) will increase net income to only $80,000.

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ex. 190 Marvin Co. had a net loss of $150,000 in 2021 when the unit selling price was $20, the unit variable costs were $15, and the fixed costs were $600,000. Management expects per unit data and total fixed costs to be the same in 2022. Management has set a goal of earning a net income of $75,000 in 2022. Instructions (a) Compute the units sold in 2021. (b) Compute the quantity of units that would have to be sold in 2022 to reach management's desired net income level. (c) Assume that Marvin sells the same quantity of units in 2022 as it did in 2021. What would the unit selling price have to be in order to reach the target net income? Use the mathematical equation. Ans: N/A, LO: 3, 4, 5, Bloom: AN, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 190

(15–20 min.) Fixed costs – Net loss Unit contribution margin

(a) Units sold in 2021 =

$600,000 – $150,000 $20 - $15

$600,000 + $75,000 $20 - $15

= $450,000 ÷ $5 = 90,000 units Fixed costs + Net income Unit contribution margin

(b) Units sold in 2022 =

= $675,000 ÷ $5 = 135,000 units

Variable costs + Fixed costs + Net income 90,000 units

Unit selling price needed in 2022 =

90,000($15) + $600,000 + $75,000 90,000 units = $2,025,000 ÷ 90,000 = $22.50

Ex. 191 In September, Matlock Industries sold 800 units of product. The average unit selling price was $30. During the month, fixed costs were $6,300 and variable costs were 70% of sales. Instructions (a) Determine the contribution margin in dollars, per unit, and as a ratio. (b) Using the contribution margin technique, compute break-even point in sales dollars and sales units. Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Moderate, Min: 12, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Cost-Volume-Profit Solution 191 (a)

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(12–17 min.)

Contribution margin (in dollars) Sales (800 × $30) Less: Variable costs ($24,000 × 70%) Contribution margin

$24,000 16,800 $7,200

Unit contribution margin Unit selling price Less: Unit variable cost ($30 × 70%) Unit contribution margin

$30 21 $9

Contribution margin ratio $9 ÷ $30 = 30% (b)

Break-even point (in dollars) Fixed costs ÷ Contribution margin ratio $6,300 ÷ 30% = $21,000 Break-even point (in units) Fixed costs ÷ Unit contribution margin $6,300 ÷ $9 = 700 units

Ex. 192 In 2021, Stallman Co. had a break-even point in sales dollars of $800,000 based on a unit selling price of $10 and fixed costs of $200,000. In 2022, the unit selling price and unit variable costs did not change, but the break-even point in sales dollars increased to $840,000. Instructions (a) Compute the unit variable cost and the contribution margin ratio for 2021. (b) Using the contribution margin ratio, compute the increase in fixed costs for 2022. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 192

(15–20 min.) Fixed Costs

(a) Unit contribution margin =

Break-even point in units $200,000 80,000

(b)

$200,000 ($800,000 ÷ $10)

= $2.50

Unit variable cost Contribution margin ratio

= =

$10 – $2.50 = $7.50 $2.50 ÷ $10 = 25%

Fixed costs

= =

Break-even point in dollars × CM Ratio $840,000 × 25% = $210,000

Therefore, fixed costs increased $10,000 = ($210,000 – $200,000).

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

18 - 48 Ex. 193

The CVP income statement for Bradford Machine Company for 2021 appears below. BRADFORD MACHINE COMPANY Income Statement For the Year Ended December 31, 2021 —————————————————————————————————————————— Sales (40,000 units) ................................................................................... $1,000,000 Variable expenses...................................................................................... 700,000 Contribution margin .................................................................................... 300,000 Fixed expenses .......................................................................................... 360,000 Net income (loss) ....................................................................................... $ (60,000) Instructions Answer the following independent questions and show computations using the contribution margin technique to support your answers: 1. What was the company's break-even point in sales dollars in 2021? 2. How many additional units would the company have had to sell in 2022 to earn a net income of $45,000? 3. If the company reduces variable costs by $2.50 per unit in 2022 while other costs and unit revenues remain unchanged, how many units will the company have to sell to earn a net income of $45,000? Ans: N/A, LO: 3, 4, 5, Bloom: AN, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 193 (15–20 min.) $360,000 1. = $1,200,000 30% $360,000 + $45,000 30%

$1,350,000

= $1,350,000 total sales needed

= 54,000 total units to be sold

$25 40,000 actual units sold 14,000 additional units to be sold Note: Required sales in units can be obtained directly by dividing fixed costs plus profit by unit contribution margin: ($360,000 + $45,000) ÷ ($25 – $17.50) = 54,000 units 3.

2021 2022

Unit variable cost Variable cost reduction Unit variable cost

$17.50 2.50 $15.00

($700,000 ÷ 40,000 units)

Expected unit contribution margin $10 ($25 – $15) $360,000 + $45,000 $10 .

= 40,500 units

Cost-Volume-Profit

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Ex. 194 Webber, Inc. developed the following information for its product: Per Unit $90 63 $27

Sales price Variable cost Contribution margin Total fixed costs

$1,215,000

Instructions Answer the following independent questions and show computations using the contribution margin technique to support your answers. 1. How many units must be sold to break even? 2. What is the total sales that must be generated for the company to earn a profit of $60,000? 3. If the company is presently selling 50,000 units, but plans to spend an additional $108,000 on an advertising program, how many additional units must the company sell to earn the same net income it is now making? 4. Using the original data in the problem, compute the new break-even point in sales units if the unit selling price is increased by 20%, unit variable cost is increased by 10%, and total fixed costs are increased by $236,250. Ans: N/A, LO: 3, 4, 5, Bloom: AN, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 194 1.

(15–20 min.)

$1,215,000

= 45,000 units must be sold to break even.

$27 2.

Contribution margin ratio = 30% ($27 ÷ $90). $1,215,000 + $60,000

= $4,250,000 total sales

.30 3.

$108,000

= 4,000 additional units

$27 4.

New unit selling price New unit variable cost New unit contribution margin New total fixed costs $1,451,250 $1,451,250 38.70

$108.00 69.30 $38.70

($90 × 1.20) ($63 × 1.10)

($1,215,000 + $236,250)

= 37,500 units (rounded) is the new break-even point in units.

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ex. 195 Werth & Garza Manufacturing's sales slumped badly in 2022 due to so many people purchasing gifts online. The company's income statement showed the following results from selling 500,000 units of product: net sales $2,125,000; total costs and expenses $2,500,000; and net loss $375,000. Costs and expenses consisted of the following: Cost of goods sold Selling expenses Administrative expenses

Total $2,000,000 200,000 300,000 $2,500,000

Variable $1,300,000 50,000 150,000 $1,500,000

Fixed $700,000 150,000 150,000 $1,000,000

Management is considering modifications to the cost structure for 2023. The plan includes purchasing new automated equipment that will result in the following: An increase in total fixed costs of $375,000. A reduction in unit variable costs of $0.75. Unit selling price would not change from 2022. Instructions (a) Compute the break-even point in sales dollars for 2022. (b) Compute the break-even point in sales dollars under the alternative course of action. Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Hard, Min: 8, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 195

(8–10 min.)

(a) Unit selling price = $2,125,000 ÷ 500,000 = $4.25 per unit Unit variable cost = $1,500,000  500,000 = $3 per unit Sales – Variable cost – Fixed cost = 0 $4.25X – $3X – $1,000,000 = 0 Break-even point in sales units = $1,000,000 ÷ $1.25 = 800,000 units Break-even point in sales dollars = 800,000 × $4.25 = $3,400,000 (b) 2023 unit selling price = 2022 unit selling price = $4.25 2023 unit variable costs = $3.00 - $0.75 = $2.25 Sales - Variable cost - Fixed cost = 0 $4.25X - $2.25X – ($1,000,000 + $375,000) = 0 Break-even point in sales units = $1,375,000 ÷ ($4.25 - $2.25) = 687,500 units Break-even point in sales dollars = 687,500 × $4.25 = $2,921,875

Ex. 196 Henning Co. estimates that variable costs will be 70% of sales and fixed costs will total $2,160,000. The unit selling price of the product is $10, and 750,000 units will be sold. Instructions Using the mathematical equation, (a) Compute the break-even point in units and sales dollars. (b) Compute the margin of safety in dollars and as a ratio. (c) Compute net income. .

Cost-Volume-Profit

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Ans: N/A, LO: 3, 4, 5, Bloom: AP, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 196

(15–20 min.)

(a)

Break-even point in units $10X = $7X + $2,160,000 $3X = $2,160,000 X = 720,000 units Break-even point in dollars X = .3X + $2,160,000 .3X = $2,160,000 X = $7,200,000

(b) Margin of safety in dollars $7,500,000 – $7,200,000 = $300,000 Margin of safety ratio $300,000 ÷ $7,500,000 = 4% (c)

Net Income Sales Variable Costs Fixed Costs Net Income

$7,500,000 (5,250,000) (2,160,000) $ 90,000

Ex. 197 Newport News Manufacturing, Inc. has the following information available for September 2022. Unit selling price of navigational equipment Unit variable costs Total fixed costs Units sold

$ 400 $ 280 $48,000 500

Instructions (a) Prepare a CVP income statement that shows both total and per unit amounts. (b) Compute Newport News break-even point in units. Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 197

(10 min.) NEWPORT NEWS MANUFACTURING, INC. CVP Income Statement For the Month Ended September 30, 2022

Total Sales (500 units) ................................................................. $200,000 Variable costs ...................................................................... 140,000 Contribution margin ............................................................. 60,000 Fixed costs .......................................................................... 48,000 Net income .......................................................................... $ 12,000 .

Per Unit $400 280 $120

Cost-Volume-Profit

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 197

(Cont.)

(b)

Sales = Variable costs + Fixed costs $400X = $280X + $48,000 $120X = 48,000 X = 400 units

Ex. 198 In June, Avante Salon gave 2,500 haircuts, shampoos, and permanents at an average unit selling price of $40. During the month, fixed costs were $20,000 and variable costs were 75% of sales. Instructions (a) Determine the contribution margin in dollars, per unit, and as a ratio. (b) Using the contribution margin technique, compute the break-even point in dollars and units. (c) Compute the margin of safety in dollars and as a ratio. Ans: N/A, LO: 3, 4, 5, Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 198 (a)

(10 min.)

Contribution margin (in dollars):

Variable cost (per unit): Contribution margin (per unit) Contribution margin (ratio): (b)

Break-even point (in dollars): Break-even point (in units):

(c)

Margin of safety (in dollars): Margin of safety (ratio)

Sales (2,500  $40) Variable costs ($100,000  .75) Contribution margin $40  .75 = $30. $40 – ($40  75%) = $10. $10  $40 = 25%

$100,000 75,000 $25,000

$20,000 = $80,000. 25% $20,000 = 2,000 units. $10 $100,000 – $80,000 = $20,000. $20,000  $100,000 = 20%

Ex. 199 Taveras Industries developed the following information for the product it sells: Sales price Variable cost of goods sold Fixed cost of goods sold Variable selling expense Variable administrative expense Fixed selling expense Fixed administrative expense

$50 per unit $28 per unit $650,000 10% of sales price $2.00 per unit $400,000 $300,000

For the year ended December 31, 2022, Taveras produced and sold 100,000 units of product. .

Cost-Volume-Profit

Ex. 199

18 - 55

(Cont.)

Instructions (a)

Prepare a CVP income statement using the contribution margin format for Taveras Industries for 2022.

(b)

What was the company's break-even point in units in 2022? Use the contribution margin technique.

(c)

What was the company's margin of safety in dollars in 2022?

Ans: N/A, LO: 3, 4, 5, Bloom: AP, Difficulty: Moderate, Min: 20, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting, Decision Analysis

Solution 199

(20–25 min.)

(a)

TAVERAS INDUSTRIES Income Statement For the Year Ended December 31, 2022 ——————————————————————————————————————————— Sales ........................................................................................ $5,000,000 Variable expenses Cost of goods sold.............................................................. $2,800,000 Administrative..................................................................... 200,000 Selling expenses ................................................................ 500,000 Total variable expenses...................................................... 3,500,000 Contribution margin .................................................................. 1,500,000 Fixed expenses Cost of goods sold.............................................................. 650,000 Selling ................................................................................ 400,000 Administrative..................................................................... 300,000 Total fixed expenses........................................................... 1,350,000 Net income ............................................................................... $ 150,000

(b)

The break-even point was 90,000 units in 2022. Unit variable costs Cost of goods sold Administrative Selling

Unit contribution margin Unit selling price Unit variable cost Unit contribution margin

$28 2 5 $35

$1,350,000 ÷ $15 = 90,000 units to break even. (c)

Margin of safety in dollars was $500,000 Actual sales Break-even point in dollars (90,000 × $50) Margin of safety in dollars

$5,000,000 4,500,000 $ 500,000

$50 35 $15

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ex. 200 Gordon Manufacturing earned net income of $100,000 during 2021. The company wants to earn net income of $40,000 more during 2022. The company's fixed costs are expected to be $147,000, and variable costs are expected to be 30% of sales Instructions (a) Determine the required sales to meet the target net income during 2022. (b) Fill in the dollar amounts for the summary income statement for 2022 below, based on your answer to part (a). Sales revenue $ Variable costs Contribution margin Fixed costs Net income

Ans: N/A, LO: 3, 5, Bloom: AP, Difficulty: Moderate, Min: 6, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting, Decision Analysis

Solution 200

(6–8 min.)

(a) 70%X– $147,000 = $140,000 Required sales = $410,000 ($287,000 ÷ .70) (b) Sales revenue Variable costs ($410,000 ×.30) Contribution margin Fixed costs Net income

$410,000 123,000 287,000 147,000 $140,000

Ex. 201 Ferris, Inc. has a unit selling price of $500, unit variable cost of $300, and total fixed costs of $260,000. Instructions Compute the break-even point in units and sales dollars. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 201

(5 min.)

$500X– $300X– $260,000 = 0 Break-even point in units = X = 1,300 units ($260,000 ÷ $200) Break-even point in dollars = 1,300 units × $500 = $650,000

Cost-Volume-Profit

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Ex. 202 Erickson, Inc. makes computer bags that sell for $20 each. For the coming year, management expects fixed costs to be $225,000. Variable costs are $14 per unit. Instructions (a) Compute the break-even point in sales dollars using the mathematical equation. (b) Compute the break-even point in sales dollars using the contribution margin ratio technique. (c) Compute margin of safety ratio assuming actual sales are $937,500. (d) Compute the sales required to earn a net income of $150,000, using the mathematical equation. Ans: N/A, LO: 4 ,5, Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 202

(10–15 min.)

(a)

Break-even point in Dollars = Variable Costs + Fixed Costs X = .70X + $225,000 .30X = $225,000 X = $750,000

(b)

Unit Contribution Margin = Unit Selling Price – Unit Variable Cost Unit CM = $20 – $14 = $6 Contribution Margin Ratio =

Unit Contribution Margin Unit Selling Price

CM Ratio = $6 ÷ $20 = 30% Fixed Costs

Break-even point in dollars =

Contribution Margin Ratio = $225,000 ÷ 30% = $750,000 (c)

Sales Less: Break-even point in dollars Margin of Safety in dollars Margin of Safety Ratio =

$937,500 750,000 $187,500

Margin of Safety in dollars Actual Sales = $187,500 ÷ $937,500 = 20%

(d)

Required Sales = Variable Costs + Fixed Costs + Targeted Net Income X = .70X + $225,000 + $150,000 .30X = $375,000 X = $1,250,000

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ex. 203 Melody Manufacturing produces a computer microphone that is sold for $20 per unit. The contribution margin ratio is 40%. Fixed expenses total $9,200. Instructions (a) Compute the unit variable cost. (b) Compute how many microphones Melody Manufacturing will have to sell to break even. (c) Compute how many microphones Melody Manufacturing will have to sell to earn a target net income of $16,200. Ans: N/A, LO: 4, 5, Bloom: AP, Difficulty: Moderate, Min: 7, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 203

(7–10 min.)

(a) Unit variable cost: $20 × (1 – .40) = $12/unit (b) $20X– $12X– $9,200 = 0 X = 1,150 units ($9,200÷ $8) (c) $20X– $12X– $9,200 = $16,200 X = 3,175 units ($25,400÷ $8) Ex. 204 Usher, Inc. has prepared the following cost-volume-profit graph:

Cost-Volume-Profit Ex. 204

18 - 59

(Cont.)

Instructions For the items listed below, enter to the left of the item, the letter in the graph which best corresponds to the item. 1. Activity base 2. Break-even point 3. Dollars 4. Fixed costs 5. Loss 6. Profit (Net income) 7. Revenues 8. Total costs 9. Variable costs Ans: N/A, LO: 4, 5, Bloom: C, Difficulty: Moderate, Min: 9, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 204 1. 2. 3. 4. 5. 6. 7. 8. 9.

D A E C G B I H F

(9–14 min.)

Activity base Break-even point Dollars Fixed costs Loss Profit Revenues Total costs Variable costs

Ex. 205 Holder Manufacturing had $125,000 of net income in 2021 when the unit selling price was $100, the unit variable costs were $70, and the fixed costs totaled $475,000. Management expects per unit data and total fixed costs to remain the same in 2022. The president of Holder Manufacturing is under pressure from stockholders to increase net income by $60,000 in 2022. Instructions (a) Compute the quantity of units sold in 2021. (b) Compute the quantity of units that would have to be sold in 2022 to reach the stockholders' desired profit level. (c) Assume that Holder Manufacturing sells the same quantity of units in 2022 as it did in 2021. What would the unit selling price have to be to reach the stockholders' desired profit level? Ans: N/A, LO: 4, 5, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 205

(10–14 min.)

(a)

Sales = Variable cost + Fixed cost + Target net income $100X= $70X + $475,000 + $125,000 $30X= $600,000 X= 20,000 units

$475,000 + $125,000

Units sold in 2021 =

= 20,000 units

$100 - $70 (b) Units sold in 2022 =

$475,000 + $185,000*

= 22,000 units

$100 - $70 *$125,000 + $60,000 = $185,000 (c)

$475,000 + $185,000 X - $70

= 20,000 units where X = new unit selling price

$660,000= 20,000X – $1,400,000 $2,060,000X= 20,000X X= $103 Ex. 206 Englehart, Inc. reports the following operating results for August: Sales $450,000 (units 5,000); variable costs $280,000; and fixed costs $115,000. Management is considering the following independent courses of action to increase net income. 1. Increase the unit selling price by 10%. 2. Reduce variable costs to 60% of sales. 3. Reduce fixed costs by $15,000. Instructions Compute the net income to be earned under each alternative. Which course of action will produce the highest net income? Ans: N/A, LO: 4, 5, Bloom: AP, Difficulty: Hard, Min: 6, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 206

(6 min.)

(1)

Current unit selling price = $450,000  5,000 units = $90 Increase unit selling price to $99, or ($90  110%). Net income = $495,000 – $280,000 – $115,000 = $100,000.

(2)

Reduce variable costs to 60% of sales. Net income = $450,000 – ($450,000 × 60%) – $115,000 = $65,000.

(3)

Reduce fixed costs to $100,000, or ($115,000 – $15,000). Net income = $450,000 – $280,000 – $100,000 = $70,000.

Cost-Volume-Profit

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Alternative 1, increasing unit selling price, will produce the highest net income.

Ex. 207 Keeter, Inc. earned a net income of $300,000 last year. This year it wants to earn a net income of $450,000. The company's fixed costs are expected to be $300,000, and variable costs are expected to be 70% of sales. Instructions (a) Determine the required sales to meet the target net income of $450,000 using the mathematical equation. (b) Using a CVP income statement format, prove your answer. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting, Decision Analysis

Solution 207 (a)

(8–12 min.)

Sales = Variable Cost + Fixed Cost + Target Net Income X = .70X + $300,000 + $450,000 .30X = $750,000 X = $2,500,000 Required Sales are $2,500,000.

(b)

Sales Variable costs Contribution margin Fixed costs Target net income

$2,500,000 1,750,000 750,000 300,000 $ 450,000

Ex. 208 Cunningham Industries reported actual sales of $2,000,000 and fixed costs of $540,000. The contribution margin ratio is 30%. Instructions Compute the margin of safety in dollars and the margin of safety ratio. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 7, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 208

(7 min.)

Sales dollars: $540,000 ÷30% = $1,800,000 Margin of safety in dollars: $2,000,000 – $1,800,000 = $200,000 Margin of safety ratio: $200,000 ÷ $2,000,000 = 10%

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

COMPLETION STATEMENTS 209. Knowledge of cost behavior is important in

analysis.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: None, AICPA PC: None, IMA: Cost Management

210. A

cost remains constant per unit at every level of activity.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

211. Unit fixed costs

with the changes in the level of activity.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

212. Total fixed costs are costs level.

over various levels of activities, whereas total variable directly and with changes in the activity

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

213. An assumption of CVP analysis is that variable and fixed costs have a relationship with an activity base. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

214. The range over which a company expects to operate is referred to as the range. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

215. A cost that has both variable and fixed components is referred to as a cost. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

216. The amount of revenue remaining after deducting total variable costs is called the . Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

217. The

point is when total revenues equal total costs.

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

218.

divided by the contribution margin ratio will give the amount of to break even.

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

219. The difference between actual or expected sales and the break-even point in sales dollars is called the . Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Cost-Volume-Profit

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Answers to Completion Statements 209. 210. 211. 212. 213. 214.

cost-volume-profit (CVP) variable vary inversely constant, vary, proportionately linear relevant

215. 216. 217. 218. 219.

mixed contribution margin break-even Fixed costs, sales (in dollars) margin of safety in dollars

MATCHING 220. Match the items in the two columns below by entering the appropriate code letter in the space provided. A. B. C. D. E.

Activity index Variable costs Fixed costs High-low method Relevant range

F. G. H. I. J.

Mixed costs Break-even point Contribution margin Margin of safety in dollars Contribution margin ratio

The amount of revenue remaining after deducting variable costs.

Costs that contain both a variable and a fixed component.

The percentage of sales dollars available to cover fixed costs and produce income.

Identifies the activity that causes changes in the behavior of costs.

The difference between actual or expected sales and the break-even point in sales dollars.

Costs that vary in total directly and proportionately with changes in the activity level.

The level of activity at which total revenues equal total costs.

The range over which the company expects to operate during the year.

Costs that remain the same in total regardless of changes in the activity level.

10. A method that uses the total costs incurred at the high and low levels of activity. Ans: N/A, LO: 1–3, 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management, Decision Analysis

Answers to Matching 1. 2. 3. 4. 5.

H F J A I

6. 7. 8. 9. 10. .

B G E C D

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

SHORT-ANSWER ESSAY QUESTIONS S-A E221 A cost-volume-profit graph is frequently used in business meetings because it presents a picture of cost relationships within a company. Briefly describe the type of information and data that you would need to prepare a CVP graph. After a CVP graph is prepared, what are the major points that could be made from the graph that would be of interest to management? Ans: N/A, LO: 4, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Communication, IMA: Cost Management

Solution 221 To begin constructing a CVP graph, information is needed concerning the maximum estimated level of sales units and the unit selling price. This is necessary to create the axes and also to plot the total revenue line from the origin. In addition, the costs must be broken down into fixed and variable components to plot both the fixed cost line and the total cost line. Using a CVP graph, management can readily identify the break-even point in sales dollars and sales units and can see how much profit or loss would result from varying levels of sales. The graph also makes it easy to portray the effects of any changes such as costs or unit selling prices. S-A E222 A CVP income statement is frequently prepared for internal use by management. Describe the features of the CVP income statement that make it more useful for management decision-making than the traditional income statement that is prepared for external users. Ans: N/A, LO: 3, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Communication, IMA: Cost Management

Solution 222 Several features of the CVP income statement make it more useful for internal decision-making. The CVP income statement classifies costs as either fixed or variable, rather than by function (product and period costs).Being able to identify the behavior of costs in this manner can aid management in controlling those costs. Also, the CVP income statement shows the contribution margin, rather than a gross profit. This helps management establish the extent to which their sales are able to cover their fixed costs, and to analyze the impact on net income of changes in sales or costs. S-A E223 (a) (b)

Matt Sampson asks your help in understanding the term "activity index." Explain the meaning and importance of this term for Matt. State the two ways that variable costs may be defined.

Ans: N/A, LO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Communication, IMA: Cost Management

Cost-Volume-Profit

18 - 65

Solution 223 (a)

The activity index identifies the activity that causes changes in the behavior of costs. Once the index is determined, it is possible to classify the behavior of costs in response to changes in activity levels into three categories: variable, fixed, or mixed.

(b)

Variable costs may be defined in total or on a per-unit basis. Variable costs in total vary directly and proportionately with changes in the activity level. Variable costs per unit remain the same at every level of activity.

S-A E224 How should mixed costs be classified in CVP analysis? What approach is used to affect the appropriate classification? Ans: N/A, LO: 2, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Communication, IMA: Cost Management

Solution 224 For CVP analysis, mixed costs must be classified into their fixed and variable components. One approach to the classification of mixed costs is the high-low method. S-A E225

(Ethics)

Hanson, Inc. requires its marketing managers to submit estimated cost-volume-profit data on all requests for new products, or expansions of a product line. Nancy Stephens is a new manager. Her calculations show a fixed cost for a new project at $100,000 and a unit variable cost of $5. Since the unit selling price is only $15 for the proposed product, 10,000 units would need to be sold to break even. That is approximately twice the volume estimate for the first year. She shares her dismay with Patti Patterson, another manager. Patti strongly advises her to revise her estimates. She points out that several of the costs that had been classified as fixed costs could be considered variable since they are step costs and mixed costs. When the data has been revised classifying those costs as variable costs, the project appears viable. Required: 1. Who are the stakeholders in this decision? 2. Is it ethical for Nancy to revise the costs as indicated? Briefly explain. 3. What should Nancy do? Ans: N/A, LO: 1, 2, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Professional Behavior, IMA: Decision Analysis, Business Applications

Solution 225 1. The stakeholders include: Patti Patterson Nancy Stephens Hanson, Inc. Hanson’s customers 2. It is ethical to revise the costs, certainly. The only problem that exists is the failure to account for the fixed cost component of the step and mixed costs. At low volume levels, such as those anticipated for this project, the project is likely to be less profitable than forecast. To the extent that Nancy is submitting misleading figures to get her project approved, she is behaving unethically. .

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 225

(Cont.)

3. Nancy should try to make the forecasts as accurate as possible by making a better determination of cost behavior. If that is not possible within the time she has, she should submit both sets of figures, and let the selection committee make its determination. S-A E 226

(Communication)

For two years, Annette Larson has been the manager of the production department of a company manufacturing toys made of plastic-coated cardboard. One of the toys is a paper doll, whose "clothes" are made of acetate, and stay on the doll with static electricity. The company's sales were mainly to large educational institutions until last year when the dolls were sold for the first time to a large discount retailer. The dolls were sold out immediately, and enough orders were received to keep the department at full capacity for the immediate future. The fixed costs for the department are $50,000, with a $1 unit variable cost. A paper doll and one set of clothes sell for $3. The maximum volume is 80,000 units. With the increased volume, Ms. Larson is considering two options to improve profitability. One would reduce unit variable costs to $0.75, and the other would reduce fixed costs to $35,000. Required: Given the fact that sales are increasing, make a short (one paragraph) recommendation to Ms. Larson about which option she should choose. Support your recommendation with a calculation showing her how profitability will change with each option. Ans: N/A, SO: 1, Bloom: S, Difficulty: Moderate, Min: 5, AACSB: Communication, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Communication, IMA: Decision Analysis

Solution 226 The unit variable costs should be reduced to $0.75 to ensure the company’s maximum profitability of the paper doll product line. The calculations are as follows: Current Profit = ($3 × 80,000) – ($1 × 80,000) – $50,000 = $240,000 – $80,000 – $50,000 = $110,000 Plan #1:Reduce Unit Variable Costs to $0.75 Profit = ($3 × 80,000) – ($0.75 × 80,000) – $50,000 = $240,000 – $60,000 – $50,000 = $130,000 Plan #2:Reduce Fixed Costs to $35,000 Profit = ($3 × 80,000) – ($1 × 80,000) – $35,000 = $240,000 – $80,000 – $35,000 = $125,000

CHAPTER 19 COST-VOLUME-PROFIT ANALYSIS: ADDITIONAL ISSUES CHAPTER LEARNING OBJECTIVES 1. Apply basic CVP concepts. The CVP income statement classifies costs and expenses as variable or fixed and reports contribution margin in the body of the statement. Contribution margin is the amount of revenue remaining after deducting variable costs. It can be expressed as a per unit amount or as a ratio. The break-even point in sales units is fixed costs divided by unit contribution margin. The break-even point in sales dollars is fixed costs divided by the contribution margin ratio. These equations can also be used to determine sales units or sales dollars needed to achieve target net income, simply by adding target net income to fixed costs before dividing by the contribution margin. Margin of safety indicates how much sales can decline before the company is operating at a loss. It can be expressed in dollar terms or as a percentage. 2. Explain the term sales mix and its effects on break-even sales. Sales mix is the relative proportion in which each product is sold when a company sells more than one product. For a company with a small number of products, break-even sales in units is determined by using the weighted-average unit contribution margin of all the products. If the company sells many different products, then calculating the break-even point using unit information is not practical. Instead, in a company with many products, break-even point sales in dollars is calculated using the weighted-average contribution margin ratio. 3. Determine sales mix when a company has limited resources. When a company has limited resources, it is necessary to find the contribution margin per unit of limited resource. This amount is then multiplied by the units of limited resource to determine which product maximizes net income. 4. Indicate how operating leverage affects profitability. Operating leverage refers to the degree to which a company’s net income reacts to a change in sales. Operating leverage is determined by a company’s relative use of fixed versus variable costs. Companies with high fixed costs relative to variable costs have high operating leverage. A company with high operating leverage experiences a sharp increase (decrease) in net income with a given increase (decrease) in sales. The degree of operating leverage is measured by dividing contribution margin by net income. a

5. Explain the differences between absorption costing and variable costing. Under absorption costing, fixed manufacturing costs are product costs. Under variable costing, fixed manufacturing costs are period costs. If production volume exceeds sales volume, net income under absorption costing will exceed net income under variable costing by the amount of fixed manufacturing costs included in ending inventory that results from units produced but not sold during the period. If production volume is less than sales volume, net income under absorption costing will be less than under variable costing by the amount of fixed manufacturing costs included in the units sold during the period that were not produced during the period. The use of variable costing is consistent with cost-volume-profit analysis. Net income under variable costing is unaffected by changes in production levels. Instead, it is closely tied to changes in sales. The presentation of fixed costs in the variable costing approach makes it easier to identify fixed costs and to evaluate their impact on the company’s profitability.

19 - 2

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

TRUE-FALSE STATEMENTS 1.

The CVP income statement classifies costs as variable or fixed and computes a contribution margin.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Decision Making, IMA: Reporting

In CVP analysis, cost includes manufacturing costs but not selling and administrative expenses.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Strategic Perspective, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Decision Making, IMA: Cost Management

When a company is in its early stages of operation, its primary goal is to generate a target net income.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Strategic Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

The margin of safety tells a company how far sales can drop before it will be operating at a loss.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Project Management, IMA: Business Economics

Sales mix is a measure of the percentage increase in sales from period to period.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Reporting

Sales mix is not important to managers when different products have substantially different contribution margins.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Reporting

The weighted-average contribution margin ratio of all the products is computed when determining the break-even point in sales dollars for a multi-product firm.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Business Economics

If Buttercup, Inc. sells two products with a sales mix of 75%:25% (as a percentage of units sold), and the respective unit contribution margins are $80 and $240, then the weightedaverage unit contribution margin is $120.

Ans: T, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Business Economics Solution: (.75% x $80) + (25% x $240) = $120 (Sales mix % x Unit contribution margin) + (Sales mix% x Unit contribution margin)

If fixed costs are $100,000 and weighted-average unit contribution margin is $50 then the break-even point in sales units is 2,000 units.

Ans: T, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics Solution: $100,000 / $50 = 2,000 units (Fixed Costs / Weighted-average unit contribution margin = break-even point in sales units)

10.

Net income can be increased or decreased by changing the sales mix.

11.

The break-even point in sales dollars is variable costs divided by the weighted-average contribution margin ratio. .

Cost-Volume-Profit Analysis: Additional Issues

19 - 3

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics

12.

When a company has limited resources, management must decide which products to make and sell in order to maximize net income.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Decision Making, AICPA PC: Decision Making, IMA: Business Economics

13.

When a company has limited resources to manufacture products, it should manufacture those products that have the highest unit contribution margin.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

14.

If a company has limited machine hours available for production, it is generally more profitable to produce and sell the product with the highest contribution margin per machine hour.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

15.

According to the theory of constraints, a company must identify its constraints and find ways to reduce or eliminate them.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Strategic Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

16.

Cost structure refers to the relative proportion of fixed versus variable costs that a company incurs.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Business Economics

17.

Operating leverage refers to the extent to which a company’s net income reacts to a given change in fixed costs.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Business Economics

18.

The degree of operating leverage provides a measure of a company’s earnings volatility.

19.

If Sprinkle Industries has a margin of safety ratio of .60, it could sustain a 60 percent decline in sales before it would be operating at a loss.

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics

20.

A company with low operating leverage will experience a sharp increase in net income with a given increase in sales.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Project Management, IMA: Business Economics a

21.

Variable costing is the approach used for external reporting under generally accepted accounting principles.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Reporting a

22.

The difference between absorption costing and variable costing is the treatment of fixed manufacturing overhead.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Reporting

19 - 4 a

23.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e Selling and administrative costs are period costs under both absorption and variable costing.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Reporting a

24.

Manufacturing cost per unit will be higher under variable costing than under absorption costing.

Ans: F, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Business Economics a

25.

Some fixed manufacturing costs of the current period are deferred to future periods through ending inventory under variable costing.

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Reporting a

26.

When units produced exceed units sold, net income under absorption costing is higher than net income under variable costing.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Business Economics a

27.

When units sold exceed units produced, net income under absorption costing is higher than net income under variable costing.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Decision Making, IMA: Reporting a

28.

When absorption costing is used for external reporting, variable costing can still be used for internal reporting purposes.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Reporting a

29.

When absorption costing is used, management may be tempted to overproduce in a given period in order to increase net income.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Project Management, IMA: Business Economics a

30.

The use of absorption costing facilitates cost-volume-profit analysis.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Strategic Perspective, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Project Management, IMA: Business Economics

MULTIPLE CHOICE QUESTIONS 31.

Cost-volume-profit analysis is the study of the effects of a. changes in costs and volume on a company’s profit. b. cost, volume, and profit on the cash budget. c. cost, volume, and profit on various ratios. d. changes in costs and volume on a company’s profitability ratios.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Project Management, IMA: Business Economics

32.

The CVP income statement classifies costs a. as variable or fixed and computes contribution margin. b. by function and computes a contribution margin. c. as variable or fixed and computes gross profit. d. by function and computes a gross profit. .

Cost-Volume-Profit Analysis: Additional Issues

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Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Reporting

33.

Contribution margin is the amount of revenue remaining after deducting a. cost of goods sold. b. fixed costs. c. variable costs. d. contra-revenue.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Business Economics

34.

Moonwalker’s CVP income statement included sales of 5,000 units, unit selling price of $100, unit variable cost of $60, and fixed expenses of $110,000. Contribution margin is a. $500,000. b. $300,000. c. $200,000. d. $90,000.

Ans: C, LO: 1, Bloom: AP, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics Solution: ($100 - $60) x 5,000 = $200,000 ((Unit selling price – unit variable cost) x units sold = Contribution Margin)

35.

Moonwalker’s CVP income statement included sales of 5,000 units, a unit selling price of $100, unit variable cost of $60, and fixed expenses of $110,000. Net income is a. $500,000. b. $200,000. c. $190,000. d. $90,000.

Ans: D, LO: 1, Bloom: AP, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Decision Making, IMA: Reporting Solution: ($100- $60) x 5,000 = $200,000; $200,000 – 110,000 = $90,000 ((Unit selling price – unit variable cost) x units sold = Contribution Margin); Contribution Margin – Fixed Expenses = Net Income

36.

For Buffalo Co., at a sales volume of 4,000 units, sales revenue is $75,000, variable costs total $50,000, and fixed expenses are $21,000. What is the unit contribution margin? a. $5.25 b. $6.25 c. $12.50 d. $13.50

Ans: B, LO: 1, Bloom: AP, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics Solution: $75,000 - $50,000 = $25,000; $25,000 / 4,000 = $6.25 (Sales - Variable Costs = Contribution Margin; Contribution Margin / Units Sold = Unit Contribution Margin)

37.

If contribution margin is $140,000, sales revenue is $300,000, and net income is $40,000, then variable and fixed expenses are a. b. c. d.

Variable $40,000 $160,000 $100,000 $130,000

Fixed $260,000 $100,000 $160,000 $130,000

Ans: B, LO: 1, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics Solution: $300,000 - $140,000 = $160,000 variable; $140,000 - $40,000 = $100,000 fixed (Sales – Contribution margin = Variable Expenses; Contribution margin – Net Income = Fixed Expenses)

19 - 6 38.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

In a CVP income statement, cost of goods sold is generally a. completely a variable cost. b. completely a fixed cost. c. neither a variable cost nor a fixed cost. d. broken down into its variable and fixed cost components.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Reporting

39. In a CVP income statement, selling expenses are generally a. completely a variable cost. b. completely a fixed cost. c. neither a variable cost nor a fixed cost. d. broken down into its variable and fixed cost components. Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Reporting

40.

Hinge Manufacturing’s cost of goods sold is $420,000 variable and $240,000 fixed. The company’s selling and administrative expenses are $300,000 variable and $360,000 fixed. If the company’s sales revenue is $1,580,000, what is its contribution margin? a. $260,000 b. $860,000 c. $920,000 d. $980,000

Ans: B, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: FSA Solution: $1,580,000 - $420,000 - $300,000 = $860,000 (Sales – Variable Cost of Goods Sold – Variable Selling and Administrative Expenses = Contribution Margin)

41. Hinge Manufacturing’s cost of goods sold is $420,000 variable and $240,000 fixed. The company’s selling and administrative expenses are $300,000 variable and $360,000 fixed. If the company’s sales revenue is $1,580,000, what is its net income? a. $260,000 b. $860,000 c. $920,000 d. $980,000 Ans: A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Decision Making, IMA: Reporting Solution: $1,580,000 - $420,000 - $240,000 - $300,000 - $360,000 = $260,000 (Sales – Variable Cost of Goods Sold – Fixed Cost of Goods Sold – Variable selling and administrative expenses – Fixed selling and administrative expenses = Net Income)

42.

Woolford’s CVP income statement included sales of 5,000 units, a unit selling price of $50, unit variable cost of $30, and net income of $25,000. Fixed expenses are a. $75,000. b. $100,000. c. $150,000. d. $250,000.

Ans: A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Decision Making, IMA: Reporting Solution: ((5,000 x ($50-$30)) - $25,000 = $75,000 (Units Sold x (Unit Selling Price – Unit Variable Cost)) – Net Income = Fixed Expenses)

Cost-Volume-Profit Analysis: Additional Issues

43.

19 - 7

The contribution margin ratio is a. sales dollars divided by contribution margin. b. sales dollars divided by fixed expenses. c. sales dollars divided by variable expenses. d. contribution margin divided by sales dollars.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Business Economics

44.

For Pierce Company, sales revenue is $500,000, variable expenses are $340,000, and fixed expenses are $140,000. Pierce’s contribution margin ratio is a. 72%. b. 28%. c. 32%. d. 68%.

Ans: C, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics Solution: ($500,000 - $340,000) / $500,000 = .32 or 32% (Sales – Variable Expenses) / Sales = Contribution Margin Ratio)

45.

For Sanborn Co., sales revenue is $1,000,000, fixed expenses are $300,000, and the unit contribution margin is $60. What is the company’s break-even point? a. $1,666,667 sales dollars b. $500,000 sales dollars c. 16,667 units d. 5,000 units

Ans: D, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics Solution: $300,000 / $60 = 5,000 units (Fixed Expenses / Unit Contribution Margin = Break-even point in Sales Units)

46.

For Franklin, Inc., sales revenue is $2,000,000, fixed expenses are $600,000, and the contribution margin ratio is 36%. What is the company’s net income? a. $120,000 b. $216,000 c. $504,000 d. $720,000

Ans: A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Decision Making, IMA: Reporting Solution: $2,000,000 x 36% = $720,000; $720,000 - $600,000 = $120,000 (Sales x Contribution margin ratio = Contribution Margin; Contribution Margin – Fixed Expenses = Net Income)

47.

For Franklin, Inc., sales revenue is $2,000,000, fixed expenses are $600,000, and the contribution margin ratio is 36%. What are the total variable expenses? a. $384,000 b. $720,000 c. $1,280,000 d. $2,000,000

Ans: C, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics Solution: $2,000,000 x (1 – 36%) = $1,280,000 (Sales x (1 – Contribution margin ratio) = Total variable expenses)

19 - 8

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

48.

In 2022, Teller Company sold 3,000 units at $600 each. Unit variable costs were $420 and total fixed expenses were $240,000. What was Teller’s 2022 net income? a. $300,000 b. $540,000 c. $1,260,000 d. $1,800,000

Ans: A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Decision Making, IMA: Reporting Solution: (3,000 x ($600 - $420)) - $240,000 = $300,000 (Units Sold x (Unit Selling price – Unit Variable Cost – Fixed Expenses = Net Income)

49.

In 2022, Teller Company sold 3,000 units at $600 each. Unit variable costs were $420 and fixed expenses were $270,000. The same unit selling price, unit variable expenses, and fixed expenses are expected for 2023. What is Teller’s break-even point in sales dollars for 2023? a. $900,000 b. $2,700,000 c. $1,800,000 d. $2,571,429

Ans: A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics Solution: $270,000 / (($600 - $420)/600 = $900,000 (Fixed Expenses / ((Unit Selling Price – Unit Variable Cost) / Unit Selling Price) = Break-even Point in Sales Dollars)

50.

In 2022, Teller Company sold 3,000 units at $600 each. Unit variable cost was $420 and fixed expenses were $270,000. The same unit selling price, unit variable expenses, and fixed expenses are expected for 2023. What is Teller’s break-even point in sales units for 2023? a. 1,500 b. 643 c. 450 d. 750

Ans: A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics Solution: $270,000 / ($600- $420) = 1,500 (Fixed expenses / (Unit Selling price – Unit variable Cost = Break-even point in sales units)

51.

The required sales in units to achieve a target net income is a. (sales + target net income) divided by unit contribution margin. b. (sales + target net income) divided by contribution margin ratio. c. (fixed cost + target net income) divided by unit contribution margin. d. (fixed cost + target net income) divided by contribution margin ratio.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Decision Making, IMA: Business Economics

52.

For Wickham Co., sales is $3,000,000, fixed expenses are $900,000, and the contribution margin ratio is 36%. What is required sales in dollars to earn a target net income of $600,000? a. $1,666,667 b. $2,500,000 c. $4,166,667 d. $3,100,000 .

Cost-Volume-Profit Analysis: Additional Issues

19 - 9

Ans: C, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Decision Making, IMA: Business Economics Solution: ($900,000 + $600,000) / 36% = $4,166,667 ((Fixed expenses + Target net income) / Contribution margin ratio = Required sales in dollars)

53.

Warner Manufacturing reported sales of $2,000,000 last year (100,000 units at $20 each) when the break-even point was 80,000 units. Warner’s margin of safety ratio is a. 20%. b. 25%. c. 80%. d. 120%.

Ans: A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Decision Making, IMA: Business Economics Solution: (100,000 – 80,000) x $20 = $400,000 / $2,000,000 = .20 or 20% (Expected (Actual) sales in units – Break-even point in units) x Unit Selling price = Margin of Safety in dollars; Margin of Safety in Dollars / Expected (Actual) Sales = Margin of safety ratio)

54.

For Wilder Corporation, sales revenue is $1,600,000 (8,000 units), fixed expenses are $480,000, and the unit contribution margin is $80. What is the margin of safety in dollars? a. $80,000 b. $400,000 c. $720,000 d. $1,120,000

Ans: B, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Decision Making, IMA: Business Economics Solution: $480,000/ $80 = 6,000; $1,600,000 / 8,000 = $200; 6,000 x $200 = $1,200,000; $1,600,000 - $1,200,000 = $400,000 (Fixed Expenses / UCM = Break-even point in units; Actual (Expected) Sales / units = USP; Break-even point in units x USP = Break-even point in $; Actual (Expected) Sales – Break-even point in $ = Margin of Safety in Dollars)

55.

Margin of safety in dollars is a. expected sales dollars divided by break-even point in sales dollars. b. expected sales dollars less break-even point in sales dollars. c. actual sales dollars less expected sales dollars. d. expected sale dollars less actual sales dollars.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Decision Making, IMA: Business Economics

56.

The margin of safety ratio is a. expected sales divided by break-even point in sales dollars. b. expected sales less break-even point in sales dollars. c. margin of safety in dollars divided by expected sales. d. margin of safety in dollars divided by break-even point in sales dollars.

57.

In 2022, Hagar Corp. sold 3,000 units at $500 each. Unit variable cost was $350 and fixed expenses totaled $780,000. The same unit variable cost and fixed expenses are expected for 2023. If Hagar cuts its unit selling price by 4%, what is Hagar’s break-even point in sales units for 2023? a. 5,200 b. 5,416 c. 5,760 d. 6,000

Ans: D, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Decision Making, IMA: Business Economics Solution: $780,000 / [{$500 X .(100% - 4%)} - $350] = 6,000 (Fixed expenses / ((Unit Selling price X (1 – Unit Selling price cut percentage) – Unit variable cost = Break-even point in sales units)

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58.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

In 2022, Carow sold 3,000 units at $500 each. Unit variable cost was $250 and fixed expenses totaled $500,000. The same unit selling price is expected for 2023. Carow is tentatively planning to invest in equipment that would increase fixed costs by 20% while decreasing unit variable cost by 20%. If Carow makes the investment, what will be the break-even point in sales units for 2023? a. 2,000 b. 2,400 c. 2,500 d. 3,000

Ans: A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Decision Making, IMA: Business Economics Solution: ($500,000 * 120%) / ($500 – ($250 * .80)) = 2,000 (Fixed expenses x Increase Percentage in Fixed Cost) / (Unit Selling price – (Unit variable costs x (1 – Unit Variable Cost Decrease Percentage) = Breakeven point in sales units)

59.

In 2022, Raleigh sold 1,000 units at $500 each and earned net income of $40,000. Unit variable cost was $300 and fixed expenses totaled $160,000. The same unit selling price is expected for 2023. Raleigh’s unit variable cost will rise by 10% in 2023 due to increasing material costs so they are tentatively planning to cut fixed costs by $10,000. If the company is successful in cutting fixed costs by $10,000, how many units must Raleigh sell in 2023 to maintain the same net income level as 2022? a. 882 b. 1,000 c. 1,056 d. 1,118

Ans: D, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics Solution: $160,000 + $40,000 – 10,000 / ($500 – ($300 x 110%)) = 1,118 (Fixed expenses + Net income – Fixed Expense cut) / (Unit Selling price – (Unit variable cost x (1 + Variable cost percentage increase))) = Units required to maintain the same net income level)

60.

Sales mix is a. the relative percentage in which a company sells its multiple products. b. the trend of sales over recent periods. c. the mix of variable and fixed expenses in relation to sales. d. a measure of leverage used by the company.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics

61.

If a company sells multiple products, at any level of units sold, net income will be higher if a. more higher contribution margin units are sold than lower contribution margin units. b. more lower contribution margin units are sold than higher contribution margin units. c. more fixed expenses are incurred. d. weighted-average unit contribution margin decreases.

Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics

Cost-Volume-Profit Analysis: Additional Issues 19 - 11

62.

Ramirez Corporation sells two types of computer hard drives. The sales mix is 30% (QDrive) and 70% (Q-Drive Plus) based upon quantity of units sold. Q-Drive has a unit variable cost of $90 and a unit selling price of $150. Q-Drive Plus has a unit variable cost of $105 and a unit selling price of $195. The weighted-average unit contribution margin for Ramirez is a. $69.00. b. $75.00 c. $81.00. d. $100.50.

Ans: C, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics Solution: (.30 x ($150 - $90)) + (.70 x ($195 - $105)) = $81 (Q-Drive Sales mix X (Unit Selling price – Unit variable cost) + (Q-Drive Plus Sales Mix x (Unit Selling price – Unit variable costs) = Weighted-average unit contribution margin)

63.

Capitol Manufacturing sells 4,000 units of Product A and 6,000 units of Product B annually. The sales mix for Product A a. 40%. b. 60%. c. 67%. d. Cannot determine from information given.

Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics Solution: 4,000 / (4,000 + 6,000) = .40 or 40% (Product A Units Sold / (Product A Units Sold + Product B Units Sold))

64.

Ramirez Corporation sells two types of computer hard drives. The sales mix is 30% (QDrive) and 70% (Q-Drive Plus) based upon quantity of units sold. Q-Drive has a unit variable cost of $90 and a unit selling price of $150. Q-Drive Plus has a unit variable cost of $105 and a unit selling price of $195. Ramirez’s fixed costs are $891,000. How many units of QDrive would be sold at the break-even point in sales units? a. 3,300 b. 4,455 c. 11,000 d. 7,700

Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Decision Making, IMA: Business Economics Solution: (30% x ($150 - $90)) + (70% x ($195 - $105)) = $81; $891,000 / $81 = 11,000; 11,000 x .3 = 3,300 ((Q-Drive Sales Mix X (Unit Selling Price – Unit variable cost)) + (Q-Drive Plus Sales Mix X (Selling price – Unit variable cost)) = Weighted-Average Unit Contribution Margin; FC / WAUCM = BEP in units; Sales Mix % of Q Drives x BEP in units = Q Drive units at BEP

65.

Roosevelt Corporation has a weighted-average unit contribution margin of $30 for its two products, Standard and Supreme. Expected sales for Roosevelt are 40,000 Standard and 60,000 Supreme. Fixed expenses are $1,800,000. How many Standards would Roosevelt sell at the break-even point in sales units? a. 24,000 b. 36,000 c. 40,000 d. 60,000

Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics Solution: 40,000 / (40,000 + 60,000) = .40 or 40% (Standard)); $1,800,000 / $30 = 60,000; 60,000 x 40% = 24,000 (Expected Sales (Standard) / (Expected Sales (Standard) + Expected Sales (Supreme) = Standard Sales Mix; Fixed Cost / Weighted-Average unit contribution margin = Break-even point in units; Break-even point in units x Standard Sales Mix = Break-even point in units for Standard)

19 - 12

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

66.

Roosevelt Corporation has a weighted-average unit contribution margin of $30 for its two products, Standard and Supreme. Expected sales for Roosevelt are 40,000 Standard and 60,000 Supreme. Fixed expenses are $1,800,000. At the expected sales level, Roosevelt’s net income will be a. $(300,000). b. $ - 0 -. c. $1,200,000. d. $3,000,000.

Ans: C, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Decision Making, IMA: Reporting Solution: [(40,000 + 60,000) x $30] - $1,800,000. [(Expected Sales Units (Standard) + Expected Sales Units (Supreme)] X Weighted-average unit contribution margin = Net Income at the expected sales level

67.

Swanson Company has two divisions; Sporting Goods and Sports Gear. The sales mix is 65% for Sporting Goods and 35% for Sports Gear, as determined by total sales dollars. Swanson incurs $6,660,000 in fixed costs. The contribution margin ratio for Sporting Goods is 30%, while for Sports Gear it is 50%. The weighted-average contribution margin ratio is a. 37%. b. 40%. c. 43%. d. 50%.

Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics Solution: (.65 x .30) + (.35 x .50) = .37 or 37% ((Sales Mix Goods x Contribution margin ratio Goods) + (Sales Mix Gear x Contribution margin ratio Gear) = Weighted-Average Contribution Margin Ratio)

68.

Swanson Company has two divisions; Sporting Goods and Sports Gear. The sales mix is 65% for Sporting Goods and 35% for Sports Gear, as determined by total sales dollars. Swanson incurs $6,660,000 in fixed costs. The contribution margin ratio for Sporting Goods is 30%, while for Sports Gear it is 50%. The break-even point in sales dollars is a. $18,464,200. b. $15,488,373. c. $16,650,000. d. $18,000,000.

Ans: D, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics Solution: (.65 x .30) + (.35 x .50) = .37 or 37%; $6,660,000 / .37 = $18,000,000 ((Sales Mix Goods x Contribution margin ratio Goods) + (Sales Mix Gear x Contribution margin ratio Gear) = Weighted-Average Contribution Margin Ratio; Fixed Costs / Weighted-Average Contribution Margin Ratio = Break-even point in dollars)

Cost-Volume-Profit Analysis: Additional Issues 19 - 13 69.

Swanson Company has two divisions; Sporting Goods and Sports Gear. The sales mix is 65% for Sporting Goods and 35% for Sports Gear, as determined by total sales dollars. Swanson incurs $6,660,000 in fixed costs. The contribution margin ratio for Sporting Goods is 30%, while for Sports Gear it is 50%. What will sales revenue be for the Sporting Goods Division at the break-even point? a. $5,400,000 b. $6,300,000 c. $10,067,442 d. $11,700,000

Ans: D, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics Solution: (.65 x .30) + (.35 x .50) = .37 or 37%; $6,660,000 /.37 = $18,000,000; $18,000,000 x .65 = $11,700,000 ((Sales Mix Goods x Contribution margin ratio Goods) + (Sales Mix Gear x Contribution margin ratio Gear) = Weighted-Average Contribution Margin Ratio; Fixed Costs / Weighted-Average Contribution Margin Ratio = Break-even point in dollars); Break-even point in dollars x Sales mix Goods = Break-even point in dollars for Goods)

70.

Swanson Company has two divisions; Sporting Goods and Sports Gear. The sales mix is 65% for Sporting Goods and 35% for Sports Gear, as determined by total sales dollars. Swanson incurs $6,660,000 in fixed costs. The contribution margin ratio for Sporting Goods is 30%, while for Sports Gear it is 50%. What will be the total contribution margin at the break-even point? a. $5,730,699 b. $6,660,000 c. $6,720,000 d. $7,740,000

Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics Solution: Total Contribution Margin = Total Fixed Costs = $6,660,000 (Total Contribution Margin = Total Fixed Costs)

71.

A shift from low-margin sales to high-margin sales a. may increase net income, even though there is a decline in total units sold. b. will always increase net income. c. will always decrease net income. d. will always decrease units sold.

Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Business Economics

72.

A shift from high-margin sales to low-margin sales a. may decrease net income, even though there is an increase in total units sold. b. will always decrease net income. c. will always increase net income. d. will always increase units sold.

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

73.

MacCloud Industries has two divisions—Standard and Premium. Each division has hundreds of different types of tennis racquets and tennis products. The following information is available: Standard Division Premium Division Total Sales $400,000 $600,000 $1,000,000 Variable costs 280,000 360,000 Contribution margin $120,000 $240,000 Total fixed costs $300,000 What is the company’s weighted-average contribution margin ratio? a. 34% b. 35% c. 36% d. 50%

Ans: C, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics Solution: Standard: $120,000 / $400,000 = .30; Premium: $240,000 / $600,000 = .40; (.40 x .30) + (.60 x .40) = .36 or 36% or ($120,000 + $240,000) / $1,000,000 = .36 or 36%. (Contribution Margin / Sales = Contribution Margin ratio; (Sales mix: Standard x Contribution Margin Ratio: Standard) + (Sales mix: Premium x Contribution Margin Ratio: Premium) = Weighted-average contribution margin ratio

74.

MacCloud Industries has two divisions—Standard and Premium. Each division has hundreds of different types of tennis racquets and tennis products. The following information is available: Standard Division Premium Division Total Sales $400,000 $600,000 $1,000,000 Variable costs 280,000 360,000 Contribution margin $120,000 $240,000 Total fixed costs $300,000 What is the company’s break-even point in sales dollars? a. $808,000 b. $833,333 c. $857,143 d. $882,353

Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics Solution: Standard: $120,000 / $400,000 = .30; Premium: $240,000 / $600,000 = .40; (.40 x .30) + (.60 x .40) = .36 or 36%; $300,000 / .36 = $833,333 (Contribution Margin / Sales = Contribution Margin ratio; (Sales mix: Standard x Contribution Margin Ratio: Standard) + (Sales mix: Premium x Contribution Margin Ratio: Premium) = Weighted-average contribution margin ratio; Total Fixed Costs / Weighted-average contribution margin ratio = Break-even point in sales dollars)

75.

The sales mix percentages for Novotna’s Boston and Seattle Divisions are 70% and 30%, as determined by total sales dollars. The contribution margin ratios are: Boston (40%) and Seattle (30%). Fixed costs are $2,220,000. What is Novotna’s break-even point in sales dollars? a. $2,777,000 b. $6,000,000 c. $6,342,856 d. $6,727,272

Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics Solution: (.70 x .40) + (.30 x .30) = .37; $2,220,000 / .37 = 6,000,000 (Sales Mix: Boston x Contribution Margin Ratio: Boston) + (Sales Mix: Seattle x Contribution Margin Ratio: Seattle) = Weighted-average contribution margin ratio; Fixed Costs / Weighted-average contribution margin ratio = Break-even point in sales dollars)

Cost-Volume-Profit Analysis: Additional Issues 19 - 15 76.

A company can sell all the units it can produce of either Product A or Product B, but not both. Product A has a unit contribution margin of $16 and takes two machine hours to make and Product B has a unit contribution margin of $30 and takes three machine hours to make. If there are 5,000 machine hours available to manufacture a product, net income will be a. $10,000 more if Product A is made. b. indeterminable given the information provided. c. $10,000 less if Product A is made. d. the same if either product is made.

Ans: C, LO: 3, Bloom: C, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Decision Making, IMA: Reporting Solution: $16 / 2 = $8 x 5,000 = $40,000; $30 / 3 = $10 x 5,000 = $50,000; ($50,000 for Product B - $40,000 for Product A) = $10,000 (Product A: Unit Contribution Margin / Product A: Machine Hours to Make) x Product A: Machine Hours Available = Net Income (Product A); (Product A: Unit Contribution Margin / Product B: Machine Hours to Make) x Product B: Machine Hours Available = Net Income (Product B); Net Income (Product B) – Net Income (Product A) = Difference in Net Income)

77.

Brooks Corporation can sell all the units it can produce of either Plain or Fancy, but not both. Plain has a unit contribution margin of $72 and takes two machine hours to make and Fancy has a unit contribution margin of $90 and takes three machine hours to make. There are 2,400 machine hours available to manufacture a product. What should Brooks do? a. Make Fancy which creates $18 more profit per unit than Plain does. b. Make Plain which creates $6 more profit per machine hour than Fancy does. c. The answer is indeterminable given the information provided. d. The same total profits exist regardless of which product is made.

Ans: B, LO: 3, Bloom: C, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics Solution: $72 / 2 = $36; $90 / 3 = $30; ($36 for Plain - $30 for Fancy) = $6 (Unit Contribution Margin: Plain / Machine Hours to Make = Unit contribution margin of limited resources: Plain; Unit Contribution Margin: Fancy / Machine hours to Make = Unit contribution margin of limited resources Fancy)

78.

What is the key factor in determining sales mix if a company has limited resources? a. Contribution margin per unit of limited resource b. The amount of fixed costs per unit c. Each product’s unit contribution margin d. The cost of limited resources

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Project Management, IMA: Business Economics

79.

Greg’s Breads can produce and sell only one of the following two products: Oven Hours Required Muffins 0.2 Coffee Cakes 0.3

Contribution Margin per Unit $3 $4

The company has oven capacity of 1,500 hours. How much will contribution margin be if it produces only the most profitable product? a. $15,000 b. $20,000 c. $22,500 d. $21,000 Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics Solution: Muffins: $3 / .2 = $15.00; $4/ .3 = $13.33; $15 x 1,500 = $22,500 (Muffins: Unit contribution margin / Muffins: Oven Hours Required = Muffins (Unit contribution margin of limited resources); Coffee Cakes: Unit contribution margin / Coffee Cakes: Oven Hours Required = Coffee Cakes (Contribution Margin per unit of limited resources); Muffins: Contribution Margin per unit of limited resources x Hours of Oven Capacity = Total Contribution Margin from most profitable product

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

80.

Curtis Corporation’s contribution margin is $25 per unit for Product A and $30 for Product B. Product A requires 2 machine hours and Product B requires 4 machine hours. What is the contribution margin per unit of limited resource for each product? A B a. $12.50 $7.50 b. $12.50 $8.33 c. $10.00 $7.50 d. $10.00 $8.33

Ans: A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics Solution: A: $25 / 2 = $12.50; B: $30 / 4 = $7.50 (Product A: Unit contribution margin / Product A: Machine hours = Product A: Unit contribution margin of limited resources; (Product B: Unit contribution margin / Product B: Machine hours = Product B: Contribution Margin per unit of limited resources)

81.

Cost structure a. refers to the relative proportion of fixed versus variable costs that a company incurs. b. generally has little impact on profitability. c. cannot be significantly changed by companies. d. refers to the relative proportion of operating versus nonoperating costs that a company incurs.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Cost Management

82.

Outsourcing production will a. reduce fixed costs and increase variable costs. b. reduce variable costs and increase fixed costs. c. have no effect on the relative proportion of fixed and variable costs. d. make the company more susceptible to economic swings.

Ans: A, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Project Management, IMA: Business Economics

83.

Reducing reliance on human workers and instead, investing heavily in technology will a. reduce fixed costs and increase variable costs. b. reduce variable costs and increase fixed costs. c. have no effect on the relative proportion of fixed and variable costs. d. make the company less susceptible to economic swings.

Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Project Management, IMA: Business Economics

84.

Cost structure refers to the relative proportion of a. selling expenses versus administrative expenses. b. selling and administrative expenses versus cost of goods sold. c. contribution margin versus sales. d. none of the above.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Cost Management

Cost-Volume-Profit Analysis: Additional Issues 19 - 17 85.

Mercantile Corporation has sales of $2,000,000, variable costs of $800,000, and fixed costs of $900,000. Mercantile’s degree of operating leverage is a. 1.33. b. 1.67. c. 1.50. d. 4.00.

Ans: D, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics Solution: $2,000,000 - $800,000 = $1,200,000 CM; $2,000,000 - $800,000 - $900,000 = $300,000; $1,200,000 / $300,000 = 4.0 (Sales – Variable Costs = Contribution Margin; Sales- Variable Costs – Fixed Costs = Net Income; Contribution Margin / Net Income = Operating leverage)

86.

Mercantile Corporation has sales of $2,000,000, variable costs of $800,000, and fixed costs of $900,000. Mercantile’s margin of safety ratio is a. 15%. b. 25%. c. 33%. d. 75%.

Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics Solution: $900,000 / (($2,000,000 - $800,000/$2,000,000) = $1,500,000; ($2,000,000 - $1,500,000) / $2,000,000 = .25 or 25% (Fixed Costs/ Contribution Margin Ratio) = Break-even point in sales dollars; (Expected (Budgeted) Sales – Break-even point in sales dollars) / Expected (Budgeted) Sales) = Margin of Safety ratio)

87.

Which of the following statements is not true? a. Operating leverage refers to the extent to which a company’s net income reacts to a given change in sales. b. Companies that have higher fixed costs relative to variable costs have higher operating leverage. c. When a company’s sales revenue is increasing, high operating leverage is good because it means that profits will increase rapidly. d. When a company’s sales revenue is decreasing, high operating leverage is good because it means that profits will decrease at a slower pace than revenues decrease.

Ans: D, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Business Economics

88.

Miller Manufacturing’s degree of operating leverage is 1.5. Warren Corporation’s degree of operating leverage is 3. Warren’s net income would go up (or down) by as much as Miller’s with an equal increase (or decrease) in sales. a. 1/2 b. 1.5 times c. 2 times d. 4.5 times

Ans: C, LO: 4, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Decision Making, IMA: Business Economics Solution: 3 / 1.5 = 2.0 times (Miller: Degree of Operating Leverage / Warren’s: Degree of Operating Leverage = Net income increases (times)

89.

The margin of safety ratio a. is computed as actual sales divided by break-even point in sales dollars. b. indicates what percent decline in sales could be sustained before the company would operate at a loss. c. measures the ratio of fixed costs to variable costs. d. is used to determine the break-even point.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Business Economics

19 - 18

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

90.

A cost structure which relies more heavily on fixed costs relative to variable cost makes the company a. more sensitive to changes in the volume of sales revenue. b. less sensitive to changes in the volume of sales revenue. c. either more or less sensitive to changes in the volume of sales revenue, depending on other factors. d. have a lower break-even point.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Project Management, IMA: Business Economics

91.

A company with a higher contribution margin ratio is a. more sensitive to changes in the volume of sales revenue. b. less sensitive to changes in the volume of sales revenue. c. either more or less sensitive to changes in the volume of sales revenue, depending on other factors. d. likely to have a lower break-even point.

92.

The degree of operating leverage a. does not provide a reliable measure of a company’s net income volatility. b. cannot be used to compare companies. c. is computed by dividing total contribution margin by net income. d. measures how much of each sales dollar is available to cover fixed expenses.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Business Economics a

93.

Only direct materials, direct labor, and variable manufacturing overhead costs are considered product costs when using a. full costing. b. absorption costing. c. variable costing. d. product costing.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Business Economics a

94.

When a company assigns the costs of direct materials, direct labor, and both variable and fixed manufacturing overhead to products, that company is using a. operations costing. b. absorption costing. c. variable costing. d. product costing.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Reporting a

95.

Companies recognize fixed manufacturing overhead costs as period costs (expenses) when incurred when using a. full costing. b. absorption costing. c. product costing. d. variable costing.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Reporting

Cost-Volume-Profit Analysis: Additional Issues 19 - 19 a

96.

Under absorption costing and variable costing, how are fixed manufacturing costs treated? a. b. c. d.

Absorption Product Cost Product Cost Period Cost Period Cost

Variable Product Cost Period Cost Product Cost Period Cost

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Decision Making, IMA: Business Economics a

97.

Under absorption costing and variable costing, how are variable manufacturing costs treated? a. b. c. d.

Absorption Product Cost Product Cost Period Cost Period Cost

Variable Product Cost Period Cost Product Cost Period Cost

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics a

98.

Under absorption costing and variable costing, how are direct labor costs treated? a. b. c. d.

Absorption Product Cost Product Cost Period Cost Period Cost

Variable Product Cost Period Cost Product Cost Period Cost

99.

Fixed selling expenses are period costs a. under both absorption and variable costing. b. under neither absorption nor variable costing. c. under absorption costing, but not under variable costing. d. under variable costing, but not under absorption costing.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Reporting a

100. Which cost is not charged to the product under variable costing? a. Direct materials b. Direct labor c. Variable manufacturing overhead d. Fixed manufacturing overhead

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Reporting a

101. Which cost is charged to the product under variable costing? a. Variable manufacturing overhead b. Fixed manufacturing overhead c. Variable administrative expenses d. Fixed administrative expenses

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Reporting

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

102. Variable costing a. is used for external reporting purposes. b. is required under GAAP. c. treats fixed manufacturing overhead as a period cost. d. is also known as full costing.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Reporting a

103. Sprinkle Co. sells its product for $60 per unit. During 2022, it produced 60,000 units and sold 50,000 units (there was no beginning inventory). Variable costs per unit are: direct materials $15, direct labor $9, and overhead $3. Fixed costs are: $720,000 manufacturing overhead, and $90,000 selling and administrative expenses. The per unit manufacturing cost under absorption costing is a. $24.00. b. $27.00. c. $39.00. d. $40.50.

Ans: C, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Cost Management Solution: $15 + $9 + $3 + ($720,000 / 60,000) = $39 (Direct Materials per unit + Direct labor per unit + Variable overhead per unit + (Fixed Costs / Units Produced) = per unit manufacturing cost under absorption costing) a

104. Sprinkle Co. sells its product for $60 per unit. During 2022, it produced 60,000 units and sold 50,000 units (there was no beginning inventory). Variable costs per unit are: direct materials $15, direct labor $9, and overhead $3. Fixed costs are: $720,000 manufacturing overhead, and $90,000 selling and administrative expenses. The per unit manufacturing cost under variable costing is a. $24.00. b. $27.00. c. $39.00. d. $40.50.

Ans: B, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Cost Management Solution: $15 + 9 + 3 = $27 (Direct Materials per unit + Direct labor per unit + Variable overhead per unit = per unit manufacturing cost under variable costing) a

105. Sprinkle Co. sells its product for $60 per unit. During 2022, it produced 60,000 units and sold 50,000 units (there was no beginning inventory). Variable costs per unit are: direct materials $15, direct labor $9, and overhead $3. Fixed costs are: $720,000 manufacturing overhead, and $90,000 selling and administrative expenses. Cost of goods sold under absorption costing is a. $1,350,000. b. $1,620,000. c. $1,950,000. d. $2,025,000.

Ans: C, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Decision Making, IMA: Reporting Solution: $15 + $9 + $3 + ($720,000 / 60,000) = $39; $39 x 50,000 = $1,950,000 (Direct Materials per unit + Direct labor per unit + Variable overhead per unit + (Fixed Costs / Units Produced) = per unit manufacturing cost under absorption costing); Per unit manufacturing cost x units sold = Cost of goods sold under absorption costing)

Cost-Volume-Profit Analysis: Additional Issues 19 - 21 a

106. Sprinkle Co. sells its product for $60 per unit. During 2022, it produced 60,000 units and sold 50,000 units (there was no beginning inventory). Variable costs per unit are: direct materials $15, direct labor $9, and overhead $3. Fixed costs are: $720,000 manufacturing overhead, and $90,000 selling and administrative expenses. Ending inventory under variable costing is valued at a. $270,000. b. $390,000. c. $600,000. d. $240,000.

107. Sprinkle Co. sells its product for $60 per unit. During 2022, it produced 60,000 units and sold 50,000 units (there was no beginning inventory). Variable costs per unit are: direct materials $15, direct labor $9, and overhead $3. Fixed costs are: $720,000 manufacturing overhead, and $90,000 selling and administrative expenses. Under absorption costing, what amount of fixed overhead is deferred to a future period? a. $30,000 b. $120,000 c. $150,000 d. $720,000

Ans: B, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics Solution: $720,000 / 60,000 = $12; $12 x 50,000 = $600,000; $720,000 – 600,000 = $120,000 (Fixed Costs / Units produced = per unit fixed cost; Fixed costs - (per unit fixed costs x units sold) = Amount of fixed overhead deferred to a future period) a

108.

Net income under absorption costing is gross profit less a. cost of goods sold. b. fixed manufacturing overhead and fixed selling and administrative expenses. c. fixed manufacturing overhead and variable manufacturing overhead. d. variable selling and administrative expenses and fixed selling and administrative expenses.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Business Economics a

109.

Net income under variable costing is contribution margin less a. cost of goods sold. b. fixed manufacturing overhead and fixed selling and administrative expenses. c. fixed manufacturing overhead and variable manufacturing overhead. d. variable selling and administrative expenses and fixed selling and administrative expenses.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Business Economics a

110.

The manufacturing cost per unit for absorption costing is a. usually, but not always, higher than manufacturing cost per unit for variable costing. b. usually, but not always, lower than manufacturing cost per unit for variable costing. c. always higher than manufacturing cost per unit for variable costing. d. always lower than manufacturing cost per unit for variable costing.

Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Business Economics

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

111. The one primary difference between variable and absorption costing is that under a. variable costing, companies charge the fixed manufacturing overhead as an expense in the current period. b. absorption costing, companies charge the fixed manufacturing overhead as an expense in the current period. c. variable costing, companies charge the variable manufacturing overhead as an expense in the current period. d. absorption costing, companies charge the variable manufacturing overhead as an expense in the current period.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Business Economics a

112. Net income under absorption costing is higher than net income under variable costing a. when units produced exceed units sold. b. when units produced equal units sold. c. when units produced are less than units sold. d. regardless of the relationship between units produced and units sold.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Reporting a

113. Some fixed manufacturing overhead costs of the current period are deferred to future periods under a. absorption costing. b. variable costing. c. both absorption and variable costing. d. neither absorption nor variable costing.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Reporting a

114. Nielson Corp. sells its product for $6,600 per unit. Unit variable cost are: manufacturing, $3,600, and selling and administrative, $75. Annual fixed costs are: $18,000 manufacturing overhead and $24,000 selling and administrative. There was no beginning inventory at 1/1/21. Production was 20 units per year in 2021–2023. Sales were 20 units in 2021, 16 units in 2022, and 24 units in 2023. Net income under absorption costing for 2022 is a. $4,800. b. $8,400. c. $9,600. d. $13,200.

Ans: B, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Decision Making, IMA: Reporting Solution: $18,000 / 20 = $900; $6,600 - $3,600 - $900 = ($2,100 x 16) = 33,600; 33,600 – 24,000 – ($75 x 16) = 8,400 (Fixed Manufacturing Overhead / Units produced = per unit fixed manufacturing cost; (Unit selling price – Variable manufacturing cost per unit – Fixed manufacturing cost per unit) = Gross Profit per unit; Gross Profit per unit x units sold = Gross Profit; Gross Profit - Fixed Selling Expenses (Variable selling expense per unit x Units sold) = Net income under absorption costing)

Cost-Volume-Profit Analysis: Additional Issues 19 - 23 a

115. Nielson Corp. sells its product for $6,600 per unit. Unit variable cost are: manufacturing, $3,600, and selling and administrative, $75. Annual fixed costs are: $18,000 manufacturing overhead and $24,000 selling and administrative. There was no beginning inventory at 1/1/21. Production was 20 units per year in 2021–2023. Sales were 20 units in 2021, 16 units in 2022, and 24 units in 2023. Net income under absorption costing for 2023 is a. $19,800. b. $23,400. c. $24,600. d. $28,200.

Ans: C, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Decision Making, IMA: Reporting Solution: $18,000 / 20 = $900; $6,600 - $3,600 - $900 = ($2,100 x 24 = 50,400; 50,400 – 24,000 – ($75 x 24) = 24,600 (Fixed Manufacturing Overhead / Units produced = per unit fixed manufacturing cost; (Unit selling price – Variable manufacturing cost per unit – Fixed manufacturing cost per unit) = Gross Profit per unit; Gross Profit per unit x units sold = Gross Profit; Gross Profit - Fixed Selling Expenses (Variable selling expense per unit x Units sold) = Net income under absorption costing) a

116. Nielson Corp. sells its product for $6,600 per unit. Unit variable cost are: manufacturing, $3,600, and selling and administrative, $75. Annual fixed costs are: $18,000 manufacturing overhead and $24,000 selling and administrative. There was no beginning inventory at 1/1/21. Production was 20 units per year in 2021–2023. Sales were 20 units in 2021, 16 units in 2022, and 24 units in 2023. Net income under variable costing for 2022 is a. $4,800. b. $8,400. c. $9,600. d. $13,200.

Ans: A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Decision Making, IMA: Reporting Solution: $6,600 - $3,600 - $75 = $2,925 x 16 = 46,800; 46,800 – 18,000 - 24,000 = $4,800 (Unit Selling Price – Unit Variable Manufacturing cost – Unit Variable Selling and Administrative cost = Unit Contribution Margin; Unit Contribution Margin x Units Sold = Contribution Margin; Contribution Margin – Fixed Manufacturing Overhead Expenses – Fixed Selling and Administrative Expenses = Net income under variable costing for 2022) a

117. Nielson Corp. sells its product for $6,600 per unit. Unit variable cost are: manufacturing, $3,600, and selling and administrative, $75. Fixed costs are: $18,000 manufacturing overhead and $24,000 selling and administrative. There was no beginning inventory at 1/1/21. Production was 20 units per year in 2021–2023. Sales were 20 units in 2021, 16 units in 2022, and 24 units in 2023. Net income under variable costing for 2023 is a. $19,800. b. $23,400. c. $24,600. d. $28,200.

Ans: D, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Decision Making, IMA: Reporting Solution: $6,600 - $3,600 - $75 = $2,925 x 24 = 70,200; 70200 – 18,000 - 24,000 = $28,200 (Unit Selling Price – Unit Variable Manufacturing cost – Unit Variable Selling and Administrative cost = Unit Contribution Margin; Unit Contribution Margin x Units Sold = Contribution Margin; Contribution Margin – Fixed Manufacturing Overhead Expenses – Fixed Selling and Administrative Expenses = Net income under variable costing for 2023)

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

118. Nielson Corp. sells its product for $6,600 per unit. Unit variable costs are: manufacturing, $3,600, and selling and administrative, $75. Fixed costs are: $18,000 manufacturing overhead and $24,000 selling and administrative. There was no beginning inventory at 1/1/21. Production was 20 units per year in 2021–2023. Sales were 20 units in 2021, 16 units in 2022, and 24 units in 2023. For the three years 2021–2023 combined, a. absorption costing net income exceeds variable costing net income by $8,000. b. absorption costing net income equals variable costing net income. c. variable costing net income exceeds absorption costing net income by $8,000. d. absorption costing net income may be greater than, equal to, or less than variable costing net income, depending on the situation.

Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Reporting a

119. When production exceeds sales, a. some fixed manufacturing overhead costs are deferred until a future period under absorption costing. b. some fixed manufacturing overhead costs are deferred until a future period under variable costing. c. some fixed manufacturing overhead costs and some fixed selling expenses are deferred until a future period. d. some variable and fixed manufacturing overhead costs are deferred until a future period under variable costing.

Ans: A, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Reporting a

120.

When production exceeds sales, a. ending inventory under variable costing will exceed ending inventory under absorption costing. b. ending inventory under absorption costing will exceed ending inventory under variable costing. c. ending inventory under absorption costing will be equal to ending inventory under variable costing. d. ending inventory under absorption costing may exceed, be equal to, or be less than ending inventory under variable costing.

Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Reporting a

121. Management may be tempted to overproduce when using a. variable costing, in order to increase net income. b. variable costing, in order to decrease net income. c. absorption costing, in order to increase net income. d. absorption costing, in order to decrease net income.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Governance Perspective, AICPA FC: Decision Making, AICPA PC: Decision Making, IMA: Business Economics a

122. If a division manager’s compensation is based upon the division’s net income, the manager may decide to meet the net income targets by increasing production when using a. variable costing, in order to increase net income. b. variable costing, in order to decrease net income. c. absorption costing, in order to increase net income. d. absorption costing, in order to decrease net income.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Governance Perspective, AICPA FC: Decision Making, AICPA PC: Decision Making, IMA: Business Economics

Cost-Volume-Profit Analysis: Additional Issues 19 - 25 a

123. Expected sales for next year for the Beresford Company are 150,000 units. Curt Planters, manager of the Beresford Division, is under pressure to improve the performance of the Division. As he plans for next year, he has to decide whether to produce 150,000 units or 170,000 units. The Beresford Company will have higher net income if production is a. 170,000 units if net income is measured under absorption costing. b. 170,000 units if net income is measured under variable costing. c. 150,000 units if net income is measured under absorption costing. d. 150,000 units if net income is measured under variable costing.

Ans: A, LO: 5, Bloom: C, Difficulty: Moderate, Min: 3, AACSB: Ethics, AICPA BB: Governance Perspective, AICPA FC: Decision Making, AICPA PC: Decision Making, IMA: Business Economics a

124. Which of the following is a potential advantage of variable costing relative to absorption costing? a. Net income is affected by changes in production levels. b. The use of variable costing is consistent with cost-volume-profit analysis. c. Net income computed under variable costing is not closely tied to changes in sales levels. d. More than one of the above.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics a

125. Companies that use just-in-time processing techniques will a. have greater differences in net income between absorption and variable costing net income. b. have smaller differences in net income between absorption and variable costing net income. c. not be able to use absorption costing. d. not be able to use variable costing.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: None, AICPA FC: Technology and Tools, AICPA PC: Project Management, IMA: Business Applications

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

BRIEF EXERCISES BE 126 Archer Industries sells three different sets of sportswear. Sleek sells for $30 and has unit variable costs of $18; Smooth sells for $50 and has unit variable costs of $30; Potent sells for $70 and has unit variable costs of $45. The sales mix of the three sets is: Sleek, 50%; Smooth, 30%; and Potent, 20%. Instructions What is the weighted-average unit contribution margin? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 6, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics

Solution 126

(6–8 min.)

Sleek: 50% × ($30 – $18) Smooth: 30% × ($50 – $30) Potent: 20% × ($70 – $45) Weighted-average unit contribution margin

$ 6 6 5 $17

BE 127 Lazaro Inc. sells two product lines. The sales mix of the product lines is: Standard, 60%; and Deluxe, 40%. The contribution margin ratio of each line is: Standard, 40%; and Deluxe, 45%. Lazaro’s fixed costs total $1,575,000. Instructions What is the dollar amount of Deluxe sales at the break-even point? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 6, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics

Solution 127

(6–8 min.)

Standard: 60% × 40% Deluxe: 40% × 45% Weighted-average contribution margin ratio

24% 18% 42%

$1,575,000 ÷ 42% = $3,750,000 break-even point in sales dollars Dollar amount of Deluxe sales at the break-even point: $3,750,000 × 40% = $1,500,000.

BE 128 Hunt, Inc. provided the following information concerning two products: Unit contribution margin Machine hours required for one unit

Product 12 $22 2 hours

Product 43 $18 1.5 hours

Instructions Compute the contribution margin per unit of limited resource for each product. Which product should Hunt tell its sales personnel to “push” to customers? .

Cost-Volume-Profit Analysis: Additional Issues 19 - 27 Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

Solution 128

(3–5 min.)

Product 12: $22 ÷ 2.0 hours = $11 Product 43: $18 ÷ 1.5 hours = $12 Sales personnel should push Product 43. BE 129 Gallery Corporation makes two products, footballs and baseballs. Additional information follows: Footballs 2,000 $60,000 24,000 10,000 $26,000 1.25 $13.00 $18.00

Units Sales Variable costs Fixed costs Net income Yards of leather per unit Net income per unit Unit contribution margin

Baseballs 2,500 $25,000 13,750 5,250 $ 6,000 0.30 $2.40 $4.50

Assume that Gallery is able to order an additional 2,500 yards of leather and wishes to maximize its net income. Of the additional units it produces, at least 500 of each product are necessary for sales. Instructions How many units of each must be produced? Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Decision Making, AICPA PC: Decision Making, IMA: Business Economics

Solution 129

(5–7 min.)

Contribution margin per yard

Footballs $18 ÷ 1.25 = $14.40

Baseballs $4.50 ÷ .30 = $15

Produce more baseballs since the contribution margin per limited resource is higher. Minimum for footballs: Material remaining for baseballs: Number of baseballs:

500 units × 1.25 yards/ unit. = 625 yards 2,500 yards – 625 yards = 1,875 yards 1,875 yards ÷ .30 = 6,250 baseballs

BE 130 Marina Manufacturing is considering buying new equipment for its factory. The new equipment will reduce variable labor costs but increase depreciation expense. Contribution margin is expected to increase from $250,000 to $300,000. Net income is expected to remain the same at $100,000. Instructions Compute the degree of operating leverage before and after the purchase of the new equipment and interpret your results. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Decision Making, IMA: Business Economics

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 130

(4–6 min.)

Before: After

Contribution margin $250,000 $300,000

÷ ÷ ÷

Net Income $100,000 $100,000

= = =

Degree of Operating Leverage 2.50 3.00

After the new equipment is purchased, Marina’s net income would go up (or down) by 1.2 times (3.00 ÷ 2.50) as much as it would have before the purchase, with an equal increase (or decrease) in sales.

BE 131 The degree of operating leverage for Gurney, Inc. and Dough Company are 2.4 and 5.6 respectively. Both companies have net incomes of $75,000. Determine their respective contribution margins. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Easy, Min: 4, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Decision Making, IMA: Performance Measurement

Solution 131

(4–6 min.)

Degree of operating leverage = Contribution margin ÷ Net income Gurney Inc. Contribution margin

2.4 = Contribution margin ÷ $75,000 = $75,000  2.4 = $180,000

Dough Company Contribution margin

5.6 = Contribution margin ÷ $75,000 = $75,000  5.6 = $420,000

BE 132

Swift Co. produces LED flashlight flash drives. It incurred the following costs this year: Direct materials Direct labor Fixed manufacturing overhead Variable manufacturing overhead Fixed selling and administrative expenses Variable selling and administrative expenses

$35,000 31,000 22,000 38,000 23,000 14,000

Instructions What are the total product costs for the company under variable costing? Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Cost Management a

Solution 132

(3–5 min.)

Direct materials Direct labor Variable manufacturing overhead Total product costs under variable costing

$ 35,000 31,000 38,000 $104,000

Cost-Volume-Profit Analysis: Additional Issues 19 - 29 a

BE 133

$40,000 31,000 22,000 38,000 23,000 14,000

Instructions What are the total product costs for the company under absorption costing? Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Cost Management a

Solution 133

(3–5 min.)

Direct materials Direct labor Fixed manufacturing overhead Variable manufacturing overhead Total product costs under absorption costing

$ 40,000 31,000 22,000 38,000 $131,000

BE 134

During 2022, Basler Manufacturing produced 60,000 units and sold 55,000 for $10 per unit. Variable manufacturing costs were $4 per unit. Annual fixed manufacturing overhead was $120,000 ($2 per unit). Variable selling and administrative costs were $1 per unit sold and fixed selling and administrative costs totaled $30,000. Instructions Prepare a variable costing income statement. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Decision Making, IMA: Reporting a

Solution 134

(5–7 min.)

Sales (55,000 × $10) Variable cost of goods sold (55,000 × $4) Variable selling and administrative expenses (55,000 × $1) Contribution margin Fixed manufacturing overhead Fixed selling and administrative expenses Net income

$550,000 $220,000 55,000 120,000 30,000

275,000 275,000 150,000 $125,000

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

BE 135

During 2022, Basler Manufacturing produced 60,000 units and sold 55,000 for $10 per unit. Variable manufacturing costs were $5 per unit. Annual fixed manufacturing overhead was $120,000 ($2 per unit). Variable selling and administrative costs were $1 per unit sold and fixed selling and administrative costs totaled $30,000. Instructions Prepare an absorption costing income statement. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Decision Making, IMA: Reporting a

Solution 135

(5–7 min.)

Sales (55,000 × $10) Cost of goods sold [55,000 × ($5 + $2)] Gross profit Variable selling and administrative expenses (55,000 × $1) Fixed selling and administrative expenses Net income

$550,000 385,000 165,000 $55,000 30,000

85,000 $ 80,000

EXERCISES Ex. 136 Kindle, Inc. manufactures cosmetic products that are sold through a network of sales agents. The agents are paid a commission of 12.5% of sales. The income statement for the year ending December 31, 2022, is as follows (all amounts are in $000s): KINDLE, INC. Income Statement Year Ending December 31, 2022 Sales Cost of goods sold Variable Fixed Gross profit Selling and marketing expenses Commissions Fixed costs Net income

$130,000 $58,500 14,350 $16,250 17,100

72,850 57,150

33,350 $ 23,800

The company is considering hiring its own sales staff to replace the network of agents. It will pay its salespeople a commission of 10% and will incur additional fixed costs of $13 million per year. Instructions (a) Under the current policy of using a network of sales agents, calculate Kindle, Inc.'s break-even point in sales dollars for the year 2022. (b) Calculate the company's break-even point in sales dollars for the year 2022 if it hires its own sales force to replace the network of agents. (c) Calculate the degree of operating leverage at sales of $130 million if (1) Kindle, Inc. uses sales agents, and (2) Kindle, Inc. employs its own sales staff. .

Cost-Volume-Profit Analysis: Additional Issues 19 - 31 Ans: N/A, LO: 1, 4, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Decision Making, IMA: Reporting a

Solution 136

(a)

(15–18 min.)

Reformat the income statement to CVP format. All amounts are in $000s. Sales........................................................................... Variable costs ($58,500 + $16,250) ............................ Contribution margin..................................................... Less: Fixed costs ($14,350 + $17,100) ....................... Net income.................................................................. Contribution margin ratio = $55,250  $130,000 = 42.5% Break-even point = $31,450  42.5% = $74,000

(b)

$130,000 74,750 55,250 31,450 $ 23,800

If a hired workforce replaces sales agents, commissions will be reduced to 10% of sales ($13,000) but fixed costs will increase by $13,000. Sales........................................................................... Variable costs ($58,500 + $13,000) ............................ Contribution margin..................................................... Less: Fixed costs ($31,450 + $13,000) ....................... Net income..................................................................

$130,000 71,500 58,500 44,450 $ 14,050

Contribution margin ratio = $58,500  $130,000 = 45% Break-even point = $44,450  45% = $98,778 (c)

Operating leverage = contribution margin  net income Current situation: from part (a) $55,250  $23,800 = 2.32 Proposed situation: from part (b) $58,500  $14,050 = 4.16

Ex. 137 Qwik Service has over 200 auto-maintenance service outlets nationwide. It provides primarily two lines of service: oil changes and brake repair. Oil change-related services represent 75% of its sales and provide a contribution margin ratio of 20%. Brake repair represents 25% of its sales and provides a 60% contribution margin ratio. The company's fixed costs are $15,000,000 (or $75,000 per service outlet). Instructions (a) Calculate the dollar amount of each type of service that the company must provide in order to break even. (b) The company has a desired net income of $45,000 per service outlet. What is the dollar amount of each type of service that must be provided by each service outlet to meet its target net income? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 12, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics

19 - 32

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 137

(12–15 min.)

(a) Weighted-Average Contribution Margin Ratio Oil changes × 15% Brake repair × 15% 30% Total break-even sales in dollars = $15,000,000  30% = $50,000,000

Oil changes Brake repair Total sales

Sales Mix Percentage 75% 25%

Contribution Margin Ratio 20% 60%

Sales Mix Percentage 75% 25%

Total Break-even in Sales Dollars $50,000,000 $50,000,000

× ×

Sales Dollars Needed per Product $37,500,000 12,500,000 $50,000,000

(b) Sales to achieve target net income = ($75,000 + $45,000)  30% = $400,000 Sales Dollars Sales Mix Total Needed Per Product Percentage Sales Needed per Outlet Oil changes 75% × $400,000 $300,000 Brake repair 25% × $400,000 100,000 Total sales $400,000

Ex. 138 Seaver Corporation manufactures mountain bikes. It has fixed costs of $4,140,000. Seaver’s sales mix and unit contribution margin are shown as follows: Sales Mix 25% 45% 30%

Green Demon Brown Beast Blue Bear

Unit Contribution Margin $120 $ 60 $ 40

Instructions Compute the number of each type of bike that the company would need to sell in order to break even under this product mix. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Decision Making, AICPA PC: Decision Making, IMA: Business Economics

Solution 138

(8–12 min.)

Weighted-Average Unit Contribution Margin Green Demon $30 Brown Beast 27 Blue Bear 12 $69 Total break-even point in sales units = $4,140,000 ÷ $69 = 60,000 bikes Sales Mix 25% 45% 30%

× × × ×

Unit Contribution Margin $120 $ 60 $ 40

Cost-Volume-Profit Analysis: Additional Issues 19 - 33 Ex 138

(cont.) Sales Mix 25% 45% 30%

Green Demon Brown Beast Blue Bear

× × ×

60,000 60,000 60,000

= = =

15,000 bikes 27,000 bikes 18,000 bikes

Ex. 139 DeMont Tax Services provides primarily two lines of service: accounting compilation and tax return preparation. Accounting compilation services represent 60% of its revenue and provide a contribution margin ratio of 30%. Tax return preparation services represent 40% of its revenue and provide a 40% contribution margin ratio. The company’s fixed costs are $4,590,000. Instructions (a) Calculate the revenue from each type of service that the company must achieve to break even. (b) The company has a desired net income of $1,700,000. What amount of revenue would DeMont earn from tax return preparation services if it achieves this goal with the current sales mix? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Decision Making, IMA: Reporting

Solution 139

(10–15 min.) Contribution Margin Ratio 30% 40%

(a) Sales Mix Accounting compilation 60% Tax return preparation 40%

Weighted-Average Contribution Margin Ratio 18% 16% 34%

Total break-even point in sales dollars = $4,590,000 ÷ 34% = $13,500,000 Sales Mix 60% × 40% ×

Accounting Tax

$13,500,000 = $8,100,000 $13,500,000 = $5,400,000

(b) Sales to achieve target net income = ($4,590,000 + $1,700,000) ÷ 34% = $18,500,000 Sales Mix 40% ×

Tax

$18,500,000 = $7,400,000

Ex. 140 Blue Chance Co. sells computers and video game systems. The business is divided into two divisions along product lines. Variable costing income statements for the current year are presented below: Computers VG Systems Total Sales $700,000 $300,000 $1,000,000 Variable costs 420,000 210,000 630,000 Contribution margin $280,000 $ 90,000 370,000 Fixed costs 296,000 Net income $ 74,000 Ex 140 (cont.) .

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Instructions (a) Determine the sales mix and contribution margin ratio for each division. (b) Calculate the company’s weighted-average contribution margin ratio. (c) Calculate the company’s break-even point in sales dollars. (d) Determine the sales level, in dollars, for each division at the break-even point. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Decision Making, AICPA PC: Decision Making, IMA: Business Economics

Solution 140

(15–20 min.)

(a) Sales mix: Computers: VG Systems

$700,000 ÷ $1,000,000 = 70% $300,000 ÷ $1,000,000 = 30%

Contribution margin ratio: Computers: VG Systems:

$280,000 ÷ $700,000 = 40% $ 90,000 ÷ $300,000 = 30%

(b) Weighted-average contribution margin ratio = (70% × 40%) + (30% × 30%) = 37% or $370,000 ÷ $1,000,000 = 37%. (c) Break-even point in sales dollars = $296,000 ÷ 37% = $800,000 (d) Sales dollars at break-even point: Computers: $800,000 × .70 = $560,000 VG Systems: $800,000 × .30 = $240,000 Ex. 141 Hewitt Co. has 4,000 machine hours available to produce either Product 22 or Product 44. The cost accounting department developed the following unit information for each product: Sales price Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Machine time required

Product 22 $27 6 3 4 3 20 minutes

Product 44 $50 8 2 5 5 60 minutes

Instructions Management wants to know which product to produce in order to maximize the company’s net income. Taking into consideration the constraints under which the company operates, prepare a report to show which product should be produced and sold. Ans: N/A, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Decision Making, AICPA PC: Decision Making, IMA: Business Economics

Cost-Volume-Profit Analysis: Additional Issues 19 - 35 Solution 141

(10–12 min.)

Unit contribution margin Sales price Unit variable costs: Direct materials Direct labor Variable overhead Contribution margin

Product 22 $27 $6 3 4

Machine hours required:

13 $14

Product 44 $50 $8 2 5

15 $35

1/3 hr.

1 hr.

Contribution margin per unit of limited resource: ($14 ÷ ) $42 ($35 ÷ 1) Machine hours available × 4,000 Contribution margin $168,000

$35 × 4,000 $140,000

The company should produce and sell product 22 because it results in a higher contribution margin per unit of limited resource (machine hours) which in turn, generated more contribution margin for the company. Ex. 142 Reynolds, Inc. manufactures and sells two products, Standard and Deluxe. Relevant per unit data for each product are given below: Product Standard Deluxe Selling price $50 $75 Variable costs $26 $33 Machine hours 2 3 Instructions (a) Compute the contribution margin per unit of limited resource for each product. (b) If 1,000 additional machine hours are available, which product should be manufactured? Ans: N/A, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 6, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics

Solution 142

(6–8 min.)

(a)

Product Unit contribution margin Machine hours required Contribution margin per unit of limited resource

Standard $24* ÷2 $12

Deluxe $42** ÷3 $14

*$24 = ($50 - $26) **$42 = ($75 - $33) (b) The Deluxe product should be manufactured because it results in the highest contribution margin per machine hour: $14 × 1,000 = $14,000.

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ex. 143 Oscar Corporation produces and sells three products. Unit data concerning each product is shown below. Product X Y Z Selling price $200 $300 $250 Direct labor costs 45 75 60 Other variable costs 110 130 102 The company has 2,000 hours of labor available to build inventory in anticipation of the company's peak season. Management is trying to decide which product should be produced. The direct labor hourly rate is $15. Instructions (a) Determine the number of direct labor hours per unit. (b) Determine the contribution margin per direct labor hour. (c) Determine which product should be produced and the total contribution margin for that product. Ans: N/A, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics

Solution 143

(10–12 min.)

(a) Product X: $45  $15 = 3 hours per unit Product Y: $75  $15 = 5 hours per unit Product Z: $60  $15 = 4 hours per unit (b) Selling price Variable costs Contribution margin Direct labor hours per unit Contribution margin per direct labor hour

X $200 155* 45 3 $ 15

Product Y $300 205** 95 5 $ 19

Z $250 162*** 88 4 $ 22

*$155 = ($45 + $110) **$205 = ($75 + $130) ***$162 = ($60 + $102) (c) Product Z should be produced because it generates the highest contribution margin per direct labor hour. Product Z Total direct labor hours available 2,000 Contribution margin per direct labor hour 22 Total contribution margin $44,000

Ex. 144 Shanahan Co. is contemplating a major change in its cost structure. Currently, all of its drafting work is performed by skilled drafters. Mike Shanahan the owner, is considering replacing the drafters with a computerized drafting system. .

Cost-Volume-Profit Analysis: Additional Issues 19 - 37 However, before making the change, Mike would like to know the consequences of the change, since the volume of business varies significantly from year to year. Shown below are CVP income statements for each alternative. Manual System Computerized System Sales $1,500,000 $1,500,000 Variable costs 1,200,000 900,000 Contribution margin 300,000 600,000 Fixed costs 150,000 450,000 Net income $150,000 $150,000 Instructions (a) Determine the degree of operating leverage for each alternative. (b) Which alternative would produce the higher net income if sales increased by $300,000? Ans: N/A, LO: 4, Bloom: AN, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics

Solution 144

(10–12 min.)

(a) Manual system Computerized system

Contribution Margin

Net Income

$300,000 $600,000

÷ ÷

$150,000 $150,000

= =

Degree of Operating Leverage 2.0 4.0

(b) The computerized system would produce net income that is are 2.0 times (4.0 ÷ 2.0) as much as the manual system. With a $300,000 increase in sales, net income would increase $60,000 ($210,000 - $150,000) under the manual system and $120,000 ($270,000 - $150,000) under the computerized system Manual System Computerized System Sales $1,800,000 $1,800,000 Variable costs 1,440,000* 1,080,000** Contribution margin 360,000 720,000 Fixed costs 150,000 450,000 Net income $ 210,000 $ 270,000 *($1,200,000 ÷ $1,500,000) × $1,800,000 **($900,000 ÷ $1,500,000) × $1,800,000 Ex. 145 The following CVP income statements are available for Chantal Corp. and Mantle, Inc. Sales revenue Variable costs Contribution margin Fixed costs Net income Ex 145

Chantal Corp. $700,000 350,000 350,000 225,000 $125,000 (cont.)

Mantle, Inc. $700,000 210,000 490,000 365,000 $125,000

Instructions (a) Compute the degree of operating leverage for each company. (b) Assume that sales revenue decreases by 20%. Prepare a CVP income statement for each company. .

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics

Solution 145 (a) Chantal Mantle

(15–20 min.) Contribution Margin $350,000 $490,000

(b) Sales revenue Variable costs Contribution margin Fixed costs Net income

÷ ÷ ÷

Net Income $125,000 $125,000

Chantal Corp. $560,000* 280,000** 280,000 225,000 $ 55,000

= = =

Degree of Operating Leverage 2.8 3.9

Mantle, Inc. $560,000* 168,000*** 392,000 365,000 $ 27,000

*$700,000 × (100% - 20%) **($350,000 ÷ $700,000) × $560,000 ***($210,000 ÷ $700,000) × $560,000 Ex. 146 An investment banker is analyzing two companies that specialize in the production and sale of gourmet cappuccino and chai mixes. Roasted Beans Co. uses a labor-intensive approach and Monat Industries uses a mechanized system. Variable costing income statements for the two companies are shown below: Sales Variable costs Contribution margin Fixed costs Net Income

Roasted Beans $1,000,000 650,000 350,000 175,000 $ 175,000

Monat Industries $1,000,000 300,000 700,000 525,000 $ 175,000

The investment banker is interested in acquiring one of these companies. However, she is concerned about the impact that each company’s cost structure might have on its profitability. Instructions (a) Calculate each company’s degree of operating leverage. (b) Determine the effect on each company’s net income if sales decrease by 10% and if sales increase by 15%. Do not prepare income statements. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics

Solution 146 (a)

(8–10 min.)

Contribution Margin Roasted Beans $350,000 Monat $700,000

÷ ÷ ÷

(b) % Change in Sales .

Net Income $175,000 $175,000

= = =

Degree of Operating Leverage

Degree of Operating Leverage 2.0 4.0 =

% Change in Net Income

Cost-Volume-Profit Analysis: Additional Issues 19 - 39 Roasted Beans Monat

(10%) (10%)

× ×

2.0 4.0

= =

(20)% (40)%

Roasted Beans Monat

15% 15%

× ×

2.0 4.0

= =

30% 60%

Ex. 147

Indicate with a check mark whether each of the following would be a product cost or a period cost under an absorption or a variable system for Sour Industries. Absorption Product Period

Variable Product Period

a. Direct materials b. Direct labor c. Factory utilities d. Factory rent e. Indirect labor f.

Factory supervisor salaries

g. Factory maintenance (variable) h. Factory depreciation i.

Sales salaries

Sales commissions

Ans: N/A, LO: 5, Bloom: K, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Decision Making, IMA: Cost Management a

Solution 147

a. b. c. d. e. f. g. h. i. j.

(10–15 min.)

Direct materials Direct labor Factory utilities Factory rent Indirect labor Factory supervisor salaries Factory maintenance (variable) Factory depreciation Sales salaries Sales commissions

Absorption Product Period � � � � � � � � � �

Variable Product Period � � � � � � � � � �

Ex. 148

Nimble Corp. manufactures and sells a variety of camping products. Recently, the company opened a new plant to manufacture an ultralight portable cooking unit. Cost and sales data for the first month of operations, June 2022, are shown below: Manufacturing Costs Fixed Overhead Variable overhead .

$140,000 $3 per unit

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

19 - 40

Direct labor Direct material

$12 per unit $30 per unit

Beginning inventory Units produced Units sold

0 units 10,000 9,000

Selling and Administrative Costs Fixed Variable

$200,000 $4 per unit sold

The portable cooking unit sells for $110. Management is interested in the opening month’s results and has asked for an income statement. Instructions Assume the company uses absorption costing. Calculate the production cost per unit and prepare an income statement for the month of June, 2022. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Decision Making, IMA: Reporting a

Solution 148

(8–12 min.)

Direct materials Direct labor Variable overhead Fixed overhead ($140,000 ÷ 10,000) Total cost

Per Unit $30 12 3 14 $59

Nimble Corp. Income Statement (Absorption Costing) For the Month Ending June 30, 2022 Sales (9,000 × $110) Less: Cost of goods sold (9,000 × $59) Gross profit Less: Selling and administrative costs Variable (9,000 × $4) Fixed Net income

$990,000 531,000 459,000 $ 36,000 200,000

236,000 $ 223,000

Cost-Volume-Profit Analysis: Additional Issues 19 - 41 a

Ex. 149

Travel Wheels, Inc. manufactures a luxury ultralight carry-on suitcase. Production and sales data for the most recent year are as follows (there was no beginning inventory): Variable production costs Fixed production costs Variable selling and administrative costs Fixed selling and administrative costs Selling price Production Sales

$100 per bag $400,000 $22 per bag $550,000 $200 per bag 20,000 bags 18,000 bags

Instructions (a) Prepare a brief income statement using absorption costing. (b) Compute the amount to be reported for inventory in the year-end absorption costing balance sheet. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Decision Making, IMA: Reporting a

Solution 149

(a)

(b)

(8–12 min.)

Sales (18,000 × $200) Less: Cost of goods sold (18,000 × $120*) Gross profit Less: selling and administrative costs [(18,000 × $22) + $550,000] Net income

$3,600,000 2,160,000 1,440,000 946,000 $ 494,000

*Variable production costs Fixed production costs ($400,000 ÷ 20,000) Total cost of goods sold per unit

$100 per bag 20 per bag $120 per bag

(20,000 – 18,000) × $120 = $240,000

Ex. 150

$95 per bag $400,000 $22 per bag $550,000 $200 per bag 20,000 bag 16,000 bag

Instructions (a) Prepare a brief income statement using variable costing. (b) Compute the amount to be reported for inventory in the year-end variable costing balance sheet. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Decision Making, IMA: Reporting

19 - 42

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

(8–12 min.)

Solution 150

(a)

(b)

Sales (16,000 × $200) Less: Variable costs Variable cost of goods sold (16,000 × $95) Variable selling and admin. costs (16,000 × $22) Contribution margin Less: Fixed costs Fixed production costs Fixed selling and administrative costs Net income

$3,200,000 $1,520,000 352,000

400,000 550,000

1,872,000 1,328,000

950,000 $ 378,000

(20,000 – 16,000) × $95 = $380,000

Ex. 151

Cutting Edge Corp. produces sporting equipment. In 2022, the first year of operations, Cutting Edge produced 25,000 units and sold 22,000 units. In 2023, the production and sales results were exactly reversed. In each year, selling price was $100, variable manufacturing costs were $40 per unit, variable selling expenses were $8 per unit, fixed manufacturing costs were $550,000, and fixed administrative expenses were $200,000. Instructions (a) Compute the net income under variable costing for each year. (b) Compute the net income under absorption costing for each year. (c) Reconcile the differences each year in income from operations under the two costing approaches. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 20, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Decision Making, IMA: Reporting a

Solution 151

(20–25 min.)

(a) 2022: [22,000 × ($100 – $40 – $8)] – ($550,000 + $200,000)] = $394,000 2023: [25,000 × ($100 – $40 – $8)] – ($550,000 + $200,000)] = $550,000 (b) 2022: [22,000 × ($100 – $40 – $22)] – ($200,000 + ($22,000 × $8)] = $460,000 2023: {[25,000 × $100) – [3,000 × ($40 + $22)] – [(22,000 × $40) + (22,000 × $550,000/22,000)]} – [$200,000 + (25,000 × $8)] = $484,000 (c) The variable costing and the absorption costing net income can be recorded as follows: 2022 variable costing net income Fixed manufacturing costs deferred at 12/31/22 under absorption costing (3,000 × $22) 2022 absorption costing net income

$394,000

2023 variable costing net income Fixed manufacturing costs expensed in 2023 under absorption costing 3,000 × $22) 2023 absorption costing net income

$550,000

66,000 $460,000

(66,000) $484,000

Cost-Volume-Profit Analysis: Additional Issues 19 - 43 a

Ex. 152

Graham is a division of Flynn, Inc. The division manufactures and sells a pump that is used in a wide variety of applications. During the coming year, it expects to sell 30,000 units for $25 per unit. Steve Moss, division manager, is considering producing either 30,000 or 35,000 units during the period. Other information is presented in the schedule below: Division Information – 2023 Beginning inventory Expected sales in units Unit selling price Variable manufacturing cost per unit Fixed manufacturing overhead costs (total) Fixed manufacturing overhead costs per unit Based on 30,000 units ($420,000 ÷ 30,000) Based on 35,000 units ($420,000 ÷ 35,000) Manufacturing cost per unit Based on 30,000 units ($7 variable + $14 fixed) Based on 35,000 units ($7 variable + $12 fixed) Selling and administrative expenses (all fixed)

0 30,000 $25 $7 $420,000 $14 $12 $21 $19 $25,000

Instructions (a) Prepare an absorption costing income statement with one column showing the results if 30,000 units are produced and one column showing the results if 35,000 units are produced. (b) Why is net income different for the two production levels when sales is 30,000 units either way? Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Decision Making, IMA: Reporting a

Solution 152

(15–20 min.)

(a)

Graham Division Income Statement (Absorption Costing) For the Year Ended 2023 Sales (30,000 units × $25) Cost of goods sold Gross profit Fixed selling and admin. expenses Net income

30,000 Produced 35,000 Produced $750,000 $750,000 630,000 (30,000 × $21) 570,000 (30,000 × $19) 120,000 180,000 25,000 25,000 $ 95,000 $155,000

(b) Net income is $60,000 higher ($155,000 - $95,000) when 35,000 units are produced because under absorption costing, $60,000 of fixed manufacturing costs (5,000 × $12) are deferred to the next year.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

19 - 44 a

Ex. 153

Graham is a division of Flynn, Inc. The division manufactures and sells a pump that is used in a wide variety of applications. During the coming year, it expects to sell 30,000 units for $25 per unit. Steve Moss, division manager, is considering producing either 30,000 or 40,000 units during the period. Other information is presented in the schedule below: Division Information – 2023 Beginning inventory Expected sales in units Unit selling price Variable manufacturing cost per unit Fixed manufacturing overhead costs (total) Fixed manufacturing overhead costs per unit Based on 30,000 units ($480,000 ÷ 30,000) Based on 40,000 units ($480,000 ÷ 40,000) Manufacturing cost per unit Based on 30,000 units ($7 variable + $16 fixed) Based on 40,000 units ($7 variable + $12 fixed) Selling and administrative expenses (all fixed)

0 30,000 $25 $7 $480,000 $16 $12 $23 $19 $25,000

Instructions Prepare a variable costing income statement with one column showing the results if 30,000 units are produced and one column showing the results if 40,000 units are produced. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Decision Making, IMA: Reporting a

Solution 153

(15–20 min.) Graham Division Income Statement (Variable Costing) For the Year Ended 2023

Sales (30,000 units × $25) Variable cost of goods sold (30,000 × $7) Contribution margin Fixed manufacturing overhead Fixed selling and administrative expenses Net income

30,000 Produced $750,000 210,000 540,000 480,000 25,000 $ 35,000

40,000 Produced $750,000 210,000 540,000 480,000 25,000 $ 35,000

COMPLETION STATEMENTS 154. The income statement classifies cost as variable or fixed and computes a contribution margin. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Decision Making, IMA: Reporting

155.

tells a company how far sales can drop before it will be operating at a loss.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Cost Management

Cost-Volume-Profit Analysis: Additional Issues 19 - 45 156.

is the relative percentage in which a company sells its multiple products.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics

157. When more than one product is sold, the break-even point in sales units can be determined by dividing fixed expenses by . Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Business Economics

158. When a company has , management must decide which products to make and sell in order to maximize net income. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Decision Making, AICPA PC: Decision Making, IMA: Business Economics

159.

refers to the relative proportion of fixed versus variable costs that a company incurs.

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Cost Management

160. The provides a measure of a company’s net income volatility and can be used to compare companies. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Risk Assessment, Analysis and Management, AICPA PC: Decision Making, IMA: Business Economics

161. Under the product.

all manufacturing costs are charged to, or absorbed by,

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Decision Making, IMA: Cost Management

162. Fixed manufacturing costs are treated as period costs under

163. When production exceeds sales, a portion of the is deferred to a future period as part of the cost of ending inventory under absorption costing, but not under variable costing.

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Decision Making, IMA: Business Economics

164. When units produced exceed units sold, net income under absorption costing is than net income under variable costing.

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Decision Making, IMA: Business Economics

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

19 - 46 a

165.

Management may be tempted to overproduce in a given period in order to increase net income if is used for internal decision making.

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Governance Perspective, AICPA FC: Decision Making, AICPA PC: Decision Making, IMA: Business Economics

Answers to Completion Statements 154. 155. 156. 157. 158. 159.

CVP Margin of safety Sales mix weighted-average unit contribution margin limited resources Cost structure

160. 161. a 162. a 163. a 164. a 165. a

degree of operating leverage absorption costing variable costing fixed manufacturing overhead higher absorption costing

SHORT-ANSWER ESSAY QUESTIONS S-A E 166 A CVP income statement is frequently prepared for internal use by management. Describe the features of the CVP income statement that make it more useful for management decision-making than the traditional income statement that is prepared for external users. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communication, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Communication, IMA: Reporting

Solution 166 Several features of the CVP income statement make it more useful for internal decision-making. The CVP income statement classifies costs as either fixed or variable, rather than by function. Being able to identify the behavior of costs in this manner can aid management in controlling those costs. Also, the CVP income statement shows the contribution margin, rather than a gross profit. This helps management establish the extent to which their sales are able to cover their fixed costs, and to analyze the impact on net income of changes in sales or costs. S-A E 167 Nancy Sound, president of Crosley Corp., has heard about operating leverage and asks you to explain this term. What is operating leverage? How does a company increase its operating leverage? Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communication, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Communication, IMA: Business Economics

Solution 167 Operating leverage refers to the change in net income that a company experiences when there is a change in net sales revenue. Companies that have higher fixed costs relative to variable costs have higher operating leverage. In that case, the company’s net incomes will increase rapidly when sales revenue increases, but decrease rapidly when sales revenue decreases. A company can increase its operating leverage by increasing its reliance on fixed costs, with a corresponding decrease in variable costs.

Cost-Volume-Profit Analysis: Additional Issues 19 - 47 a

S-A E 168

Define variable costing and absorption costing. What are some of the benefits to a manager from using variable costing instead of absorption costing for internal decision making? Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communication, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Communication, IMA: Cost Management a

Solution 168

Variable costing is a system for determining product costs that is used primarily for making managerial decisions. This system determines product costs by considering only direct materials, direct labor, and variable manufacturing overhead. In contrast, absorption costing is used by some managers and also for external reporting. Under absorption costing, product costs include direct materials, direct labor, and both fixed and variable manufacturing overhead costs. Some of the benefits to a manager from using variable costing instead of absorption costing for internal decision-making include: variable costing already has to be used when constructing a contribution margin income statement, variable costing puts greater focus on cost behaviors, fixed expenses do not get tied up in inventory under variable costing, variable costing is better suited for cost-volume-profit analysis, variable costing produces income statements that are closer to net cash flows than absorption costing, and the method ties in with standard costing and flexible budgeting more effectively. Net income under variable costing is unaffected by changes in production levels and prevents managers from manipulating net income by changing production levels. a

S-A E 169

How do differences in production and sales levels affect net income under absorption and variable costing? Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communication, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Communication, IMA: Business Economics a

Solution 169

If production equals sales in any given period, the net incomes under both absorption and variable costing will be equal. Under this scenario, fixed manufacturing overhead will not differ, because the direct cost expense under variable costing will be equal to the product cost component of fixed overhead under absorption costing. If production exceeds sales, absorption costing net income will be greater than variable costing net income. Absorption costing net income is higher because some fixed manufacturing overhead costs will be deferred in the inventory account until the products are sold, whereas under variable costing, all fixed manufacturing overhead costs will be expensed. If sales exceed production, absorption costing net income will be less than variable costing net income. Absorption costing net income is less because some fixed manufacturing overhead costs from the previous period will now be expensed when the older product is sold, whereas under variable costing, only fixed manufacturing overhead costs of the current period will be expensed.

CHAPTER 20 INCREMENTAL ANALYSIS

CHAPTER LEARNING OBJECTIVES 1. Describe management’s decision-making process and incremental analysis. Management’s decision-making process consists of (a) identifying the problem and assigning responsibility for the decision, (b) determining and evaluating possible courses of action, (c) making the decision, and (d) reviewing the results of the decision. Incremental analysis identifies financial data that change under alternative courses of action. These data are relevant to the decision because they will vary across the possible alternatives. 2. Analyze the relevant costs in accepting an order at a special price. The relevant costs are those that change if the order is accepted. The relevant information in accepting an order at a special price is the difference between the variable manufacturing costs to produce the special order and expected revenues. Any changes in fixed costs, opportunity cost, or other incremental costs or savings (such as additional shipping) should be considered. 3. Analyze the relevant costs in a make-or-buy decision. In a make-or-buy decision, the relevant costs are (a) the variable manufacturing costs that will be saved as well as changes to fixed manufacturing costs, (b) the purchase price, and (c) opportunity cost. 4. Analyze the relevant costs and revenues in determining whether to sell or process materials further. The decision rule for whether to sell or process materials further is: Process further as long as the incremental revenue from processing exceeds the incremental processing costs. 5. Analyze the relevant costs to be considered in repairing, retaining, or replacing equipment. The relevant costs to be considered in determining whether equipment should be repaired, retained, or replaced are the effects on variable costs and the cost of the new equipment. Also, any disposal value of the existing asset must be considered. 6. Analyze the relevant costs in deciding whether to eliminate an unprofitable segment or product. In deciding whether to eliminate an unprofitable segment or product, the relevant costs are the variable costs that drive the contribution margin, if any, produced by the segment or product. Opportunity cost and reduction of fixed expenses must also be considered.

20 - 2

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

TRUE-FALSE STATEMENTS 1.

An important step in management’s decision-making process is determining and evaluating possible courses of action.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

In making decisions, management ordinarily considers both financial and nonfinancial information.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

In incremental analysis, total variable costs will change under alternative courses of action while total fixed costs will remain constant.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Accountants are mainly involved in developing nonfinancial information for management’s consideration in choosing among alternatives.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Decision-making involves choosing among alternative courses of action.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Financial data are developed for a course of action on an incremental basis and then compared to data developed on a differential basis before a decision is made.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

In incremental analysis, total fixed costs remain constant under alternative courses of action.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

A special one-time order should not be accepted if the unit selling price is less than the unit variable cost.

Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

If a company has excess capacity and present markets will not be affected, it would be profitable to accept an order at a special unit selling price even though it is less than the unit variable cost to manufacture the item.

Ans: F, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

10.

A company should never accept a special order for its product for less than its regular sales price.

Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

11.

If a company is operating at less than full capacity, the incremental costs of a special order will likely include variable manufacturing costs, but not fixed costs.

Ans: T, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Incremental Analysis 12.

20 - 3

The decision rule for an incremental make-or-buy decision is: Choose the lowest cost alternative.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

13.

A decision whether to continue to make a product or buy it externally depends on the external price and the amount of variable and fixed costs that can be eliminated assuming no alternative uses of resources.

Ans: T, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

14.

An opportunity cost is the lost potential benefit that could have been obtained by following an alternative course of action.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

15.

If an incremental make or buy analysis indicates that it is cheaper to buy rather than make an item, management should always choose the lowest cost alternative.

Ans: F, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

16.

In a sell or process further decision, management should process further as long as the incremental revenues from additional processing exceed the incremental variable costs.

Ans: F, LO: 4, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

17.

It is generally better to sell now rather than process further because of the time value of money.

Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

18.

The basic decision rule in a sell or process further decision is: Process further if the incremental revenue from processing exceeds the incremental processing costs.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

19.

In an equipment replacement decision, the book value of the old equipment is considered an opportunity cost.

Ans: F, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

20.

In an equipment replacement decision, the book value of the old equipment is considered a sunk cost.

Ans: T, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

21.

In an equipment replacement decision, the salvage value of the old equipment is relevant in incremental analysis.

Ans: T, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

22.

It is better not to replace old equipment if it is not fully depreciated.

Ans: F, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

23.

From a quantitative standpoint, a segment should be eliminated if its contribution margin is less than the fixed costs that can be eliminated. .

20 - 4

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ans: T, LO: 6, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

24.

The elimination of an unprofitable product line may adversely affect the remaining product lines.

Ans: T, LO: 6, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

25.

Many incremental analysis decisions have qualitative considerations, but since they are not easily measured, they should be ignored.

Ans: F, LO: 6, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

26.

Accounting contributes to management’s decision-making process through internal reports that review the actual impact of the decision.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

27.

The process used to identify the financial data that change under alternative courses of action is called allocation of limited resources.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

28.

If a company is operating at full capacity, the incremental costs of a special order will likely include fixed manufacturing costs.

Ans: T, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

29.

The basic decision rule in a sell or process further decision is: Sell without further processing as long as the incremental revenue from processing exceeds the incremental processing costs.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

30.

In deciding on the future status of an unprofitable segment, management should recognize that net income could decrease is the unprofitable segment is eliminated.

Ans: T, LO: 6, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

MULTIPLE CHOICE QUESTIONS 31.

A major accounting contribution to the managerial decision-making process in evaluating alternative courses of action is to a. assign responsibility for the decision. b. provide relevant revenue and cost data about each course of action. c. determine the amount of money that should be spent on a project. d. decide which actions that management should consider.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

32.

Which of the following stages of the managerial decision-making process is improperly sequenced? a. Evaluate possible courses of action  Make decision. b. Assign responsibility for the decision  Identify the problem. c. Identify the problem  Determine possible courses of action. d. Assign responsibility for decision  Determine possible courses of action. .

Incremental Analysis

20 - 5

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

33.

Internal reports that review the actual impact of decisions are prepared by a. department heads. b. the controller. c. management accountants. d. factory workers.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

34.

Which of the following steps in the management decision-making process does not generally involve the managerial accountant? a. Determine possible courses of action b. Make the appropriate decision based on relevant data c. Prepare internal reports that review the impact of decisions d. None of these answers are correct.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

35.

Which is the first step in the management decision-making process? a. Determine and evaluate possible courses of action b. Review results of the decision c. Identify the problem and assign responsibility d. Make the appropriate decision based on relevant data

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

36.

Which of the following is always a relevant cost? a. Sunk cost b. Fixed cost c. Variable cost d. Opportunity cost

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

37.

Costs that will differ between alternative courses of action and influence the outcome of a decision are called a. sunk costs. b. unavoidable costs. c. relevant costs. d. product costs.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

38.

A revenue that differs between alternative courses of action and makes a difference in decision-making is called a(n) a. sales revenue. b. incremental revenue. c. unavoidable revenue. d. irrelevant revenue.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

20 - 6

39.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Alvarez Company is considering the following alternatives: Alternative A Alternative B Revenues $50,000 $60,000 Variable costs 30,000 30,000 Fixed costs 10,000 16,000 What is the incremental profit? a. $10,000 b. $0 c. $6,000 d. $4,000

Ans: D, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($60,000 - $30,000 - $16,000) – ($50,000 - $30,000 - $10,000) = $4,000 ((Alternative B: Revenues – Variable costs – Fixed costs) – (Alternative A: Revenues – Variable costs – Fixed costs) = Incremental Profit)

40.

Which of the following is an irrelevant cost? a. An avoidable cost b. An incremental cost c. A sunk cost d. An opportunity cost

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

41.

Relevant costs are always a. fixed costs. b. variable costs. c. avoidable costs. d. sunk costs.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

42.

The process of evaluating financial data that change under alternative courses of action is called a. double entry analysis. b. contribution margin analysis. c. incremental analysis. d. cost-benefit analysis.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

43.

Nonfinancial information that management might evaluate in decision-making would not include a. employee turnover. b. contribution margin. c. the environment. d. the corporate profile in the community.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

44.

The term incremental analysis is synonymous with the term a. difficult analysis. b. differential analysis. c. gross profit analysis. .

Incremental Analysis

20 - 7

d. derivative analysis. Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

45.

In incremental analysis, a. only costs are analyzed. b. only revenues are analyzed. c. both costs and revenues may be analyzed. d. both costs and revenues that stay the same between alternate courses of action will be analyzed.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

46.

Incremental analysis is most useful a. in developing relevant information for management decisions. b. in choosing between capital budgeting methods. c. in evaluating the master budget. d. as a replacement technique for variance analysis.

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

47.

The source of data to serve as inputs in incremental analysis is generated by a. market analysts. b. engineers. c. accountants. d. All of these answers are correct.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

48.

Which of the following is not a true statement? a. Incremental analysis might also be referred to as differential analysis. b. Incremental analysis is the same as CVP analysis. c. Incremental analysis is useful in making decisions. d. Incremental analysis focuses on decisions that involve a choice among alternative courses of action.

Ans: B, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

49.

Incremental analysis would not be appropriate for a. a make or buy decision. b. an allocation of limited resource decision. c. a decision regarding the elimination of an unprofitable segment. d. analysis of manufacturing variances.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

50.

Incremental analysis would be appropriate when making a decision about a. accepting of an order at a special unit selling price. b. retaining or replacing equipment. c. selling or processing further. d. All of these answers are correct.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

20 - 8

51.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Which of the following is a true statement about cost behavior in incremental analysis? 1. Fixed costs will not change between alternative courses of action. 2. Fixed costs may change between alternative courses of action. 3. Variable costs will always change between alternative courses of action. a. 1 b. 2 c. 3 d. 2 and 3

Ans: B, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

52.

A company is considering the following alternatives: Alternative 1 Alternative 2 Revenues $120,000 $120,000 Variable costs 60,000 70,000 Fixed costs 35,000 35,000 Which of the following are relevant in choosing between the alternatives? a. Variable costs b. Revenues c. Fixed costs d. Variable costs and fixed costs

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

53.

It costs Garner Company $12 of variable and $5 of fixed costs to produce one scale which normally sells for $35. A foreign wholesaler offers to purchase 3,000 scales at $15 each. Garner would incur special shipping costs of $1 per scale if the order were accepted. Garner has sufficient unused capacity to produce the 3,000 scales. If the special order is accepted, what will be the effect on net income? a. $6,000 increase b. $6,000 decrease c. $9,000 decrease d. $45,000 increase

Ans: A, LO: 2, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($12 + $1) x 3,000 = $39,000; 3,000 x $15 = $45,000; $45,000 - $39,000 = $6,000 increase ((Number of Scales x Unit Selling e Price) – ((Unit variable cost + Unit shipping cost) x number of scales) = Net Income Increase)

54.

Baden Company manufactures a product with a unit variable cost of $100 and a unit selling price of $176. Fixed manufacturing costs were $480,000 when 10,000 units were produced and sold. The company has a one-time opportunity to sell an additional 1,000 units at $140 each in a foreign market which would not affect its present sales. If the company has sufficient capacity to produce the additional units, how would acceptance of the special order affect income? a. Income would decrease by $8,000. b. Income would increase by $8,000. c. Income would increase by $140,000. d. Income would increase by $40,000. .

Incremental Analysis

20 - 9

Ans: D, LO: 2, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: (1,000 x $140) = $140,000; 1,000 x $100 = $100,000; $140,000 - $100,000 = $40,000 (Special order quantity x Special order price) – (Special order quantity x Unit variable cost) = Income Increase)

55.

In incremental analysis, a. costs are not relevant if they change between alternatives. b. all costs are relevant if they change between alternatives. c. only fixed costs are relevant. d. only variable costs are relevant.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

56.

If a plant is operating at full capacity and receives a one-time opportunity to accept an order at a special price that is below its usual selling price, then a. only variable costs are relevant. b. fixed costs are not relevant. c. the order will likely be accepted. d. the order will likely be rejected.

Ans: D, LO: 2, Bloom: C, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

57.

Miley, Inc. has excess capacity. Under what situations should the company accept a special order at a price that is less than the current selling price? a. Never b. When additional fixed costs must be incurred to accommodate the order c. When the company thinks it can use the cheaper materials without the customer’s knowledge d. When incremental revenues exceed incremental costs

Ans: D, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

58.

If a company must expand capacity to accept a special order, it is likely that there will be a. an increase in unit variable costs. b. no increase in fixed costs. c. an increase in variable and fixed costs per unit. d. an increase in fixed costs.

Ans: D, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

59.

Which of the following is true if a company can accept a special order without affecting its regular sales and is within plant capacity? a. Net income will not be affected. b. Net income will increase if the special unit selling price exceeds the unit variable costs. c. Net income will decrease. d. Additional fixed costs will likely be incurred.

Ans: B, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

60.

If a company anticipates that other sales will be affected by the acceptance of a special order, then a. the lost sales should be considered in the incremental analysis. b. the lost sales should not be considered in the incremental analysis. c. the order should not be accepted. .

20 - 10

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e d. the order will only be accepted if the plant is below capacity.

Ans: A, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

61.

Martin Company incurred the following costs for 70,000 units: Variable costs $420,000 Fixed costs 392,000 Martin has received a special order from a foreign company for 3,000 units. There is sufficient capacity to fill the order without jeopardizing regular sales. Filling the order will require spending an additional $6,300 for shipping. If Martin wants to break even on the order, what should the unit selling price be? a. $6.00 b. $8.10 c. $11.60 d. $13.70

Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $420,000 / 70,000 = $6.00; $6,300 / 3,000 = $2.10; $6.00 + $2.10 = $8.10 (Variable costs / Units = Unit variable cost; Shipping Costs / Special Order Units = Unit shipping cost; Units sales price to break-even = Unit variable cost + Unit shipping cost)

62.

Martin Company incurred the following costs for 70,000 units: Variable costs $420,000 Fixed costs 392,000 Martin has received a special order from a foreign company for 3,000 units. There is sufficient capacity to fill the order without jeopardizing regular sales. Filling the order will require spending an additional $6,300 for shipping. If Martin wants to earn $6,000 on the order, what should the unit selling price be? a. $9.70 b. $15.70 c. $8.00 d. $10.10

Ans: D, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $420,000 / 70,000 = $6.00; $6,300 / 3,000 = $2.10; $6.00 + $2.10 = $8.10; $6,000 / 3,000 = $2.00; $8.10 + 2.00 = $10.10 (Variable costs / units = Unit variable cost; Additional Shipping Costs / Special Order Quantity = Unit shipping cost; Net Income on order / Special Order Quantity = Income per Unit; Unit variable cost + Unit shipping cost + Income per unit = Unit Price)

63.

Canosta, Inc. has determined that it must expand its capacity to accept a special order. Which situation is likely? a. Unit variable costs will increase. b. Fixed costs will not be relevant. c. Both variable and fixed costs will be relevant. d. The company should accept the order.

Ans: C, LO: 2, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

64.

A company is operating at less than full capacity. It is contemplating whether a special order should be accepted. The order will not impact regular sales. If the company accepts the special order, which of the following will occur? a. Incremental costs will not change since fixed costs will stay the same. b. Net income will increase if the special unit selling price exceeds the unit variable costs. c. Net income will not change because no incremental revenues will be generated . .

Incremental Analysis

20 - 11

d. Net income will decrease if fixed and variable costs increase. Ans: B, LO: 2, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

65.

Argus Company anticipates that other sales will be affected by the acceptance of a special order. What should the company do? a. Reject the order b. Consider the opportunity cost of lost sales in the incremental analysis c. Accept the order d. Accept the order if the plant is below capacity

Ans: B, LO: 2, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

66.

It costs Lannon Fields $28 of variable costs and $12 of allocated fixed costs to produce an industrial trash can that sells for $60. A buyer in Mexico offers to purchase 3,000 units at $36 each. Lannon Fields has excess capacity and can handle the additional production. What effect will acceptance of the offer have on net income? a. Decrease $12,000 b. Increase $12,000 c. Increase $108,000 d. Increase $24,000

Ans: D, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: (3,000 x $36) – (3,000 x $28) = $24,000 increase ((Offer units x Offer price) – (Offer units x Unit variable cost) = Net Income Increase)

67.

A factory is operating at less than 100% capacity. Potential additional business will not use up the remainder of the plant capacity. Which one of the following costs will be ignored in a decision to produce and sell additional units of product? a. Variable selling expenses b. Fixed factory overhead c. Direct labor d. Contribution margin of additional units

Ans: B, LO: 2, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

68.

A company is contemplating the acceptance of a special order. The order would not affect regular sales and could be filled without exceeding plant capacity. However, a new stamping machine would have to be purchased in order to stamp the customer’s name on the product. Which of the following costs are relevant? a. total variable costs b. only variable costs c. only fixed costs d. both variable and fixed costs

Ans: D, LO: 2, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

20 - 12

69.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

A company contemplating the acceptance of a special order has the following unit costs based on 10,000 units: Direct materials Direct labor Variable overhead Fixed overhead

$ 4 10 8 6

A foreign company wants to purchase 2,000 units at a special unit price of $25. The normal selling price per unit is $40. In addition, a special stamping machine will have to be purchased for $4,000 in order to stamp the foreign company’s name on the product. The order would not affect regular sales and could be filled without exceeding plant capacity. The incremental income (loss) from accepting the order is a. $6,000. b. $2,000. c. $(6,000). d. $(2,000). Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: (2,000 x $25) – ((2,000 x ($4 + $10 + $8)) - $4,000 = $2,000 income ((Special order units x Special order price) – ((Special order units x (Direct materials per unit + Direct labor per unit + Variable overhead per unit)) – Special Stamping machine cost = Income from accepting the order)

70.

Akron Company’s unit costs based on 100,000 units are: Variable cost $75 Fixed cost 30 Akron’s normal unit selling price is $175. A special order from Astra International, an Indonesian firm, has been received for 5,000 units at $135 per unit. Akron would incur an additional variable cost of $2 per unit in shipping costs on the special order. The company has available production productive capacity to accept the order. The incremental profit (loss) from accepting the order would be a. $290,000. b. $(140,000). c. $300,000. d. $(200,000).

Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($135 - $75 - $2) x 5,000 = $290,000 (Special order price – Unit variable cost – Additional variable cost) x Special order units) – = Incremental Profit)

71.

Bertram Company’s unit manufacturing costs are: Variable Cost $60 Fixed Cost 35 A special order for 1,000 units has been received from Somair, a company in Niger. Bertram has available productive capacity to fill the order. The unit price requested by Somair is $95. Bertram’s normal unit selling price is $110. If the order is accepted, unit variable costs will increase by $3 for additional labeling and freight costs. If the special order is accepted, Bertram’s incremental profit (loss) will be a. $(15,000). b. $32,000. c. $(8,000). .

Incremental Analysis

20 - 13

d. $50,000. Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($95 - $60 - $3) x 1,000 = $32,000 (Special order price per unit - Unit variable cost – Additional labeling and freight costs per unit) x Special Order Units) = Incremental Profit

72.

Able Company’s unit manufacturing costs are: Variable Cost $50 Fixed Cost 25 A special order for 2,000 units has been received from a foreign company. The unit selling price requested is $55. The normal unit selling price is $80. If the order is accepted, unit variable costs will increase by $2 for additional freight costs. Able has sufficient capacity to accommodate the special order. If the order is accepted, incremental profit (loss) will be a. $(46,000). b. $6,000. c. $(40,000). d. $10,000.

Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($55 - $50 - $2) x 2,000 = $6,000 ((Special order unit selling price - Unit variable cost – Additional Freight costs per unit) x Special Order Units) = Incremental Profit)

73.

In the analysis concerning the acceptance or rejection of a special order, which costs are relevant? a. Variable costs only b. Fixed costs only c. Variable costs and fixed costs d. Variable costs and avoidable costs

Ans: D, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

74.

What of the following would not be relevant in a make-or-buy decision? a. Unavoidable variable costs b. Incremental fixed costs c. Opportunity costs d. Avoidable fixed cost

Ans: A, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

75.

Which of the following is not a qualitative factor to be considered in a make-or-buy decision? a. Possible lost jobs from buying externally b. Supplier’s ability to satisfy quality standards c. Incremental benefit from buying externally d. Supplier’s ability to meet production schedule

Ans: C, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

20 - 14

76.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Clemente Inc. incurs the following costs to produce 10,000 units of a subcomponent: Direct materials Direct labor Variable overhead Fixed overhead

$8,400 11,250 12,600 16,200

An outside supplier has offered to sell Clemente the subcomponent for $2.85 a unit. None of the fixed costs are avoidable. If Clemente accepts the offer, by how much will net income increase (decrease)? a. $3,750 b. $19,950 c. $(8,850) d. $(2,850) Ans: A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($8,400 + $11,250 + $12,600) - ($2.85 x 10,000) = $3,750 ((Direct Materials + Direct Labor + Variable Overhead) – (Purchase price x Units) = Net Income Increase)

77.

Clemente Inc. incurs the following costs to produce 10,000 units of a subcomponent: Direct materials Direct labor Variable overhead Fixed overhead

$8,400 11,250 12,600 16,200

An outside supplier has offered to sell Clemente the subcomponent for $2.85 a unit. If Clemente could avoid $3,000 of fixed overhead by accepting the offer, net income would increase (decrease) by a. $750. b. $(5,850). c. $(3,150). d. $6,750. Ans: D, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($8,400 + $11,250 + $12,600 + $16,200) - ($2.85 x 10,000 + $13,200) = $6,750 ((Direct Materials + Direct Labor + Variable Overhead + Fixed Overhead) - (Purchase price x Units + Unavoidable Fixed Overhead) = Net Income Increase)

78.

Clemente Inc. incurs the following costs to produce 10,000 units of a subcomponent: Direct materials Direct labor Variable overhead Fixed overhead

$8,400 11,250 12,600 16,200

An outside supplier has offered to sell Clemente the subcomponent for $2.85 a unit. If Clemente accepts the offer, it could use the production capacity to produce another product that would generate additional income of $3,600. None of the fixed costs are avoidable. The increase (decrease) in net income from accepting the offer would be a. $150. b. $7,350. c. $(150). d. $(3,600). .

Incremental Analysis

20 - 15

Ans: B, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($8,400 + $11,250 + $12,600 + $3,600) - ($2.85 x 10,000) = $7,350 (Direct Materials + Direct Labor + Variable Overhead + Opportunity Cost) - (Purchase price x Units) = Net Income Increase)

79.

Orion Co. produces 5,000 units of part Alpha-E for use in one its products. The following costs are incurred at that level of production: Direct materials $ 55,000 Direct labor 160,000 Variable overhead 75,000 Fixed overhead 175,000 If Orion buys the part from an outside supplier, $40,000 of the fixed overhead is avoidable. The outside supplier has offered to sell the units at $64 per unit. The increase (decrease) in net income from purchasing the part from the outside supplier would be a. $10,000 increase b. $10,000 decrease c. $50,000 increase d. $55,000 decrease

Ans: D, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($55,000 + $160,000 + $75,000 + $40,000) – (5,000 x $64) = $10,000 increase (Direct Materials + Direct Labor + Variable Overhead + Avoidable Cost) - (Purchase price x Units) = Net Income Increase)

80.

Ortiz Co. produces 5,000 units of part A12E. The following costs were incurred at that level of production: Direct materials $ 55,000 Direct labor 160,000 Variable overhead 75,000 Fixed overhead 175,000 If Ortiz buys the part from an outside supplier, $40,000 of the fixed overhead is avoidable. If the outside supplier offers a unit price of $68, net income will increase (decrease) by a. $(10,000). b. $125,000. c. $(50,000). d. $85,000.

Ans: A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($55,000 + $160,000 + $75,000 + $175,000) – (($68 x 5,000) + ($175,000 - $40,000)) = $(10,000) ((Direct Materials + Direct Labor + Variable Overhead + Fixed Overhead) - ((Purchase Price x Units) + (Fixed Overhead - Avoidable Fixed Overhead)) = Net Income increase (decrease))

81.

In a make-or-buy decision, which costs are considered relevant? a. Unavoidable variable costs, incremental fixed costs, and sunk costs b. Incremental variable costs, unavoidable fixed costs, and opportunity costs c. Incremental variable costs, incremental fixed costs, and sunk costs d. Incremental variable costs, incremental fixed costs, and opportunity costs

Ans: D, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

20 - 16 82.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e Billings Company incurred the following costs to produce 100,000 units: Variable costs Fixed costs

$600,000 900,000

An outside supplier has offered to make the item at $4.50 a unit. If the decision is made to purchase the item outside, current production facilities could be leased to another company for $165,000. None of the fixed costs are avoidable. The net increase (decrease) in the net income as a result of accepting the supplier’s offer is a. $285,000. b. $315,000. c. $(15,000). d. $840,000. Ans: B, LO: 3, Bloom: AP, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($600,000 + $165,000) – ($4.50 x 100,000) = $315,000 ((Variable Costs + Opportunity Cost) - (Purchase Price x Units) = Net Income increase (decrease))

83.

Sandusky Inc. incurred the following costs to produce 100,000 units: Variable costs Fixed costs

$600,000 900,000

An outside supplier is interested in producing the item for Sandusky. If the item is produced outside, Sandusky could use the released production facilities to make another item that would generate $150,000 of net income. None of the fixed costs are avoidable. At what unit price would Sandusky accept the outside supplier’s offer if Sandusky wanted to increase net income by $120,000? a. $8.70 b. $6.30 c. $7.50 d. $5.70 Ans: B, LO: 3, Bloom: AN, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $600,000 + $150,000 = $750,000; $750,000 - $120,000 = $630,000; $630,000 ÷ 100,000 = $6.30 ((Variable Costs + Opportunity Cost) = Total cost to make; Total cost to make - Incremental net income to buy = Total cost to buy; Total cost to buy ÷ units = Acceptable unit purchase price)

84.

Which statement is true concerning the make-or-buy decision rule? a. The company should buy if the cost of buying is less than the cost of producing. b. The company should buy if the incremental revenue exceeds the incremental costs. c. The company should buy as long as total revenue exceeds present revenues. d. The company should buy assuming no additional fixed costs are incurred.

Ans: A, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

85.

Which one of the following does not affect a make-or-buy decision? a. Variable manufacturing costs b. Opportunity costs c. Incremental revenue d. Direct labor costs

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Incremental Analysis 86.

20 - 17

During 2021, it costs Westa, Inc. $18 per unit to produce part T5. During 2022, the unit cost has increased to $21 per unit. In 2022, Southside Company has offered to provide Part T5 for $16 per unit to Westa. None of the fixed manufacturing overhead costs are avoidable. Which of the following statements is true with regard to this make-or-buy decision? a. Differential costs are $5 per unit. b. Incremental costs are $2 per unit. c. Net relevant costs are $2 per unit. d. Incremental revenues are $3 per unit.

Ans: A, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $21 - $16 = $5 (Increased cost per unit – Offer price per unit = Differential cost per unit)

87.

Chapman Company manufactures widgets. Embree Company has approached Chapman with a proposal to sell the company widgets at a total selling price of $125,000 for 100,000 units. Chapman has the following cost associated the production of 100,000 widgets: Direct materials Direct labor Manufacturing overhead Total

$ 46,500 43,500 60,000 $150,000

Manufacturing overhead includes $24,000 of costs that will be eliminated if the widgets are no longer produced by Chapman. What is the incremental cost or savings if the widgets are bought instead of made? a. $25,000 incremental savings b. $11,000 incremental cost c. $11,000 incremental savings d. $25,000 incremental cost Ans: B, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $125,000 – ($46,500 + $43,500 + $24,000) = $11,000 incremental cost (Proposal Price – (Direct materials + Direct labor + Manufacturing Overhead Eliminated) = Incremental Cost)

88.

The cost to produce Part A was $20 per unit in 2021. In 2022, it increased to $23 per unit. In 2022, Supplier Company has offered to supply Part A for $18 per unit. No fixed manufacturing overhead costs are avoidable. For the make-or-buy decision, a. incremental revenues are $5 per unit. b. incremental costs are $3 per unit. c. net relevant costs are $3 per unit. d. differential costs are $5 per unit.

Ans: D, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $23 - $18 = $5 differential costs (Increased cost per unit – Supplier Offer price per unit = Differential cost per unit)

89.

Max Company uses 20,000 units of Part A in producing its products. A supplier offers to make Part A for $7. Max Company’s relevant costs of $8 per unit to manufacture Part A. If Max has excess capacity, the opportunity cost of not buying Part A from the supplier is a. $0. b. $20,000. c. $140,000. d. $160,000.

Ans: B, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($8 - $7) x 20,000 = $20,000 ((Relevant unit cost to manufacture Part A – Supplier Offer price per unit) x Units = Opportunity cost of not buying Part A from the supplier)

20 - 18

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

90.

Truckel, Inc. currently manufactures a wicket which is part of its main product. Costs per unit are as follows: Direct materials and direct labor $11 Variable overhead 5 Fixed overhead 8 Total $24 They are considering the possibility of purchasing this product from an outside vendor. Under this alternative, they estimated that 75% of the fixed overhead would be avoidable. What is the relevant unit cost of the wicket? a. $36 b. $24 c. $19 d. $16

Ans: B, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $11 + $5 + $8 = $24 (Direct materials + Direct labor + Variable overhead + Fixed Manufacturing overhead) = Relevant Cost of the Wicket)

91.

Truckel, Inc. currently manufactures a wicket which is part of its main product. Costs per unit are as follows: Direct materials and direct labor $11 Variable overhead 5 Fixed overhead 8 Total $24 Saran Company has contacted Truckel with an offer to sell it 5,000 wickets for $18 each. Of Truckel’s $8 per unit fixed cost, $5 per unit is unavoidable. Should Truckel make or buy the wickets and why? a. Buy because the cost savings is $15,000 b. Buy because the cost savings is $5,000 c. Make because the cost savings is $10,000 d. Make because the cost savings is $5,000

Ans: B, LO: 3, Bloom: AN, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $18 – ($16 + $3) x 5,000 = $5,000 buy (Offer sale price – (Unit variable cost + (Unit fixed cost – Unavoidable Unit fixed cost)) x Units) = Savings (Buy)

92.

Galley Industries can produce 100 units of a necessary component part with the following costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead

$20,000 9,000 21,000 8,000

If Galley Industries purchases the component externally, $2,000 of the fixed costs can be avoided. Below what external price for the 100 units would Galley choose to buy instead of make the units? a. $50,000 b. $56,000 c. $44,000 d. $52,000 Ans: D, LO: 3, Bloom: AN, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $20,000 + $9,000 + $21,000 + $2,000 = $52,000

Incremental Analysis

20 - 19

(Direct Materials + Direct Labor + Variable Overhead + Fixed Costs Avoided = External Price to Buy instead of Make)

93.

Which of the following decisions will involve no incremental revenues? a. Make or buy decision b. Drop a product line c. Accept a special order d. Additional processing decision

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

94.

An opportunity cost a. should be initially recorded as an asset. b. is the cost of a new product proposal. c. lost potential benefit that could have been obtained by following an alternative course of action. d. is classified as manufacturing overhead.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

95.

Opportunity cost is considered in decisions involving a. budgeting. b. financial accounting. c. CVP analysis. d. resources that have alternative uses.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

96.

The opportunity cost of an alternate course of action that is relevant to a make-or-buy decision is a. subtracted from the “Make” costs. b. added to the “Make” costs. c. added to the “Buy” costs. d. None of these answers are correct.

Ans: B, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

97.

Opportunity cost is usually a. a standard cost. b. a potential benefit. c. a sunk cost. d. included as part of cost of goods sold.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

98.

Each of the following is a disadvantage of buying rather than making a component of a company’s product except that a. quality control specifications may not be met. b. the outside supplier could increase prices significantly in the future. c. profitable product lines may be dropped. d. the supplier may not deliver on time.

Ans: C, LO: 3, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

20 - 20

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

99.

Tex’s Manufacturing Company can make 100 units of a necessary component part with the following costs: Direct Materials $120,000 Direct Labor 25,000 Variable Overhead 45,000 Fixed Overhead 30,000 If Tex purchases the component externally, $20,000 of the fixed costs will be avoided. At what external price for the 100 units is the company indifferent between making or buying the units? a. $190,000 b. $200,000 c. $210,000 d. $220,000

Ans: C, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $120,000 + $25,000 + $45,000 + $20,000 = $210,000 (Direct Materials + Direct Labor + Variable Overhead + Fixed Costs Avoided = External price that is indifferent between making or buying)

100.

Tex’s Manufacturing Company can make 100 units of a necessary component part with the following costs: Direct Materials $120,000 Direct Labor 25,000 Variable Overhead 45,000 Fixed Overhead 30,000 If Tex can purchase the component externally for $190,000 and only $5,000 of the fixed costs can be avoided, what is the correct make-or-buy decision and why? a. Buy and save $5,000 b. Make and save $5,000 c. Make and save $15,000 d. Buy and save $15,000

Ans: A, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $190,000 – ($120,000 + $25,000 + $45,000 + $5,000) = $5,000 (Buy and save) (External Purchase price – (Direct Materials + Direct Labor + Variable Overhead + Fixed Costs can be avoided) = Buy and Save)

101.

Bell’s Shop can make 1,000 units of a necessary component with the following costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead

$24,000 6,000 3,000 ?

The company can purchase the 1,000 units externally for $39,000. The unavoidable fixed costs are $2,000 if the units are purchased externally. An analysis shows that at this external price, the company is indifferent between making or buying the part. What are the fixed overhead costs of making the component? a. $8,000 b. $6,000 c. $4,000 d. Cannot be determined. Ans: A, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $39,000 - $24,000 - $6,000 - $3,000 = $6,000; $6,000 + $2,000 = $8,000 (External purchase price – Direct Materials – Direct Labor – Variable Overhead + Fixed costs unavoidable = Fixed overhead costs of making the component)

Incremental Analysis 102.

20 - 21

Ruth Company produces 1,000 units of a necessary component with the following costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead

$34,000 15,000 9,000 10,000

Ruth Company could avoid $6,000 in fixed overhead costs if it acquires the components externally. If cost minimization is the major consideration and the company would prefer to buy the components, what is the maximum external price that Ruth Company would accept to acquire the 1,000 units externally? a. $58,000 b. $64,000 c. $59,000 d. $62,000 Ans: B, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $34,000 + $15,000 + $9,000 + $6,000 = $64,000 (Direct Materials + Direct Labor + Variable Overhead + Avoidable Fixed Overhead Costs = Maximum External Price)

103.

Ruth Company produces 1,000 units of a necessary component with the following costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead

$27,000 16,000 4,000 7,000

Ruth Company‘s fixed overhead costs cannot be reduced, but another product could be made that would increase profit contribution by $8,000 if the components were acquired externally. If cost minimization is the major consideration and the company would prefer to buy the components, what is the maximum external price that Ruth Company would be willing to accept to acquire the 1,000 units externally? a. $46,000 b. $58,000 c. $51,000 d. $55,000 Ans: D, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $27,000 + $16,000 + $4,000 + $8,000 = $55,000 (Direct Materials + Direct Labor + Variable Overhead + Increased Profit Contribution = Maximum External Price)

104.

Fornelli, Inc. can produce 100 units of a component part with the following costs: Direct Materials $15,000 Direct Labor 6,500 Variable Overhead 16,000 Fixed Overhead 11,000 If Fornelli, Inc. purchases the units externally for $40,000 and none of its fixed costs are avoidable, by what amount will its total costs change? a. An increase of $40,000 b. An increase of $2,500 c. An increase of $8,500 d. A decrease of $11,000

Ans: B, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

20 - 22

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution: $40,000 – ($15,000 + $6,500 + $16,000) = $2,500 increase (External purchase price – (Direct Materials + Direct Labor + Variable Overhead) = Increase in Cost)

105.

Fornelli, Inc. can produce 100 units of a component part with the following costs: Direct Materials $15,000 Direct Labor 6,500 Variable Overhead 16,000 Fixed Overhead 11,000 If Fornelli, Inc. can purchase the component part externally for $44,000 and only $4,000 of the fixed costs can be avoided, what is the correct make-or-buy decision? a. Make and save $500 b. Buy and save $500 c. Make and save $2,500 d. Buy and save $6,500

Ans: C, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $44,000 – ($15,000 + $6,500 + $16,000 + $4,000) = $2,500 (Make and save) (External purchase price – (Direct Materials + Direct Labor + Variable Overhead + Fixed Costs Avoided) = Make and Save Dollars)

106.

Crigui Tech produces 60,000 iPhone adapters with the following costs: Direct Materials $13,000 Direct Labor 15,000 Variable Overhead 3,000 Fixed Overhead 7,000 Crigui could avoid $4,000 in fixed overhead costs if it acquires the adapters externally. If cost minimization is the major consideration and the company would prefer to buy the 60,000 units externally, what is the maximum external price that Crigui would expect to pay for the units? a. $34,000 b. $31,000 c. $38,000 d. $35,000

Ans: D, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $13,000 + $15,000 + $3,000 + $4,000) = $35,000 (Direct Materials + Direct Labor + Variable Overhead + Avoided Fixed Overhead Costs = Maximum External Price)

107.

Crigui Tech produces 60,000 iPhone adapters with the following costs: Direct Materials $13,000 Direct Labor 15,000 Variable Overhead 3,000 Fixed Overhead 7,000 None of Crigui’s fixed overhead costs can be reduced, but another product could be made that would increase profit by $4,000 if the adapters were acquired externally. If cost minimization is the major consideration and the company would prefer to buy the adapters, what is the maximum external price that Crigui would be willing to accept to acquire the 60,000 units externally? a. $38,000 b. $34,000 c. $35,000 d. $42,000

Incremental Analysis

20 - 23

(Direct Materials + Direct Labor + Variable Overhead + Increase in Profit Contribution = Maximum External Price)

108.

Tasty Bites produces corn chips. The cost of one batch is as follows: Direct materials $18 Direct labor 13 Variable overhead 11 Fixed overhead 14 An outside supplier has offered to produce the corn chips for $30 per batch. What will Tasty Bites’ cost savings be if the company accepts the offer and no fixed costs are avoidable? a. $15 per batch b. $12 per batch c. $26 per batch d. $1 per batch

Ans: B, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $30 – ($18 + $13 + $11) = $12 per batch (Outside Offer Price – (Direct materials + Direct Labor + Variable Overhead) = Savings)

109.

NF Toy Company is unsure of whether to sell its product assembled or unassembled. The unit cost of the unassembled product is $24 and NF Toy would sell it for $52. The cost to assemble the product is estimated at $17 per unit and the company believes the market would support a price of $68 on the assembled unit. What decision should NF Toy make and why? a. Sell before assembly because the company will be better off by $1 per unit. b. Sell before assembly because the company will be better off by $16 per unit. c. Process further because the company will be better off by $23 per unit. d. Process further because the company will be better off by $11 per unit.

Ans: A, LO: 4, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $52 - $24 = $28; $68 - $24 - $17 = $27; $28 - $27 = $1 (Sell before assembly) ((Unassembled Selling Price – Cost of the unassembled product) – (Assembled Selling Price – Cost of assembled product) = Sell before assembly)

110.

Moreland Clean Company spent $8,000 to produce Product 89, which can be sold as is for $10,000, or processed further incurring additional costs of $3,000 and then be sold for $14,000. Which amounts are relevant to the decision about Product 89? a. $8,000, $10,000, and $14,000 b. $8,000, $3,000, and $14,000 c. $10,000, $3,000, and $14,000 d. $8,000, $10,000, $3,000 and $14,000

Ans: C, LO: 4, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

111.

Pratt Company has inventory on hand that cost $15,000. Its scrap value is $20,000. The inventory could be sold for $50,000 if manufactured further at an additional cost of $15,000. What should Pratt do? a. Sell the inventory for $20,000 scrap value b. Dispose of the inventory to avoid any further decline in value c. Hold the inventory at its $15,000 cost d. Manufacture further and sell it for $50,000

Ans: D, LO: 4, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($50,000 - $20,000) - $15,000 = $15,000 (Processed Sales Revenue - Unprocessed Sales Revenue) - Incremental Processing Costs = Incremental Profit)

20 - 24

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

112.

New Age Makeup produces facial moisturizer. Each bottle of moisturizer costs $10 to produce and can be sold for $13. The bottles can be sold as is, or processed further into sunscreen at an additional cost of $14 each. New Age Makeup could sell the sunscreen for $23 per bottle. What decision should the company make and why? a. Moisturizer should be processed into sunscreen because its unit profit is $9. b. Moisturize should not be processed into sunscreen because incremental costs exceed incremental revenue. c. Moisturize should not be processed into sunscreen because unit profit decreases by $1. d. Moisturizer should be processed into sunscreen because unit profit increases by $3.

Ans: B, LO: 4, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution; ($23 - $13) - $14 = $(4) (Processed Unit Selling Price - Unprocessed Unit Selling Price) - Incremental Unit Processing Costs = Incremental Unit Profit (Loss)

113.

Janssen Company has inventory on hand with a cost of $24,000. Its scrap value is $32,000. The inventory could be sold for $80,000 if processed further at an additional cost of $24,000. What should Janssen do? a. Sell the inventory for $32,000 scrap value b. Dispose of the inventory to avoid any further decline in value c. Hold the inventory at its $24,000 cost d. Manufacture further and sell it for $80,000.

Ans: D, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($80,000 - $32,000) - $24,000 = $24,000 (Processed Sales Revenue - Unprocessed Sales Revenue) - Incremental Processing Costs = Incremental Profit (Loss)

114.

A company has a process that results in 24,000 pounds of Product A that can be sold for $8 per pound. An alternative would be to process Product A further at a cost of $160,000 and then sell it for $14 per pound. Should management sell Product A now or should Product A be processed further and then sold? What is the effect of the action? a. Process further because the company will be better off by $16,000. b. Sell now because the company will be better off by $16,000. c. Process further because the company will be better off by $144,000. d. Sell now because the company will be better off by $160,000.

Ans: B, LO: 4, Bloom: AN, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ((24,000 x $14) - (24,000 x $8)) - $160,000 = $(16,000) (Processed Sales Revenue - Unprocessed Sales Revenue) - Incremental Processing Costs = Incremental Profit (Loss)

115.

The decision rule on whether to sell or process further a. varies from situation to situation. b. is process further as long as total revenue exceeds present revenues. c. is process further if incremental revenues from such processing exceed incremental fixed costs. d. is process further if incremental revenues from such processing exceed the incremental processing costs.

Ans: D, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Incremental Analysis 116.

20 - 25

Eddy Company is starting business and is unsure of whether to sell its product assembled or unassembled. The unit cost of the unassembled product is $60 and Eddy Company would sell it for $135. The cost to assemble the product is estimated at $27 per unit and Eddy Company believes the market would support a price of $174 on the assembled unit. What is the correct decision using the sell or process further decision rule and why? a. Sell before assembly because profits will be greater by $27 per unit. b. Sell before assembly because profits will be greater by $39 per unit. c. Process further because profits will be greater by $39 per unit. d. Process further because profits will be greater by $12 per unit.

Ans: D, LO: 4, Bloom: AN, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($174 - $135) - $27 = $12 (Processed Unit Selling Price - Unprocessed Unit Selling Price) - Incremental Unit Processing Costs = Incremental Unit Profit (Loss)

117.

Mallory Company manufactures widgets. Bowden Company has approached Mallory with a proposal to sell the company widgets at a price of $82,000 for 100,000 units. The following costs are associated with Mallory’s production process when 100,000 units are produced: Direct material Direct labor Manufacturing overhead Total

$ 31,000 29,000 40,000 $100,000

Manufacturing overhead of $16,000 of costs will be eliminated if the components are no longer produced by Mallory. What is the incremental cost or savings to Mallory if the widgets are bought instead of made? a. $18,000 incremental savings b. $6,000 incremental cost c. $2,000 incremental savings d. $18,000 incremental cost Ans: B, LO: 4, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($31,000 + $29,000 + $16,000) = $76,000; $82,000 - $76,000 = 6,000 incremental cost (Proposed purchase price - (Direct material + Direct Labor + Manufacturing cost that can be eliminated) = Incremental Cost)

118.

The focus of a sell or process further decision is on a. incremental revenue. b. incremental cost. c. both incremental revenue and incremental cost. d. neither incremental revenue nor incremental cost.

Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

20 - 26 119.

Marcus Company gathered the following data about the three products that it produces: Present Sales Revenue $12,000 14,000 11,000

Product A B C

Estimated Additional Processing Costs $8,000 5,000 3,000

Sales Revenue if Processed Further $21,000 18,000 16,000

Which of the products should not be processed further? a. Product A b. Product B c. Product C d. Products A and C Ans: B, LO: 4, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: A: ($21,000 – $12,000) – $8,000 = $1,000; B: ($18,000 – $14,000) - $5,000 = $(1,000) (do not process further); ($16,000 – $11,000) – $3,000 = $2,000 (Processed Sales Revenue - Unprocessed Sales Revenue) - Incremental Processing Costs = Incremental Profit (Loss)

120.

Serene Dairy has four product lines: sour cream, ice cream, yogurt, and butter. The total cost of producing the milk base for the products is $45,000, which has been allocated based on the gallons of milk base used by each product. Results for July are as follows: Sour Cream Units sold 2,000 Revenue $10,000 Variable departmental costs 6,000 Fixed costs 5,000 Net income (loss) $ (1,000)

Ice Cream 500 $20,000 13,000 2,000 $ 5,000

Yogurt 400 $10,000 4,200 3,000 $ 2,800

Butter 2,000 $20,000 4,800 7,000 $ 8,200

Total 4,900 $60,000 28,000 17,000 $15,000

What are the total joint costs of the products? a. $28,000 b. $17,000 c. $45,000 d. $15,000 Ans: C, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $28,000 + $17,000 = $45,000 (Total Variable departmental costs + Fixed Costs = Total joint costs)

121.

Which of the following is not relevant in a sell or process further decision? a. Revenues b. Variable costs c. Opportunity costs d. Joint costs

Ans: D, LO: 4, Bloom: K, Difficulty: Moderate, Min: 5, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

122.

All of the following are relevant to the sell or process further decision except a. costs incurred beyond the split-off point. b. revenues at the split-off point. c. costs incurred before the split-off point. d. revenues beyond the split-off point.

Ans: C, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Incremental Analysis 123.

20 - 27

In a sell or process further decision, costs incurred before the split-off point are considered a. sunk costs. b. incremental costs. c. relevant costs. d. opportunity costs.

Ans: A, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

124.

Which of the following terms are synonymous in the context of a sell or process further decision? a. Avoidable costs and irrelevant costs b. Unavoidable costs and incremental costs c. Sunk costs and relevant costs d. Joint costs and sunk costs

Ans: D, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

125.

Paul Bunyon Lumber Co. produces several products that can be sold at the split-off point or processed further and then sold. The following results are from a recent period: Sales Revenue Additional Sales Revenue after Product at Split-off Variable Costs Further Processing Green lumber $159,600 $24,000 $178,000 Rough lumber 124,000 28,200 173,600 Sawdust 102,000 19,600 130,000 The additional profit that would result from processing rough lumber further is a. $21,400. b. $49,600. c. $145,400. d. $95,800.

Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($173,600 – $124,000) - $28,200 = $21,400 (Rough lumber: (Processed Sales Revenue - Unprocessed Sales Revenue) - Incremental Processing Costs = Incremental Profit (Loss))

126. Paul Bunyon Lumber Co. produces several products that can be sold at the split-off point or processed further and then sold. The following results are from a recent period: Sales Revenue at Split-off $159,600 124,000 102,000

Product Green lumber Rough lumber Sawdust

Additional Variable Costs $24,000 28,200 19,600

Sales Revenue after Further Processing $178,000 173,600 130,000

Which of the company’s products should be processed further? a. Green lumber and rough lumber b. Green lumber and sawdust c. Rough lumber and sawdust d. All three products Ans: C, LO: 4, Bloom: K, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: Rough Lumber: ($173,600 – $124,000) - $28,200 = $21,400 (Yes); Green Lumber: ($178,000 – $159,600) - $24,000 = ($5,600) (No); Sawdust: ($130,000 – $102,000) - $19,600 = $8,400 (Yes) (Processed Sales Revenue - Unprocessed Sales Revenue) - Incremental Processing Costs = Incremental Profit (Loss)

20 - 28

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

127. Paul Bunyon Lumber Co. produces several products that can be sold at the split-off point or processed further and then sold. The following results are from a recent period: Sales Revenue at Split-off $159,600 124,000 102,000

Product Green lumber Rough lumber Sawdust

Additional Variable Costs $24,000 28,200 19,600

Sales Revenue after Further Processing $178,000 173,600 130,000

What is the increase in profit if the products, which are profitable to process further, are processed further? a. $24,200 b. $29,800 c. $96,000 d. $255,800 Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: Rough Lumber: ($173,600 – $124,000) - $28,200 = $21,400 (Yes); Sawdust: ($130,000 – $102,000) - $19,600 = $8,400 (Yes); Green Lumber: ($178,000 - $159,600) - $24,000 = $(5,600) (No). $21,400 + $8,400 = $29,800 (Processed Sales Revenue - Unprocessed Sales Revenue) - Incremental Processing Costs = Incremental Profit (Loss) (Rough Lumber additional profit + Sawdust additional profit = Total additional profit)

128.

The point in the production process when joint products are readily identifiable is the a. separation point. b. split-off point. c. common point. d. break-even point.

Ans: B, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

129.

The costs incurred prior to the split-off point are referred to as a. separable costs. b. split-off costs. c. joint product costs. d. joint costs.

Ans: D, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

130.

Hi-Tech Inc. has several outdated computers that cost a total of $17,800 and could be sold as scrap for $4,600. They could be updated for an additional $2,400 and sold. If Hi-Tech updates the computers and sells them, net income will increase by $9,000. At what price were the updated versions sold? a. $26,800 b. $13,200 c. $13,600 d. $16,000

Ans: D, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $4,600 + $9,000 + $2,400 = $16,000 Scrap Value + Net Income Increase + Additional Cost to be updated = Updated version Price

Incremental Analysis 131.

20 - 29

Hi-Tech Inc. has several outdated computers that cost a total of $17,800 and could be sold as scrap for $4,600. They could be updated for an additional $2,400 and sold. If Hi-Tech updates the computers and sells them, net income will increase by $9,000. What amount is considered sunk costs? a. $2,400 b. $9,000 c. $17,800 d. $20,200

Ans: C, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

132.

When deciding whether to replace old equipment with new equipment, the overriding consideration is the a. book value of the old equipment. b. cost of replacing the old equipment. c. salvage value of the old equipment. d. difference between future cost savings and the new equipment’s costs.

Ans: D, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

133.

In an equipment replacement decision, the cost of the old equipment is a(n) a. incremental cost. b. sunk cost. c. relevant cost. d. opportunity cost.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

134. Chung Inc. is considering the replacement of a piece of equipment with a newer model. The following data has been collected: Old Equipment New Equipment Purchase price $225,000 $375,000 Accumulated depreciation 90,000 -0Annual operating costs 300,000 240,000 If the old equipment is replaced now, it can be sold for $60,000. Both the old equipment’s remaining useful life and the new equipment’s useful life is 5 years and both have no end-oflife salvage value. Which of the following amounts is irrelevant to the replacement decision? a. $375,000 b. $135,000 c. $240,000 d. $60,000 Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $225,000 – $90,000 = $135,000 (Old Equipment: Purchase Price - Accumulated Depreciation = Amount Irrelevant to the replacement decision)

20 - 30 135.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e Chung Inc. is considering the replacement of a piece of equipment with a newer model. The following data has been collected: Old Equipment New Equipment Purchase price $225,000 $375,000 Accumulated depreciation 90,000 -0Annual operating costs 300,000 240,000 If the old equipment is replaced now, it can be sold for $60,000. Both the old equipment’s remaining useful life and the new equipment’s useful life is 5 years. Each of the assets has a $0 end-of-life salvage value. What is the relevant cost related to the new equipment? a. $375,000 b. $315,000 c. $150,000 d. $75,000

Ans: A, LO: 5, Bloom: AP, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $375,000

136.

Chung Inc. is considering the replacement of a piece of equipment with a newer model. The following data has been collected: Old Equipment New Equipment Purchase price $225,000 $375,000 Accumulated depreciation 90,000 -0Annual operating costs 300,000 240,000 If the old equipment is replaced now, it can be sold for $60,000. Both the old equipment’s remaining useful life and the new equipment’s useful life is 5 years. Each of the assets has a $0 end-of-life salvage value. The net advantage (disadvantage) of replacing the old equipment with the new equipment is a. $60,000 b. $(15,000) c. $(75,000) d. $90,000

Ans: B, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: (($300,000 – $240,000) × 5) + $60,000 - $375,000 = $(15,000) (Annual cost savings x 5) + Proceeds from old equipment – Cost of new equipment = Net advantage (disadvantage)

137.

Which of the following is relevant information in a decision whether old equipment presently being used should be replaced by new equipment? a. The cost of the old equipment b. The present-day salvage value of the old equipment c. The book value of the old equipment d. The accumulated depreciation of the old equipment

Ans: B, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Incremental Analysis 138.

20 - 31

A company is deciding whether or not to replace some old equipment with new equipment. Which of the following is not considered in the incremental analysis? a. Annual operating cost of the new equipment b. Annual operating cost of the old equipment c. Cost of the new equipment d. Book value of the old equipment

Ans: D, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

139.

Is a trade-in allowance on old equipment relevant to a decision to retain or replace equipment? Why or why not? a. It is not relevant since it does not differ across the two options. b. It is not relevant because it relates to the net book value of the old equipment. c. It is not relevant since it is a sunk cost. d. It is relevant since it differs across the two options.

Ans: D, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

140.

A company decided to replace an old machine with a new machine. Which of the following is considered a relevant cost? a. The book value of the old equipment b. Depreciation expense of the old equipment c. The loss on disposal of the old equipment d. The current disposal proceeds of the old equipment

Ans: D, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

141.

The cash disposal proceeds of the old equipment is considered to be a (an) a. irrelevant cost. b. avoidable cost. c. sunk cost. d. relevant cost.

Ans: D, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

142.

Which of the following is not relevant information in a decision whether old equipment presently being used should be replaced by new equipment? a. The cash price of the new equipment b. The present-day salvage value of the old equipment c. The book value of the old equipment d. The cost savings if the new equipment is purchased

Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

143.

In an equipment replacement decision, the book value of old equipment is considered to be a(n) a. relevant cost. b. opportunity cost. c. sunk cost. d. cost that can be changed by a present or future decision.

Ans: C, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

20 - 32 144.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e A company is deciding on whether to replace some old equipment with new equipment. Which of the following is not a relevant cost for incremental analysis? a. Annual operating cost of the new equipment b. Annual operating cost of the old equipment c. Cost of the new equipment d. Accumulated depreciation on the old equipment

Ans: D, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

145.

A company is considering replacing old equipment with new equipment. Which of the following is a relevant cost for incremental analysis? a. Annual depreciation charge on the old equipment b. Book value of the old equipment c. Estimated annual depreciation of the new equipment d. Cost of the new equipment

Ans: D, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

146.

In a retain or replace equipment decision, a trade-in allowance available on old equipment a. is an irrelevant sunk cost. b. is relevant because it will not be realized if the old equipment is retained. c. is not relevant to the decision. d. is not allowable under GAAP.

Ans: B, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

147.

Sala Co. is contemplating the replacement of an old machine with a new one. The following information has been gathered: Old Machine Price $300,000 Accumulated Depreciation 90,000 Remaining useful life 10 years Useful life -0Annual operating costs $240,000

New Machine $600,000 -0-010 years $180,600

If the old machine is replaced, it can be sold for $24,000. Which of the following amounts is a sunk cost? a. $240,000 b. $180,600 c. $600,000 d. $210,000 Ans: D, LO: 5, Bloom: C, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $300,000- $90,000 = $210,000 (Old Machine: Price – Accumulated Depreciation)

Incremental Analysis 148.

20 - 33

New Machine $600,000 -0-010 years $180,600

If the old machine is replaced, it can be sold for $24,000. Which of the following amounts is relevant to the replacement decision? a. $210,000 b. $300,000 c. $59,400 d. $90,000 Ans: C, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $240,000 - $180,600 = $59,400 (Old Machine: Annual operating costs – New Machine: Annual operating costs = Amounts relevant to the replacement decision)

149.

New Machine $600,000 -0-010 years $180,600

If the old machine is replaced, it can be sold for $24,000. The net advantage (disadvantage) of replacing the old machine is a. $18,000 b. $24,000 c. $(6,000) d. $(60,000) Ans: A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: ($600,000) + [($240,000 – $180,600) × 10] + $24,000 = $18,000 (New Machine: Price + [(Old Machine: Annual operating costs – New Machine: Annual operating costs) x 10] + Old Machine: salvage value = Net advantage of replacing the old machine

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

150.

Abel Company produces three versions of baseball bats: wood, aluminum, and hard rubber. A condensed segmented income statement for a recent period follows: Wood $500,000 325,000 175,000 75,000 $100,000

Sales Variable expenses Contribution margin Fixed expenses Net income (loss)

Aluminum $200,000 140,000 60,000 35,000 $ 25,000

Hard Rubber $65,000 58,000 7,000 22,000 $(15,000)

Total $765,000 523,000 242,000 132,000 $110,000

Assume none of the fixed expenses for the hard rubber line are avoidable. What will be total net income if the line is dropped? a. $125,000 b. $103,000 c. $105,000 d. $140,000 Ans: B, LO: 6, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $100,000 + $25,000 – $22,000 = $103,000 (Wood: Net Income + Aluminum: Net Income – Hard Rubber: Fixed Expenses = Total Net Income if the line is dropped)

151.

Sales Variable expenses Contribution margin Fixed expenses Net income (loss)

Aluminum $200,000 140,000 60,000 35,000 $ 25,000

Hard Rubber $65,000 58,000 7,000 22,000 $(15,000)

Total $765,000 523,000 242,000 132,000 $110,000

Assume all of the fixed expenses for the hard rubber line are avoidable. What will be total net income if the line is dropped? a. $125,000 b. $103,000 c. $105,000 d. $140,000 Ans: A, LO: 6, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: Wood ($100,000) + Aluminum ($25,000) = $125,000 (Wood: Net Income + Aluminum: Net Income = Total Net Income if the line is dropped)

152.

What will likely occur if a company eliminates an unprofitable segment when a portion of fixed costs are unavoidable? a. All expenses of the eliminated segment will be eliminated. b. Net income will decrease. c. Net income will increase. d. The company’s variable costs will increase.

Ans: B, LO: 6, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Incremental Analysis 153.

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A company has three product lines, one of which has the following results: Sales Variable expenses Contribution margin Fixed expenses Net loss

$215,000 125,000 90,000 130,000 $ (40,000)

If this product line is eliminated, 60% of the fixed expenses will be eliminated and the other 40% will be allocated to other product lines. If management decides to eliminate this product line, the company’s net income will a. increase by $40,000. b. decrease by $90,000. c. decrease by $12,000. d. increase by $12,000. Ans: C, LO: 6, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $90,000 – ($130,000 x .60) = $12,000 (decrease) (Contribution margin – Fixed expenses eliminated = Net Income decrease)

154.

A company is considering eliminating a product line. The fixed costs currently allocated to the product line will be allocated to other product lines upon discontinuance. If the product line is discontinued, a. total net income will increase by the amount of the product line’s fixed costs. b. total net income will decrease by the amount of the product line’s fixed costs. c. the contribution margin of the product line will indicate the net income increase or decrease. d. the company’s total fixed costs will decrease.

Ans: C, LO: 6, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

155.

A segment has the following data: Sales Variable expenses Fixed expenses

$700,000 300,000 550,000

What will be the incremental effect on net income if this segment is eliminated, assuming the segment’s fixed expenses can be allocated to profitable segments? a. $400,000 increase b. $400,000 decrease c. $5,000 decrease d. Cannot be determined from the data provided. Ans: B, LO: 6, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $700,000 - $300,000 = $400,000 (Sales – Variable expenses = Net Income Decrease)

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

156.

Corn Crunchers has three product lines. Its only unprofitable line is Corn Flakes, the results of which appear below for 2022: Sales Variable expenses Fixed expenses Net loss

$1,400,000 920,000 600,000 $ (120,000)

If this product line is eliminated, 30% of the fixed expenses can be eliminated. What are the relevant costs in the decision to eliminate this product line? a. $180,000 b. $1,520,000 c. $1,340,000 d. $1,100,000 Ans: D, LO: 6, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $920,000 + ($600,000 x .30) = $1,100,000 (Variable expenses + Fixed Expenses eliminated = Relevant costs in the decision to eliminate this product)

157.

North Division has the following information: Sales Variable expenses Fixed expenses

$1,200,000 640,000 620,000

If this division is eliminated, the fixed expenses can be allocated to the company’s other divisions. What is the incremental effect on net income if the division is discontinued? a. $60,000 increase b. $620,000 decrease c. $560,000 decrease d. $580,000 increase Ans: C, LO: 6, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: $1,200,000 - $640,000 = $560,000 (Sales – Variable Expenses = Net Income decrease)

158.

The potential effects of the decision to eliminate a line of business on existing employees and the community are a. ignored in incremental analysis. b. quantitative factors. c. qualitative factors. d. opportunity costs.

Ans: C, LO: 6, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

159.

When will the elimination of a product line have no effect on the company’s overall profits? a. When the avoidable fixed costs equal the product line’s contribution margin b. When the unavoidable fixed costs equal the product line’s contribution margin c. When there are no fixed costs incurred by the product line d. When the product line contribution margin is negative

Ans: A, LO: 6, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Incremental Analysis 160.

20 - 37

Accounting’s contribution to the decision-making process occurs in all of the following steps except to a. identify the problem and assign responsibility. b. determine possible courses of action. c. review results of the decision. d. make a decision.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

161.

It costs Dryer Company $26 per unit ($18 variable and $8 fixed) to produce a product that normally sells for $38 per unit. A foreign wholesaler offers to purchase 5,000 units at $21 each. Dryer will incur special shipping costs of $2 per unit if the order is accepted. Dryer has sufficient unused capacity to produce the 5,000 units. If the special order is accepted, what will be the effect on net income? a. $5,000 decrease b. $5,000 increase c. $15,000 increase d. $90,000 increase

Ans: B, LO: 2, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis Solution: (5,000 x $21) – (($18 + $2) x 5,000) = 5,000 increase (Offer Purchase Price x units) – ((Unit variable cost + Special Unit shipping cost) x units) = Net Income Increase)

162.

In a make-or-buy decision, opportunity costs are a. added to the make total cost. b. deducted from the make total cost. c. added to the buy total cost. d. ignored.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

163.

Which of the following would generally not affect a make-or-buy decision? a. Selling expenses b. Direct labor c. Variable manufacturing costs d. Opportunity cost

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

164.

A cost that is not changed by any present or future decision is a(n) a. incremental cost. b opportunity cost. c. sunk cost. d. variable cost.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

165.

If an unprofitable segment is eliminated, a. net income will increase. b. fixed expenses allocated to the discontinued segment will be eliminated. c. variable expenses of the discontinued segment will be eliminated. d. revenues and net income will decrease.

Ans: C, LO: 6, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

20 - 38

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

166.

All of the following are relevant in deciding whether to eliminate an unprofitable segment except the segment’s a. sales. b. variable expenses. c. contribution margin. d. unavoidable fixed expenses.

Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Incremental Analysis

20 - 39

BRIEF EXERCISES BE 167 Sedgwick Inc. is considering Plan 1 that is estimated to have sales of $40,000 and costs of $15,500. The company currently has sales of $37,000 and costs of $14,000. Instructions Compare plans using incremental analysis. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 167

(3 min.)

Incremental revenue ($40,000 – $37,000) Incremental costs ($15,500 – $14,000) Incremental increase in profit if Plan 1 is selected

$3,000 (1,500) $1,500

BE 168 Pederson Enterprises produces giant stuffed bears. Each bear consists of $12 of variable costs and $9 of fixed costs and sells for $45. A wholesaler offers to buy 8,000 units at $14 each, for which Pederson has the capacity to produce. Pederson will incur extra shipping costs of $1 per bear. Instructions Determine the incremental income or loss that Pederson Enterprises would realize by accepting the special order. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 168

(5 min.)

Incremental revenue (8,000 × $14) Incremental variable costs ($12 × 8,000) Incremental shipping costs ($1× 8,000) Incremental profit if special order accepted

$112,000 (96,000) (8,000) $ 8,000

BE 169 Notson, Inc. produces several models of clocks. An outside supplier has offered to produce the commercial clocks for Notson for $420 each. Notson needs 1,200 clocks annually. Notson has provided the following unit costs for its commercial clocks: Direct materials Direct labor Variable overhead Fixed overhead (40% avoidable)

$100 140 80 150

Instructions Prepare an incremental analysis which shows the effect of the make-or-buy decision. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

20 - 40

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 169

(5 min.)

Incremental Analysis Cost to buy (1,200 × $420) Cost savings: Direct material $100 × 1,200 = $120,000 Direct labor $140 × 1,200 = 168,000 Variable OH $80 × 1,200 = 96,000 Fixed OF 40% × $150 × 1,200 = 72,000 Total cost savings Incremental net cost to buy

Incremental Effect $(504,000)

456,000 $ (48,000)

BE 170 Parks Corporation currently manufactures 3,000 staplers annually for its main product. The costs per stapler are as follows: Direct materials Direct labor Variable overhead Fixed overhead Total

$ 3 7 4 7 $21

Gallup Company has contacted Parks with an offer to sell it 3,000 staplers for $18 each. $5 of the fixed overhead per unit is unavoidable. Instructions Prepare an incremental analysis for the make-or-buy decision. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 170

(5 min.)

Incremental cost to buy (3,000 × $18) Incremental savings on direct materials (3,000 × $3) Incremental savings on direct labor (3,000 × $7) Incremental savings on variable MOH (3,000 × $4) Incremental savings on fixed MOH (3,000 × $2) Incremental net cost to buy

$(54,000) 9,000 21,000 12,000 6,000 $ (6,000)

BE 171 Calc, Inc. owns a machine that produces baskets for the gift packages the company sells. The company uses 900 baskets in production each month. The cost of making one basket is $4 for direct materials, $3 for variable manufacturing overhead, $2 for direct labor, and $5 for fixed manufacturing overhead. The unit cost is based on the monthly production of 900 baskets. The company determined that 30% of the fixed manufacturing overhead is avoidable. An outside supplier has offered to sell Calc the baskets for $13 each, and can supply all the units it needs. Instructions Prepare an incremental analysis to determine if Calc should buy the baskets from the supplier. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Incremental Analysis Solution 171 (6–8 min.) Incremental cost to buy (900 × $13) Incremental cost savings: DM ($4 × 900) VOH ($3 × 900) DL ($2 × 900) FOH ($5 × 30% × 900) Additional cost to buy

20 - 41

$(11,700) 3,600 2,700 1,800 1,350 $ (2,250)

or Make Incremental cost to buy (900 × $13) Incremental costs to make: DM ($4 × 900) VOH ($3 × 900) DL ($2 × 900) FOH Incremental cost to buy

$3,600 2,700 1,800 4,500 $12,600

Buy $11,700

3,150 $14,850

BE 172 Hernandez, Inc. manufactures three models of picture frames for a total of 8,000 frames per year. The unit cost to produce a metal frame follows: Direct materials Direct labor Variable overhead Fixed overhead (70% unavoidable) Total

$ 6 8 2 5 $21

A local company has offered to supply Hernandez the 8,000 metal frames it needs for $17 each. Instructions Create an incremental analysis for the make-or-buy decision. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 172

(5 min.)

Incremental cost to buy (8,000 × $17) Incremental savings: Direct materials savings (8,000 × $6) Direct labor savings (8,000 × $8) Variable overhead savings (8,000 × $2) Fixed overhead savings—avoidable portion (8,000 × $1.50) Incremental savings if “buy” decision is made

$(136,000) 48,000 64,000 16,000 12,000 $ 4,000

20 - 42

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

BE 173 Wood Chuck Furniture currently manufactures rocking chairs as its main product. Each chair uses one seat cushion and one back cushion with the following costs per set of cushions (one seat and one back): Direct materials Direct labor Variable overhead Fixed overhead Total

$ 1 10 5 8 $24

Shepert Company has contacted Wood Chuck with an offer to sell it 5,000 sets of cushions for $18 each. If Wood Chuck buys the cushions, $2 of the fixed overhead per unit will be allocated to other products. Instructions Should Wood Chuck make or buy the cushions? Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 173

(5 min.)

Cost to make – Cost to buy = Incremental cost ($24 – $2) – $18 = $4 = Incremental cost per set Incremental cost to make = $4 × 5,000 units = $20,000 Therefore, Wood Chuck should buy to save $4 per set. BE 174 Paola Farms, Inc. produces a crop of chickens at a total cost of $66,000. The production generates 60,000 chickens which can be sold for $1 each to a slaughtering company, or the chickens can be slaughtered in house and then sold for $2.75 each. It costs $65,000 more to turn the annual chicken crop into chicken meat. Instructions If Paola Farms slaughters the chickens, determine how much incremental profit or loss it would report. What should Paola Farms do? Ans: N/A, LO: 4, Bloom: AN, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 174

(4 min.)

Incremental revenues: ($2.75 – $1.00) × 60,000 chickens = $105,000 Incremental costs: given as $65,000 Incremental profits: $105,000 – $65,000 = $40,000 profit Paola Farms should slaughter. BE 175 Elmdale Company has a machine that affixes labels to bottles. The machine has a book value of $80,000 and a remaining useful life of 3 years and no salvage value. A new, more efficient machine is available at a cost of $300,000 that will have a 3-year useful life with no salvage value. The new machine will lower annual variable production costs from $520,000 to $410,000. .

Incremental Analysis BE 175

20 - 43

(Cont.)

Instructions Prepare an analysis showing whether the old machine should be retained or replaced. Ans: N/A, LO: 5, Bloom: AN, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 175

(4 min.)

Variable manufacturing costs New machine cost Net savings over 3 years

Retain Equipment $1,560,000

Replace Equipment $1,230,000

Net Income Change $330,000* (300,000) $ 30,000

*For 3 years of remaining life BE 176 Keith Inc. has 4 product lines: sour cream, ice cream, yogurt, and butter. Demand of individual products is not affected by changes in other product lines. 30% of the fixed costs are direct, and the other 70% are allocated. Results of June follow: Sour Cream Units sold 2,000 Revenue $10,000 Variable departmental costs 6,000 Fixed costs 5,000 Net income (loss) $ (1,000)

Ice Cream 500 $20,000 13,000 2,000 $ 5,000

Yogurt 400 $10,000 4,200 3,000 $ 2,800

Butter 200 $20,000 4,800 7,000 $ 8,200

Total 3,100 $60,000 28,000 17,000 $15,000

Instructions Prepare an incremental analysis of the effect of dropping the sour cream product line. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 176

(4 min.)

Incremental revenue Incremental variable cost savings Incremental fixed cost savings ($5,000 x .30) Incremental decrease in profits if dropped

$(10,000) 6,000 1,500 $ (2,500)

BE 177 Parino Company has three product lines in its retail stores: books, videos, and music. The allocated fixed costs are based on units sold and are unavoidable. Demand of individual products is not affected by changes in other product lines. Results of the fourth quarter are presented below: Books Music Videos Total Units sold 1,000 2,000 2,000 5,000 Revenue $24,000 $48,000 $30,000 $102,000 Variable departmental costs 15,000 22,000 23,000 60,000 Direct fixed costs 3,000 6,000 4,000 13,000 Allocated fixed costs 4,400 8,800 8,800 22,000 Net income (loss) $ 1,600 $11,200 $ (5,800) $ 7,000

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

20 - 44 BE 177

(Cont.)

Instructions Prepare an incremental analysis of the effect of dropping the Video product line. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 177

(5 min.)

Incremental revenue Incremental savings on variable costs Incremental savings on direct fixed costs Incremental decrease in profit to drop video line

$(30,000) 23,000 4,000 $ (3,000)

BE 178 Harmark has three product lines in its retail stores: kites, wind socks, and flags. Results of the fourth quarter are presented below: Kites Wind Socks Flags Total Units sold 1,000 2,000 2,000 5,000 Revenue $22,000 $40,000 $23,000 $85,000 Variable departmental costs 17,000 22,000 12,000 51,000 Direct fixed costs 1,000 3,000 2,000 6,000 Allocated fixed costs 8,000 8,000 8,000 24,000 Net income (loss) $ (4,000) $ 7,000 $ 1,000 $ 4,000 The allocated fixed costs are unavoidable. Demand of individual products is not affected by changes in other product lines. Instructions What will happen to profits if Harmark discontinues the Kites product line? Ans: N/A, LO: 6, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 178

(5 min.)

Incremental revenue Incremental costs: Variable cost savings Direct fixed cost savings Drop in profits if discontinued

$(22,000) 17,000 1,000 $ (4,000)

BE 179 Dolls R Us sells three products in its retail stores: baby dolls, teenage dolls, and plush dolls. Results of the fourth quarter are below: Baby Dolls Teenage Dolls Plush Dolls Total Units sold 1,000 2,000 2,000 5,000 Revenue $32,000 $43,000 $26,000 $101,000 Variable departmental costs 22,000 24,000 13,000 59,000 Direct fixed costs 5,000 4,000 3,000 12,000 Allocated fixed costs 6,000 7,000 7,000 20,000 Net income (loss) $ (1,000) $ 8,000 $ 3,000 $ 10,000 .

Incremental Analysis BE 179

20 - 45

(cont.)

Instructions Demand for individual products is not affected by changes in other product lines. Prepare an incremental analysis to determine if the Baby Dolls should be discontinued Ans: N/A, LO: 6, Bloom: AN, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 179

(5 min.)

Incremental revenue Incremental costs: Variable cost savings Direct cost savings Drop in profits if discontinued

$(32,000) 22,000 5,000 $ (5,000)

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

20 - 46

EXERCISES Ex. 180 Roland Company operates a small factory in which it manufactures two products: A and B. Production and sales result for last year were as follow: Units sold Selling price per unit Unit variable cost Unit fixed cost

A 8,000 65 35 15

B 16,000 52 30 15

For purposes of simplicity, the firm allocates total fixed costs over the total number of units of A and B produced and sold. The research department has developed a new product (C) as a replacement for product B. Market studies show that Roland Company could sell 11,000 units of C next year at a unit selling price of $80. The unit variable cost of C is $39. The introduction of product C will lead to a 10% increase in demand for product A and discontinuation of product B. If the company does not introduce the new product, it expects next year’s result to be the same as last year’s. Instructions Should Roland Company introduce product C next year? Explain why or why not. Show calculations to support your decision. Ans: N/A, LO: 1, 6, Bloom: AN, Difficulty: Hard, Min: 9, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 180

(8 – 10 min.)

Calculation of contribution margin per unit: Selling price per unit Less: variable costs/unit Net incremental net income

A $65 35 $30

B $52 30 $22

C $80 39 $41

Fixed costs = $15 × (8,000 + 16,000) = $360,000 Company profit with Products A and B: Units sold Sales revenue Less: Variable costs Contribution margin Less: Fixed costs Net profit

A 8,000

B 16,000

Total

$520,000 280,000 $240,000

$832,000 480,000 $352,000

$1,352,000 760,000 592,000 360,000 $ 232,000

Incremental Analysis Solution 180

20 - 47

(cont.)

Company profit with Products A and C: Units sold Sales Revenue Less: Variable costs Contribution margin Less: Fixed costs Net profit

A 8,800*

C 11,000

Total

$572,000 308,000 $264,000

$880,000 429,000 $451,000

$1,452,000 737,000 715,000 360,000 $ 355,000

*Product A sales increase by 10%, (8,000  110%) Yes, product C should be introduced since net profit increases by $123,000 ($355,000  $232,000) Ex. 181 Felter Company produced and sold 50,000 units of product and is operating at 70% of plant capacity. Unit information about its product is as follows: Sales price Variable manufacturing cost Fixed manufacturing cost ($500,000 ÷ 50,000) Profit per unit

$70 $45 10

55 $15

The company received a proposal from a foreign company to buy 10,000 units of Felter Company’s product for $50 per unit. This is a one-time only order and acceptance of this proposal will not affect the company’s regular sales. The president of Felter Company is reluctant to accept the proposal because he is concerned that the company will lose money on the special order. Instructions Prepare a schedule reflecting an incremental analysis of this proposal and indicate the effect the acceptance of this order might have on the company’s income. Ans: N/A, LO: 2, Bloom: AN, Difficulty: Hard, Min: 9, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 181

(9–13 min.) FELTER COMPANY Incremental Analysis Proposal to sell 10,000 units at $50

Revenues (10,000 × $50) Costs (10,000 × $45) Net Income

Reject Order $ -0-0$ -0-

Accept Order $500,000 (450,000) $ 50,000

Net Income Increase (Decrease) $500,000 (450,000) $ 50,000

Felter Company would increase its income by $50,000 by accepting the special order.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

20 - 48 Ex. 182

Carney Company manufactures cappuccino makers. For the first eight months of 2022, the company reported the following operating results while operating at 80% of plant capacity: Sales (500,000 units) Cost of goods sold Gross profit Operating expenses Net income

$90,000,000 54,000,000 36,000,000 24,000,000 $12,000,000

An analysis of costs and expenses reveals that variable cost of goods sold is $95 per unit and variable operating expenses are $35 per unit. In September, Carney Company receives a special order for 40,000 machines at $135 each from a major coffee shop franchise. Acceptance of the order would result in $10,000 of shipping costs but no increase in fixed expenses. Instructions (a) Prepare an incremental analysis for the special order. (b) Should Carney Company accept the special order? Justify your answer. Ans: N/A, LO: 2, Bloom: AN, Difficulty: Moderate, Min: 12, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 182

(12–17 min.)

(a) Reject Order $ -0-0-0$ -0-

Revenues Cost of Goods Sold Operating Expense Net Income

Accept Order $5,400,000 3,800,000* 1,410,000** $ 190,000

Net Income Increase (Decrease) $5,400,000 (3,800,000) (1,410,000) $ 190,000

*Variable cost of goods sold = 40,000 × $95 = $3,800,000. **Variable operating expenses = 40,000 × $35 = $1,400,000 + $10,000 = $1,410,000. (b) The incremental analysis shows Carney Company should accept the special order because incremental revenues exceed incremental costs. This recommendation assumes that acceptance of the special order will not affect relations with existing customers. Ex. 183 Gregg Company supplies schools with floor mats to use in physical education classes. Gregg has received a special order from a large school district to buy 600 mats at $45 each. Acceptance of the special order will not affect fixed costs but will result in $1,200 of shipping costs. For the first 6 months of 2022, the company reported the following operating results while operating at 80% capacity: Sales (100,000 units) Cost of goods sold Gross profit Operating expenses Net income

$7,000,000 4,200,000 2,800,000 2,000,000 $ 800,000

Incremental Analysis

20 - 49

Cost of goods sold was 75% variable and 25% fixed; operating expenses were 70% variable and 30% fixed.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

20 - 50 Ex 183

(cont.)

Instructions (a) Prepare an incremental analysis for the special order. (b) Should Gregg Company accept the special order? Justify your answer. Ans: N/A, LO: 2, Bloom: E, Difficulty: Moderate, Min: 13, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 183

(13–18 min.)

(a) Revenues Cost of Goods Sold Operating Expense Net Income

Reject Order $ -0-0-0$ -0-

Accept Order $27,000 18,900 9,600 $ (1,500)

Net Income Increase (Decrease) $27,000 (18,900) (9,600) $ (1,500)

Variable cost of goods sold = $4,200,000 × 75% = $3,150,000. Variable cost of goods sold per unit = $3,150,000 ÷ 100,000 = $31.50. Variable cost of goods sold for the special order = 600 × $31.50 = $18,900. Variable operating expenses = $2,000,000 × 70% = $1,400,000 Variable operating expenses per unit = $1,400,000 ÷ 100,000 = $14 Variable operating expenses for the special order = 600 × $14 = $8,400 + $1,200 = $9,600 (b)

The incremental analysis shows Gregg Company should not accept the special order because incremental costs exceed incremental revenues.

Ex. 184 Larkin Company produces golf discs which it normally sells to retailers for $6 each. The cost of manufacturing 25,000 golf discs is: Materials Labor Variable overhead Fixed overhead Total

$ 10,000 30,000 20,000 40,000 $100,000

Larkin also incurs 5% sales commission ($0.30) on each disc sold. Rudd Corporation offers Larkin $4.25 per disc for 3,000 discs. Rudd would sell the discs under its own brand name in foreign markets not served by Larkin. If Larkin accepts the offer, its fixed overhead will increase from $40,000 to $43,000 due to the purchase of a new imprinting machine. No sales commission will result from the special order. Larkin has sufficient capacity to accommodate the special order. Instructions (a) Prepare an incremental analysis for the special order. (b) Should Larkin accept the special order? Why or why not? Ans: N/A, LO: 2, Bloom: E, Difficulty: Hard, Min: 12, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Incremental Analysis Solution 184

(12 min.)

(a) Revenues Materials ($0.40) Labor ($1.20) Variable overhead ($0.80) Fixed overhead Sales commissions Net income (b)

20 - 51

Reject Order $ -0-0-0-0-0-0$ -0-

Accept Order $12,750 (1,200) (3,600) (2,400) (3,000) -0$ 2,550

Net Income Effect $12,750 (1,200) (3,600) (2,400) (3,000) -0$ 2,550

As shown in the incremental analysis, Larkin should accept the special order because incremental revenue exceeds incremental expenses by $2,550.

Ex. 185 Kasten, Inc. budgeted 10,000 widgets for production during 2022. Kasten has capacity to produce 12,000 units. Fixed factory overhead is allocated to production. The following estimated costs were provided: Direct material ($7/unit) $ 70,000 Direct labor ($15/hr. × 2 hrs./unit) 300,000 Variable manufacturing overhead ($4/unit) 40,000 Fixed factory overhead costs ($5/unit) 50,000 Total $460,000 Cost per unit = $46 Instructions Answer each of the following independent questions: 1. Kasten received an order for 1,000 units from a new customer in a country in which Kasten has never done business. This customer has offered $43 per widget. Should Kasten accept the order? 2. Kasten received an offer from another company to manufacture the same quality widgets for $39. Should Kasten outsources the manufacture of all 10,000 widgets and focus only on distribution? Ans: N/A, LO: 2, 3, Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 185

(10–12 min.)

1. Yes, Kasten can make an extra $2,000. Incremental revenue per widget Incremental cost per widget: $7 + ($15 × 2) + $4 = Incremental profit per unit

$43 41 $ 2

Total incremental profit = $2 × 1,000 = $2,000 2. Yes, Kasten will save $20,000 if it buys instead of makes. Cost to buy per widget Cost to make per widget: $7 + ($15 × 2) + $4 = Incremental savings per widget if purchased .

$39 41 $ 2

20 - 52

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Total incremental savings if purchased = $2 × 10,000 = $20,000

Incremental Analysis

20 - 53

Ex. 186 Coyle Company manufactured 6,000 units of a component part that is used in its product and incurred the following costs: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead

$35,000 15,000 10,000 20,000 $80,000

Another company has offered to sell the same component part to the company for $13 per unit. The fixed manufacturing overhead consists mainly of depreciation on the equipment used to manufacture the part and would not be reduced if the component part was purchased from the outside firm. If the component part is purchased from the outside firm, Coyle Company has the opportunity to use the factory equipment to produce another product which is estimated to have a contribution margin of $22,000. Instructions Prepare an incremental analysis report for Coyle Company which can serve as informational input into this make or buy decision. Ans: N/A, LO: 3, Bloom: E, Difficulty: Moderate, Min: 13, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 186

(13–18 min.)

Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Purchase price (6,000 × $13) Total annual cost Opportunity cost Total cost

Make $ 35,000 15,000 10,000 20,000 -080,000 22,000 $102,000

Buy $ -0-0-020,000 78,000 98,000 -0$98,000

Increase (Decrease) $35,000 15,000 10,000 -0(78,000) (18,000) 22,000 $ 4,000

Income is expected to increase by $4,000 if the component part is purchased from the outside firm and the new product is manufactured. Ex. 187 Agler Corporation currently manufactures a subassembly for its main product. The costs per unit are as follows: Direct materials Direct labor Variable overhead Fixed overhead Total

$ 1 10 5 8 $24

Funkhouser Company has contacted Agler with an offer to sell it 4,000 of the subassemblies for $17 each. If Agler buys the subassemblies, $2 of the fixed overhead per unit will be allocated to other products. .

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

20 - 54 Ex. 187

(Cont.)

Instructions Should Agler make or buy the subassemblies? Explain your answer. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 6, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 187

(6 min.)

Cost to make - cost to buy = incremental cost ($24 – $2) – $17 = $5 Incremental cost to make = $5 × 4,000 units = $20,000 Agler should buy to save $5 per unit. Ex. 188 Kuhn Bicycle Company manufactures its own seats for its bicycles. The company is currently operating at 100% capacity. Variable manufacturing overhead is charged to production at the rate of 60% of direct labor cost. The direct materials and direct labor cost per unit to make the bicycle seats are $8.00 and $9.00, respectively. Normal production is 50,000 bicycles per year. A supplier offers to make the bicycle seats at a price of $21 each. If the bicycle company accepts this offer, all variable manufacturing costs will be eliminated, but the $30,000 of fixed manufacturing overhead currently being charged to the bicycle seats will have to be absorbed by other products. Instructions (a) Prepare the incremental analysis for the decision to make or buy the bicycle seats. (b) Should Kuhn Bicycle Company buy the seats from the outside supplier? Justify your answer. Ans: N/A, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 188

(15–20 min.)

(a) Direct Materials (50,000 × $8) Direct Labor (50,000 × $9) Variable Manufacturing Costs ($450,000 × 60%) Fixed Manufacturing Costs Purchase Price (50,000 × $21) Total annual cost

Make $ 400,000 450,000

Buy $ -0-0-

Net Income Increase (Decrease) $ 400,000 450,000

270,000 30,000 -0$1,150,000

-030,000 1,050,000 $1,080,000

270,000 -0(1,050,000) $ 70,000

(b) The seats should be purchased from the outside supplier. As indicated, the company’s net income would increase $70,000 by purchasing the seats.

Incremental Analysis

20 - 55

Ex. 189 Larkin, Inc. uses 1,000 units of the component NJF1 every month to manufacture one of its products. The unit costs incurred to manufacture the component are as follows: Direct materials Direct labor Overhead Total

$ 65 48 96 $209

Overhead costs include variable material handling costs of $10 that are applied to products on the basis of direct material costs. The remainder of the overhead costs are applied on the basis of direct labor dollars and consist of 50% variable costs and 50% fixed costs. A vendor has offered to supply the NJF1 component at a price of $175 per unit. Instructions (a) Should Larkin purchase the component from the outside vendor if its capacity remains idle? (b) Should Larkin purchase the component from the outside vendor if it can use its facilities to manufacture another product? What information will Larkin need to make an accurate decision? Show your calculations. Ans: N/A, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 189

(10-12 min.)

(a) Make NJF1 $ 65 48 10 43* 0 $166

Direct materials Direct labor Material handling Variable overhead Purchase price Total unit cost

Buy NJF1 $ 0 0 0 0 175 $175

Net Income Increase (Decrease) $ 65 48 10 43 (175) $ (9)

*Variable overhead  50%  ($96  $10) The unit should not be purchased from the outside vendor, as the per unit cost would be $9 greater than if they made it. (b) In order for Larkin to make an accurate decision, the company would have to know the opportunity cost of manufacturing the other product. As determined in (a), purchasing the product from outside would cost $9,000 more (1,000  $9). Larkin would have to increase their contribution margin by more than $9,000 through the manufacture of the other product, before it would be economical for them to purchase the NJF1 from the outside vendor.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

20 - 56 Ex. 190

A company manufactures three products using the same production process. The costs incurred up to the split-off point are $200,000. These costs are allocated to the products on the basis of their sales value at the split-off point. The number of units produced, the selling prices per unit of the three products at the split-off point and after further processing, and the additional processing costs are as follow: Number of Selling Price Selling Price Additional Units Produced at Split-off after Processing Processing Costs Product X 5,000 $10.00 $15.00 $14,000 Y 10,000 11.60 16.20 21,000 Z 4,000 19.40 21.60 12,000 Instructions (a) Which product(s) should be processed further and which should be sold at the split-off point? (b) Would your decision be different if the company was using the quantity of output to allocate joint costs? Explain. Ans: N/A, LO: 4, Bloom: AN, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 190

(8–10 min.)

(a) Revenue after further processing: Product X $75,000 (5,000 units X $15.00 per unit) Product Y $162,000 (10,000 units X $16.20 per unit) Product Z $86,400 (4,000 units X $21.60 per unit) Revenue at split-off: Product X $50,000 (5,000 units X $10.00 per unit) Product Y $116,000 (10,000 units X $11.60 per unit) Product Z $77,600 (4,000 units X $19.40 per unit) Incremental revenue Incremental cost Increase (decrease) in profit

X $25,000 14,000 $11,000

Y $46,000 21,000 $25,000

Z $ 8,800 12,000 $(3,200)

Product X and Y should be processed further but Product Z should be sold at the split–off point. (b) The decision would remain the same. It does not matter how the joint costs are allocated because joint costs are irrelevant to this decision. Ex. 191 Spencer Chemical Corporation produces an oil-based chemical product which it sells to paint manufacturers. In 2022, the company incurred $344,000 of costs to produce 40,000 gallons of the chemical. The selling price of the chemical is $12.00 per gallon. The costs per unit to manufacture a gallon of the chemical are presented below: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total manufacturing costs .

$6.00 1.20 .80 .60 $8.60

Incremental Analysis

20 - 57

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

20 - 58 Ex. 191

(Cont.)

The company is considering manufacturing the paint itself. If the company processes the chemical further and manufactures the paint itself, the following additional costs per gallon will be incurred: Direct materials $1.70, Direct labor $.60, Variable manufacturing overhead $.50. No increase in fixed manufacturing overhead is expected. The company can sell the paint at $15.50 per gallon. Instructions Determine the incremental per gallon increase in net income and the total increase in net income if the company manufactures the paint. Ans: N/A, LO: 4, Bloom: E, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 191

(15–20 min.) Sell Chemical $12.00

Process Further $15.50

6.00 1.20 .80 .60 8.60 $ 3.40

7.70 1.80 1.30 .60 11.40 $ 4.10

Unit selling price Cost per unit: Direct materials (A) Direct labor (B) Variable manufacturing overhead (C) Fixed manufacturing overhead Total Net income per unit

Net Income Increase (Decrease) $3.50 (1.70) (.60) (.50) — (2.80) $ .70

(A) $6.00 + $1.70 (B) $1.20 + $.60 (C) $.80 + $.50 Assuming the company sells all 40,000 gallons that it produces, the incremental net income would be $28,000 (40,000 gallons × $.70). Ex. 192 Ecker, Inc. produces milk at a total cost of $66,000. The production generates 60,000 gallons of milk which can be sold for $1 per gallon to a pasteurization company, or the milk can be processed further into ice cream and then sold for $3 per gallon. It costs $75,000 more to turn the annual milk supply into ice cream. Instructions If Ecker processes the milk into ice cream, how much is the incremental profit or loss? Should Ecker process the milk into ice cream or sell it as is? Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 6, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 192

(6 min.)

Incremental revenues: ($3 – $1) × 60,000 gallons = $120,000 Incremental costs: given as $75,000 Incremental profits: $120,000 – $75,000 = $45,000 profit Ecker should process the milk into ice cream. .

Incremental Analysis

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Ex. 193 Speedy Bikes could sell its bicycles to retailers either assembled or unassembled. The cost of an unassembled bike is as follows. Direct materials Direct labor Variable overhead (70% of direct labor) Fixed overhead (30% of direct labor) Manufacturing cost per unit

$150 70 49 21 $290

The unassembled bikes are sold to retailers at $450 each. Speedy has unused productive capacity that is expected to continue indefinitely; management has concluded that some of this capacity could be used to assemble the bikes and sell them at $495 each. Assembling the bikes will increase direct materials by $5 per bike and direct labor by $10 per bike. Additional variable overhead will be incurred at the normal rates, but there will be no additional fixed overhead as a result of assembling the bikes. Instructions (a) Prepare an incremental analysis for the sell-or-process-further decision. (b) Should Speedy sell or process further? Why or why not? Ans: N/A, LO: 4, Bloom: E, Difficulty: Moderate, Min: 12, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 193

(12 min.)

(a)

Sales per unit Costs per unit Materials Labor Variable overhead (70%) Fixed overhead Total Net income per unit

Sell $450

Process Further $495

Net Income Increase (Decrease) $ 45

150 70 49 21 290 $160

155 80 56 21 312 $183

(5) (10) (7) -0(22) $ 23

(b) As shown in the incremental analysis, Speedy Bikes should process further (rather than sell unassembled) because incremental revenue exceeds incremental expenses by $23 per unit.

Ex. 194 Harris Timber Corporation uses a machine that removes the bark from cut timber. The machine is unreliable and results in a significant amount of downtime and excessive labor costs. Management is considering replacing the machine with a more efficient one which will minimize downtime and excessive labor costs. Data are presented below for the two machines: Original purchase cost Accumulated depreciation Estimated life .

Old Machine $340,000 230,000 5 years

New Machine $370,000 — 5 years

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

20 - 60 Ex. 194

(Cont.)

It is estimated that the new machine will produce annual cost savings of $85,000. The old machine can be sold to a scrap dealer for $8,000. Both machines will have a salvage value of zero if operated for the remainder of their useful lives. Instructions Determine whether the company should purchase the new machine. Ans: N/A, LO: 5, Bloom: AN, Difficulty: Moderate, Min: 11, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 194

(11–16 min.)

Cost savings New machine cost Proceeds from sale of old machine Net incremental net income

Retain Equipment $ -0-0-0$ -0-

Replace Net Income Equipment Increase/(Decrease) $425,000 (A) $425,000 (370,000) (370,000) 8,000 8,000 $ 63,000 $ 63,000

(A) $85,000 × 5 = $425,000. The company should purchase the new machine because there will be an increase in net income of $63,000. Ex. 195 Kinder Enterprises relies heavily on a copier machine to process its paperwork. Recently the copy clerk has not been able to process all the necessary copies within the regular work week. Management is considering updating the copier machine with a faster model. Original purchase cost Accumulated depreciation Estimated operating costs (annual) Useful life

Current Copier $10,000 8,000 7,000 5 years

New Model $20,000 — 2,600 5 years

If sold now, the current copier would have a salvage value of $1,000. If operated for the remainder of its useful life, the current machine would have zero salvage value. The new machine is expected to have zero salvage value after five years. Instructions Prepare an analysis to show whether the company should retain or replace the machine. Ans: N/A, LO: 5, Bloom: E, Difficulty: Moderate, Min: 12, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 195

(12–16 min.) Retain Machine $35,000 -0-0$35,000

Operating costs New machine cost Salvage value Totals

Replace Machine $13,000 20,000 (1,000) $32,000

Net Income Increase (Decrease) $22,000 (20,000) 1,000 $ 3,000

The current copier should be replaced. The incremental analysis shows that net income for the five-year period will be $3,000 higher by replacing the current copier. .

Incremental Analysis

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Ex. 196 Milwaukee, Inc. has three divisions: Bud, Wise, and Er. The results of operations for May, 2022 are presented below. Bud Wise Er Total Units sold 3,000 5,000 2,000 10,000 Revenue $70,000 $50,000 $40,000 $160,000 Less variable costs 32,000 26,000 16,000 74,000 Less direct fixed costs 14,000 19,000 12,000 45,000 Less allocated fixed costs 6,000 10,000 4,000 20,000 Net income $18,000 $ (5,000) $ 8,000 $ 21,000 All of the allocated costs will continue even if a division is discontinued. Milwaukee allocates indirect fixed costs based on the number of units to be sold. Since the Wise division has a net loss, Milwaukee is concerned that it should be discontinued. Milwaukee thinks that if the division is closed, that sales at the Bud division will increase by 12% while sales at the Er division will stay the same. Instructions (a) Prepare an analysis showing the effect of discontinuing the Wise division. (b) Should Milwaukee close the Wise division? Briefly indicate why or why not. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 196

(10–12 min.)

(a) Revenue Less variable costs Less direct fixed costs Less allocated fixed costs Net income

Bud $78,400 35,840 14,000 12,537 $16,023

Er $40,000 16,000 12,000 7,463 $ 4,537

Total $118,400 51,840 26,000 20,000 $ 20,560

Calculations: Revenue = $70,000 × 112% = $78,400 Variable costs = $32,000 × 112% = $35,840 Allocation of total allocated fixed costs of $20,000: To Bud: [3,360 ÷ (3,360 + 2,000)] × $20,000 = $12,537 To Er: [2,000 ÷ (3,360 + 2,000)] × $20,000 = $7,463 (b) No. Profit decreases by $440 ($21,000 – $20,560) when the division is eliminated. The increase in sales by 12% of the Bud division is not enough to offset the loss of the Wise division. Ex. 197 Roberts Forest Corporation operates two divisions, the Timber Division and the Consumer Division. The Timber Division manufactures and sells logs to paper manufacturers. The Consumer Division operates retail lumber mills which sell a variety of products in the do-it-yourself homeowner market. The company is considering disposing of the Consumer Division since it has been consistently unprofitable for a number of years. The income statements for the two divisions for the year ended December 31, 2022 are presented below:

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

20 - 62 Ex. 197

(Cont.)

Sales Cost of goods sold Gross profit Selling & administrative expenses Net income

Timber Division $1,500,000 900,000 600,000 250,000 $ 350,000

Consumer Division $500,000 350,000 150,000 180,000 $ (30,000)

Total $2,000,000 1,250,000 750,000 430,000 $ 320,000

In the Consumer Division, 70% of the cost of goods sold are variable costs and 35% of selling and administrative expenses are variable costs. The management of the company feels it can save $45,000 of fixed cost of goods sold and $50,000 of fixed selling expenses if it discontinues operation of the Consumer Division. Instructions (a) Determine whether the company should discontinue operating the Consumer Division. (b) If the company had discontinued the division for 2022, determine what net income would have been. Ans: N/A, LO: 6, Bloom: E, Difficulty: Moderate, Min: 20, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 197

(20–25 min.)

(a)

CONSUMER DIVISION

Sales Variable expenses: Cost of goods sold Selling and admin. exp. Contribution margin Fixed expenses: Cost of goods sold Selling and admin. exp. Net income (A) (B)

Continue $500,000

Eliminate $ -0-

Net Income Increase (Decrease) $(500,000)

245,000 (A) 63,000 (B) . 192,000

-0-0-0-

245,000 63,000 (192,000)

105,000 (C) 117,000 (D) $ (30,000)

60,000 67,000 $(127,000)

45,000 50,000 $ (97,000)

$350,000 × 70% = $245,000 $180,000 × 35% = $63,000

$350,000 – $245,000 = $105,000 $180,000 – $63,000 = $117,000

The company should continue the Consumer Division because the contribution margin of $192,000 is greater than the avoidable fixed costs, $95,000. (b)

Net income for the total company would have been $223,000: Total Net Income + Decrease in Net Income $320,000 + $(97,000) = $223,000

Incremental Analysis

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Ex. 198 Mercer has three product lines in its retail stores: flipflops, sandals, and slippers. Results of the fourth quarter are presented below: Units sold Revenue Variable departmental costs Direct fixed costs Allocated fixed costs Net income (loss)

Flipflops 1,000 $20,000 17,000 1,000 7,000 $ (5,000)

Sandals 2,000 $40,000 22,000 3,000 7,000 $ 8,000

Slippers 2,000 $25,000 12,000 2,000 7,000 $ 4,000

Total 5,000 $85,000 51,000 6,000 21,000 $ 7,000

The allocated fixed costs are unavoidable. Demand of individual products are not affected by changes in other product lines. Instructions What will happen to profits if Mercer discontinues the Flipflops product line? Ans: N/A, LO: 6, Bloom: AP, Difficulty: Moderate, Min: 6, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Solution 198

(6 min.)

Incremental revenue Incremental costs: Variable costs savings Direct fixed costs savings Decrease in profits if discontinued

$(20,000) 17,000 1,000 $ (2,000)

Ex. 199 A recent accounting graduate from Marvel State University evaluated the operating performance of Fanning Company’s four divisions. The following presentation was made to Fanning’s Board of Directors. During the presentation, the accountant made the recommendation to eliminate the Southern Division stating that total net income would increase by $60,000. (See analysis below.) Other 3 Divisions $2,000,000 950,000 1,050,000 800,000 $ 250,000

Sales Cost of Goods Sold Gross Profit Operating Expenses Net Income

Southern Division $480,000 400,000 80,000 140,000 $ (60,000)

Total $2,480,000 1,350,000 1,130,000 940,000 $ 190,000

For the other divisions, cost of goods sold is 80% variable and operating expenses are 70% variable. The cost of goods sold for the Southern Division is 30% fixed, and its operating expenses are 75% fixed. If the division is eliminated, only $15,000 of the fixed operating costs will be eliminated. Instructions Do you concur with the new accountant’s recommendation? Present a schedule to support your answer. Ans: N/A, LO: 6, Bloom: E, Difficulty: Moderate, Min: 20, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

20 - 64

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 199

(20–25 min.)

Sales Variable Expenses Cost of goods sold Operating expenses Total Variable Costs Contribution Margin Fixed Expenses Cost of goods sold Operating expenses Net Income (Loss)

Net Income Increase (Decrease) $(480,000)

Continue $480,000

Eliminate $ -0-

280,000 35,000 315,000 165,000

-0-0-0-0-

280,000 35,000 315,000 (165,000)

120,000 105,000 $ (60,000)

120,000 90,000 $(210,000)

-015,000 $(150,000)

The accountant is not correct. If the Southern Division is eliminated, the net income will be $150,000 less, not $60,000 more. The reduction in income is the result of the loss of the contribution margin less the avoidable fixed costs of $15,000.

Incremental Analysis

20 - 65

COMPLETION STATEMENTS 200. An important purpose of management accounting is to provide for decision making. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

201. The process used to identify the financial data that change under alternative courses of action is called analysis. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

202. In a decision on whether an order should be accepted at a special price when there is plant capacity available, a major consideration is whether the special price exceeds . Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

203. The lost potential benefit that could have been obtained by following an alternative course of action is called a(n) cost. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

204. A decision whether to sell a product now or to process it further, depends on whether the incremental from processing further are greater than the incremental processing . Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

205. The value of old equipment is irrelevant in a decision to replace that equipment and is often referred to as a cost. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Answers to Completion Statements 200. relevant information 201. incremental (differential) 202. variable costs (incremental costs)

203. 204. 205.

opportunity revenues, costs book, sunk

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

20 - 66

MATCHING 206. Match the items below by entering the appropriate code letter in the space provided. A. Incremental analysis B. Opportunity cost C. Sunk cost

1. A cost that cannot be changed by any present or future decision. 2. The process of identifying the financial data that change under alternative courses of action. 3. The potential benefit that may be lost from following an alternative course of action. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Decision Analysis

Answers to Matching 1. C 2. A 3. B

Incremental Analysis

20 - 67

SHORT-ANSWER ESSAY QUESTIONS S-A E 207 Management is often faced with the alternative of continuing to make a product or component internally, or going to an external source and purchasing the product or component. In gathering relevant information for these two alternatives, briefly identify the quantitative factors that should be considered. Are there any qualitative factors that should also be considered? Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Communication, IMA: Decision Analysis

Solution 207 The quantitative factors to be considered in a make or buy decision include the incremental costs to make the product, the incremental costs of buying the product, and the opportunity cost (potential benefit foregone) if the product is made. Generally, all variable production costs are relevant in a make or buy decision, but only some fixed costs, or no fixed costs, are relevant because many fixed costs will be incurred regardless of whether the decision is to make or buy. Qualitative factors include the possible adverse effect on employees and the stability of the supplier’s price and quality. S-A E 208 Define the term “opportunity cost.” How may this cost be relevant in a make-or-buy decision? Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Communication, IMA: Decision Analysis

Solution 208 Opportunity cost is the lost potential benefit that could have been obtained by following an alternative course of action. Opportunity cost is relevant in a make-or-buy decision when the facilities used to make the part can be used to generate additional income. S-A E 209 (Communication) You are the general accountant for Word Systems, Inc., a word processing service based in Los Angeles, California. The company has decided to upgrade its equipment. It currently has a widely used version of a word processing program. The company wishes to invest in more up-to-date software and to improve its printing capabilities. Two options have emerged. Option #1 is for the company to keep its existing computer system, and upgrade its word processing program. The memory of each individual work station would be enhanced, and a larger, more efficient printer would be used. Better telecommunications equipment would allow for the electronic transmission of some documents as well. Option #2 would be for the company to invest in an entirely different computer system. The software for this system is extremely impressive, and it comes with individual laser printers. However, the company is not well known, and the software does not connect well with well-known software. The net present value information for these options follows: Option #1 Initial Investment $(95,000) Cost savings of labor over 4 years 95,000

Option #2 $(270,000) 270,000

20 - 68

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

S-A E 209 (Cont.) Required: Prepare a brief report for management in which you make a recommendation for one system or the other, using the information given. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Communication, IMA: Decision Analysis

Solution 209 I recommend that the company accept Option #1, to purchase upgrades to our present system and to buy a more efficient printer. In the first place, the changes will be easier to implement because the equipment is similar to that which we already use. Secondly, the company will have less money invested in the project, which decreases our risk of loss should the project fail. Option #2 appears to be too risky.

CHAPTER 21 PRICING CHAPTER LEARNING OBJECTIVES 1. Compute a target cost when the market determines a product price. To compute a target cost, the company determines its target selling price. Once the target selling price is set, it determines its target cost by setting a desired profit. The difference between the target price and desired profit is the target cost of the product. 2. Compute a target selling price using cost-plus pricing. Cost-plus pricing involves establishing a cost base and adding to this cost base a markup to determine a target selling price. The cost-plus pricing equation is expressed as follows: Target selling price = Cost + (Markup percentage × Cost). 3. Use time-and-material pricing to determine the cost of services provided. Under timeand-material pricing, two pricing rates are set—one for labor used on a job and another for the material. The labor rate includes direct labor time and other employee costs. The material charge is based on the cost of direct parts and materials used and a material loading charge for related overhead costs. 4. Determine a transfer price using the negotiated, cost-based, and market-based approaches. The negotiated price is determined through agreement of division managers. Under a cost-based approach, the transfer price may be based on variable cost alone or on variable cost plus fixed costs. Companies may add a markup to these numbers. The costbased approach often leads to poor performance evaluations and purchasing decisions. The advantage of the cost-based system is its simplicity. A market-based transfer price is based on existing competing market prices and services. A market-based system is often considered the best approach because it is objective and generally provides the proper economic incentives. *5. Determine prices using absorption-cost pricing and variable-cost pricing. Absorptioncost pricing uses total manufacturing cost as the cost base and provides for selling and administrative costs plus the target ROI through the markup. The target selling price is computed as: Manufacturing cost per unit + (Markup percentage × Manufacturing cost per unit). Variable-cost pricing uses all of the variable costs, including selling and administrative costs, as the cost base and provides for fixed costs and target ROI through the markup. The target selling price is computed as: Unit variable cost + (Markup percentage × Unit variable cost). *6. Explain issues involved in transferring goods between divisions in different countries. Companies must pay income tax in the country where they generate the income. In order to maximize income and minimize income tax, many companies prefer to report more income in countries with low tax rates, and less income in countries with high tax rates. This is accomplished by adjusting the transfer prices they use on internal transfers between divisions located in different countries.

21 - 2

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

TRUE-FALSE STATEMENTS 1.

In most cases, a company sets the selling price instead of it being set by the competitive market.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

In a competitive market, a company is forced to act as a price taker and must emphasize minimizing and controlling costs.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

The difference between the target selling price and the desired profit is the target cost of the product.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

In a competitive environment, the company must set a target cost and a target selling price.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

The cost-plus pricing approach establishes a cost base and adds a markup to this base to determine a target selling price.

Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Cost Management

The cost-plus pricing model gives consideration whether demand will dictate that customers pay the target selling price.

Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Cost Management

Sales volume plays a large role in determining unit costs in the cost-plus pricing approach.

Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Cost Management

In time-and-material pricing, the material charge is based on the cost of direct materials used and a material loading charge for related overhead costs.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

The first step in time-and-material pricing is to calculate the material loading charge.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Cost Management

10.

The material loading charge is expressed as a percentage of the total estimated cost of materials for the year.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

11.

Divisions within vertically integrated companies normally sell goods only to other divisions within the same company.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

Pricing 12.

8-3

Using the negotiated transfer pricing approach, a minimum transfer price is established by the selling division.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

13.

There are two approaches for determining a transfer price: cost-based and market-based.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

14.

If a cost-based transfer price is used, the transfer price must be based on unit variable cost.

Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

15.

One problem with a cost-based transfer price is that it does not provide adequate incentive for the selling division to control costs.

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

16.

In the calculation of a minimum transfer price, opportunity cost is the contribution margin of goods sold externally.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

17.

The market-based transfer price approach produces a higher total contribution margin to the company than the cost-based approach.

Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

18.

A cost-based approach is the most commonly used method to establish a transfer price.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics a

19.

The markup percentage in the variable-cost approach is computed by dividing the desired ROI per unit plus the unit fixed cost by the unit variable cost.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Business Economics a

20.

Under the variable-cost approach, the cost base consists of all of the variable costs associated with a product except variable selling and administrative costs.

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Business Economics a

21.

The absorption-cost approach is consistent with generally accepted accounting principles because it defines the cost base as the manufacturing cost.

Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: FSA a

22.

The first step in the absorption-cost approach is to compute the markup percentage used in setting the target selling price.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Business Economics a

23.

Because absorption cost data already exists in general ledger accounts, it is cost effective to use it for pricing.

24.

The number of transfers between divisions that are located in different countries has .

21 - 4

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e decreased as companies rely more on outsourcing.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Global Business a

25.

Differences in tax rates between countries can complicate the determination of the appropriate transfer price when transferring goods between divisions in different countries.

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Global Business

MULTIPLE CHOICE QUESTIONS 26.

Factors that can affect pricing decisions include all of the following except a. cost considerations. b. environment. c. pricing objectives. d. All of these are factors.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

27.

In most cases, prices are set by the a. customers. b. competitive market. c. largest competitor. d. selling company.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

28.

A company must price its product to cover its costs and earn a reasonable profit in a. all cases. b. its early years. c. the long run. d. the short run.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

29.

Prices are set by the competitive market when a. the product is specially made for a customer. b. no other producers are manufacturing a similar item. c. a company can effectively differentiate its product from others. d. the product is not easily distinguished from competing products.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

30.

All of the following are factors that can affect pricing decisions except a. cost considerations. b. demand. c. environment. d. All of these are factors.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

31.

Companies that sell products whose prices are set by market forces are called .

Pricing a. b. c. d.

8-5

price givers. price leaders. price takers. price setters.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

32.

In which of the following situations would a company be unable to set the prices of its products? a. The product is not easily differentiated from competing products. b. The product is custom made for a customer. c. There are few or no other producers capable of making a similar product. d. The product can be effectively differentiated from others.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

33.

The calculation to determine target cost is a. variable manufacturing costs + fixed manufacturing costs. b. sales price – (variable manufacturing costs + fixed manufacturing costs). c. variable manufacturing costs + selling and administrative variable costs. d. market price – desired profit.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Cost Management

34.

Target cost is comprised of a. variable and fixed manufacturing costs only. b. variable manufacturing and selling and administrative costs only. c. total manufacturing and selling and administrative costs. d. fixed manufacturing and selling and administrative costs only.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Cost Management

35.

A company that is a price taker would most likely use which of the following methods? a. Time-and-material pricing b. Target costing c. Cost plus pricing, contribution approach d. Cost plus pricing, absorption approach

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

36.

Bond Co. is using the target cost approach on a new product. Information gathered so far is as follows: Expected annual sales 400,000 units Desired profit per unit $0.35 Target cost $168,000 What is the unit selling price? a. $0.42 b. $0.70 c. $0.35 d. $0.77

Ans: D, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: ($168,000 / 400,000) = $.42; $0.42 + $0.35 = $0.77 ((Target cost / Expected annual sales) – Desired profit per unit = Target selling price)

21 - 6

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

37.

Well Water Inc. wants to produce and sell a new flavored water. In order to penetrate the market, the product will have to sell at $2.00 per 12 oz. bottle. The following data has been collected: Projected annual sales Projected selling and administrative costs Desired profit

50,000 bottles $8,000 $70,000

The target cost per bottle is a. $0.44. b. $0.60. c. $0.16. d. $0.40. Ans: B, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: $2.00 – ($70,000 / 50,000) = $0.60 (Target selling price per bottle – (Desired profit / Annuals Sales) = Target cost per bottle)

38.

Larry Cable Inc. plans to introduce a new product and is using the target cost approach. Projected sales revenue is $810,000 ($4.05 per unit) and target costs are $730,000. What is the desired profit per unit? a. $0.40 b. $2.03 c. $3.65 d. None of the above

Ans: A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: $810,000 / $4.05 = 200,000; $730,000 / 200,000 = $3.65; $4.05 - $3.65 = $0.40 ((Target sales revenue / Target selling price) = Units; Target selling price – (Target costs / Units) = Desired profit per unit)

39.

Wasson Widget Company is contemplating the production and sale of a new widget. Projected sales are $300,000 (or 75,000 units) and desired profit is $36,000. What is the target unit cost? a. $4.00 b. $3.52 c. $4.48 d. $4.80

Ans: B, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $300,000 / 75,000 = $4.00; $36,000/ 75,000 = $0.48; $4.00 - $0.48 = $3.52 (Target sales revenue / units = Target selling price; Desired Profit / Units = Desired profit per unit; Target selling price – Desired profit per unit = Target unit cost)

40.

Boomer Boombox Inc. wants to produce and sell a new lightweight radio. Desired profit per unit is $1.84. The expected unit selling price is $22 based on a volume of 10,000 units. What is the total target cost at this sales volume? a. $201,600 b. $220,000 c. $18,400 d. $238,400

Ans: A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($22- $1.84) x 10,000 = $201,600 (Target selling price – Desired profit per unit) x Units = Total target cost)

Pricing 41 .

8-7

In cost-plus pricing, the markup consists of a. manufacturing costs. b. desired ROI. c. selling and administrative costs. d. total cost and desired ROI.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Business Economics

42.

The desired ROI per unit is calculated by a. multiplying the ROI by the investment and dividing by the estimated sales number of units produced. b. multiplying the unit selling price by the ROI. c. dividing the total cost by the estimated sales volume and multiplying by the ROI. d. dividing the ROI by the estimated sales volume and subtracting the result from the unit cost.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Performance Measurement

43.

Bellingham Watersports Co. has received a shipment of wet suits that cost $200 each. If the company uses cost-plus pricing and applies a markup percentage of 60%, what is the selling price per suit? a. $333 b. $320 c. $280 d. $500

Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: $200 x 1.60 = $320 (Target cost x Markup percentage = Sales price per wet suit)

44.

Smoky Mountain Shoe Company has gathered the following information for one model of its hiking boots: Variable manufacturing costs Variable selling and administrative costs Fixed manufacturing costs Fixed selling and administrative costs Investment ROI Planned production and sales

$40,000 $20,000 $160,000 $120,000 $1,700,000 30% 5,000 pairs

What is the total cost per pair of boots? a. $40 b. $68 c. $168 d. $96 Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $40,000 + $20,000 + $160,000 + $120,000 = $340,000; $340,000 / 5,000 = $68 ((Variable manufacturing costs + Variable selling and administrative costs + Fixed manufacturing costs + Fixed selling and administrative costs) / Planned Production and Sales = Total cost per pair of boots)

21 - 8 45.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

$40,000 $20,000 $160,000 $120,000 $1,700,000 30% 5,000 pairs

What is the desired ROI per pair of boots? a. $68 b. $168 c. $102 d. $170 Ans: C, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement Solution: $1,700,000 x .30 = $510,000 /5,000 = $102 ((Investment x ROI) / Planned Production and Sales = Desired ROI per pair of boots)

46.

$40,000 $20,000 $160,000 $120,000 $1,700,000 30% 5,000 pairs

What is the target selling price per pair of boots? a. $142 b. $170 c. $114 d. $158 Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: $40,000 + $20,000+ $160,000 + $120,000 = $340,000; $340,000 / 5,000 = $68; $1,700,000 x.30 = $510,000 /5,000 = $102; $102+ $68 - $170 ((Variable manufacturing costs + Variable selling and administrative costs + Fixed manufacturing costs + Fixed selling and administrative costs) / Planned Production and Sales = Total cost per pair of shoes; (Investment x ROI) / Planned Production and Sales = Desired ROI per pair of boots; Total cost per pair of boots + Desired ROI per pair of boots = Target selling price per pair of boots)

Pricing 47.

8-9

$40,000 $20,000 $160,000 $120,000 $1,700,000 30% 5,000 pairs

What is the markup percentage? a. 150% b. 255% c. 850% d. 130% Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: $40,000 + $20,000 + $160,000 + $120,000 = $340,000; $340,000 / 5,000 = $68; $1,700,000 x 30% = $510,000 /5,000 = $102; $102+ $68 $170; ($170 - $68) / $68 – 1.5 or 150% ((Target selling price per pair of boots – Total cost per pair of boots) / Total cost per pair of boots = Markup Percentage)

48.

Lock Inc. has collected the following data concerning one of its electronic keypad deadbolt: Unit selling price Total sales Unit cost Total investment

$145 15,000 units $115 $1,800,000

The ROI percentage is a. 20%. b. 25%. c. 30%. d. 35%. Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement Solution $1,800,000 * X = (($145-$115) x 15,000); X = .25 or 25% (Total investment x ROI percentage (X) = ROI)

49.

Lock Inc. has collected the following data concerning one of its electronic keypad deadbolt: Unit selling price Total sales Unit cost Total investment

$145 15,000 units $115 $1,800,000

The markup percentage is a. 20.69%. b. 22.59%. c. 25%. d. 26.09%. Ans: D, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: ($145- $115) / $115 = .2609 or 26.09% ((Target selling price per pair of shoes – Total cost per pair of shoes) / Total cost per pair of shoes = Markup Percentage)

21 - 10 50.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e A company using cost-plus pricing has an ROI of 24%, total sales of 20,000 units and a desired ROI per unit of $30. What was the amount of investment? a. $1,440,000 b. $2,500,000 c. $456,000 d. $789,475

Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement Solution: ($30 ÷ 24%) x 20,000 = $2,500,000. (Total investment (X) x ROI percentage = Desired ROI)

51.

Brislin Products has a new product going on the market next year. The following data are projections for production and sales: Variable costs Fixed costs ROI Investment Sales

$250,000 $450,000 14% $2,000,000 200,000 units

What is the target selling price? a. $4.90 b. $3.50 c. $2.65 d. $3.99 Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: $2,000,000 x 14% = $280,000; $280,000 / 200,000 = $1.4; ($250,000 + $450,000) / 200,000 = $3.5; $1.40 + $3.50 = $4.90 (Investment x ROI = Desired ROI; Desired ROI / Sales = Desired ROI per unit; (Variable Costs + Fixed Costs) / Sales = Unit cost; Desired ROI per unit + Unit cost = Target selling price)

52.

Brislin Products has a new product going on the market next year. The following data are projections for production and sales: Variable costs Fixed costs ROI Investment Sales

$250,000 $450,000 14% $2,000,000 200,000 units

What is the markup percentage? a. 14% b. 20% c. 62% d. 40% Ans: D, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: $2,000,000 x .14 = $280,000; $280,000 / 200,000 = $1.4; ($250,000 + $450,000) / 200,000 = $3.5; $1.40 + $3.50 = $4.90; ($4.90 - $3.50)/ $3.50 = .40 or 40% ((Target selling price - Unit cost) / Unit cost = Markup percentage)

Pricing 53.

8 - 11

Brislin Products has a new product going on the market next year. The following data are projections for production and sales: Variable costs Fixed costs ROI Investment Sales

$250,000 $450,000 14% $2,000,000 200,000 units

What would the markup percentage be if only 150,000 units were produced and sold and Brislin still wanted to earn the desired ROI? a. 32.95% b. 53.43% c. 35.0% d. 44.00% Ans: D, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: $2,000,000 x .14 = $280,000; $280,000 / 150,000 = $1.87; ($250,000 / 200,000) + ($450,000) / 150,000) = $4.25; $4.25 + $1.87 = $6.12; ($6.12 - $4.25)/ $4.25 = .44 or 44% ((Investment x ROI) / Units sold = Desired ROI per unit; (Variable Costs + Fixed Costs) / Units Sold = Unit cost; Desired ROI per unit + Unit cost = Targeted Selling Price; (Target selling price – Unit Cost) / Unit cost = Markup percentage)

54.

When using cost-plus pricing, which per unit amount does not change when the expected volume differs from the budgeted volume? a. Variable cost b. Fixed cost c. Desired ROI d. Target selling price

Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Business Economics

55.

Why does the unit selling price increase when expected volume is lower than the budgeted volume? a. Variable costs and fixed costs have to be spread over fewer units. b. Fixed costs and desired ROI have to be spread over fewer units. c. Variable costs and desired ROI have to be spread over fewer units. d. Fixed costs only have to be spread over fewer units.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Business Economics

56.

In cost-plus pricing, the target selling price is computed as a. unit variable cost + desired ROI per unit. b. unit fixed cost + desired ROI per unit. c. total unit cost + desired ROI per unit. d. unit variable cost + unit fixed manufacturing cost + desired ROI per unit.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Business Economics

57.

In cost-plus pricing, the markup percentage is computed by dividing the desired ROI per unit by the a. unit fixed cost. b. total unit cost. c. total manufacturing cost per unit. d. unit variable cost. .

21 - 12

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

58.

The cost-plus pricing approach’s major advantage is a. it considers customer demand. b. that sales volume has no effect on per unit costs. c. it is simple to compute. d. it can be used to determine a product’s target cost.

Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Business Economics

59.

The following per unit information is available for a new product of Red Ribbon Company: Desired ROI Fixed cost Variable cost Total cost Selling price

$ 20 40 60 100 120

Red Ribbon Company’s markup percentage is a. 17%. b. 20%. c. 33%. d. 50%. Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: ($120 - $100)/ $100 = .20 or 20% ((Selling price – Total cost) / Total cost = Markup Percentage)

60.

Bryson Company has just developed a new product. The following data is available for this product: Desired ROI per unit Unit fixed cost Unit variable cost Total unit cost

$ 30 50 75 125

The target selling price for this product is a. $155. b. $125. c. $105. d. $200. Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: $125 + $30 = $155 (Total unit cost + Desired ROI per unit = Target selling price)

61.

All of the following are correct statements about the cost-plus pricing approach except that it a. is simple to compute. b. considers customer demand. c. includes only variable costs in the cost base. d. is the most commonly used method.

Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

Pricing 62.

8 - 13

In the cost-plus pricing approach, the desired ROI per unit is computed by multiplying the a. ROI percentage by fixed costs. b. total unit cost by the markup percentage c. contribution margin ration by total costs. d. unit variable cost by the markup percentage.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

63.

Red Grass Company produces high definition television sets. The following information is available for this product: Unit fixed cost $ 250 Unit variable cost 750 Total unit cost 1,000 Desired ROI per unit 300 Red Grass Company’s markup percentage is a. 30%. b. 40%. c. 60%. d. 23.1%.

Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution; ($1,300 - $1,000) / $1,000 = .30 or 30% ((Total unit cost + Desired ROI per unit = Targeted unit selling price; (Target selling price – Total unit cost) / Total unit cost = Markup percentage)

64.

Red Grass Company produces high definition television sets. The following information is available for this product: Unit fixed cost $ 250 Unit variable cost 750 Total unit cost 1,000 Desired ROI per unit 300 The target selling price for this television is a. $550. b. $1,000. c. $1,050. d. $1,300.

Ans: D, LO: 2, Bloom: AP, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: $1,000 + $300 = $1,300 (Total unit cost + Desired ROI per unit = Target selling price)

65.

In time-and-material pricing, a material loading charge covers all of the following except a. purchasing costs. b. related overhead. c. desired profit margin. d. All of these are covered.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Business Economics

21 - 14 66.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e The first step for time-and-material pricing is to calculate the a. charge for obtaining materials. b. charge for holding materials. c. labor charge per hour. d. charges for a particular job.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Business Economics

67.

The labor charge per hour in time-and-material pricing includes all of the following except a. an allowance for a desired profit. b. charges for labor loading. c. selling and administrative costs. d. overhead costs.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Business Economics

68.

The last step in determining the material loading charge percentage is to a. estimate annual costs for purchasing, receiving, and storing materials. b. estimate the total cost of parts and materials. c. divide material charges by the total estimated costs of parts and materials. d. add a desired profit margin on the materials themselves.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Business Economics

69.

In time-and-material pricing, the charge for a particular job is the sum of the labor charge and the a. materials charge. b. material loading charge. c. materials charge + desired profit. d. materials charge + the material loading charge.

70.

The following data is available for Wheels ‘N Spokes Repair Shop for 2022: Repair technicians’ wages $360,000 Employee benefits 80,000 Overhead 60,000 Total $500,000 The desired profit margin is $40 per labor hour. The material loading charge is 28% of invoice cost. It is estimated that 5,000 labor hours will be worked in 2022. Wheels ‘N Spokes’ labor charge per hour in 2022 would be a. $100. b. $112. c. $128. d. $140.

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution; $500,000 / 5,000 = $100; $100 + $28 = $128 (Total labor cost / labor hours = Total labor cost per hour; Total labor cost per hour + Desired profit margin per hour = Labor charge per hour)

Pricing 71.

8 - 15

The following data is available for Wheels ‘N Spokes Repair Shop for 2022: Repair technicians’ wages $360,000 Employee benefits 80,000 Overhead 60,000 Total $500,000 The desired profit margin is $40 per labor hour. The material loading charge is 28% of invoice cost. It is estimated that 5,000 labor hours will be worked in 2022. In January 2022, Wheels ‘N Spokes repairs a bicycle that uses parts of $180. Its material loading charge on this repair would be a. $50.40. b. $108. c. $180. d. $252.

Ans: A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $180 x .28 = $72 (Total material used x Material loading charge per invoice (%) = Material loading charge)

72.

The following data is available for Wheels ‘N Spokes Repair Shop for 2022: Repair technicians’ wages $360,000 Employee benefits 80,000 Overhead 60,000 Total $500,000 The desired profit margin is $40 per labor hour. The material loading charge is 28% of invoice cost. It is estimated that 5,000 labor hours will be worked in 2022. In March 2022, Wheels ‘N Spokes repairs a bicycle that takes two hours to repair and uses parts of $240. The bill for this repair would be a. $520.20. b. $560.00. c. $592.50. d. $587.20.

Ans: D, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: $240 + ($140 x 2) + ($240 x .28) = $616 (Total labor cost / labor hours = Total labor cost per hour; Material cost + (Labor cost per hour x hours + cost of materials + material loading charge = Bill for this repair)

73.

Which of the following organizations would most likely not use time-and-material pricing? a. Automobile repair company b. Engineering firm c. Custom furniture manufacturer d. Public accounting firm

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

21 - 16 74.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e Carlos Consulting Inc. provides financial consulting and sells its own line of financial planners and budgeting products. The company has collected the following data for the next year’s budgeted activity for a lead consultant and the supplies clerk.

Consultants’ wages Benefits Related overhead

$90,000 22,500 17,500

Clerk’s wages Benefits Related overhead

$18,000 4,000 20,000

Profit margin per hour Profit margin on materials Total estimated consulting hours Total estimated material costs

$20 15% 2,000 $168,000

The labor rate per hour for this consultant is a. $42.50. b. $26.00. c. $65.00. d. $85.00. Ans: D, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: ($90,000 + $22,500 + $17,500) / 2,000 = $65 + $20 = $85 (Consultants’ wages + Benefits + Related Overhead) / Total estimated consulting hour = Total labor cost per hour; Total labor cost per hour + Profit margin per hour = Total labor rate per hour)

75.

Carlos Consulting Inc. provides financial consulting and sells its own line of financial planners and budgeting products. The company has collected the following data for the next year’s budgeted activity for a lead consultant and the supplies clerk. Consultants’ wages Benefits Related overhead

$90,000 22,500 17,500

Clerk’s wages Benefits Related overhead

$18,000 4,000 20,000

Profit margin per hour Profit margin on materials Total estimated consulting hours Total estimated material costs

$20 15% 5,000 $168,000

The material loading charge is a. 15%. b. 25%. c. 40%. d. 55%. Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: ($18,000 + $4,000 + $20,000) = $42,000 ÷ $168,000 = 25% + 15% = .40 or 40%. (Supply clerk’s wages + Benefits + Related Overhead + (Total estimated materials costs x profit margin on materials)) / Total estimated material costs = Material loading charge)

Pricing 76.

8 - 17

$90,000 22,500 17,500

Clerk’s wages Benefits Related overhead

$18,000 4,000 20,000

Profit margin per hour Profit margin on materials Total estimated consulting hours Total estimated material costs

$20 15% 2,000 $168,000

If a consulting job takes 20 hours of consulting time and $180 of materials, the client’s bill would be a. $1,952. b. $1772. c. $1,700. d. $1,880. Ans: A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: ($90,000 + $22,500 + $17,500) / 5,000 = $26 + $20 = $46; ($18,000 + $4,000 + $20,000) = $42,000 ÷ $168,000 = 25% + 15% = .40 or 40%; (20 x $85) + $180 + ($180 x .40) = $1,952 (Labor cost per hour x hours) + Materials + (Materials x Material loading charge %) = Client’s bill

77.

Los Lobos Repair Service recently performed repair services for a customer that totaled $400. Somehow the bill was lost and the company accountant was trying to recreate the bill from memory. This is what was remembered: Total bill Labor profit margin Materials profit margin Total labor charges Cost of materials used Total hourly cost

$600 $10 20% $390 $120 $22.50

What was the material loading charge? a. 37.5% b. 43.8% c. 61.3% d. 75% Ans: D, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: $600 - $390 - $120 = $90 / $120 = .75 or 75% ((Total bill – Total labor charges – Cost of materials used) / Cost of materials used = material loading charge)

21 - 18 78.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e Los Lobos Repair Service recently performed repair services for a customer that totaled $400. Somehow the bill was lost and the company accountant was trying to recreate the bill from memory. This is what was remembered:

Total bill Labor profit margin Materials profit margin Total labor charges Cost of materials used Total hourly cost

$600 $10 20% $390 $120 $22.50

How many hours were billed on the job? a. 19.5 b. 18.5 c. 17.3 d. 12.0 Ans: D, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: $390 / ($22.5 + $10) = 12 (Total labor charges / (Total hourly cost + Labor profit margin) = Hours billed on the job)

79.

Solberg Architectural Services recently billed a customer $690. Labor hours were 6 and the cost of the materials used was $150. If the company’s hourly labor rate was $75, what material loading charge was used? a. 30% b. 50% c. 60% d. 100%

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: $690 - $150 – (6 x $75) = $90; $90/$150 = .60 or 60% ((Total bill – Materials used – (Hourly labor rate x labor hours)) / Materials used = Material loading charge (%)

80.

Dudly Drafting Services uses a 45% material loading charge and a labor rate of $20 per hour. How much will be charged on a job that requires 3.5 hours of work and $40 of materials? a. $128 b. $110 c. $88 d. $133

Ans: A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: $40 + ($40 x .45) + (3.5 x $20) = $128 ((Materials used + (Materials used x Material loading charge) + (Labor rate per hour x labor hours) = Total cost charged to the job)

81.

The time component under time-and-material pricing includes a a. loading charge. b. charge for receiving, handling, and storing materials. c. portion of the materials clerk’s wages. d. profit margin.

Pricing 82.

8 - 19

Using time-and-material pricing involves how many steps? a. 4 b. 3 c. 2 d. 1

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Business Economics

83.

The last step in calculating the hourly rate to be charged in time-and-material pricing is to a. estimate the total labor costs plus fringe benefits. b. estimate the total labor hours. c. add a profit margin. d. add a charge for overhead costs.

84.

Jaycee Auto Repair has the following budgeted costs for the next year: Shop employees’ wages and benefits Parts manager’s salary and benefits Office employee’s salary and benefits Other overhead Invoice cost of parts and materials Total budgeted costs

Time Charges $120,000 30,000 15,000 $165,000

Material Charges $ 45,000 15,000 40,000 400,000 $500,000

The labor rate to be used next year assuming 7,500 hours of repair time and a profit margin of $25 per labor hour is a. $53. b. $41. c. $43. d. $47. Ans: D, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: $165,000 / 7,500 = $22; $22 + $25 = $47 ((Total budgeted cost / hours) + Profit margin per labor hour = Labor rate used next year)

85.

Time Charges $120,000 30,000 15,000 $165,000

Material Charges $ 45,000 15,000 40,000 400,000 $500,000

Next year’s material loading charge, assuming a 40% markup on material cost is a. 20%. b. 40%. c. 65%. d. 60%. Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: ($45,000 + $15,000 + $40,000) = $100,000 ÷ $500,000 = 25% + 40% = .65 or 65%.

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

((Total budgeted materials charges – Invoice cost of parts and materials) + (Invoice cost of parts and materials x Mark-up percentage)) / Invoice cost of parts and materials = Material loading charge)

86.

Jaycee Auto Repair has the following budgeted costs for the next year based on budgeted hours of 6,000: Shop employees’ wages and benefits Parts manager’s salary and benefits Office employee’s salary and benefits Other overhead Invoice cost of parts and materials Total budgeted costs

Time Charges $120,000 30,000 15,000 $165,000

Material Charges $ 45,000 15,000 40,000 400,000 $500,000

Jaycee estimates that the repairs to a Cadillac Escalade damaged in an accident will take 45 hours of labor and $3,500 in parts and materials. If the hourly labor charge is $47, what is the total cost of the repairs? a. $5,890. b. $7,890. c. $5,775. d. $7,015. Ans: B, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: ($45,000 + $15,000 + $40,000) = $100,000 ÷ $500,000 = 25% + 40% = .65 or 65%; $165,000 / 7,500 = $22; $22 + $25 = $47; $3,500 + ($3,500 x .65) + ($47 x 45) = $7,890 (Parts and Materials + (Parts and Materials x Material Loading charge) + (Labor rate per hour x labor hours) = Total cost of the repairs)

87.

The price used to record a sale between divisions within the same vertically integrated company is called the a. sales price. b. integrated price. c. transfer price. d. bargain price.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

88.

The overall objective in the determination of a transfer price is to a. maximize the return of the selling division. b. minimize the cost to the purchasing division. c. minimize the return of the selling division. d. maximize the return to the whole company.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

89.

Which two methods are used most often when establishing a transfer price? a. Negotiated transfer pricing and cost-based transfer pricing b. Cost-based transfer pricing and market-based transfer pricing c. Negotiated transfer pricing and market-based transfer pricing d. Cost-based transfer pricing and standard-based pricing

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

Pricing 90.

8 - 21

Alpha Company’s Selling Division’s unit sales price is $25 and its unit variable cost is $15. Its capacity is 10,000 units. Unit fixed cost are $6. Current outside sales are 8,000 units. What is the Selling Division’s opportunity cost per unit from selling 2,000 units to the Purchasing Division? a. $10 b. $25 c. $4 d. $0

Ans: D, LO: 4, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: 8,000 + 2,000 = 10,000 (at capacity) (Current outside sales in units + Units sold = Total units at capacity)

91.

Beatty Company’s Selling Division’s unit sales price is $25 and its unit variable cost is $15. Its capacity is 8,000 units. Unit fixed cost are $6. Current outside sales are 8,000 units. What is the Selling Division’s opportunity cost per unit from selling 3,000 units to the Purchasing Division? a. $10 b. $25 c. $4 d. $0

Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: $25 - $15 = $10 (Current outside sales in units + Units sold = Total units (over capacity); Unit sales price – Unit variable cost = Opportunity cost per unit)

92.

In the minimum transfer price equation, variable cost is defined as the variable cost of a. all units sold, both internally and externally. b. units sold externally. c. units not sold. d. units sold internally.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Business Economics

93.

Under the negotiated transfer pricing approach, the minimum transfer price is established by the a. purchasing division. b. corporate headquarters management. c. selling division. d. corporate negotiator.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

94.

Under the negotiated transfer pricing approach, the maximum transfer price is established by the a. purchasing division. b. corporate headquarters management. c. selling division. d. corporate negotiator.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

95.

Assume that the Thread Division has excess capacity. The Garment Division wants the Thread Division to furnish them additional spools of thread that could be made using the excess capacity. In a negotiated transfer price, the Thread Division should accept as a minimum any transfer price that exceeds the a. total cost of producing spools for outside sales. b. variable costs of producing the additional spools for the Garment Division. c. contribution margin and outside spool sales. d. foregone contribution margin on outside spool sales.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

96.

The most common method used to establish transfer prices is a. negotiated transfer pricing. b. market-based transfer pricing. c. cost-plus transfer pricing. d. cost-based transfer pricing.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

97.

When a sale occurs between divisions of the same company, which transfer pricing approach may lead to the buying division overpricing its product? a. Cost based transfer pricing b. Market-based transfer pricing c. Negotiated transfer pricing d. Cost-plus transfer pricing

Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

98.

The Lumber Division of Paul Bunyon Homes Inc. produces and sells lumber that can be sold to outside customers or within the company to the Construction Division. The following data have been gathered for the coming period: Lumber Division: Capacity Price per board foot Variable production cost per bd. ft. Variable selling cost per bd. ft.

200,000 board feet $2.50 $1.25 $0.50

Construction Division: Board feet needed Outside price paid per bd. ft.

60,000 $2.00

If the Lumber Division sells to the Construction Division, $0.35 per board foot can be saved in shipping costs. If current outside sales are 130,000 board feet, what is the minimum transfer price that the Lumber Division should accept? a. $1.25 b. $1.40 c. $1.75 d. $2.50 Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: $1.25 + $.50 - $.35 = $1.40 (Variable production cost per board foot + Variable selling cost per board foot – Shipping cost per board foot savings = Minimum transfer price)

Pricing 99.

8 - 23

200,000 board feet $2.50 $1.25 $0.50

Construction Division: Board feet needed Outside price paid per bd. ft.

60,000 $2.00

If the Lumber Division sells to the Construction Division, $0.35 per board foot can be saved in shipping costs. If current outside sales are 200,000 board feet, what is the minimum transfer price that the Lumber Division should accept? a. $2.00 b. $1.65 c. $1.40 d. $2.15 Ans: D, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: $2.50 - .35 = $2.15 (Price per board foot – Shipping cost per board food savings = minimum transfer price)

100.

200,000 board feet $2.50 $1.25 $0.50

Construction Division: Board feet needed Outside price paid per bd. ft.

60,000 $2.00

If the Lumber Division sells to the Construction Division, $0.35 per board foot can be saved in shipping costs. If the Lumber Division has sufficient excess capacity to fulfill the Construction Division’s needs, what will be the effect on the company’s overall contribution margin? a. Decrease by $30,000 b. Decrease by $24,000 c. Increase by $36,000 d. Increase by $33,500 Ans: C, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: ($2.00 - $1.40) x 60,000 = $36,000 ((Outside price paid per board – minimum transfer price) x board feet needed = Increase in overall contribution margin)

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

101.

Tuttle Motorcycles Inc. manufactures and sells high-priced motorcycles. The Engine Division produces and sells engines to other motorcycle companies and internally to its Retail Division. It has been decided that the Engine Division will sell 20,000 units to the Retail Division at $1,050 a unit. The Engine Division, currently operating at capacity, has a unit selling price of $2,550 and unit variable costs and unit fixed costs of $1,050 and $750, respectively. The Retail Division is currently paying $2,400 per unit to an outside supplier. If the product is sold internally, $90 per unit can be saved on reduced selling expenses. What is the minimum transfer price that the Engine Division should accept? a. $2,460 b. $2,550 c. $2,400 d. $1,500

Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: $2,550 = ($1,050 - $90) + ($2,550 - $1,050) ((Outside Supplier Price + (Unit Sales Price – Outside Supplier Price – Savings internally on reduced selling expenses per unit) = Minimum transfer price)

102.

Tuttle Motorcycles Inc. manufactures and sells high-priced motorcycles. The Engine Division produces and sells engines to other motorcycle companies and internally to the Retail Division. It has been decided that the Engine Division will sell 20,000 units to the Retail Division at $1,050 a unit. The Engine Division, currently operating at capacity, has a unit selling price of $2,550 and unit variable costs and unit fixed costs of $1,050 and $750, respectively. The Retail Division is currently paying $2,400 per unit to an outside supplier. If the product is sold internally, $90 per unit can be saved on reduced selling expenses. What is the increase/decrease in overall company profits if this transfer takes place? a. Decrease $1,200,000 b. Increase $2,520,000 c. Decrease $3,000,000 d. Increase $27,000,000

Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement Solution: ($2,550 - $2,400 - $90) = $60 x 20,000 = $1,200,000 ((Unit Sales Price – Outside Supplier Price – Savings internally on reduced selling expenses per unit) x Units sold = Increase/decrease in overall company profits)

103.

The Can Division of Fruit Products Inc. manufactures and sells recyclable containers externally for $0.60 per container. Its unit variable costs and unit fixed costs are $0.24 and $0.08, respectively. The Packaging Division wants to purchase 50,000 containers at $0.32 per unit. Selling internally will save $0.02 a container. Assuming that the Can Division has sufficient capacity, what is the minimum transfer price it should accept? a. $0.24 b. $0.32 c. $0.22 d. $0.30

Pricing 104.

8 - 25

The Can Division of Fruit Products Inc. manufactures and sells recyclable containers externally for $0.60 per container. Its unit variable costs and unit fixed costs are $0.24 and $0.08, respectively. The Packaging Division wants to purchase 50,000 containers at $0.32 per unit. Selling internally will save $0.02 a container. Assuming that the Can Division is already operating at full capacity, what is the minimum transfer price it should accept? a. $0.58 b. $0.66 c. $0.28 d. $0.34

Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution; ($0.24 - $0.02) + ($0.60 - $0.24) = $0.58 External Selling price – Internal Savings = Minimum transfer price)

105.

The Non-dairy Division of Pure Plant Foods, Inc. produces and sells almond milk to outside customers. The operation has the capacity to produce 200,000 gallons of milk a year. Last year’s operating results were as follows: Sales (160,000) gallons $500,000 Variable costs 312,000 Contribution margin 188,000 Fixed costs 100,000 Net Income $ 88,000 Assume the Desserts Division wants to purchase 30,000 gallons of milk from the Non-dairy Division. The minimum price that will increase the Non-dairy Division’s sales revenue is a. $2.50 per gallon. b. $1.18 per gallon. c. $1.95 per gallon. d. $0.55 per gallon.

106.

The Non-dairy Division of Pure Plant Foods, Inc. produces and sells almond milk to outside customers. The operation has the capacity to produce 200,000 gallons of milk a year. Last year’s operating results were as follows: Sales (160,000) gallons $500,000 Variable costs 312,000 Contribution margin 188,000 Fixed costs 100,000 Net Income $ 88,000 Assume the Non-dairy Division is operating at capacity. If the Dessert Division wants to purchase 30,000 gallons of milk from the Non-dairy Division, what is the minimum price that will allow the Non-dairy Division to maintain its current net income? a. $3.13 per gallon b. $1.18 per gallon c. $1.95 per gallon d. $0.55 per gallon

Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution; $500,000 / $160,000 = $3.13 (Sales / Units = Minimum price)

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

107.

All of the following are reasons why negotiated transfer pricing is not always feasible except a. market price information is sometimes not easily obtainable. b. a lack of trust between the negotiating divisions may lead to a breakdown in the negotiations. c. negotiations often lead to different pricing strategies from division to division. d. opportunity cost is sometimes not determinable.

Ans: D, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

108.

All of the following are approaches for determining a transfer price except the a. cost-based approach. b. market-based approach. c. negotiated approach. d. time-and-material approach.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

109.

When a cost-based transfer price is used, the transfer price may be based on any of the following except a. fixed cost alone. b. full cost. c. variable cost alone. d. variable cost plus fixed cost.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

110.

All of the following are correct statements about the cost-based transfer price approach except that it a. can understate the actual contribution to profit by the selling division. b. can reduce a division manager’s control over the division’s performance. c. bases the transfer price on estimated cost instead of actual cost. d. provides incentive for the selling division to control costs.

Ans: D, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

111.

The general equation for the minimum transfer price is: minimum transfer price equals a. fixed cost + opportunity cost. b. external purchase price. c. total cost + opportunity cost. d. variable cost + opportunity cost.

112.

Variable costs of units sold internally will always be a. lower than the variable costs of units sold externally. b. higher than the variable costs of units sold externally. c. the same as the variable costs of units sold externally. d. Either higher or lower than for units sold externally.

Pricing 113.

8 - 27

In the calculation of the minimum transfer price, opportunity cost is the foregone of the goods sold externally. a. variable cost b. total cost c. selling price d. contribution margin

114.

Conceptually, the transfer price approach that should work the best is the a. cost-based approach. b. market-based approach. c. negotiated price approach. d. time-and-material pricing approach.

Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Business Economics

115.

The transfer price approach that is often considered the best approach because it generally provides the proper economic incentives is the a. cost-based approach. b. market-based approach. c. negotiated price approach. d. time-and-material pricing approach.

116.

All of the following are correct statements about the market-based approach except that it a. assumes that the transfer price should be based on the most objective inputs possible. b. provides a fairer allocation of the company’s contribution margin to each division. c. produces a higher company contribution margin compared to the cost-based approach. d. ensures that each division manager is properly motivated and rewarded.

117.

The negotiated transfer price approach can be used when a. the selling division has available capacity and is willing to accept less than the market price. b. an outside market for the goods does not exist. c. no market price is available. d. any of these situations exist.

Ans: D, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

118.

Assuming that the selling division has available capacity, a negotiated transfer price should be within the range of a. unit fixed cost and the external purchase price. b. total unit cost and the external purchase price. c. unit variable cost and the external purchase price. d. unit variable cost and the opportunity cost.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

119.

The transfer price approach that will result in the greatest contribution margin to the buying division is the a. cost-based approach. b. market-based approach. c. negotiated price approach. d. time-and-material pricing approach.

Ans: A, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

120.

The maximum transfer price from the buying division’s standpoint is the a. total cost + opportunity cost. b. variable cost + opportunity cost. c. external purchase price. d. external purchase price + opportunity cost.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Governance Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics

121.

The Wood Division of Fir Products, Inc. manufactures rubber moldings and sells the product externally for $55. Its unit variable cost is $25 and its unit fixed cost is $7. Fir’s president wants the Wood Division to transfer 5,000 units to another company division at a price of $32. Assuming the Wood Division has available capacity of 5,000 units, the minimum transfer price it should accept is a. $7. b. $25. c. $32. d. $55.

Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: $25 + ($55 - $25) = $55 Variable cost + opportunity cost or (unit selling price – unit variable cost)

122.

The Wood Division of Fir Products, Inc. manufactures rubber moldings and sells the product externally for $55. Its unit variable cost is $25 and its unit fixed cost is $7. Fir’s president wants the Wood Division to transfer 5,000 units to another company division at a price of $32. Assuming the Wood Division does not have any available capacity, the minimum transfer price it should accept is a. $7. b. $25. c. $32. d. $55.

Ans: D, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: $25 + 30 = $55 (Variable cost + Opportunity cost = Minimum transfer price)

Pricing 123.

8 - 29

Management of the Catering Company would like the Food Division to transfer 10,000 jars of its final product to the Restaurant Division for $30. The Food Division sells the product to customers for $70 per unit. The Food Division’s unit variable cost is $35 and its unit fixed cost is $10. If the Food Division is currently operating at full capacity, what is the minimum transfer price the Food Division should accept? a. $30 b. $35 c. $45 d. $70

Ans: D, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: $35 + ($70 - $35) = $70 Variable cost + opportunity cost or (unit selling price – unit variable cost)

124.

Management of the Catering Company would like the Food Division to transfer 10,000 jars of its final product to the Restaurant Division for $30. The Food Division sells the product to customers for $70 per unit. The Food Division’s unit variable cost is $35 and its unit fixed cost is $10. If the Food Division has 10,000 units available capacity, what is the minimum transfer price the Food Division should accept? a. $30 b. $35 c. $45 d. $70

125.

Papillon Co. has determined the following per unit amounts: Direct materials Direct labor Desired ROI Fixed mfg. overhead

$30 36 33 45

Fixed selling and administrative Variable mfg. overhead Variable selling and administrative

$60 24 15

The target selling price using the variable-cost approach is a. $311.85. b. $207.90. c. $212.10. d. $242.97 Ans: D, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: ($33 + $45 + $60) / ($30 + $36 + $24 + $15) = 1.314; $105 + (105 x 1.314) = $242.97 ((Desired ROI + Fixed overhead + Fixed selling and administrative) / (Direct materials + Direct labor + Variable overhead + Variable selling and administrative = Markup; Variable Cost + (Variable cost x Markup) = Target selling price)

21 - 30 a

126.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e Alfredo Co. has collected the following per unit data: Direct labor Direct materials Variable mfg. overhead

$8 5 4

Variable selling and admin. Fixed mfg. overhead Fixed selling and admin.

$3 1 7

The markup percentage is 120%. What is the markup amount using the variable-cost approach? a. $21.60 b. $24.00 c. $20.40 d. $33.60 Ans: B, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($8 + $5 + $4 + $3) x 1.20 = $24 ((Direct labor + Direct materials + Variable overhead + Variable selling and admin) x markup percentage = Markup amount under variable-cost approach) a

127.

Which of the following is consistent with generally accepted accounting principles? a. Absorption-cost approach b. Contribution approach c. Variable-cost approach d. Both absorption-cost and contribution approach

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting a

128.

Under the absorption-cost approach, all of the following are included in the cost base except a. direct materials. b. fixed manufacturing overhead. c. selling and administrative costs. d. variable manufacturing overhead.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: FSA a

129.

The first step in the absorption-cost approach is to compute the a. desired ROI per unit. b. markup percentage. c. target selling price. d. unit manufacturing cost.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Business Economics a

130.

The markup percentage in the absorption-cost approach is computed by dividing the sum of the desired ROI per unit and the a. unit fixed cost by the unit manufacturing cost. b. unit fixed cost by the unit variable cost. c. selling and administrative expenses per unit by unit manufacturing cost. d. selling and administrative expenses per unit by the unit variable cost.

Pricing a

131.

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In the absorption-cost approach, the markup percentage covers the a. desired ROI only. b. desired ROI and selling and administrative expenses. c. desired ROI and fixed costs. d. selling and administrative expenses only.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Cost Management a

132.

The absorption-cost approach is used by most companies for all of the following reasons except that a. absorption cost information is readily provided by a company’s cost accounting system. b. absorption cost provides the most defensible base for justifying prices to interested parties. c. basing prices on only variable costs could encourage managers to set too low a price to boost sales. d. this approach is more consistent with cost-volume-profit analysis.

Ans: D, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Cost Management a

133.

Under the variable-cost approach, the cost base includes all of the following except a. variable selling and administrative costs. b. variable manufacturing costs. c. total fixed costs. d. All of these costs are included.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Cost Management a

134.

In the variable-cost approach, the markup percentage covers the a. desired ROI only. b. desired ROI and fixed costs. c. desired ROI and selling and administrative expenses. d. fixed costs only.

135.

The markup percentage denominator in the variable-cost approach is the a. desired ROI per unit. b. unit fixed cost. c. manufacturing unit cost. d. unit variable cost.

136.

The reasons for using the variable-cost approach include all of the following except that this approach a. avoids arbitrary allocation of common fixed costs to individual product lines. b. is more consistent with cost-volume-profit analysis. c. provides the most defensible bases for justifying prices to all interested parties. d. provides the type of data managers need for pricing special orders.

Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Business Economics

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

137. Maggie Co. has unit variable manufacturing costs of $20 and unit fixed manufacturing cost of $15. Unit variable selling and administrative costs are $4 while unit fixed selling and administrative costs are $6. Maggie desires an ROI of $7.50 per unit. If Maggie Co. uses the absorption-cost approach, what is its markup percentage? a. 8.33% b. 16.67% c. 25% d. 50%

Ans: D, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: $7.50 + $4 + $6/ ($15 + $20) = .50 or 50% ((Desired ROI per unit + Variable selling and administrative costs + Fixed selling and administrative costs) / (Fixed manufacturing costs per unit + Variable manufacturing costs per unit) = Markup percentage using absorption) a

138. Maggie Co. has unit variable manufacturing costs of $20 and unit fixed manufacturing cost of $10. Unit variable selling and administrative costs are $5 while unit fixed selling and administrative costs are $2. Maggie desires an ROI of $8 per unit. If Maggie Co. uses the variable-cost approach, what is its markup percentage? a. 30% b. 50% c. 80% d. 100%

Ans: C, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: ($8 +$10 + $2) / ($5 + $20) = .80 or 80% ((Desired ROI per unit + Fixed Manufacturing unit cost + Unit fixed selling and administrative costs) / (Unit variable selling and administrative cost+ Unit variable manufacturing cost = markup percentage) a

139.

Papillon Co. has determined the following per unit amounts: Direct materials Direct labor Desired ROI Fixed mfg. overhead

$30 36 33 45

Fixed selling and administrative Variable mfg. overhead Variable selling and administrative

$60 24 15

The cost base using the absorption-cost approach is a. $90. b. $105. c. $195. d. $135. Ans: D, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $30 + $36 + $24 + $45 = $135 (Direct materials + Direct labor + Variable mfg. overhead + Fixed mfg. overhead = cost base using the absorption-cost approach)

Pricing a

140.

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Papillon Co. has determined the following per unit amounts: Direct materials Direct labor Desired ROI Fixed mfg. overhead

$30 36 33 45

Fixed selling and administrative $60 Variable mfg. overhead 24 Variable selling and administrative 15

The markup percentage using the absorption-cost approach is a. 131%. b. 102%. c. 90%. d. 80%. Ans: D, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: ($33 + $60 + $15) / ($30 + $36 + $24 + $45) = .80 or 80% (Desired ROI + Fixed Selling and Administrative + Variable selling and administrative) / (Direct materials + Direct labor + Variable mfg. overhead + Variable Selling and Administrative) = Markup percentage using the absorption-cost approach) a

141.

Papillon Co. has determined the following per unit amounts: Direct materials Direct labor Desired ROI Fixed mfg. overhead

$30 36 33 45

Fixed selling and administrative Variable overhead Variable selling and administrative

$60 24 15

The target selling price using the absorption-cost approach is a. $351. b. $243. c. $162. d. $371. Ans: B, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: $30 + $36 + $24 + $45 = $135; ($33 + $60 + $15) / ($30 + $36 + $24 + $45) = .80 or 80%; $135 x 1. 80 = $243 (Variable Cost + (Variable cost x Markup percentage) = Target selling price using the absorption-cost approach) a

142.

Papillon Co. has determined the following per unit amounts: Direct materials Direct labor Desired ROI Fixed mfg. overhead

$30 36 33 45

Fixed selling and administrative $60 Variable mfg. overhead 24 Variable selling and administrative 15

The cost base using the variable-cost approach is a. $90. b. $105. c. $195. d. $135. Ans: B, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: ($30 + $36 + $24 + $15) = $105 (Direct materials + Direct labor + Variable mfg. overhead + Variable selling and administrative = cost base)

21 - 34 a

143.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e Papillon Co. has determined the following per unit amounts:

Direct materials Direct labor Desired ROI Fixed mfg. overhead

$30 36 33 45

Fixed selling and administrative $60 Variable mfg. overhead 24 Variable selling and administrative 15

The markup percentage using the variable-cost approach is a. 131%. b. 102%. c. 90%. d. 80%. Ans: A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics Solution: ($33 + $45 + $60) / ($30 + $36 + $24 + $15) = 1.31 or 131% ((Desired ROI + Fixed Overhead + Fixed Selling and Administrative) / (Direct materials + Direct labor + Variable mfg. overhead + Variable selling and administrative) =Markup percentage using the variable-cost approach)

144.

All of the following are correct statements about transfers between divisions located in countries with different tax rates except that a. differences in tax rates across countries complicate the determination of the appropriate transfer price. b. many companies prefer to report more income in countries with low tax rates. c. companies must pay income tax in the country where income is generated. d. a decreasing number of transfers are between divisions located in different countries.

Ans: D, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Business Economics a

145.

Transfers between divisions located in different countries with varying tax rates a. can more simply determine the appropriate transfer price. b. are decreasing in number as more companies “localize” operations. c. encourage companies to report more income in countries with low tax rates. d. All of these answers are correct.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Decision Making, AICPA PC: Project Management, IMA: Global Business

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BRIEF EXERCISES BE 146 Home Appliances Co. wants to introduce a new digital display, laser driven iron to the market. The estimated unit sales price is $85. The required investment is $3,500,000. Unit sales are expected to be 300,000 and the minimum required rate of return on all investments is 15%. Instructions Compute the target cost per iron. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 146 Sales (300,000 × $85) Less desired ROI ($3,500,000 × 15%) Target cost Number of irons Target cost per iron

$25,500,000 525,000 24,975,000 ÷ 300,000 $ 83.25

Alternatively: (Required Investment + Minimum Required Rate of Return)/ Expected unit sales = Desired unit ROI Estimated selling price – Desired unit ROI = Target cost per iron ($3,500,000 x 15%)/ 300,000 = $1.75; $85.00 - $1.75 = $83.25 BE 147 Talia Corp. produces electric scooters. For each scooter produced, direct materials are $20, direct labor is $16, variable manufacturing overhead is $12, fixed manufacturing overhead is $28, variable selling and administrative expenses are $10, and fixed selling and administrative expenses are $24. Instructions Compute the target selling price assuming a 40% markup on total unit cost. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

Solution 147 Direct materials ....................................................... Direct labor ............................................................. Variable manufacturing overhead............................ Fixed manufacturing overhead ................................ Variable selling and administrative expenses .......... Fixed selling and administrative expenses .............. Total unit cost.................................................... Total unit cost $110

+ +

$ 20 16 12 28 10 24 $110

(Markup percentage × Total unit cost) (40% × $110)

= =

Target selling price $154

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

BE 148 Tina Company expects to produce 100,000 products in the coming year and has invested $20,000,000 in production equipment. Tina requires a return on investment of 10%. Instructions What is Tina’s ROI per unit? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Solution 148 ROI per unit = (Total investment  Desired ROI percentage) = ($20,000,000  10%) = $20 100,000 Number of units BE 149 NayTag produces stackable washing machines and dryers. The following per unit information is available for washing machines: direct materials, $72; direct labor, $48; variable manufacturing overhead, $36; fixed manufacturing overhead, $84; variable selling and administrative expenses, $24; fixed selling and administrative expenses, $56. NayTag desires an ROI per unit of $80. Instructions Compute NayTag’s markup percentage using a total cost approach. Solution 149 The markup percentage is:

$80 = 25% $72  $48  $36  $84  $24  $56

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

BE 150 MAC Company has invested $3,000,000 in assets to produce 10,000 units of its finished product. MAC’s budget for the year is as follows: net income, $360,000; variable costs, $2,400,000; fixed costs, $300,000. Instructions Compute each of the following: 1. Budgeted ROI 2. Markup percentage using the total cost approach Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Solution 150 1. ROI is equal to net income divided by invested assets. For MAC Company, budgeted ROI is: Budgeted ROI = $360,000 ÷ $3,000,000 = 12% 2. The markup percentage is equal to:

Net income Total cost

For MAC Company, the budgeted markup percentage is: .

$360,000 = 13.3% $2,400,000  $300,000

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BE 151 During the current year, Greeve Corporation expects to produce 10,000 units and has budgeted the following: net income $300,000; variable costs $900,000; and fixed costs $350,000. It’s investment in assets is $1,750,000. The company’s budgeted ROI is 20%. What is its budgeted markup percentage using the full-cost approach? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Solution 151 The markup percentage is equal to desired ROI per unit divided by total unit cost. The desired ROI per unit is computed as follows: Desired ROI per unit =

$1,750,000  20%  $35 10,000 units

The total unit cost is computed as follows: Total unit cost =

$900,000  $350,000  $125 10,000 units

The markup percentage is computed as follows: Desired ROI per unit = $35  28% Total unit cost

$125

BE 152 Horton Small Engine Repair charges $45 per hour of labor. It has a material loading percentage of 40%. On a recent job replacing the engine of a riding lawnmower, Horton worked 4 hours and used parts with a cost of $400. Calculate the customer’s total bill. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

Solution 152 The customer’s total bill would equal: (4 hours  $45) + $400 + ($400  40%) = $740 BE 153 On a recent job repairing a small boat engine, Marine Repairs Company worked 21 hours and used parts with a cost of $1,500. Marine Repairs Company charges $80 per hour of labor and has a material loading charge of 60%. Instructions Calculate the total bill for repairing the small boat engine. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

Solution 153 The total bill would equal: (21 hours × $80) + $1,500 + ($1,500 × 60%) = $4,080

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

BE 154 Alma and Associates, a consulting service, recently received a bill for repairs on its computer system totaling $2,280. Alma thinks it may have been overcharged and is trying to recreate the components of the bill. She knows the hourly rate is $75 and 15 hours of labor was charged. She also knows $700 of parts were replaced. Instructions Compute the material loading charge percentage the repair service used. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

Solution 154

(5 min)

Total repair bill Less labor charges (15 hours × $75) Total charge for parts Less parts cost Cost of loading charge Parts cost Loading charge percentage

$2,280 1,125 1,155 700 455 ÷ 700 65%

BE 155 Freberg Company, a division of Dudge Cars, produces solar batteries. Freberg sells the batteries to its customers for $92 per unit. The unit variable cost is $42, and unit fixed cost is $16. Top management of Dudge Cars would like Freberg to transfer 30,000 batteries to another division within the company at a price of $54. Freberg is operating at full capacity. Instructions Compute the minimum transfer price that Freberg should accept. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

Solution 155 The minimum transfer price is equal to Freberg’s variable cost plus its opportunity cost. The opportunity cost is equal to its contribution margin on goods sold to external parties. Thus, the minimum transfer price in this case is: $42 + ($92 – $42) = $92. BE 156 Freberg Company, a division of Dudge Cars, produces solar batteries. Freberg sells the batteries to its customers for $92 per unit. The unit variable cost is $55, and unit fixed cost are $16. Top management of Dudge Cars would like Freberg to transfer 30,000 batteries to another division within the company at a price of $61. Freberg has sufficient excess capacity to provide the 30,000 batteries to the other division. Instructions Compute the minimum transfer price that Freberg should accept. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

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Solution 156 If Freberg has excess capacity, then its opportunity cost is zero. In this case, the minimum transfer price is: $55 + $0 = $55.

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

BE 157 Freberg Company, a division of Dudge Cars, produces solar batteries. Freberg sells the batteries to its customers for $92 per unit. The unit variable cost is $55, and unit fixed cost are $16. Top management of Dudge Cars would like Freberg to transfer 30,000 special, high-performance batteries to another division within the company. Freberg’s variable cost on these special batteries is $62 per unit. Freberg is operating at full capacity. Instructions Compute the minimum transfer price that Freberg should accept. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

Solution 157 The minimum transfer price is equal to Freberg’s variable cost plus its opportunity cost. In this case, the minimum transfer price is: $62 + ($92 – $55) = $99. a

BE 158

Bundy Batteries produces batteries for laptop computers. The following per unit cost information is available: direct materials $15; direct labor $18; variable manufacturing overhead $12; fixed manufacturing overhead $30; variable selling & administrative expenses $15; and fixed selling & administrative expenses $20. The desired ROI per unit is $25. Instructions Compute the markup percentage using the absorption-cost approach. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement a

Solution 158

Markup percentage =

$25  ($15  $20) = 80% $15  $18  $12  $30

BE 159

Future Adhesives Inc. uses the variable-cost approach to determine target selling prices. A special adhesive used in the aerospace industry has the following per unit data: desired ROI $30; unit fixed manufacturing overhead $25; and unit fixed selling & administrative costs $35. The markup percentage is 150%. Instructions Compute the target selling price. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics a

Solution 159

Markup percentage = $30  $25  $35 = 150% Cost base Cost base = $90 ÷ 150% = $60 Target selling price = $60 + ($60 × 150%) = $150 .

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EXERCISES Ex. 160 Sterling Company is considering introducing a new line of filtration products. Sterling believes that if the filters can be priced competitively at $45 then approximately 300,000 units can be sold. The controller has determined that an investment in new equipment totaling $4,000,000 will be required. Sterling requires a minimum rate of return of 16% on all investments. Instructions Compute the target unit cost of the filter. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 6, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

Solution 160 Sales (300,000 × $45) Less desired ROI ($4,000,000 × 16%) Target cost for 300,000 units

$13,500,000 640,000 $12,860,000

Target unit cost = $12,860,000 ÷ 300,000 = $42.87 Alternatively: (Required Investment + Minimum Required Rate of Return)/ Expected unit sales = Desired unit ROI Estimated selling price – Desired unit ROI = Target cost per iron ($4,000,000 x 16%)/300,000 = $2.13; $45.00 - $2.13 = $42.87

Ex. 161 Mellie Computer Devices Inc. is considering the introduction of a new printer. The company’s accountant had prepared an analysis computing the target unit cost but misplaced his working papers. From memory he remembers the estimated unit sales price was $200 and the target unit cost was $195. Sales were projected at 100,000 units with a required $5,000,000 investment. Instructions Compute the required minimum rate of return. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Solution 161 Sales (100,000 × $200) Less target cost (100,000 × $195) Desired ROI (in dollars) Investment Minimum ROI

$20,000,000 19,500,000 500,000 ÷ 5,000,000 10%

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

21 - 42 Ex. 162

Laserspot produces and sells high-end golf equipment. The company has recently been involved in developing various types of laser guns to measure yardages on the golf course. One small laser gun, called LittleLaser, appears to have a large potential market. Because of competition, Laserspot does not believe that it can charge more than $80 for LittleLaser. At this price, Laserspot believes it can sell 100,000 of these laser guns. LittleLaser will require an investment of $7,500,000 to manufacture, and the company wants an ROI of 16%. Instructions Determine the target cost for one LittleLaser. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 6, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Solution 162 The following equation may be used to determine return on investment Investment  ROI percentage = Return on investment $7,500,000  16% = $1,200,000 Return on investment per unit is then $12 ($1,200,000  100,000) The target cost is therefore $68 computed as follows: Target cost = Market Price  Desired profit $68 = $80  $12

Ex. 163 Joey’s Recording Studio rents studio time to musicians in 2-hour blocks. Each session includes the use of the studio facilities, a digital recording of the performance, and a professional music producer/mixer. Anticipated annual volume is 1,000 sessions. The company has invested $2,000,000 in the studio and expects a return on investment (ROI) of 16.5%. Budgeted costs for the coming year are as follows.

Direct materials Direct labor Variable overhead Fixed overhead Variable selling and administrative expenses Fixed selling and administrative expenses

Per Session $60 $400 $50

Total

$850,000 $40 $800,000

Instructions (a) Determine the total unit cost per session. (b) Determine the desired ROI per session. (c) Calculate the mark-up percentage on the total unit cost per session. (d) Calculate the target selling price per session. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 12, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Pricing

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

21 - 44 Solution 163

(a) Total unit cost per session: Per Session $ 60 400 50 850 40 800 $2,200

Direct materials Direct labor Variable overhead Fixed overhead ($850,000 ÷ 1,000) Variable selling & administrative expenses Fixed selling & administrative expenses ($800,000 ÷ 1,000)

(b) Desired ROI per session = (16.5% × $2,000,000) ÷ 1,000 = $330 (c) Mark-up percentage on total unit cost per session = $330 ÷ 2,200 = 15% (d) Target selling price per session = $2,200 + ($2,200 × 15%) = $2,530

Ex. 164 Rita Corporation produces commercial fertilizer spreaders. The following information is available for Rita’s anticipated annual volume of 400,000 units. Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses

Per Unit $32 54 72

Total

$12,000,000 34 7,200,000

The company has a desired ROI of 20%. It’s investment in assets is $120,000,000. Instructions Compute each of the following: 1. Total unit cost. 2. Desired ROI per unit. 3. Markup percentage using total unit cost. 4. Target selling price. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 12, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Solution 164 1. Total unit cost: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($12,000,000 ÷ 400,000) Variable selling and administrative expenses Fixed selling and administrative expenses ($7,200,000 ÷ 400,000) .

Per Unit $ 32 54 72 30 34 18

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$240 Solution 164

(Cont’d)

2. Desired ROI per unit = (20% × $120,000,000) ÷ 400,000 = $60 3. Markup percentage using total unit cost = $60 ÷ $240 = 25% 4. Target selling price = $240 + ($240 × 25%) = $300 Ex. 165 Goliath Corporation is in the process of setting a selling price for a recently designed product. The following data relate to this product at a budgeted volume of 60,000 units. Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses

Per Unit $30 40 10

Total

$1,800,000 6 1,440,000

Goliath uses cost-plus pricing to set its target selling price and has a markup on total unit cost of 30%. Instructions Compute each of the following for the new product: 1. Total unit variable cost, total unit fixed cost, and total unit cost. 2. Desired ROI per unit. 3. Target selling price. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 18, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Solution 165 1. Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative expenses Unit variable cost

Fixed manufacturing overhead Fixed selling and administrative expenses Unit fixed cost Unit variable cost Unit fixed cost Total unit cost

$ 86 54 $140

2. Total unit cost Markup Desired ROI per unit

$140 × 30% $ 42

3. Total unit cost Desired ROI per unit

$140 42 .

$30 40 10 6 $86 Total Costs $1,800,000 1,440,000

Budgeted Cost Volume Per Unit ÷ 60,000 = $30 ÷ 60,000 = 24 $54

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Target selling price

$182

Ex. 166 Skyhigh Company is in the process of setting a selling price for its newest model stunt kite, the Looper. The controller of Skyhigh estimates unit variable cost for the model to be as follows: Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative expenses

$15 8 4 5 $32

In addition, Skyhigh anticipates incurring the following unit fixed cost at a budgeted sales volume of 20,000 units: Total Costs ÷ Budget Volume = Unit cost Fixed manufacturing overhead $240,000 20,000 $12 Fixed selling and administrative expenses 260,000 20,000 13 Unit fixed cost $25 Skyhigh uses cost-plus pricing and would like to earn a 10-percent ROI of $400,000. Instructions Compute the target selling price that would provide Skyhigh a 10-percent ROI. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 6, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Solution 166 Unit variable cost Unit fixed cost Desired ROI per unit Target selling price

$32 25 2* $59

*$400,000 × .10 = $40,000; $40,000 ÷ 20,000 = $2 per unit Ex. 167 Silver Spoon Service repairs commercial food preparation equipment. The following budgeted cost data is available for 2022:

Technicians’ wages and benefits Parts manager’s salary and benefits Office manager’s salary and benefits Other overhead Total budgeted costs

Time Charges $500,000 112,000 48,000 $660,000

Material Charges $ 72,000 18,000 135,000 $225,000

Silver Spoon has budgeted for 10,000 hours of technician time during the coming year. It desires a $54 profit margin per hour of labor and a 40% profit margin on parts. Silver Spoon estimates the total invoice cost of parts and materials in 2022 will be $500,000. Instructions 1. Compute the rate charged per hour of labor. .

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2. Compute the material loading charge. Ex. 167 (Cont’d) 3. Silver Spoon has received a request from Lime Corporation for an estimate to repair a commercial fryer. The company estimates that it would take 20 hours of labor and $8,000 of parts. Compute the total estimated bill. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 18, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

Solution 167 1. Total Cost Hourly labor rate for repairs Technicians’ wages and benefits Overhead costs Office manager’s salary and benefits Other overhead

Per Hour Charge

Total Hours

$500,000

10,000

$ 50.00

112,000 48,000 $660,000

÷ ÷ ÷

10,000 10,000 10,000

= = =

11.20 4.80 66.00 54.00 $120.00

Profit margin Rate charged per hour of labor 2. Material Charges Overhead costs Parts manager’s salary and benefits Office manager’s salary and benefits Other overhead

$ 72,000 18,000 $ 90,000 135,000

Total Invoice Cost, Parts and Materials

÷ ÷

$500,000 $500,000

Profit margin Material loading charge 3. Job: Lime Corporation Labor charges 20 hours @ $120 Material charges Cost of parts and materials Material loading charge (85% × $8,000) Total price of labor and materials

$ 2,400 $8,000 6,800

14,800 $17,200

Ex. 168 Forrest Painting Service has budgeted the following time and material for 2022: BUDGETED COSTS FOR 2022

Painters’ wages and benefits Service manager’s salary and benefits Office employee’s salary and benefits Cost of paint .

Time Charges $ 36,000 12,000

Material Charges $23,000 3,000 50,000

= =

Material Loading Charge

18% 27% 45% 40% 85%

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Overhead (supplies, utilities, etc.) Total budgeted costs Ex. 168 (Cont’d)

16,000 $64,000

8,500 $84,500

Forrest budgets 4,000 hours of paint time in 2022 and will charge a profit of $12 per hour in addition to a 25% markup on the cost of paint. On February 15, 2022, Forrest is asked to prepare a price estimate to paint a small building. Forrest estimates that this job will take 12 labor hours and $500 in paint. Instructions 1. Compute the labor rate for 2022. 2. Compute the material loading charge rate for 2022. 3. Prepare a time-and-material price estimate for painting the building. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 18, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

Solution 168 1. Computation of labor rate Total Cost Hourly labor rate Painters’ wages and benefits Overhead costs Office employee’s salary and benefits Other overhead

Total Hours

Per Hour Charge

$36,000

4,000

12,000 16,000 $64,000

÷ ÷ ÷

4,000 4,000 4,000

= = =

3 4 16 12 $28

Profit margin Rate charged per hour of labor 2. Computation of material loading charge

Overhead costs Service manager’s salary and benefits Office employee’s salary and benefits Other overhead

Material Charges

Total Invoice Cost of Paint

$23,000 3,000 26,000 8,500 $34,500

÷ ÷ ÷

$50,000 50,000 50,000

Profit margin Material loading charge 3. Price estimate for time and materials Job: Paint building Labor charges: 12 hours @ $28 Material charges Cost of paint Material loading charge (94% × $500) Total price of labor and materials .

$ 336 $500 470

970 $1,306

Material Loading Charge

= = =

52% 17% 69% 25% 94%

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Ex. 169 Chuck’s Classic Cars restores classic automobiles to showroom status. Budgeted data for the current year are as follows: Material Loading Charges

Time Charges $270,000

Restorers’ wages and benefits Purchasing agent’s salary and benefits Administrative salaries and benefits Other overhead costs Total budgeted costs

$ 67,500 22,500 75,600 $165,600

60,000 20,000 $350,000

The company anticipated that the restorers would work a total of 10,000 hours this year. Expected parts and materials were $1,200,000. In late January, the company experienced a fire in its facilities that destroyed most of the accounting records. The accountant remembers that the hourly labor rate was $60 and that the material loading charge was 83.80%. Instructions (a) Determine the profit margin per hour on labor. (b) Determine the profit margin on materials. (c) Determine the total price of labor and materials on a job that was completed after the fire that required 150 hours of labor and $60,000 in parts and materials. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

Solution 169 (a) Hourly labor rate: Restorers’ wages & benefits Overhead costs: Administrative salaries & benefits Other overhead costs Total hourly cost

Total Cost

÷ Total Hours

Hourly Charge

$270,000

10,000

$27

60,000 20,000 $350,000

÷ ÷ ÷

10,000 10,000 10,000

= = =

6 2 $35

Profit margin = Hourly rate  total hourly cost = $60  $35 = $25 (b) Material Loading Charges Overhead costs: Purchasing agent’s salary & benefits Administrative salaries & benefits Other overhead costs .

Total Invoice Cost, Parts & Materials =

Material Loading Percentage

$ 67,500 22,500 90,000 ÷ $1,200,000

7.50%

75,600

6.30%

÷ $1,200,000

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$165,600

÷ $1,200,000

13.80%

Solution 169 (Cont’d) Material loading charge (with profit) Material loading charge (without profit) Profit margin on materials

83.80% 13.80% 70.00%

(c) Labor charges: 150 hours x $60 Material charges: Cost of parts & materials Material loading charge ($60,000 × 83.80%) Total price of labor and materials

$ 9,000 $60,000 50,280

110,280 $119,280

Ex. 170 The Appraisal Department of Easy Mortgage Bank performs appraisals of business properties for loans being considered by the bank and appraisals for home buyers that are financing their purchase through some other financial institution. The department charges $280 per home appraisal and its variable costs are $220 per appraisal. Recently, Easy Mortgage Bank has opened its own Home-Loan Department and wants the Appraisal Department to perform 1,500 appraisals on all Easy Mortgage Bank-financed home loans. Bank management feels that the cost of these appraisals to the Home-Loan Department should be $265. The variable cost per appraisal to the Home-Loan Department would be $10 less than those performed for outside customers due to savings in administrative costs. Instructions (a) Determine the minimum transfer price assuming that the Appraisal Department has excess capacity. (b) Determine the minimum transfer price assuming that the Appraisal Department has no excess capacity. (c) Assuming that the Appraisal Department has no excess capacity, should management force the department to charge the Home-Loan Department only $265? Discuss. Ans: N/A, LO: 4, Bloom: AN, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

Solution 170 (a) Minimum transfer price = ($220  $10) + $0 = $210 (b) Minimum transfer price = ($220  $10) + ($280  $220) = $270 (c) No. By forcing the Appraisal Department to accept the $265 per appraisal price, management is penalizing the Appraisal department. If the department was allowed to sell its services to outside customers it could earn $60 ($280  $220) in contribution margin per appraisal. Forcing them to sell their services internally would allow them to earn only $55 ($265  $210) in contribution margin. A loss of $5 per appraisal or a total of $7,500 (1,500  $5) would result.

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Ex. 171 The Pacific Company is a multidivisional company. Its managers have full responsibility for profits and complete autonomy to accept or reject transfers from other divisions. Division A produces a sub-assembly part for which there is a competitive market. Division B currently uses this subassembly for a final product that is sold outside at $1,200. Division A charges Division B the market price of $700 per unit of the part.t. Unit variable costs are $530 and $600 for Divisions A and B, respectively. The manager of Division B feels that Division A should transfer the part at a lower price than market because at market, Division B is unable to make a profit. Instructions (a) Calculate Division B’s contribution margin if transfers are made at the market price, and calculate the company’s total contribution margin. (b) Assume that Division A can sell all its production in the open market. Should Division A transfer the goods to Division B? If so, at what price? (c) Assume that Division A can sell only 500 units externally at $700 per unit out of the 1,000 units that it can produce every month. Assume also that a 20% reduction in price is necessary to sell all 1,000 units each month. Should transfers be made? If so, how many units should the division transfer and at what price? To support your decision, submit a schedule that compares the contribution margins under three different alternatives. Ans: N/A, LO: 4, Bloom: AN, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Solution 171 (a) Sales Less: Costs Variable costs Transfer costs Total costs Contribution to income

Division A $700

Division B $1,200

$530 0 $530 $170

$ 600 700 $1,300 $ (100)

Total Company $1,200 $1,130 0 $1,130 $ 70

(b) The opportunity cost is the market price. Transfers should be made at market prices less any avoidable costs. In the current situation, it would appear that no transfers should be made. (c) (i) Maintain price, no transfers (500 × $700)  $265,000 = $85,000 (ii) Cut price, no transfers (1,000 × $560)  $530,000 = $30,000 (iii) Maintain price and transfers (500 × $1,200) + (500 × $700)  $830,000* = $120,000 * (500 × $1,130) + (500 × $530) The firm is better off by maintaining the current market price for Division A’s product and transferring 500 units to Division B. A transfer price within the range of $530 to $600 would be needed to motivate both divisional managers to engage in the transfers. An optimal transfer price cannot be determined from the information given (even with full information, the best transfer price in the range may not be determinable). .

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

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Pert Corporation manufactures wireless soundbar speakers. It is a division of Vany TV, which manufactures televisions. Pert sells the speakers to Vany as well as to retail stores. The following information is available for Pert’s speaker: unit variable cost $60; unit fixed cost $45; and a unit selling price of $150 to outside customers. Vany currently purchases speakers from an outside supplier for $140 each. Top management of Vany would like Pert to provide 50,000 speakers per year at a transfer price of $60 each. Instructions Compute the minimum transfer price that Pert should accept under each of the following assumptions: 1. Pert is operating at full capacity. 2. Pert has sufficient excess capacity to provide the 50,000 speakers to Vany. Ans: N/A, LO: 4, Bloom: AN, Difficulty: Moderate, Min: 9, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

Solution 172 1. The minimum transfer price is $150 [$60 + ($150 – $60)], the outside market price, since Pert is operating at full capacity. 2. The minimum transfer price is $60, the variable cost of the speakers, since Pert has excess capacity. However, since the market price is $140 (Vany’s current cost), Pert should be able to negotiate a price much higher than $60.

Ex. 173 Green Yard Company, a division of Lawn Supplies, Inc., produces electric lawn mowers. Green Yard sells lawn mowers to home improvement stores, as well as to Lawn Supplies, Inc. The following information is available for Green Yard’s mowers: Unit fixed cost Unit variable cost Unit selling price

$150 100 375

Lawn Supplies, Inc. can purchase comparable lawn mowers from an outside supplier for $340. In order to ensure a reliable supply, the management of Lawn Supplies, Inc. ordered Green Yard to provide 100,000 lawn mowers per year at a transfer price of $340 per unit. Green Yard is currently operating at full capacity. It could avoid $6 of unit variable selling costs by selling internally. Instructions 1. Compute the minimum transfer price that Green Yard should be required to accept. 2. Compute the increase (decrease) in contribution margin for Lawn Supplies, Inc. for this transfer. Ans: N/A, LO: 4, Bloom: AN, Difficulty: Moderate, Min: 9, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

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Solution 173 1. The minimum transfer price that Green Yard should accept is: ($100 – $6) + ($375 – $100) = $369 2. The decrease in contribution margin per unit to Lawn Supplies, Inc. is: Contribution margin lost by Green Yard ($375 – $100) Increased contribution margin to Lawn Supplies ($340 – $94) Net decrease in contribution margin

$275 246 $ 29

Total contribution margin decrease is: $29 × 100,000 units = $2,900,000 Ex. 174 Spirit Manufacturing is a division of Birch Communications, Inc. Spirit produces cell phones and sells these phones to other communication companies, as well as to Birch. Recently, the vice president of marketing for Birch approached Spirit with a request to make 20,000 units of a special cell phone that could be used anywhere in the world. The following information is available regarding the Spirit division: Selling price of regular cell phone Variable cost of regular cell phone Additional variable cost of special cell phone

$100 50 35

Instructions Calculate the minimum transfer price and indicate whether the internal transfer should occur for each of the following scenarios: 1. The marketing vice president offers to pay Spirit $110 per phone. Spirit has available capacity. 2. The marketing vice president offers to pay Spirit $110 per phone. Spirit has no available capacity and would have to forgo sales of 20,000 phones to existing customers to meet this request. 3. The marketing vice president offers to pay Spirit $175 per phone. Spirit has no available capacity and would have to forgo sales of 30,000 phones to existing customers to meet this request. Ans: N/A, LO: 4, Bloom: AN, Difficulty: Moderate, Min: 13, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

Solution 174 1. Assuming that Spirit Manufacturing has available capacity, variable cost would be ($50 + $35) or $85 and the opportunity cost would be zero. Therefore, the minimum transfer price would be $85 = $85 + $0. Since the $110 transfer price being offered exceeds the $85 minimum transfer price, the offer should be accepted. 2. Assuming no available capacity, and that the new units produced would be equal to the number of standard units forgone, variable cost of the special cell phone would be ($50 + $35) or $85 and the opportunity cost would be ($100 – $50) or $50. Therefore, the minimum transfer price would be $135 = $85 + $50. Since this is higher than the $110 transfer price, Spirit Manufacturing should reject the offer. .

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 174

(Cont’d)

3. Assuming no available capacity, and that in order to produce the 20,000 special cell phones, 30,000 standard cell phones would be forgone, the minimum variable cost would be ($50 + $35) or $85 and the opportunity cost would be: Total contribution margin on standard cell phones ($100 – $50) × 30,000 —————————————————————— = —————————— Number of special cell phones 20,000

= $75

Therefore, the minimum transfer price would be $160 = ($50 + $35) + $75. Since the $175 transfer price being offered exceeds the minimum transfer price of $160, Spirit Manufacturing should accept the offer. Ex. 175 Pubworld is a textbook publishing company that has contracts with a number of different authors. It also operates a printing operation called Printpro. Both companies operate as separate profit centers. Printpro prints textbooks written by Pubworld authors as well as books written by nonPubworld authors. The printing operation bills out at $0.06 per page and a typical textbook requires 600 pages of print. A developmental editor from Pubworld approached the printing operation manager offering to pay $0.045 per page for 5,000 copies of a 600-page textbook. Outside printers are currently charging $0.05 per page. Printpro’s variable cost per page is $0.04. Instructions 1. Calculate the appropriate transfer price and indicate whether the printing should be done internally by Printpro under each of the following situations: a. Printpro has available capacity. b. Printpro has no available capacity and would have to cancel an outside customer’s job to accept the editor’s offer. 2. Calculate the change in contribution margin for each company, if top management forces Printpro to accept the $0.045 transfer price when it has no available capacity. Ans: N/A, LO: 4, Bloom: AN, Difficulty: Moderate, Min: 13, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Economics

Solution 175 1a. Assuming that the printing operation has available capacity, the printing operation’s variable cost is $0.04 and its opportunity cost is $0. The minimum transfer price would be $0.04 = $0.04 + $0. Therefore, in this case, the printing operation should accept the offer to print internally. The $0.045 transfer price would provide a contribution margin of $0.005 ($0.045 – $0.04) per page. Depending on its bargaining strength, the printing operation might want to ask for a transfer price higher than $0.045 since the company is saving money at any price below the $0.05 price charged by outside printers. 1b. Assuming no available capacity, the printing operation’s variable cost is $0.04 per page and its opportunity cost is $0.02 ($0.06 – $0.04) per page. The minimum transfer price would be $0.06 = $0.04 + $0.02. Therefore, the printing operation should not accept the internal transfer price of $0.045. 2. Printpro would lose: ($0.06 – $0.04) × 600 pages × 5,000 copies = $60,000

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Pubworld would save: ($0.05 – $0.045) × 600 pages × 5,000 copies = $15,000 Ex. 176

The following information is available for a product manufactured by Gardenia Corporation: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and admin. expenses Fixed selling and admin. expenses

Per Unit $62 48 15

Total

$250,000 10 55,000

Gardenia has a desired ROI of 16%. It has invested assets of $8,250,000 and expects to produce 5,000 units per year. Instructions Compute each of the following: 1. Cost per unit of fixed manufacturing overhead and fixed selling and administrative expenses. 2. Desired ROI per unit. 3. Markup percentage using the absorption-cost approach. 4. Markup percentage using the variable-cost approach. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 12, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement a

Solution 176

$250,000 1. Fixed manufacturing overhead = ———— = $50 per unit 5,000 $55,000 Fixed selling and administrative expenses per unit = ———— = $11 per unit 5,000 16% × $8,250,000 2. Desired ROI per unit = ————————— = $264 per unit 5,000 $264 + ($10 + $11) 3. Absorption-cost markup percentage = ——————————— = 163% $62 + $48 + $15 + $50 $264 + ($50 + $11) 4. Variable-cost markup percentage = ——————————— = 241% $62 + $48 + $15 + $10

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Ex. 177

Peachtree Doors, Inc. is in the process of setting a target selling price on its newly designed patio door. Cost data relating to the door at a budgeted volume of 5,000 units is as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses

Per Unit $100 170 80

Total

$750,000 25 375,000

Peachtree uses cost-plus pricing that provides it with a 25% ROI on its patio door line. A total of $4,000,000 in assets is committed to production of the new door. Instructions 1. Compute each of the following under the absorption-cost approach: a. Markup percentage needed to provide the desired ROI b. Target selling price of the patio door

2. Compute each of the following under the variable-cost approach: a. Markup percentage needed to provide desired ROI b. Target selling price of the patio door Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 12, AACSB: Analytic, AICPA BB: Customer Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting a

Solution 177

1. Absorption-cost approach a. Computation of unit manufacturing cost: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($750,000 ÷ 5,000) Total manufacturing cost

Per Unit $100 170 80 150 $500

Computation of markup percentage to provide a 25% ROI: Markup [25% × ($4,000,000 ÷ 5,000)] + [$25 + ($375,000 ÷ 5,000)] $300 Percentage = —————————————————————————— = —— = 60% $500 $500 b. Computation of target selling price: Target selling price: $500 + (60% × $500) = $800

Pricing a

Solution 177

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(Cont’d)

2. Variable-cost approach a. Computation of unit variable cost: Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative expenses Total unit variable cost

Per Unit $100 170 80 25 $375

Computation of markup percentage to provide a 25% ROI: Markup [25% × ($4,000,000 ÷ 5,000)] + [($750,000 ÷ 5,000) + ($375,000 ÷ 5,000)] Percentage = ————————————————————————————————— $375 $425 = —— = 113.33% $375 b. Computation of target price: Target price: $375 + (113.33% × $375) = $800

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COMPLETION STATEMENTS 178.

The difference between the target selling price and the desired profit is the cost of the product.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Business Economics

179.

In the cost-plus pricing equation, the target selling price equals total unit cost + ( × total unit cost).

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Business Economics

180.

The

pricing approach has a major advantage: it is simple to compute.

181.

Under the time-and-material pricing approach, the material charge is based on the cost of direct materials used and a material for related overhead costs.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Business Economics

182.

The transfer of goods between divisions of the same company is termed sales.

183.

The three approaches for determining a transfer price are negotiated, based, and based transfer prices.

184.

A transfer price is based on the costs incurred by the division producing the goods or services.

185.

The calculation of the minimum transfer price is: Minimum transfer price = Variable cost + .

186.

The approach is consistent with generally accepted accounting principles because it defines the cost base as the manufacturing cost.

187.

involves contracting with an external party to provide a good or service, rather than performing the work internally.

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Answers to Completion Statements 178. target 179. markup percentage 180. cost-plus 181. loading charge 182. internal 183. cost, market 184. cost-based 185. Opportunity cost a 186. absorption-cost a 187. Outsourcing

MATCHING 188.

Match the items in the two columns below by entering the appropriate code letter in the space provided. A. B. C. D.

Cost-plus pricing Market-based transfer price Markup Negotiated transfer price

E. F. G. H.

Outsourcing Target selling price Time-and-material pricing Virtual companies

1. Contracting with an external party to provide a good or service. 2. An approach to cost-plus pricing that uses two pricing rates. 3. Product’s selling price is determined by adding a markup to a cost base. 4. Transfer price is determined by agreement of division managers. 5. Companies that have no manufacturing facilities. 6. Percentage applied to a product’s cost. 7. Price that will provide the desired profit on a product. 8. Transfer price is based on existing prices of competing products. Ans: N/A, LO: 1-4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Business Economics

Answers to Matching 1. 2. 3. 4.

E G A D

5. 6. 7. 8.

H C F B

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

SHORT-ANSWER ESSAY QUESTIONS S-A E 189 A variation on cost-plus pricing is time-and-material pricing. Under this approach, two pricing rates are set. Required: Explain where this approach is used and identify the steps involved in time-and-material pricing. Also explain what the material loading charge covers and how it is expressed. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communication, AICPA BB: Customer Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Communication, IMA: Business Economics

Solution 189 The time-and-material pricing approach is used often in service industries, especially professional firms and consulting firms. This approach involves three steps: (1) calculate the labor charge per hour, (2) calculate the charge for obtaining and holding materials, and (3) calculate the charges for a particular job. The material loading charge covers the costs of purchasing, handling, and storing materials, plus any desired profit margin on the materials. It is expressed as a percentage of the total estimated costs of parts and materials. S-A E 190 There are three possible approaches for determining a transfer price: negotiated, cost-based, and market-based transfer prices. Required: Explain how the transfer price is determined under each of the approaches. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communication, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Communication, IMA: Business Economics

Solution 190 Under the negotiated transfer price approach, the transfer price will range between the external purchase price per unit and the sum of unit variable cost and unit opportunity cost. In the costbased approach, the transfer price is based on either the full cost or the variable cost of the selling division. Under the market-based approach, the minimum transfer price is the unit variable cost plus the unit opportunity cost. The transfer price is based on existing prices of competing goods or services.

CHAPTER 22 BUDGETARY PLANNING CHAPTER LEARNING OBJECTIVES 1. State the essentials of effective budgeting and components of the master budget. The primary benefits of budgeting are that it (a) requires management to plan ahead, (b) provides definite objectives for evaluating performance, (c) creates an early warning system for potential problems, (d) facilitates coordination of activities, (e) results in greater management awareness, and (f) motivates personnel to meet planned objectives. The essentials of effective budgeting are (a) sound organizational structure, (b) research and analysis, and (c) acceptance by all levels of management. The master budget consists of the following budgets: (a) sales, (b) production, (c) direct materials, (d) direct labor, (e) manufacturing overhead, (f) selling and administrative expense, (g) budgeted income statement, (h) capital expenditure budget, (i) cash budget, and (j) budgeted balance sheet. 2. Prepare budgets for sales, production, and direct materials. The sales budget is derived from sales forecasts. The production budget starts with budgeted sales units, adds desired ending finished goods inventory, and subtracts beginning finished goods inventory to arrive at the required number of units to be produced. The direct materials budget starts with the direct materials units (e.g., pounds) required for budgeted production, adds desired ending direct materials units, and subtracts beginning direct materials units to arrive at required direct materials units to be purchased. This amount is multiplied by the direct materials cost (e.g., cost per pound) to arrive at the total cost of direct materials purchases. 3. Prepare budgets for direct labor, manufacturing overhead, and selling and administrative expenses, and a budgeted income statement. The direct labor budget starts with the units to be produced as determined in the production budget. This amount is multiplied by the direct labor hours per unit and the direct labor cost per hour to arrive at the total direct labor cost. The manufacturing overhead budget lists all of the individual types of overhead costs, distinguishing between fixed and variable costs. The selling and administrative expense budget lists all of the individual types of selling and administrative expense items, distinguishing between fixed and variable costs. The budgeted income statement is prepared from the various operating budgets. Cost of goods sold is determined by calculating the budgeted cost to produce one unit, then multiplying this amount by the number of units sold. 4. Prepare a cash budget and a budgeted balance sheet. The cash budget has three sections (receipts, disbursements, and financing) and the beginning and ending cash balances. Receipts and payments sections are determined after preparing separate schedules for collections from customers and payments to suppliers. The budgeted balance sheet is developed from the budgeted balance sheet from the preceding year and the various budgets for the current year. 5. Apply budgeting principles to nonmanufacturing companies. Budgeting may be used by merchandisers for development of a merchandise purchases budget. In service companies, budgeting is a critical factor in coordinating staff needs with anticipated services. In not-for-profit organizations, the starting point in budgeting is usually expenditures, not receipts.

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

TRUE-FALSE STATEMENTS 1.

Budgets are statements of management's plans stated in financial terms.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

A benefit of budgeting is that it provides definite objectives for evaluating performance.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

A budget can be a means of communicating a company's objectives to external parties.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

A budget can be used as a basis for evaluating performance.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

A well-developed budget can operate and enforce itself.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

The budget itself and the administration of the budget are the responsibility of the accounting department.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Effective budgeting requires clearly defined lines of authority and responsibility.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

The flow of input data for budgeting should be from the highest levels of responsibility to the lowest.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Budgets can have a positive or negative effect on human behavior depending on the manner in which the budget is developed and administered.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

10.

A budget can facilitate the coordination of activities among the segments of a large company.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

11.

The longer the budget period, the more reliable the estimates of future outcomes.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

12.

The budget committee has the responsibility for coordinating the preparation of the budget.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

13.

The budget is developed within the framework of a sales forecast. .

Budgetary Planning

22 - 3

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

14.

Budgeting and long-range planning are two terms that describe the same process.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

15.

Long-range plans are used more as a review of progress toward long-term goals rather than an evaluation of specific results to be achieved.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

16.

The master budget reflects management's long-term plans encompassing five years or more.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

17.

The master budget consists of operating and financial budgets.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

18.

Financial budgets must be completed before the operating budgets can be prepared.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

19.

The direct materials budget must be completed before the production budget because the quantity of materials available for production must be known.

Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

20.

The number of direct labor hours needed for production is obtained from the production budget.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

21.

A manufacturing overhead budget is not needed if the company calculates a predetermined overhead rate to apply overhead.

Ans: F, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

22.

The manufacturing overhead budget generally has separate sections for variable, mixed, and fixed costs.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

23.

A production budget should be prepared before the sales budget.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

24.

The direct materials budget contains both quantity and cost data.

Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

25.

The budgeted income statement projects the expected profitability of operations for the next year.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

26.

If a monthly cash budget is prepared properly, there will never be a cash deficiency at the end of any month.

Ans: F, LO: 4, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

27.

The budgeted balance sheet can be prepared entirely from the budgets for the current year.

Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

28.

The starting point when budgeting for a not-for-profit organization is generally to budget expenditures first.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

29.

A merchandiser has a merchandise purchases budget rather than a production budget.

Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

30.

A critical factor in budgeting for a service firm is to determine the amount of products to purchase.

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

31.

Preparation and administration of the budget are entirely responsibilities of the accounting department.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

32.

Financial planning models and statistical and mathematical techniques may be used in forecasting sales.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Budgetary Planning 33.

22 - 5

The direct materials budget is derived from the direct materials units required for production plus desired ending direct materials units less beginning direct materials units.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

34.

The manufacturing overhead budget shows the expected manufacturing overhead costs.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

35.

In order to develop a budgeted balance sheet, the previous year's balance sheet is needed.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

36.

In service enterprises, the critical factor in budgeting is coordinating materials and equipment with anticipated services.

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

MULTIPLE CHOICE QUESTIONS 37.

Why are budgets useful in the planning process? a. They provide management with information about the company's past performance. b. They help communicate goals and provide a basis for evaluation. c. They guarantee the company will be profitable if it meets its objectives. d. They enable the budget committee to evaluate the performance of employees.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

38.

A budget a. is a substitute for management. b. is an aid to management. c. can operate or enforce itself. d. is the responsibility of the accounting department.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

39.

Accounting generally has the responsibility for a. setting company goals. b. expressing the budget in financial terms. c. enforcing the budget. d. administration of the budget.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

22 - 6 40.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e Which one of the following is not a benefit of budgeting? a. It facilitates the coordination of activities. b. It provides definite objectives for evaluating performance. c. It provides assurance that the company will achieve its objectives. d. It requires all levels of management to plan ahead on a recurring basis.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

41.

Budgeting is usually most closely associated with which management function? a. Planning b. Directing c. Motivating d. Controlling

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

42.

Which of the following items does not follow from the adoption of a budget? a. Promotes efficiency b. Deterrent to waste c. Basis for performance evaluation d. Guarantee of accomplishing the profit objective

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

43.

Which is true of budgets? a. They are voted on and approved by stockholders. b. They are used in the planning, but not in the control process. c. There is a standard form and structure for budgets. d. They are used in performance evaluation.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

44.

A common starting point in the budgeting process is a. expected future net income. b. past performance. c. motivating the sales force. d. a clean slate, with no expectations.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

45.

The effectiveness of budgeting is enhanced by all of the following except a. acceptance at all levels of management. b. research and analysis in setting realistic goals. c. stockholders' approval. d. sound organizational structure.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

46.

The effectiveness of a budget is enhanced by a. a history of successful operations. b. independent verification of budget goals. c. an organizational structure with clearly defined lines of authority and responsibility. d. excess plant capacity. .

Budgetary Planning

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Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

47.

It is important that budgets be accepted by a. division managers only. b. department heads only. c. supervisors only. d. division managers, department heads, and supervisors.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

48.

Which of the following statements about budget acceptance in an organization is true? a. The most widely accepted budget by the organization is the one prepared by top management. b. The most widely accepted budget by the organization is the one prepared by the department heads. c. Budgets are hardly ever accepted by anyone except top management. d. Budgets have a greater chance of acceptance if all levels of management have provided input into the budgeting process.

Ans: D, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

49.

Top management notices a variation from budget and an investigation of the difference reveals that the department manager could not be expected to have controlled the variation. Which of the following statements is applicable? a. Department managers should be held accountable for all variances from budgets for their departments. b. Department managers should only be held accountable for controllable variances for their departments. c. Department managers should be credited for favorable variances even if they are beyond their control. d. Department managers' performances should not be evaluated based on actual results to budgeted results.

Ans: B, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

50.

An unrealistic budget is more likely to result when it a. has been developed in a top down fashion. b. has been developed in a bottom up fashion. c. has been developed by all levels of management. d. is developed with performance appraisal usages in mind.

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

51.

A budget is more likely to be effective if a. it is used to assess blame when things do not occur according to plans. b. it is not used to evaluate a manager's performance. c. employees and managers at the lower levels do not get involved in the budgeting process. d. it has top management support.

Ans: D, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

52.

In many companies, responsibility for coordinating the preparation of the budget is assigned to a. the company's independent certified public accountants. b. the company's internal auditors. c. the company's board of directors. d. a budget committee.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

53.

A budget period should be a. monthly. b. for a year or more. c. long-term. d. long enough to provide obtainable goals under normal business conditions.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

54.

If a company has adopted continuous budgeting, the budget will show plans for a. every day. b. a full year ahead. c. the current year and the next year. d. at least five years.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

55.

The most common budget period is a. one month. b. three months. c. six months. d. one year.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

56.

Budget development for the coming year usually starts a. a year in advance. b. the first month of the year to be budgeted. c. several months before the end of the current year. d. the last month of the previous year.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

57.

The budget committee would not normally include the a. research director. b. treasurer. c. sales manager. d. external auditor.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

58.

All of the following can be a budget period except a. a month. b. a quarter. .

Budgetary Planning

22 - 9

c. a year. d. each of these options can be a budget period. Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

59.

Long-range planning a. generally presents more detailed information than an annual budget. b. generally encompasses a longer period of time than an annual budget. c. is usually more accurate than an annual budget. d. is prepared on a quarterly basis if the budget is prepared on a quarterly basis.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

60.

Long-range planning usually encompasses a period of at least a. six months. b. 1 year. c. 5 years. d. 10 years.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

61.

Which of the following is not a proper match-up? a. Long range planning ↔ Strategies b. Budgeting ↔ Short-term goals c. Long-range planning ↔ 5 years d. Budgeting ↔ Long-term goals

Ans: D, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

62.

Which is the last step in developing the master budget? a. Preparing the budgeted balance sheet b. Preparing the cost of goods manufactured budget c. Preparing the budgeted income statement d. Preparing the cash budget

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

63.

If there were 60,000 pounds of direct materials on hand on January 1, 120,000 pounds are desired for inventory at January 31, and 410,000 pounds are required for January production, how many pounds of direct materials should be purchased in January? a. 350,000 pounds b. 530,000 pounds c. 290,000 pounds d. 470,000 pounds

Ans: D, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: 120,000 + 410,000 – 60,000 = 470,000 (Jan 31 desired inventory + Pounds required – Jan 1 pounds of material on hand = Direct materials purchases)

64.

In preparing a direct labor budget, the number of direct labor hours required is calculated using the a. sales forecast. b. production budget. c. direct materials budget. .

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e d. sales budget.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Budgetary Planning 65.

22 - 11

The direct materials and direct labor budgets provide information for preparing the a. sales budget. b. production budget. c. manufacturing overhead budget. d. cash budget.

Ans: D, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

66.

A sales forecast a. shows a forecast for the firm only. b. shows a forecast for the industry only. c. shows forecasts for the industry and for the firm. d. plays a minor role in the development of the master budget.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

67.

Which of the following is not an operating budget? a. Direct labor budget b. Sales budget c. Production budget d. Cash budget

Ans: 1, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

68.

Which of the following is not a financial budget? a. Capital expenditure budget b. Cash budget c. Manufacturing overhead budget d. Budgeted balance sheet

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

69.

Which of the following can be done to improve the reliability of the sales forecast? a. Employ financial planning models b. Lengthen the planning horizon to more than a year c. Rely solely on outside consultants d. Use the sales forecasts from the previous year

Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

70.

The financial budgets include the a. cash budget and the selling and administrative expense budget. b. cash budget and the budgeted balance sheet. c. budgeted balance sheet and the budgeted income statement. d. cash budget and the production budget.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

71.

The culmination of preparing operating budgets is the preparation of the a. budgeted balance sheet. b. production budget. c. cash budget. d. budgeted income statement. .

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

72.

The following information is taken from the production budget for the first quarter: Beginning finished goods units Expected sales units Capacity in units of production facility

1,200 426,000 472,000

How many units of finished goods should be produced during the quarter if the company desires 3,200 finished goods units available to start the next quarter? a. 428,000 b. 424,000 c. 474,000 d. 429,200 Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: 3,200 + 426,000 – 1,200 = 428,000 (Desired units available next quarter + Sales budgeted for the quarter – Beginning inventory in units = Finished goods to be produced during the quarter)

73.

An overly optimistic sales budget may result in a. increases in selling prices late in the year. b. insufficient inventories. c. increased sales during the year. d. excessive inventories.

Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

74.

In the production budget, total required production units is equal to the expected sales units plus a. beginning finished goods units. b. desired ending finished goods units. c. desired ending finished goods units plus beginning finished goods units. d. desired ending finished goods units minus beginning finished goods units.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

75.

The direct materials budget details: 1. the quantity of direct materials to be purchased. 2. the cost of direct materials to be purchased. a. 1 b. 2 c. both 1 and 2 d. neither 1 nor 2

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

76.

The production budget shows expected unit sales of 32,000. Beginning finished goods units are 3,600. Required production units are 33,600. What is the desired number of units in ending finished goods? a. 2,000 b. 3,600 c. 6,400 d. 5,200

Ans: D, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Budgetary Planning

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Solution: X + 32,000 – 3,600 = 33,600; X = 5,200 (Desired ending finished goods units (x) + Expected unit sales – Beginning finished goods units = Required production units)

77.

The production budget shows expected sales units are 100,000. The required production units are 104,000. What are the beginning and desired ending finished goods units, respectively? a. b. c. d.

Beginning Units 10,000 6,000 4,000 10,000

Ending Units 6,000 10,000 10,000 4,000

Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: Ending Units + 100,000 – Beginning units = 104,000; 10,000 + 100,000 – 6,000 = 104,000 (Ending Units + Expected Sales Units – Beginning Units = Required Production Units)

78.

The production budget shows expected sales units of 48,000. The total required units are 54,000. What are required production units? a. 6,000 b. 9,000 c. 12,000 d. Cannot be determined from the data provided.

Ans: D, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

79.

The direct materials budget shows the following: Units to be produced Direct materials pounds required for production Direct materials pounds to be purchased

3,000 9,000 9,900

What are the direct materials per unit? a. .33 pounds b. 3.0 pounds c. 3.3 pounds d. Cannot be determined from the data provided. Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: 9,000 / 3,000 = 3.0 pounds (Pounds required for production / Units to be produced = Direct Materials per unit)

80.

The direct materials budget shows the following: Desired ending direct materials Direct materials required for production Beginning direct materials

18,000 pounds 99,000 pounds 13,200 pounds

The total quantity of direct materials to be purchased is a. 103,800 pounds. b. 94,200 pounds. c. 112,200 pounds. d. 117,000 pounds. Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: 99,000 + 18,000 – 13,200 = 103,800 (Total materials required + Desired ending direct materials – Beginning direct materials) = Direct materials purchases

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

81.

If the required direct materials purchases are 24,000 pounds, the direct materials required for production is three times the direct materials purchases, and the beginning direct materials inventory is three and a half times the direct materials purchases, what is the desired ending direct materials inventory in pounds? a. 60,000 b. 12,000 c. 36,000 d. 24,000

Ans: C, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: X + (3 x 24,000) - (3.5 x 24,000) = 24,000; X = 36,000 (Desired Ending Materials in pounds (x) + Direct Materials Required for Production – Beginning Direct Materials = Required Direct Materials Purchases)

82.

Dart, Inc. makes and sells umbrellas. The company is in the process of preparing its Selling and Administrative Expense Budget for the last half of the year. The following budget data are available: Unit Variable Cost Monthly Fixed Cost Sales commissions $0.60 $ 6,000 Shipping 1.20 Advertising 0.30 Executive salaries 40,000 Depreciation on office equipment 8,000 Other 0.35 28,000 Expenses are paid in the month incurred. If the company has budgeted sales of 8,000 umbrellas in October, what is the total budgeted variable selling and administrative expenses for October? a. $16,800 b. $18,400 c. $101,600 d. $19,600

Ans: D, LO: 3, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: (($0.60 + $1.20 + $0.30 + $0.35) x 8,000) = $19,600 (Variable cost per unit sold (Sales commissions, Shipping, Advertising, and Other) x Units sold = Total budgeted variable selling and administrative expenses)

83.

Which of the following expenses would not appear on a selling and administrative expense budget? a. Sales commissions b. Depreciation c. Property taxes d. Indirect labor

Ans: D, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

84.

Which of the following would not appear as a fixed expense on a selling and administrative expense budget? a. Freight-out b. Office salaries c. Property taxes d. Depreciation

Ans: A, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Budgetary Planning 85.

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A master budget consists of a. an interrelated long-term plan and operating budgets. b. financial budgets and a long-term plan. c. interrelated financial budgets and operating budgets. d. all the accounting journals and ledgers used by a company.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

86.

The starting point for preparing the master budget is the preparation of the a. production budget. b. sales budget. c. purchasing budget. d. personnel budget.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

87.

Which one of the following is not needed to prepare a production budget? a. Budgeted unit sales b. Budgeted raw materials c. Beginning finished goods units d. Ending finished goods units

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

88.

A company budgeted unit sales of 204,000 units for January, 2022 and 240,000 units for February, 2022. The company’s policy is to have finished goods inventory of units on hand at the end of each month that is equal to 30% of next month's budgeted unit sales. If there were 61,200 units of finished goods inventory on hand on December 31, 2021, how many units should be produced in January, 2022 in order for the company to meet its goals? a. 214,800 units b. 204,000 units c. 193,200 units d. 276,000 units

89.

At January 1, 2022, Deer Corp. has beginning inventory of 2,000 surfboards. Deer estimates it will sell 10,000 units during the first quarter of 2022 with a 12% increase in sales in each for the following quarters. Deer’s policy is to maintain an ending finished goods inventory equal to 25% of the next quarter’s sales. Each surfboard costs $100 and is sold for $150. What is budgeted sales revenue for the third quarter of 2022? a. $450,000 b. $1,950,000 c. $1,881,600 d. $12,544

Ans: C, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: (10,000 x 1.12 x 1.12 x $150) = $1,881,600 (Expected Unit Sales x Unit Selling Price) = Budgeted Sales Revenue

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

90.

Doe Manufacturing plans to sell 6,000 lawn chairs during May, 5,700 in June, and 6,000 during July. The company keeps 15% of the next month’s sales as ending inventory. How many units should Doe produce during June? a. 5,745 b. 6,600 c. 5,655 d. Not enough information to determine.

Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: (.15 x 6,000) + 5,700 – (.15 x 5,700) = 5,745 (Units to be produced in June = Ending inventory + Estimated units sold – Beginning inventory)

91.

Strand Company is planning to produce 380 composting bins and sell 400 composting bins during March. Each composting bin requires 500 grams of plastic and one-half hour of direct labor. Plastic costs $10 per 500 grams and employees of the company are paid $15.00 per hour. Manufacturing overhead is applied at a rate of 110% of direct labor costs. Strand has 300 kilos of plastic in beginning direct materials inventory and wants to have 200 kilos in ending direct materials inventory. What is total amount budgeted for direct labor in March? a. $3,000 b. $6,000 c. $2,850 d. $5,7000

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3 AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: (380 x .5 x $15 = $2,850 Units to be produced x direct labor hours per unit x Direct labor cost per hour = Total direct labor cost for March

92.

Teller Co. is planning to sell 900 boxes of ceramic tile, with production estimated at 870 boxes, during May. Each box of tile requires 44 pounds of clay mix and a quarter hour of direct labor. Clay mix costs $0.40 per pound and employees of the company are paid $12.00 per hour. Manufacturing overhead is applied at a rate of 110% of direct labor costs. Teller has 3,900 pounds of clay mix in beginning inventory and wants to have 4,500 pounds in ending inventory. What is the total amount to be budgeted for manufacturing overhead for the month? a. $2,871 b. $2,970 c. $11,484 d. $11,880

Ans: A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: 870 x .25 x $12 x 110% = $2,871 Production Estimate x .25 direct labor hours x Direct labor hour rate x applied rate of direct labor hours = Budgeted for manufacturing overhead

93.

Teller Co. is planning to sell 900 boxes of ceramic tile, with production estimated at 870 boxes, during May. Each box of tile requires 44 pounds of clay mix and a quarter hour of direct labor. Clay mix costs $0.40 per pound and employees of the company are paid $12.00 per hour. Manufacturing overhead is applied at a rate of 110% of direct labor costs. Teller has 3,900 pounds of clay mix in beginning inventory and wants to have 4,500 pounds in ending inventory. What is the total amount to be budgeted for direct labor for the month? a. $2,610 b. $10,440 c. $2,700 .

Budgetary Planning

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d. $41,760 Ans: A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: 870 x .25 x $12 = $2,610 (Production estimate x .25 of direct labor hours x direct labor rate = Budgeted for direct labor)

94.

Teller Co. is planning to sell 900 boxes of ceramic tile, with production estimated at 870 boxes, during May. Each box of tile requires 44 pounds of clay mix and a quarter hour of direct labor. Clay mix costs $0.40 per pound and employees of the company are paid $12.00 per hour. Manufacturing overhead is applied at a rate of 110% of direct labor costs. Teller has 3,900 pounds of clay mix in beginning inventory and wants to have 4,500 pounds in ending inventory. What is the budgeted amount of direct materials to be purchased (in pounds) for the month? a. 38,280 b. 37,680 c. 38,880 d. 40,200

Ans: C, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: 4,500 + (44 x 870) - 3,900 = 38,880 (Ending Inventory: Pounds + (Production Box Estimate x pounds per box) – Beginning Inventory: Pounds = Budgeted in pounds for direct materials to be purchased)

95.

Lorie Nursery plans to sell 320 potted plants during April and 240 units in May. Lorie Nursery keeps 15% of the next month’s sales as ending inventory. How many units should Lorie Nursery produce during April? a. 308 b. 332 c. 320 d. 356

Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: (240 x .15) + 320 - (320 x .15) = 308 (Ending inventory units + Estimated units sold – Beginning inventory units = Units produced in April)

96.

Comma Co. makes and sells widgets. The company is in the process of preparing its selling and administrative expense budget for the month. The following budget data are available: Item Sales commissions Shipping Advertising Executive salaries Depreciation on office equipment Other

Unit Variable Cost $1 $3 $4

Monthly Fixed Cost $10,000 $120,000 $4,000 $6,000

Expenses are paid in the month incurred. If the company has budgeted sales of 80,000 widgets in October, what are the total budgeted selling and administrative expenses for October? a. $940,000 b. $140,000 c. $930,000 d. $800,000 Ans: A, LO: 3, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: (($1 + $3 + 4 + $2) x 80,000) + ($10,000 + $120,000 + $4,000 + $6,000) = $940,000

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

(Unit Variable Cost (Sales commission, Shipping, Advertising, and Other) x widgets) + Monthly Fixed Cost (Sales commission, Executive salaries, Depreciation on office equipment and Other)

97.

Comma Manufacturing budgets on an annual basis for its fiscal year. The following beginning and ending direct material inventory levels are planned for the fiscal year of July 1, 2021 to June 30, 2022: June 30, 2022 June 30, 2021 Direct Materials 3,000 kilos 2,000 kilos Three kilos of direct materials are needed to produce each unit finished goods unit. If Comma Manufacturing plans to produce 560,000 units during the 2021-2022 fiscal year, how many kilos of materials will the company need to purchase for its production during the period? a. 1,681,000 b. 1,686,000 c. 1,680,000 d. 1,678,000

Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: 3,000 + (560,000 x 3) – 2,000 = 1,681,000 (Ending Raw Materials: kilos + (Units produced x 3 kilos of raw materials needed) – Beginning Raw Materials: kilos)

98.

The following information is taken from the production budget for the first quarter: Beginning finished goods units Expected sales units for the quarter Production capacity in units

1,200 456,000 472,000

How many finished goods units should be produced during the quarter if the company desires 3,200 finished goods units available at the beginning of the next quarter? a. 458,000 b. 454,000 c. 474,000 d. 459,200 Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: 3,200 + 456,000 – 1,200 = 458,000 (Ending finished goods units + Expected sales units– Beginning finished goods units = Required production units)

99.

Off-Line Co. has 9,000 units in beginning finished goods. The sales budget shows expected sales of 36,000 units. If the production budget shows that 42,000 units required for production, what is the desired ending finished goods inventory in units? a. 3,000. b. 9,000. c. 15,000. d. 27,000.

Ans: C, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: X + 36,000 – 9,000 = 42,000; X = 15,000 (Desired Ending Finished Goods (X) + Expected units to be sold – Beginning Finished Goods = Required production units)

Budgetary Planning 100.

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Lion Industries required production for June is 132,000 units. To make one unit of finished product, three pounds of direct material Z are required. Actual beginning and desired ending inventories of direct material Z are 300,000 and 330,000 pounds, respectively. How many pounds of direct material Z must be purchased? a. 378,000. b. 396,000. c. 408,000. d. 426,000.

Ans: D, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: 330,000 + (132,000 x 3) – 300,000 = 426,000 ((Ending inventory: pounds + (Units required in production x pounds required) – Beginning inventory: pounds) = Pounds Purchased)

101.

Haft Construction Company determines that 54,000 pounds of direct materials are needed for production in July. There are 3,200 pounds of direct materials on hand at July 1 and the desired ending inventory is 2,800 pounds. If the cost per unit of direct materials is $3, what is the budgeted total cost of direct materials purchases for the month? a. $158,400. b. $160,800. c. $163,200. d. $165,600.

Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: 2,800 + 54,000 – 3,200 = 53,600 x $3 = $160,800. (Ending inventory: pounds + Pounds needed for production in July – Beginning inventory: pounds) = Direct materials needed to be purchased in pounds; Cost per unit x Direct materials needed to be purchased in pounds = Total Cost of Direct Materials Purchases)

102.

Pell Manufacturing is preparing its direct labor budget for May. Projections for the month are that 33,400 units are to be produced and that the direct labor time required is three hours per unit. If the labor cost per hour is $12, what is the total budgeted direct labor cost for May? a. $1,159,200. b. $1,180,800. c. $1,202,400. d. $1,296,000.

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: 33,400 x $12 x 3 = $1,202,400 (Units to be produced x Hours per unit x labor cost per hour = total budgeted direct labor cost)

103.

Dolce Co. estimates its sales at 180,000 units in the first quarter and that sales will increase by 18,000 units for each subsequent quarter during the year. The company has, and desires, an ending finished goods inventory equal to 25% of the next quarter’s sales . Each unit sells for $25. Forty percent of the sales are for cash. Seventy percent of credit customers pay within the quarter. The remainder is collected in the quarter following the sale. Production in units for the third quarter should be budgeted at a. 220,500. b. 207,000. c. 274,500. d. 216,000.

Ans: A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: ((180,000 + 18,000 + 18,000 +18,000) x 25%) + (180,000 + 18,000 + 18,000) – ((180,000 + 18,000 + 18,000) x25%) = 220,500 (Ending Finished goods + Estimated sales unit in 3rd quarter – Beginning Finished goods = Production in units for the third quarter)

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

104.

Dolce Co. estimates its sales at 180,000 units in the first quarter and that sales will increase by 18,000 units for each subsequent quarter during the year. The company has, and desires, an ending finished goods inventory equal to 25% of the next quarter’s sales. Each unit sells for $25. Forty percent of the sales are for cash. Seventy percent of credit customers pay within the quarter. The remainder is collected in the quarter following the sale. Cash collections for the third quarter are budgeted at a. $3,051,000. b. $4,428,000. c. $5,319,000. d. $6,156,000.

Ans: C, LO: 4, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: (180,000 + 18,000 + 18,000) x $25 x 40% = $2,160,000; (180,000 + 18,000 + 18,000) x $25 X .7 x .6 = $2,268,000; (180,000 + 18,000) x $25 x .6 x .3 = $891,000; $2,160,000 + $2,268,000 + $891,000 = $5,319,000 (Third Quarter Cash Sales + Third Quarter Credit Sales + Second Quarter Credit Sales = Cash Collections for third quarter)

105.

Bear, Inc. estimates its sales at 200,000 units in the first quarter and that sales will increase by 20,000 units for each subsequent quarter during the year. The company has, and desires, an ending finished goods inventory equal to 25% of the next quarter’s sales . Each unit sells for $35. Forty percent of sales are for cash. Seventy percent of credit customers pay within the quarter. The remainder is collected in the quarter following sale. Production in units for the third quarter should be budgeted at a. 245,000. b. 230,000. c. 305,000. d. 240,000.

Ans: A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: ((200,000 + 20,000 + 20,000 + 20,000) x 25%) + (200,000 + 20,000 + 20,000) – ((200,000 + 20,000 + 20,000) x 25%) = 245,000 (Desired Ending Inventory + Estimated Sales unit in third quarter – Beginning Inventory = Production in units for the third quarter)

106.

Bear, Inc. estimates its sales at 200,000 units in the first quarter and that sales will increase by 20,000 units for each subsequent quarter during the year. The company has, and desires, an ending finished goods inventory equal to 25% of the next quarter’s sales . Each unit sells for $35. Forty percent of sales are for cash. Seventy percent of credit customers pay within the quarter. The remainder is collected in the quarter following sale. Cash collections for the third quarter are budgeted at a. $4,746,000. b. $6,888,000. c. $8,274,000. d. $9,576,000.

Ans: C, LO: 4, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: (200,000 + 20,000 + 20,000) x $35 x 40% = $3,360,000; (200,000 + 20,000 + 20,000) x $35 x .6 x 70% = $3,528,000; ((200,000 + 20,000) X $35 x .6 x .3) = $1,386,000; $3,360,000 + $3,528,000 + $1,386,000 = $8,274,000 (Cash Collections third quarter + Credit Collections third quarter + Credit Collection second quarter = Collections for third quarter)

Budgetary Planning 107.

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A company determined that the expected unit production cost is $30. On June 1, there were 80,000 units on hand. The sales department budgeted sales of 300,000 units in June and the company desires to have 120,000 units on hand on June 30. The budgeted cost of goods produced for June is a. $7,800,000. b. $11,400,000. c. $9,000,000. d. $10,200,000.

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: 300,000 units sold x $30 per unit = $9,000,000. (Expected sales units x Expected unit production cost = Budgeted cost of goods sold)

108.

Which of the following is not shown on one of the operating budgets? a. Selling and administrative expenses b. Accounts receivable c. Cost of goods sold d. Sales

Ans: B, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

109.

Which of the following statements about a budgeted income statement is not true? a. The budgeted income statement is prepared after the financial budgets are prepared. b. The budgeted income statement is prepared on the accrual basis of accounting. c. The budgeted income statement can be prepared in a multiple-step format. d. The budgeted income statement is prepared using the individual operating budgets.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

110.

A company has budgeted direct materials purchases of $300,000 in July and $480,000 in August. Past experience indicates that the company pays for 70% of its purchases in the month of purchase and the remaining 30% in the next month. All selling and administrative expenses are paid in cash as incurred. During August, the following items were budgeted: Wages Expense Purchase of office equipment Selling and Administrative Expenses Depreciation Expense

$150,000 72,000 48,000 36,000

Budgeted cash disbursements for August are a. $648,000. b. $426,000. c. $696,000. d. $732,000. Ans: C, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: ($150,000 + $72,000 + $48,000 + ($480,000 x 70%) + ($300,000 x 30%) = $696,000 (Wage Expense + Purchase of office equipment + Selling and Administrative Expenses + Direct material purchases August + Direct Material purchases July portion = Budgeted cash disbursements for August)

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

111.

Astor Manufacturing has the following budgeted sales: January $120,000, February $180,000, and March $150,000. Forty percent of sales are for cash and sixty percent are on credit. For the credit sales, 50% are collected in the month of sale and 50% the next month. Total expected cash receipts for March are a. $168,000. b. $159,000. c. $157,500. d. $150,000.

Ans: B, LO: 4, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: ($150,000 x 40%) + ($150,000 x 60% x 50%) + ($180,000 x 60% x .5) = $159,000 (Cash Sales March Collection + Credit Sales March Collection + February Credit Sales Collection = Total Expected Cash Receipts)

112.

Garnett Co. expects to purchase $180,000 of materials in July and $210,000 of materials in August. Three-fourths of all purchases are paid for in the month of purchase and the other one-fourth are paid for in the month following the month of purchase. What are budgeted cash disbursements for materials purchases in August? a. $135,000 b. $157,500 c. $202,500 d. $210,000

Ans: C, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: ($210,000 x 75%) + ($180,000 x 25%) = $202,500 (August Direct Materials Purchase + July Direct Materials Purchase = August’s cash disbursement)

113.

The single most important output from preparing financial budgets is the a. sales forecast. b. determination of the unit cost of the product. c. cash budget. d. budgeted income statement.

Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

114.

Which of the following is not a separate section on the cash budget? a. Cash receipts b. Cash disbursements c. Capital expenditures d. Financing

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

115.

The financing section of a cash budget is needed if there is a cash deficiency or if the ending cash balance is less than a. the prior years. b. management's minimum required balance. c. the amount needed to avoid a service charge at the bank. d. the industry average.

Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Budgetary Planning 116.

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Beginning cash balance plus total receipts a. equals ending cash balance. b. must equal total disbursements. c. equals total available cash. d. is the excess of available cash over disbursements.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

117.

The projected financial position at the end of the budget period is found on the a. budgeted income statement. b. cash budget. c. budgeted balance sheet. d. sales budget.

Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

118.

What is the proper preparation sequencing of the following budgets? 1. Budgeted Balance Sheet 2. Sales Budget 3. Selling and Administrative Budget 4. Budgeted Income Statement a. 1, 2, 3, 4 b. 2, 3, 1, 4 c. 2, 3, 4, 1 d. 2, 4, 1, 3

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

119.

Kam Department Store reported the following information for 2022: October Budgeted sales $1,240,000  

November $1,160,000

December $1,440,000

All sales are on credit. Accounts receivable are collected 50% in the month of sale and 50% in the following month.

What are budgeted cash receipts for November? a. $580,000 b. $1,300,000 c. $1,200,000 d. $1,160,000 Ans: C, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: ($1,240,000 x 50%) + ($1,160,000 x 50%) = $1,200,000 (Cash Collections of October Sales + Cash Collections of November Sales = Budgeted Cash Receipts for November)

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

120.

The following information was taken from Southgate Industry’s cash budget for the month of July: Beginning cash balance $480,000 Cash receipts 304,000 Cash disbursements 544,000 If the company’s policy is to maintain a minimum end of the month cash balance of $400,000, the amount the company would have to borrow in July is a. $160,000. b. $80,000. c. $240,000. d. $96,000.

Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: $480,000 + $304,000 - $544,000 = $240,000; $400,000 - $240,000 = $160,000 (Beginning cash balance + Cash Receipts – Cash disbursements = Ending Cash Balance; Minimum Cash Balance – Ending Cash Balance = Amount Need to Borrow)

121.

The cash budget reflects a. all revenues and all expenses for a period. b. expected cash receipts and cash disbursements from all sources. c. all the items that appear on a budgeted income statement. d. all the items that appear on a budgeted balance sheet.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

122.

The following credit sales are budgeted by Terra Co.: January February March April

$204,000 300,000 420,000 360,000

The company's past experience indicates that 70% of accounts receivable are collected in the month of sale, 20% in the month following the sale, and 8% in the second month following the sale. The budgeted cash receipts for the month of April are a. $370,320. b. $336,000. c. $360,000. d. $352,800. Ans: C, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: ($360,000 x 70%) + ($420,000 x 20%) + ($300,000 x 8%) = $360,000 (April Cash collections + March Cash Collections + February Cash Collections = Anticipated Cash inflow for the month of April)

123.

Hyde Corp.'s cash budget showed total available cash less cash disbursements. What does this amount equal? a. Ending cash balance b. Total cash receipts c. The excess (deficiency) of available cash over cash disbursements d. The amount of financing required

Ans: C, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Budgetary Planning 124.

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Which one of the following is not a section of a cash budget? a. Cash receipts b. Financing c. Investing d. Cash disbursements

Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

125.

A company's past experience indicates that 60% of its credit sales are collected in the month of sale, 30% in the next month, and 5% in the second month after the sale; the remainder is never collected. Budgeted credit sales for the first quarter are: January February March

$360,000 216,000 540,000

Budgeted cash receipts for the month of March are a. $406,800. b. $307,800. c. $324,000. d. $388,800. Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: ($540,000 x 60%) + ($216,000 x 30%) + ($360,000 x 5%) = $324,000 + $64,800 + $18,000 = $406,800 (Cash Collections of March Sales + Cash Collections of February Sales + Cash Collections of January Sales = Budgeted Cash Receipts for the month of March)

126.

Which one of the following items would not be included on a cash budget? a. Office salaries expense b. Interest expense c. Depreciation expense d. Travel expense

Ans: C, LO: 4, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

127.

Correy Inc. reported the following information for 2022: October November Budgeted sales $460,000 $440,000 Budgeted purchases $240,000 $256,000     

December $540,000 $288,000

All sales are on credit. Customer amounts on account are collected 50% in the month of sale and 50% in the following month. Cost of goods sold is 35% of sales. Purchases are paid for 60% in the month of acquisition and 40% in the following month. Accounts payable is used only for inventory acquisitions.

What are Correy’s budgeted cash receipts during November? a. $220,000 b. $490,000 c. $450,000 d. $440,000 Ans: C, LO: 4, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: $440,000 x 50% = $220,000; $460,000 x 50% = $230,000; $220,000 + $230,000 = $450,000

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

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(November Cash Collections + October Cash Collections = Collections received during November)

128.

Correy Company reported the following information for 2022: Budgeted sales Budgeted purchases     

October $460,000 $240,000

November $440,000 $256,000

December $540,000 $288,000

What is the budgeted balance for Accounts Payable at October 31, 2022? a. $96,000 b. $144,000 c. $204,000 d. $102,400 Ans: A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: $240,000 x 40% = $96,000 (Budgeted Purchases: October X % on account (not paid) = Budgeted balance for Accounts Payable)

129.

Petal Co. reported the following information for 2022: Budgeted sales  

October $930,000

November $870,000

December $1,080,000

All sales are on credit. Accounts receivable are collected 50% in the month of sale and 50% in the following month.

What is the November 30, 2022 budgeted balance of Accounts Receivable? a. $900,000 b. $540,000 c. $465,000 d. $435,000 Ans: D, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: ($870,000 x 50%) = $435,000 (November Budgeted Sales x % on Account (Not collected) = November 30th budgeted Accounts Receivable)

130.

Bean Manufacturing reported the following information for 2022: Budgeted purchases   

October $240,000

November $256,000

December $288,000

Operating expenses are: Salaries, $100,000; Depreciation, $40,000; Rent, $20,000; Utilities, $28,000 Operating expenses are paid during the month incurred. Accounts payable is used only for inventory acquisitions.

What are budgeted cash disbursements for operating expenses in November? a. $404,000 b. $148,000 .

Budgetary Planning

22 - 27

c. $188,000 d. $444,000 Ans: B, LO: 4, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: $100,000 + $28,000 + $20,000 = $148,000 (Salaries + Rent + Utilities = Budgeted amount of cash to be paid for operating expenses)

131.

For September, the capital expenditure budget indicates a $420,000 purchase of equipment. The ending September cash balance from operations is budgeted to be $60,000. The company wants to maintain a minimum cash balance of $30,000. What is the minimum amount of cash that the company should plan to borrow in September? a. $330,000 b. $360,000 c. $450,000 d. $390,000

Ans: D, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: $420,000 - $60,000 + $30,000 = $390,000 (Capital Expenditure for Equipment – Ending Cash Balance + Minimum Cash Balance = Minimum Cash Loan)

132.

Young Co. has budgeted its activity for December according to the following information: 1. 2. 4. 5.

Sales are budged at $600,000 and are all cash sales. Budgeted depreciation for December is $15,000. The budgeted cash balance at December 1 is $15,000. Selling and administrative expenses are budgeted at $60,000 for December and are paid for in cash. 6. Budgeted merchandise inventories on December 31 and December 1 are $18,000. 7. The invoice cost for merchandise purchases represents 75% of the sales price. All purchases are paid in cash. What are the budgeted cash disbursements for December? a. $345,000 b. $510,000 c. $525,000 d. $492,000 Ans: B, LO: 4, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: $60,000 + ($600,000 x 75%) = $510,000 (Selling and administrative expenses + Merchandise Cash Purchases (% of Sales Price) = Budgeted cash disbursements for December)

133.

Dex Industries expects to purchase $120,000 of materials in March and $140,000 of materials in April. Three-fourths of all purchases are paid for in the month of purchase and the other one-fourth are paid for in the month following the month of purchase. In addition, a 2% discount is received for payments made in the month of purchase. What are Dex’s budgeted cash disbursements for materials purchases in April? a. $88,200 b. $108,200 c. $132,900 d. $120,000

Ans: C, LO: 4, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: ($140,000 x 75% * .98) + ($120,000 x 25%) = $102,900 + $30,000 = $132,900 (April Material Purchases Paid + March Material Purchases Paid = April’s cash disbursement for material purchases)

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

134.

On January 1, Witt Company has a beginning cash balance of $126,000. During the year, the company expects cash disbursements of $1,020,000 and cash receipts of $870,000. If Witt requires an ending cash balance of $120,000, Witt Company must borrow a. $96,000. b. $120,000. c. $144,000. d. $276,000.

Ans: C, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: $126,000 + $870,000 - $1,020,000 = -$24,000; -$24,000 - $120,000 = -$144,000 (loan) (Beginning cash balance + cash receipts – cash disbursements = Deficiency of available cash over cash disbursements.; Required ending cash balance – Deficiency of available cash over cash disbursements. = Amount to Borrow)

135.

Mapleview, Inc. has the following budgeted sales: July $200,000, August $300,000, and September $250,000. Forty percent of sales are for cash and sixty percent are on account. For the credit sales, 50% are collected in the month of sale and 50% in the following month. Total expected cash receipts for September are a. $280,000. b. $265,000. c. $262,500. d. $250,000.

Ans: B, LO: 4, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: ($250,000 x 40%) + ($250,000 x 60% x .5) + ($300,000 x .6 x .5) = $100,000 + $75,000 + $90,000 = $265,000 (September Cash Collection + September Credit Collections + August Credit Collections = Total Expected cash receipts during September)

136.

Burr, Inc.'s direct materials budget shows total cost of direct materials purchases for April $400,000, May $480,000 and June $560,000. Cash payments are 60% in the month of purchase and 40% in the following month. Budgeted cash disbursement for materials purchases for June are a. $528,000. b. $512,000. c. $480,000. d. $416,000.

Ans: A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: ($560,000 x 60%) + ($480,000 X 40%) = $528,000 (June Cash Payments + May Cash Payments = Budgeted cash payments for June)

137.

Which one of the following budgets would be prepared for a manufacturer but not for a merchandiser? a. Direct labor budget b. Cash budget c. Sales budget d. Budgeted income statement

Ans: A, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

138.

The equation for determining budgeted merchandise purchases is budgeted a. production + desired ending inventory – beginning inventory. b. sales + beginning inventory – desired ending inventory. c. cost of goods sold + desired ending inventory – beginning inventory. d. cost of goods sold + beginning inventory – desired ending inventory.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Budgetary Planning 139.

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Which of the following is a problem resulting from a service company being overstaffed? a. Labor costs will be disproportionately low. b. Profits will be higher because of the additional salaries. c. Staff turnover may increase. d. Revenue may be lost.

Ans: C, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

140.

The master budget for a service enterprise a. will have the same types of budgets as a merchandiser. b. may include a sales budget for sales revenue. c. will not include a budgeted income statement. d. includes a service revenue budget based on expected client billings.

Ans: D, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

141.

Budgeting in not-for-profit organizations a. is not important because they are not profit-oriented. b. usually starts with budgeting expenditures rather than receipts. c. is necessary only if some product is produced and sold. d. consists only of budgeted contributions.

Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

142.

For a merchandiser, the starting point in the development of the master budget is the a. cash budget. b. sales budget. c. selling and administrative expenses budget. d. budgeted income statement.

Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

143.

Instead of a production budget, a merchandiser will prepare a a. pseudo-production budget. b. merchandise purchases budget. c. master time sheet. d. sales forecast.

Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

144.

Orange Co. is a manufacturer and Pineapple Company is a merchandiser. What is the difference in the budgets the two entities will prepare? a. Orange Co. will prepare a production budget while Pineapple Company will prepare a merchandise purchases budget. b. Orange Co. will prepare a sales forecast while Pineapple Company will prepare a sales budget. c. Pineapple Company will prepare a production budget while Orange Co. will prepare a merchandise purchases budget. d. Both companies will prepare the same types of budgets.

Ans: A, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

145.

An appropriate activity index for a college or university for budgeting faculty positions would be the a. faculty hours worked. .

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e b. number of administrators. c. credit hours taught by a department. d. number of days in the school term.

Ans: C, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

146.

A critical factor in budgeting for a service firm is to a. hire professional staff to perform the budgeting work. b. coordinate professional staff needs with anticipated services. c. classify all personnel as either variable or fixed. d. budget expenditures before anticipated receipts.

Ans: B, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

147.

The primary benefits of budgeting include all of the following except it a. requires only top management to plan ahead and formalize their future goals. b. provides definite objectives for evaluating performance. c. creates an early warning system for potential problems. d. motivates personnel throughout the organization.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

148.

The has primary responsibility for expressing management's budgeting goals in financial terms. a. accounting department b. top management c. lower level of management d. budget committee

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

149.

Coordinating the preparation of the budget is the responsibility of the a. treasurer. b. president. c. chief accountant. d. budget committee.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

150.

For better management acceptance, the flow of input data for budgeting should begin with the a. accounting department. b. top management. c. lower levels of management. d. budget committee.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

151.

In the direct materials budget, the quantity of direct materials to be purchased is computed by adding direct materials required for production to a. desired ending direct materials. b. beginning direct materials. c. desired ending direct materials less beginning direct materials. d. beginning direct materials less desired ending direct materials.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Budgetary Planning 152.

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Grey Company has 24,000 units in beginning finished goods. If sales are expected to be 120,000 units for the year and Grey desires an ending finished goods of 30,000 units, how many units must the company produce? a. 114,000 b. 120,000 c. 126,000 d. 150,000

Ans: C, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: 30,000 + 120,000 – 24,000 = 126,000 (Ending Inventory units + Expected sales units – Beginning Inventory units) = Units to be produced)

153.

The important end-product of the operating budgets is the a. budgeted income statement. b. cash budget. c. production budget. d. budgeted balance sheet.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

154.

On January 1, Kale Company has a beginning cash balance of $42,000. During the year, the company expects cash disbursements of $340,000 and cash receipts of $290,000. If Kale requires an ending cash balance of $40,000, the company must borrow a. $32,000. b. $40,000. c. $48,000. d. $92,000.

Ans: C, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: $42,000 + $290,000 - $340,000 = -$8,000; -$8,000 - $40,000 = -$48,000 (loan) (Beginning cash balance + cash receipts – cash disbursements = Deficiency of available cash over cash receipts.; Required Ending Cash balance – Deficiency of available cash over cash receipts = Amount required to borrow)

155.

The budget that is often considered to be the most important financial budget is the a. cash budget. b. capital expenditure budget. c. budgeted income statement. d. budgeted balance sheet.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

156.

Lark Corp.'s direct materials budget shows direct materials purchases for January $250,000, February $300,000 and March $350,000. Cash payments are 60% in the month of purchase and 40% in the following month. The budgeted cash disbursements for direct materials purchases in March are a. $330,000. b. $320,000. c. $300,000. d. $260,000.

Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: ($350,000 x 60%) + ($300,000 * 40%) = $210,000 + $120,000 = $330,000 (March Direct material purchases paid + February Direct material purchases paid = Budgeted cash payments for March)

157.

A purchases budget is used instead of a production budget by a. merchandising companies. .

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

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b. service enterprises. c. not-for-profit organizations. d. manufacturing companies. Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

158.

Which of the following statements is incorrect? a. A continuous twelve-month budget results from dropping the budgeted amounts for the month that has just ended and adding the budgeted amounts for the subsequent month. b. The production budget is derived from the direct materials and direct labor budgets. c. The cash budget shows anticipated cash receipts and disbursements. d. In the budget process for not-for-profit organizations, the emphasis is on cash flows rather than on revenue and expenses.

Ans: B, LO: 5, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

BRIEF EXERCISES BE 159 Wynn, Inc. manufactures afghans. The budgeted units to be produced and sold are as follows: August September

Expected Production 3,500 2,800

Expected Sales 2,900 3,900

It takes 18 yards of yarn to produce an afghan. The company's policy is to maintain yarn at the end of each month equal to 5% of next month's production needs and to maintain a finished goods inventory at the end of each month equal to 20% of next month's anticipated production needs. The cost of yarn is $0.20 a yard. At August 1, 3,150 yards of yarn were on hand. Instructions Compute the budgeted cost of direct materials purchases for August. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 159

(5 min.)

Units to be produced Yards required per afghan Yards required for production Add: Desired materials ending inventory (yards) (5% × 2,800 × 18) Less: Beginning inventory on hand (yards) (5% × 3,500 × 18) Yards to be purchased Cost per yard Budgeted cost of direct materials purchases for August

3,500 × 18 63,000 2,520 (3,150) 62,370 × $0.20 $12,474

BE 160 The budget components for Birk Company for the quarter ended June 30 appear below. Birk sells recycling bins for $12 each. Budgeted production for the next three months is: April

26,000 units .

Budgetary Planning May June

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46,000 units 29,000 units

Birk desires to have recycling bins on hand at the end of each month equal to 20 percent of the following month’s budgeted sales in units. On March 31, Birk had 4,000 bins on hand. Five pounds of plastic are required for each recycling bin. At the end of each month, Birk desires to have 10 percent of the following month’s direct material needed for production on hand. At March 31, Birk had 13,000 pounds of plastic on hand. The direct materials used in production cost $0.60 per pound. Each recycling bin produced requires 0.10 hours of direct labor. Instructions Compute the budgeted dollar value of the ending direct materials inventory at the end of May. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 160

(4 min.)

Budgeted dollar value of ending direct materials inventory = (10% × 29,000) × 5 × $0.60 per pound = $8,700 BE 161 Smoke, Inc. makes and sells serving trays. Each tray uses 1/2 pound of plastic. Budgeted production of trays in units for the next three months is as follows: Budgeted production

April 21,000

May 22,000

June 24,000

The company wants to maintain monthly ending inventories of plastic equal to 25% of the following month's budgeted production needs. The cost of plastic is $2.20 per pound. Instructions Prepare a direct materials purchases budget for the month of May. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 161

(5 min.)

Serving trays to be produced in May Pounds of plastic needed for each tray Total pounds of plastic required for production Add: desired direct materials ending inventory (25% × 24,000 × 1/2) Less: beginning direct materials inventory (25% × 22,000 × 1/2) Pounds of plastic to be purchase Cost per pound Budgeted cost of direct materials purchases for May

22,000 × ½ lb. 11,000 3,000 (2,750) 11,250 × $2.20 $24,750

BE 162 The budget components for Park Company for the quarter ended June 30 appear below. Park sells high performance coolers for $120 each. Budgeted sales and production for the next three months are: Sales Production April 20,000 units 26,000 units May 50,000 units 46,000 units .

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

June

30,000 units

29,000 units

Park desires to have coolers on hand at the end of each month equal to 20 percent of the following month’s budgeted sales in units. On March 31, Park had 4,000 completed units on hand. Five pounds of plastic are required for each cooler. At the end of each month, Park desires to have 10 percent of the following month’s production material needs on hand. At March 31, Park had 13,000 pounds of plastic on hand. The materials used in production cost $0.60 per pound. The production of each cooler requires 0.10 hours of direct labor. Instructions Determine the budgeted cost of direct materials purchases for the month of April. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 162

(5 min.)

Required production of coolers in April (given) Pounds of plastic per cooler Total pounds of plastic required for production Add: ending plastic inventory desired (10% × 46,000 × 5) Total pounds of plastic required Less: beginning inventory of plastic (given) Pounds of plastic to be purchased Cost per pound of plastic Budgeted cost of direct materials purchases for the month of April

26,000 × 5 130,000 23,000 153,000 (13,000) 140,000 × $0.60 $84,000

BE 163 Jent Company reported the following information for 2019: Budgeted sales Budgeted purchases  

October $320,000 $120,000

November $340,000 $128,000

December $360,000 $144,000

All sales are on credit. Customer amounts on account are collected 40% in the month of sale and 60% in the following month.

Instructions Compute Jent’s budgeted cash receipts for November. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 163

(3 min.)

From November sales: $340,000 × 40% = $136,000 From October sales: $320,000 × 60% = $192,000 Budgeted cash receipts for November = $136,000 + $192,000 = $328,000 BE 164 Plack Company budgeted the following information for 2022: Budgeted purchases of merchandise .

May

June

$104,000

$110,000

July $102,000

Budgetary Planning    

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Cost of goods sold is 40% of sales. Accounts payable is used only for merchandise inventory acquisitions. Plack purchases and pays for merchandise 60% in the month of acquisition and 40% in the following month. Selling and administrative expenses are budgeted at $30,000 for May and are expected to increase 5% per month. These expenses are paid during the month when incurred. In addition, depreciation is budgeted at $10,000 per month. Income taxes are $38,400 for July and are paid in the month incurred.

Instructions Compute the amount of budgeted cash disbursements for July. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 164

(5 min.)

Cash disbursements: Cash paid for July purchases (60% × $102,000) Cash paid for June purchases (40% × $110,000) Cash paid for July selling and admin ($30,000 × 1.05 × 1.05) Cash paid for income taxes Budgeted cash disbursements for July

$ 61,200 44,000 33,075 38,400 $176,675

BE 165 Sable, Inc. has budgeted direct materials purchases of $400,000 in March and $500,000 in April. The company policy is to pay for 60% of purchases in the month of purchase and the remaining 40% in the next month. Other expenses are paid during the month when incurred. During April, the following items were budgeted: Salaries and wages expense Purchase of office equipment Selling and administrative expenses Depreciation expense

$120,000 200,000 126,000 18,000

Instructions Compute budgeted cash disbursements for April. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 165

(4 min.)

Payment of March purchases ($400,000 × 40%) Payment of April purchases ($500,000 × 60%) Salaries and wages expense Purchase of office equipment Selling and administrative expenses Budgeted cash disbursements for April

$160,000 300,000 120,000 200,000 126,000 $906,000

BE 166 Chain Inc. provided the following information: April .

May

June

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Projected merchandise purchases   

$92,000

$80,000

$66,000

Chain pays for 40% of merchandise purchases in the month of the purchase and 60% in the following month. General operating expenses are budgeted to be $31,000 per month of which depreciation is $3,000 of this amount. Chain pays operating expenses in the month incurred. Chain makes loan payments of $4,000 per month of which $450 is interest and the remainder is principal.

Instructions Calculate budgeted cash disbursements for May. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 166

(5 min.)

Budgeted cash disbursements for purchases: Cash paid for May purchases ($80,000 × 40%) Cash paid for April purchases ($92,000 × 60%) Budgeted cash paid for purchases Budgeted cash payments for operating expenses ($31,000 – $3,000) Budgeted cash payments for loan ($4,000 – $450) Budgeted cash payments for interest Total budgeted cash disbursements for May

$ 32,000 55,200 87,200 28,000 3,550 450 $119,200

BE 167 Beal, Inc. provided the following information: Projected merchandise purchases  

March $65,000

April $75,000

May $80,000

Beal pays for 40% of merchandise purchases in the month of the purchase and 60% in the following month. General operating expenses are budgeted to be $20,000 per month of which depreciation is $2,000 of this amount. Beal pays operating expenses in the month incurred.

Instructions Calculate Beal’s budgeted cash disbursements for May. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 167

(4 min.)

Cash paid for merchandise purchases: May purchases: $80,000 × 40% = April purchases: $75,000 × 60% = Cash paid for operating expenses ($20,000 − $2,000) Budgeted cash disbursements for May

$32,000 45,000 18,000 $95,000

BE 168 The beginning cash balance is $15,000. Sales are forecasted at $800,000 of which 80% will be on account. Seventy percent of credit sales are expected to be collected in the year of sale. Cash .

Budgetary Planning

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expenditures for the year are forecasted at $475,000. Accounts Receivable from previous accounting periods totaling $9,000 will be collected in the current year. The company is required to make a $15,000 loan payment and an annual interest payment on the last day of every year. The loan balance as of the beginning of the year is $90,000, and the annual interest rate is 10%. Instructions Compute the excess of available cash over cash disbursements. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 168

(5 min.)

Cash collections: Accounts receivable collected Cash sales: 20% × $800,000 Cash collections of credit sales: (80% × $800,000) × 70% Cash expenditures Loan payment Interest payment (10% × $90,000) Excess of available cash over cash disbursements

9,000 160,000 448,000 (475,000) (15,000) (9,000) $118,000

EXERCISES Ex. 169 Delta Manufacturing has budgeted the following unit sales: 2022 April May June July

Units 25,000 40,000 60,000 45,000

Of the units budgeted, 40% are sold by the Coastal Division at an average price of $15 per unit and the remainder are sold by the Central Division at an average price of $12 per unit. Instructions Prepare separate sales budgets for each division and for the company in total for the second quarter of 2022. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 169

(15–20 min.) DELTA MANUFACTURING Sales Budget For the Quarter Ended June 30, 2022

Total Company Expected unit sales

25,000

40,000

60,000

125,000

Coastal Division

April

May

June

Total

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Expected unit sales Unit selling price Total sales

10,000 $15 $150,000

16,000 $15 $240,000

24,000 $15 $360,000

50,000 $15 $750,000

Central Division Expected unit sales Unit selling price Total sales

15,000 $12 $180,000

24,000 $12 $288,000

36,000 $12 $432,000

75,000 $12 $900,000

Total sales

$330,000

$528,000

$792,000

$1,650,000

Ex. 170 Pitt Corp. makes and sells deck coating which are sold by the gallon. Two pounds of sand are needed to make one gallon of deck coating. Budgeted production of deck coating for the next two months follows: September October

25,000 gallons 31,000 gallons

The company wants to maintain monthly ending inventories of sand equal to 20% of the following month's production needs. On August 31, 10,000 pounds of sand were on hand. Instructions How much sand should be purchased in September? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 170

(8 min.)

Expected production of gallons during September (given) Pounds of sand required per gallon of deck coating Pounds of sand required for September production Add: desired ending direct materials inventory (20% × 31,000 units × 2 pounds) Less: beginning direct materials inventory Budgeted purchases of pounds of sand for September

25,000 × 2 50,000 12,400 (10,000) 52,400

Ex. 171 Butler Manufacturing manufactures two products, (1) Regular and (2) Deluxe. The budgeted units to be produced are as follows: Units of Product 2022 Regular Deluxe Total July 10,000 15,000 25,000 August 6,000 10,000 16,000 September 9,000 14,000 23,000 October 8,000 12,000 20,000 It takes 2 pounds of direct materials to produce the Regular product and 5 pounds of direct materials to produce the Deluxe product. It is the company's policy to maintain an inventory of direct materials at the end of each month equal to 30% of the next month's production needs for the Regular product and 20% of the next month's production needs for the Deluxe product. Direct materials inventory on hand at June 30 were 6,000 pounds for the Regular product and 15,000 pounds for the Deluxe product. The cost per pound of materials is $5 for the Regular product and $8 for the Deluxe. .

Budgetary Planning

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Instructions Prepare separate direct materials budgets for each product for the third quarter of 2022. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 25, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 171

(25–30 min.) BUTLER MANUFACTURING Direct Materials Budget—Regular For the Quarter Ended September 30, 2022

Units to be produced Direct materials per unit Total pounds needed for production Add: Desired ending direct materials inventory Total pounds of direct materials required Less: Beginning direct materials inventory Budgeted direct materials purchases Cost per pound Budgeted cost of direct materials purchases *30% × (8,000 × 2)

July 10,000 × 2 20,000 3,600 23,600 6,000 17,600 × $5 $88,000

August 6,000 × 2 12,000 5,400 17,400 3,600 13,800 × $5 $69,000

September Total 9,000 × 2 18,000 4,800* 22,800 5,400 17,400 × $5 $87,000 $244,000

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 171 (Cont.) BUTLER MANUFACTURING Direct Materials Budget—Deluxe For the Quarter Ended September 30, 2022 July Units to be produced 15,000 Direct materials per unit × 5 Total pounds needed for production 75,000 Add: Desired ending direct materials inventory 10,000 Total pounds of direct materials required 85,000 Less: Beginning direct materials inventory 15,000 Budgeted direct materials purchases 70,000 Cost per pound × $8 Budgeted cost of direct materials purchases $560,000 *20% × (12,000 × 5)

August 10,000 × 5 50,000 14,000 64,000 10,000 54,000 × $8 $432,000

September Total 14,000 × 5 70,000 12,000* 82,000 14,000 68,000 × $8 $544,000 $1,536,000

Ex. 172 Garver Industries has budgeted the following unit sales: 2022 January February March April May

Units 10,000 8,000 9,000 11,000 15,000

The finished goods units on hand on December 31, 2021 was 2,000 units. Each unit of finished goods requires 3 pounds of direct materials that are estimated to cost an average of $4 per pound. It is the company's policy to maintain a finished goods inventory at the end of each month equal to 20% of next month's anticipated sales. The company also has a policy of maintaining a direct materials inventory at the end of each month equal to 30% of the pounds needed for the following month's production. There were 8,640 pounds of direct materials on hand at December 31, 2021. Instructions For the first quarter of 2022, prepare (1) a production budget and (2) a direct materials budget. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 25, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 172

(25–30 min.)

(1)

GARVER INDUSTRIES Production Budget For the Quarter Ended March 31, 2022

Expected unit sales Desired ending finished goods inventory Total required finished goods units Less: Beginning finished goods inventory Required production of finished goods units *April units: 11,000 × 20%. .

January 10,000 1,600 11,600 2,000 9,600

February 8,000 1,800 9,800 1,600 8,200

March 9,000 2,200* 11,200 1,800 9,400

Total

27,200

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Solution 172 (Cont.) (2)

GARVER INDUSTRIES Direct Materials Budget For the Quarter Ended March 31, 2022

Units to be produced Direct materials per unit Total pounds required for production Desired ending direct materials inventory Total materials required Less: Beginning direct materials inventory Budgeted direct materials purchases Cost per pound Budgeted cost of direct materials purchases

January 9,600 × 3 28,800 7,380 36,180 8,640 27,540 × $4 $110,160

February 8,200 × 3 24,600 8,460 33,060 7,380 25,680 × $4 $102,720

March 9,400 × 3 28,200 10,620** 38,820 8,460 30,360 × $4 $121,440

Total

$334,320

**April units: 11,800 × 3 = 35,400 × 30%. Ex. 173 Benet Company has budgeted the following unit sales: 2022

2023

Quarter 1 2 3 4

Units 105,000 60,000 75,000 120,000

Quarter 1

Units 90,000

The finished goods inventory on hand on December 31, 2021 was 21,000 units. It is the company's policy to maintain a finished goods inventory at the end of each quarter equal to 20% of the next quarter's anticipated sales. Instructions Prepare a production budget for 2022. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 173

(15–20 min.) BENET COMPANY Production Budget For the Year Ended December 31, 2022

1 Expected unit sales 105,000 Desired ending finished goods units 12,000 Total required finished goods units 117,000 Less: Beginning finished goods units 21,000 Required production units 96,000 *2023 Q1: 90,000 units × 20% = 18,000. .

Quarter 2 3 60,000 75,000 15,000 24,000 75,000 99,000 12,000 15,000 63,000 84,000

4 120,000 18,000* 138,000 24,000 114,000

Total

357,000

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ex. 174 The following facts are known: 

The total pounds needed for production are 2 times the units to be produced.



The desired ending direct materials inventory in pounds is 20% of the total pounds needed for production.



The beginning direct materials inventory in pounds is equal in number to 10% of the units to be produced.



Cost per pound is $5.



The total cost of the direct materials purchases is $1,035,000.

Instructions Prepare a direct materials budget for the period. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 12, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 174

(12–17 min.)

Let X = total units to be produced. Then total pounds needed equals 2X. Desired ending inventory is 20% × 2X. The beginning inventory is .10X. The direct materials budget is: Units to be produced Direct materials per unit Total pounds required for production Add: Desired ending direct materials inventory Total materials required Less: Beginning direct materials inventory Budgeted direct materials purchases Cost per pound Budgeted cost of direct materials purchases

X 2 2X .2 (2X) = .4X 2.4X .10X 2.3X $5

90,000* × 2 180,000 36,000 216,000 9,000 207,000 × $5 $1,035,000

*2X + .2(2X) – .1X = 207,000 2X + .4X – .1X = 207,000 2.3X = 207,000 X = 90,000 Ex. 175 Tall Oak, Inc. produces pellets for cornhole bags from plastic resin which they sell by the pound. Tall Oak has estimated production and sales of pellets in pounds for the next 2 months as: May June Estimated production 42,000 48,000 Estimated sales 50,000 36,000 Each pound of pellets requires 0.25 pounds of resin. The cost of resin is $4.50 per pound. Tall Oak wants to have 20% of the next month's direct materials requirements on hand at the end of each month. Instructions Prepare a direct materials purchases budget for the month of May. .

Budgetary Planning

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Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 175

(10 min.) TALL OAK, INC. Direct Materials Purchases Budget Month of May

Estimated production in pounds of pellets for May 42,000 Pounds of resin needed per pound of pellets × .25 Total pounds of resin needed for production 10,500 Less: beginning direct materials inventory (20% × 42,000 × .25 lbs.) (2,100) Add: ending direct materials inventory desired (20% × 48,000 × .25 lbs.) 2,400 Budgeted direct materials purchases in pounds 10,800 Cost per pound of resin × $4.50 Budgeted cost of direct materials purchases $48,600 Ex. 176 Pulham Company is preparing its direct labor budget for 2022 from the following production budget based on a calendar year: Quarter 1 2 3 4

Units 60,000 30,000 45,000 75,000

Each unit requires 2 hours of direct labor. The union contract provides for a 10% increase in wage rate to $22 per hour on October 1. Instructions Prepare a direct labor budget for 2022. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 176

(10–15 min.) PULHAM COMPANY Direct Labor Budget For the Year Ended December 31, 2022

Quarter 1 2 3 4 Units to be produced 60,000 30,000 45,000 75,000 Direct labor time (hours) per unit × 2 × 2 × 2 × 2 Total required direct labor hours 120,000 60,000 90,000 150,000 Direct labor cost per hour × $20* × $20 × $20 × $22 Total direct labor cost $2,400,000 $1,200,000 $1,800,000 $3,300,000 *$22 ÷ 110% = $20.

Total

$8,700,000

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ex. 177 For each item given, identify the budget in which it will appear. If an item will appear on more than one budget, then indicate as many budgets as are relevant. Budget Code: DM DL P S C BBS BIS SA MOH

Direct Materials Budget Direct Labor Budget Production Budget Sales Budget Cash Budget Budgeted Balance Sheet Budgeted Income Statement Selling and Administrative Expense Budget Manufacturing Overhead Budget 1. Ending cash balance 2. Total selling and administrative expenses 3. Total sales (in dollars) 4. Interest expense 5. Ending raw materials inventory in dollars) 6. Ending finished goods inventory in dollars

Ans: N/A, LO: 2,3,4, Bloom: C, Difficulty: Easy, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 177 BBS, C SA, BIS S, BIS BIS BBS BBS

(10–13 min.) 1. Ending cash balance 2. Total selling and administrative expenses 3. Total sales (in dollars) 4. Interest expense 5. Ending raw materials inventory in dollars 6. Ending finished goods inventory in dollars

Ex. 178 Leaf Industries is preparing its master budget for 2022. Relevant data pertaining to its sales budget are as follows: Sales for the year are expected to total 8,000,000 units. Quarterly sales are 25%, 30%, 15%, and 30%, respectively. The sales price is expected to be $2.00 per unit for the first quarter and then be increased to $2.20 per unit in the second quarter. Instructions Prepare a sales budget for 2022 for Leaf Industries. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 9, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Budgetary Planning

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Solution 178 (9–14 min.) LEAF INDUSTRIES Sales Budget For the Year Ended December 31, 2022

Expected unit sales Unit selling price Total sales

1 2,000,000 × $2.00 $4,000,000

Quarter 2 3 2,400,000 1,200,000 × $2.20 × $2.20 $5,280,000 $2,640,000

4 2,400,000 × $2.20 $5,280,000

Year 8,000,000 $17,200,000

Ex. 179 Shep Company combines its operating expenses for budget purposes in a selling and administrative expense budget. For the first quarter of 2022, the following data are developed: 1. Sales: 20,000 units; unit selling price: 2. Variable costs per sales dollar: Sales commissions Delivery expense Advertising 3. Fixed costs per quarter: Sales salaries Office salaries Depreciation Insurance Utilities

$30 6% 2% 4% $24,000 19,000 6,000 2,000 1,000

Instructions Prepare a selling and administrative expense budget for the first quarter of 2022. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Hard, Min: 12, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 179

(12–17 min.) SHEP COMPANY Selling and Administrative Expense Budget For the Quarter Ended March 31, 2022

Variable expenses Sales commissions ($600,000 × 6%) Delivery expense ($600,000 × 2%) Advertising ($600,000 × 4%) Total variable Fixed expenses Sales salaries Office salaries Depreciation Insurance Utilities Total fixed Budgeted selling and administrative expenses

$ 36,000 12,000 24,000 72,000 $ 24,000 19,000 6,000 2,000 1,000 52,000 $124,000

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Ex. 180 Thread Company is preparing its manufacturing overhead budget for 2022. Relevant data consist of the following. Quarterly units production: Q1 -10,000, Q2-12,000, Q3-14,000, Q4-16,000. Direct labor: Labor required is 1 hour per unit. Variable overhead costs per direct labor hour: Indirect materials $0.80; indirect labor $1.20; and maintenance $0.50. Fixed overhead costs per quarter: Supervisory salaries $42,000; depreciation $16,000; and maintenance $12,000. Instructions Prepare the manufacturing overhead budget for the year, showing quarterly data. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 180

(15 min.) THREAD COMPANY Manufacturing Overhead Budget For the Year Ending December 31, 2022

Direct labor hours Variable costs Indirect materials ($.80/hour) Indirect labor($1.20/hour) Maintenance($.50/hour) Total variable Fixed costs Supervisory salaries Depreciation Maintenance Total fixed Total manufacturing overhead

1 10,000

Quarter 2 12,000

3 14,000

4 16,000

Year 52,000

$8,000 12,000 5,000 25,000

$9,600 14,400 6,000 30,000

$11,200 16,800 7,000 35,000

$12,800 19,200 8,000 40,000

$41,600 62,400 26,000 130,000

42,000 16,000 12,000 70,000 $95,000

42,000 16,000 12,000 70,000 $100,000

42,000 16,000 12,000 70,000 $105,000

42,000 16,000 12,000 70,000 $110,000

168,000 64,000 48,000 280,000 $410,000

Manufacturing overhead rate per direct labor hour ($410,000  52,000)

$7.88

Ex. 181 Walt Bach Company has accumulated the following budget data for the year 2022. 1. Sales: 40,000 units, unit selling price $50. 2. Cost of one unit of finished goods: Direct materials 2 pounds at $5 per pound, direct labor 1.5 hours at $12 per hour, and manufacturing overhead $6 per direct labor hour. 3. Inventories (raw materials only): Beginning, 10,000 pounds; desired ending, 15,000 pounds. 4. Raw materials cost: $5 per pound. 5. Selling and administrative expenses: $200,000. 6. Income taxes: 20% of income before income taxes.

Budgetary Planning

22 - 47

Ex. 181 (Cont.) Instructions (a) Prepare a schedule showing the computation of budgeted cost of goods sold for 2022. (b) Prepare a budgeted income statement for 2022. Ans: N/A, LO: 2, 3, Bloom: AP, Difficulty: Hard, Min: 16, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 181

(16 min.)

(a) WALT BACH COMPANY Computation of Cost of Goods Sold For the Year Ending December 31, 2022 Cost of one unit of finished goods: Direct materials (2 × $5) ................................................................. ......................... Direct labor (1.5 × $12) .................................................................. ......................... Manufacturing overhead (1.5 × $6) ................................................ ......................... Total unit cost........................................................................... ................ .......

$10 18 9 $37

40,000 units × $37 = $1,480,000. (b) WALT BACH COMPANY Budgeted Income Statement For the Year Ending December 31, 2022 Sales (40,000 × $50)............................................................................ Cost of goods sold (see part (a)) .......................................................... Gross profit .......................................................................................... Selling and administrative expenses .................................................... Income before income taxes ................................................................ Income tax expense ($320,000 × 20%) ................................................ Net income...........................................................................................

$2,000,000 1,480,000 520,000 200,000 320,000 64,000 $ 256,000

Ex. 182 The Northeast Regional Division of Union Corp. has been requested to prepare a quarterly budgeted income statement for 2022. The regional manager expects that sales in the first quarter of 2022 will increase by 10% over the same quarter of the preceding year and will then increase by 5% for each succeeding quarter in 2022. The corporate head office has requested that the regional manager maintain an inventory in dollars equal to 25% of the next quarter's sales. Quarterly purchases average 55% of quarterly sales. Budgeted ending inventory on December 31, 2021 is $176,000. Quarterly salaries are $20,000 plus 5% of sales. All salaries are classified as sales salaries. Other quarterly expenses are estimated to be as follows: Rent expense Depreciation on office equipment Utilities expense Miscellaneous expenses .

$24,000 $12,000 $3,600 2% of sales

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ex. 182 (Cont.) The income statement for the first quarter of 2021 was as follows: Income Statement For the Quarter Ended March 31, 2021 Sales .................................................................................................... Cost of goods sold................................................................................ Gross profit........................................................................................... Operating expenses Sales salaries................................................................................ Rent expense................................................................................ Depreciation.................................................................................. Utilities .......................................................................................... Miscellaneous ............................................................................... Total operating expenses....................................................... Net income ...........................................................................................

$720,000 396,000 324,000 $52,000 24,000 12,000 3,600 12,800 104,400 $219,600

Instructions Prepare a budgeted quarterly income statement in tabular form for the first quarter of 2022. (Show computations.) Ans: N/A, LO: 3, Bloom: AP, Difficulty: Hard, Min: 18, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 182

(18–23 min.)

UNION CORP. Northeast Regional Division Budgeted Income Statement For the Quarter Ended March 31, 2022 Sales (1) ............................................................................................................ Cost of goods sold (2) ........................................................................................ Gross profit......................................................................................................... Operating expenses Sales salaries (3) $59,600 Rent expense 24,000 Depreciation 12,000 Utilities 3,600 Miscellaneous (4) 15,840 Total operating expenses..................................................................... Net income ......................................................................................................... (1) (2)

(3) (4)

Sales Qtr. 1 $720,000 × 110% = $792,000 Cost of goods sold Beginning inventory Purchases ($792,000 × 55% = $435,600) Cost of goods available Ending inventory ($792,000 × 105% = $831,600 × 25% = $207,900) Cost of goods sold Sales salaries: $20,000 + ($792,000 × 5%) = $59,600. Miscellaneous expenses: $792,000 × 2% = $15,840. .

$792,000 403,700 388,300

115,040 $273,260

$176,000 435,600 611,600 (207,900) $403,700

Budgetary Planning

22 - 49

Ex. 183 In September 2022, the budget committee of Jason Company assembles the following data: 1. Expected Sales October $1,800,000 November 1,700,000 December 1,600,000 2. Cost of goods sold is expected to be 60% of sales. 3. Desired ending merchandise inventory is 20% of the next month's cost of goods sold. 4. The beginning inventory at October 1 will be the desired amount. Instructions Prepare the budgeted income statement for October through gross profit on sales, including a cost of goods sold schedule. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Hard, Min: 16, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 183

(16–21 min.) JASON COMPANY Budgeted Income Statement For the Month Ended October 31, 2022

Sales Cost of goods sold Inventory, October 1 Purchases Cost of goods available for sale Less: Inventory, October 31 Cost of goods sold Gross profit

$1,800,000 $216,000 1,068,000 1,284,000 204,000 1,080,000 $720,000

Ex. 184 Burr, Inc. provided the following information: Projected sales Projected merchandise purchases 

July $220,000 $150,000

August $260,000 $180,000

Burr estimates that it will collect 40% of its sales in the month of sale, 35% in the month after the sale, and 22% in the second month following the sale. Three percent of all sales are estimated to be bad debts.

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ex. 184 (Cont.)  Burr pays for 30% of merchandise purchases in the month purchased and 70% in the following month. 

General operating expenses are budgeted to be $20,000 per month, including depreciation of $2,000. Burr pays operating expenses in the month incurred.



Burr makes loan payments of $3,000 per month of which $400 is interest and the remainder is principal.

Instructions Calculate Burr's budgeted cash disbursements for August. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 184

(8 min.)

Cash paid for merchandise purchases: August purchases: $180,000 × 30% July purchases: $150,000 × 70% Cash paid for operating expenses ($20,000 – $2,000) Cash paid for loan ($3,000 – $400) Cash paid for interest Budgeted cash disbursements for August

$ 54,000 105,000 18,000 2,600 400 $180,000

Ex. 185 Casa Development, Inc. has budgeted sales revenues as follows: Budgeted Sales Revenues $55,000 75,000 90,000 80,000 60,000 35,000

January February March April May June

Past experience has indicated that 80% of sales each month are on credit and that collection of credit sales occurs as follows: 60% in the month of sale, 30% in the month following the sale, and 5% in the second month following the sale. The other 5% is uncollectible. Instructions Prepare a schedule which shows expected cash receipts from sales for the months of April, May, and June. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Budgetary Planning Solution 185

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(20–25 min.) CASA DEVELOPMENT, INC. Expected Cash Receipts from Sales For the Quarter Ended June 30 April

February sales Credit sales: ($75,000 × 80% × 5%)

May

June

$ 3,000

March sales Credit sales: ($90,000 × 80% × 30%) ($90,000 × 80% × 5%)

21,600 $ 3,600

April sales Credit sales: ($80,000 × 80% × 60%) ($80,000 × 80% × 30%) ($80,000 × 80% × 5%) Cash sales: ($80,000 × 20%)

38,400 19,200 $ 3,200 16,000

May sales Credit sales: ($60,000 × 80% × 60%) ($60,000 × 80% × 30%) Cash sales: ($60,000 × 20%)

28,800 14,400 12,000

June sales Credit sales: ($35,000 × 80% × 60%) Cash sales: ($35,000 × 20%) Total cash receipts

$79,000

$63,600

16,800 7,000 $41,400

Ex. 186 Cruises, Inc. has budgeted sales revenues as follows: June $135,000 90,000 $225,000

Credit sales Cash sales Total sales

July $125,000 255,000 $380,000

August $ 90,000 195,000 $285,000

Past experience indicates that 60% of the credit sales will be collected in the month of sale and the remaining 40% will be collected in the following month. Purchases of inventory are all on account with 50% is paid in the month of purchase and 50% paid in the month following purchase. Budgeted inventory purchases are as follows: June July August

$300,000 240,000 105,000

Other cash disbursements budgeted: (a) selling and administrative expenses of $48,000 each month, (b) dividends of $103,000 will be paid in July, and (c) purchase of equipment in August for $30,000 cash. .

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

22 - 52 Ex. 186

(Cont.)

The company’s policy is to maintain a minimum cash balance of $50,000 at the end of each month. The company borrows money from the bank at 6% interest if necessary to maintain the minimum cash balance. Borrowed money is repaid in months when there is an excess cash balance. The beginning cash balance on July 1 was $50,000. Assume that borrowed money in this case is for one month. Instructions Prepare a cash budget for the months of July and August. Prepare separate schedules for expected collections from customers and expected payments for purchases of inventory. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 25, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 186

(25–35 min.) CRUISES, INC. Cash Budget For the Two Months of July and August

Beginning cash balance Add Receipts: Collections from customers Cash sales Total receipts Total available cash Less Disbursements: Purchases Selling and administrative expenses Dividends Equipment purchase Total disbursements Excess (deficiency) of available cash over disbursements Financing Borrowings ($50,000 - $13,000) Repayments Ending cash balance

July $ 50,000

August $ 50,000

129,000 255,000 384,000 434,000

104,000 195,000 299,000 349,000

270,000 48,000 103,000

172,500 48,000

421,000 13,000

30,000 250,500 98,500

37,000 $ 50,000

(37,185)* $ 61,315

*$37,000 × 6% × 1/12 = $185 + $37,000 = $37,185. Schedule of Expected Collections from Customers Credit sales June ($135,000) July ($125,000) August ($90,000) Total collections

July $ 54,000 75,000 $129,000

August $ 50,000 54,000 $104,000

Budgetary Planning

22 - 53

Solution 186 (Cont.) Schedule of Expected Payments for Purchases of Inventory Inventory purchases June ($300,000) July ($240,000) August ($105,000) Total payments

July $150,000 120,000 $270,000

August $120,000 52,500 $172,500

Ex. 187 Clay Co.’s projected sales are as follows: August September October

$400,000 $450,000 $550,000

Clay estimates that it will collect 30% in the month of sale, 50% in the month after the sale, and 18% in the second month following the sale. Two percent of all sales are estimated to be bad debts. Instructions What are Clay Co.'s budgeted cash receipts for October? Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 187

(8 min.)

Collections of October sales: $550,000 × 30% Collections of September sales: $450,000 × 50% Collections of August sales: $400,000 × 18% Total budgeted cash receipts for October

$165,000 225,000 72,000 $462,000

Ex. 188 The Sunstate Bank has asked Dell Printing Co. for a budgeted balance sheet for the year ended December 31, 2022. The following information is available: 1. The cash budget shows an expected cash balance of $75,000 at December 31, 2022. 2. The 2022 sales budget shows total annual sales of $800,000. All sales are made on account and accounts receivable at December 31, 2022 are expected to be 10% of annual sales. 3. The merchandise purchases budget shows budgeted cost of goods sold for 2022 of $600,000 and ending merchandise inventory of $95,000. 20% of the ending inventory is expected to have not yet been paid at December 31, 2022. 4. The December 31, 2021 balance sheet includes the following balances: Equipment $294,000, Accumulated Depreciation $122,000, Common Stock $270,000, and Retained Earnings $48,000. 5. The budgeted income statement for 2022 includes the following: depreciation on equipment $15,000, federal income taxes $21,000, and net income $49,000. The income taxes will not be paid until 2022. 6. In 2022, management does not expect to purchase additional equipment or to declare any dividends. It does expect to pay all operating expenses, other than depreciation, in cash.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

22 - 54 Ex. 188 (Cont.)

Instructions Prepare an unclassified budgeted balance sheet at December 31, 2022. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 20, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 188

(20–25 min.) DELL PRINTING CO. Budgeted Balance Sheet December 31, 2022

Assets Cash..................................................................................................... Accounts receivable ($800,000 × 10%) ................................................ Inventory .............................................................................................. Equipment ............................................................................................ $294,000 Less: Accumulated depreciation ($122,000 + $15,000) ........................ 137,000 Total assets................................................................................... Liabilities and Stockholders' Equity Accounts payable ($95,000 × 20%) ...................................................... Income taxes payable .......................................................................... Common stock ..................................................................................... Retained earnings ($48,000 + $49,000) ............................................... Total liabilities and stockholders' equity.........................................

$ 75,000 80,000 95,000 157,000 $407,000 $ 19,000 21,000 270,000 97,000 $407,000

Ex. 189 The management of Ocean Industries estimates that credit sales for August, September, October, and November will be $540,000, $750,000, $840,000, and $480,000, respectively. Experience has shown that collections are made as follows: In month of sale In first month after sale In second month after sale

25% 60% 10%

Instructions Determine the collections from customers in October and November. Show all computations. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 13, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Budgetary Planning Solution 189

22 - 55

(13–18 min.)

Collections from Customers August Sales ($540,000 × 10%) September Sales ($750,000 × 60%) ($750,000 × 10%) October Sales ($840,000 × 25%) ($840,000 × 60%) November Sales ($480,000 × 25%) Total budgeted collections

October

November

$ 54,000

-0-

450,000 75,000 210,000 504,000 -0$714,000

120,000 $699,000

Ex. 190 The beginning cash balance is $20,000. Sales are forecasted at $700,000 of which 80% will be on account. The remainder are cash sales. Seventy percent of credit sales are expected to be collected in the year of sale. Cash expenditures for the year are forecasted at $500,000. Accounts receivable from previous accounting periods totaling $12,000 will be collected in the current year. The company is required to make a $20,000 loan payment and an annual interest payment on the last day of the year. The loan balance as of the beginning of the year is $120,000, and the annual interest rate is 10%. Instructions What will be reported as 'cash' on the budgeted balance sheet? Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 12, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 190

(12 min.)

Cash collections: Collections of accounts receivable Cash sales: 20% × $700,000 Credit sales: (80% × $700,000) × 70% Cash expenditures Loan payment Interest payment (10% × $120,000) Net increase in cash Add: beginning cash balance Ending cash balance

$ 12,000 140,000 392,000 (500,000) (20,000) (12,000) 12,000 20,000 $32,000

Ex. 191 Rudd Company has budgeted sales revenue as follows for the next 4 months: February March April May

$300,000 240,000 210,000 330,000

Past experience indicates that 80% of sales each month are on credit. The remainder are cash sales. Collection of credit sales occurs as follows: 60% in the month of sale, 35% in the month following the sale, and 3% in the second month following the sale. The other 2% is uncollectible. .

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

22 - 56 Ex. 191

(Cont.)

Instructions Prepare a schedule which shows expected cash receipts from sales for the month of May. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 7, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 191

(7–9 min.) RUDD COMPANY Expected Cash Receipts from Sales For the Month Ended May 31

March sales Credit sales: ($240,000 × 80% × 3%)

5,760

April sales Credit sales: ($210,000 × 80% × 35%)

58,800

May sales Credit sales: ($330,000 × 80% × 60%) Cash sales: ($330,000 × 20%) Total cash receipts

158,400 66,000 $288,960

Ex. 192 Hagen Company's budgeted sales and direct materials (DM) purchases are as follows. Budgeted Sales $300,000 330,000 350,000

January February March

Budgeted DM Purchases $60,000 70,000 80,000

Hagen's sales are 40% cash and 60% credit. Credit sales are collected 10% in the month of sale, 50% in the month following sale, and 36% in the second month following sale; 4% are uncollectible. Hagen's purchases are 50% cash and 50% on account. Purchases on account are paid 40% in the month of the purchase and 60% in the month following the purchase. Instructions (a) Prepare a schedule of budgeted cash receipts from customers for March. (b) Prepare a schedule of budgeted cash disbursements for direct materials for March. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Budgetary Planning Solution 192

22 - 57

(10 min.)

(a) HAGEN COMPANY Budgeted Cash Receipts from Customers March March cash sales (40% × $350,000) ................................................................... $140,000 Collection of March credit sales [(60% × $350,000) × 10%] ................................................................................ 21,000 Collection of February credit sales [(60% × $330,000) × 50%] ................................................................................ 99,000 Collection of January credit sales [(60% × $300,000) × 36%] ............................................................................. 64,800 Budgeted cash receipts........................................................................ $324,800 (b) HAGEN COMPANY Budgeted Cash Disbursements for Direct Materials March March cash purchases (50% × $80,000) .............................................................. $40,000 Payment of March credit purchases [(50% × $80,000) × 40%] .................................................................................. 16,000 Payment of February credit purchases [(50% × $70,000) × 60%] ................................................................................ 21,000 Budgeted cash disbursements ............................................................... $77,000 Ex. 193 Minor Landscaping Company is preparing its budget for the first quarter of 2022. The next step in the budgeting process is to prepare cash receipts and cash payments schedules. To that end the following information has been collected. Clients usually pay 60% of their fee in the month that service is provided, 30% the month after, and 10% the second month after receiving service. Actual service revenue for 2021 and expected service revenues for 2022 are: November 2021, $120,000; December 2021, $110,000; January 2022, $140,000; February 2022, $160,000; March 2022, $170,000. Purchases of landscaping supplies are paid 40% in the month of purchase and 60% the following month. Actual purchases for 2021 and expected purchases for 2022 are: December 2021, $21,000; January 2022, $20,000; February 2022, $22,000; March 2022, $27,000. Instructions (a) Prepare the following schedules for each month in the first quarter of 2022 and for the quarter in total: (1) Expected collections from clients. (2) Expected payments for landscaping supplies.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

22 - 58 Ex. 193

(Cont.)

(b) Determine the following balances at March 31, 2022: (1) Accounts receivable. (2) Accounts payable. Ans: N/A, LO: 4, 5, Bloom: AP, Difficulty: Hard, Min: 12, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 193

(12 min.)

(a) (1) MINOR LANDSCAPING COMPANY Schedule of Expected Collections From Clients For the Quarter Ending March 31, 2022 January February March November ($120,000) ........ $12,000 December ($110,000) ........ 33,000 $11,000 January ($140,000) ............ 84,000 42,000 $14,000 February ($160,000)........... 96,000 48,000 March ($170,000) ........................ 102,000 Total collections............ $129,000 $149,000 $164,000

Quarter $ 12,000 44,000 140,000 144,000 102,000 $442,000

(2) MINOR LANDSCAPING COMPANY Schedule of Expected Payments for Landscaping Supplies For the Quarter Ending March 31, 2022 January February March December ($21,000) .......... $12,600 January ($20,000) .............. 8,000 $12,000 February ($22,000)............. 8,800 $13,200 March ($27,000) ................. 10,800 Total payments ............. $20,600 $20,800 $24,000

Quarter $12,600 20,000 22,000 10,800 $65,400

(b) (1) Accounts receivable at March 31, 2022: ($160,000 × 10%) + ($170,000 × 40%) = $84,000 (2) Accounts payable at March 31, 2022: ($27,000 × 60%) = $16,200 Ex. 194 In May 2022, the budget committee of Crater, Inc. assembles the following data in preparation of budgeted merchandise purchases for the month of June. 1. 2. 3. 4.

Expected sales: June $750,000, July $900,000. Cost of goods sold is expected to be 80% of sales. Desired ending merchandise inventory is 40% of the following month's cost of goods sold. The beginning inventory at June 1 will be the desired amount.

Instructions (a) Compute the budgeted merchandise purchases for June. (b) Prepare the budgeted income statement for June through gross profit. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 12, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Budgetary Planning

22 - 59

Solution 194 (12 min.) (a) CRATER, INC. Merchandise Purchases Budget For the Month Ending June 30, 2022 Budgeted cost of goods sold ($750,000 × 80%) ........................................... Add: Desired ending merchandise inventory ($900,000 × 80% × 40%) ........................................................................ Total ............................................................................................................. Less: Beginning merchandise inventory ($600,000 × 40%) ................................................................................... Required merchandise purchases ................................................................

$600,000 288,000 888,000 240,000 $648,000

(b) CRATER, INC. Budgeted Income Statement For the Month Ending June 30, 2022 Sales ............................................................................................................ Cost of goods sold (80% × $750,000)........................................................... Gross profit...................................................................................................

$750,000 600,000 $150,000

Ex. 195 In September 2022, the management of Rye Company assembles the following data in preparation of budgeted merchandise purchases for the months of October and November. 1. Expected Sales October November December

$1,500,000 2,100,000 2,700,000

2. Cost of goods sold is expected to be 70% of sales. 3. Desired ending merchandise inventory is 20% of the next month's cost of goods sold. 4. The beginning inventory at October 1 will be the desired amount. Instructions Compute the budgeted merchandise purchases for October and November. Use a columnar format with separate columns for each month. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 12, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 195

(12–17 min.) RYE COMPANY Merchandise Purchases Budget For the Months of October and November, 2022

Budgeted cost of goods sold Desired ending merchandise inventory Total Less: Beginning merchandise inventory Required merchandise purchase .

October $1,050,000 294,000 1,344,000 210,000 $1,134,000

November $1,470,000 378,000 1,848,000 294,000 $1,554,000

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 195 (Cont.) October $1,500,000 × 70% = $1,050,000 $1,470,000 × 20% = $294,000 $1,050,000 × 20% = $210,000

November $2,100,000 × 70% = $1,470,000 $2,700,000 × 70% × 20% = $378,000

COMPLETION STATEMENTS 196. A financial terms.

is a formal written statement of management's plans expressed in

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

197. A budget is a primary means of business organization.

agreed upon objectives throughout the

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

198. Effective budgeting is dependent on an and responsibility are clearly defined.

in which authority

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

199. The budget should have the support of basis for

and should be an important by comparing actual results to expected results.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

200. Many companies use just ending and adding a future month.

budgets by dropping the month

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

201. A many companies.

is responsible for coordinating the preparation of the budget in

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

202. A major difference between the annual budget and long-range planning is the over which the data pertain. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

203. The

is the starting point in preparing the master budget.

Ans: N/A, LO: 1,2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

204. The equation for developing a production budget is minus

plus .

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Budgetary Planning

22 - 61

205. The is a set of interrelated budgets that constitutes a plan of action for a specified period of time. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

206. Three

major

sections

of a cash , and (3)

budget

are

(1)

, (2) .

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

207. The two major differences between the master budgets of a merchandiser and a manufacturer are that the merchandiser will have a budget and will not have budgets. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Answers to Completion Statements 196. 197. 198. 199.

budget communicating organizational structure top management, evaluating performance 200. continuous twelve-month 201. budget committee 202. time period

203. 204.

205. 206. 207.

sales budget expected sales units, desired ending finished goods units, beginning finished goods units master budget cash receipts, cash disbursements, financing merchandise purchases, manufacturing

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

22 - 62

MATCHING 208. Match the items below by entering the appropriate code letter in the space provided. A. Budget B. Financial budgets C. Budget committee D. Master budget E. Sales forecast

F. G. H. I. J.

Production budget Cash budget Long-range planning Direct materials budget Sales budget

1. A selection of strategies to achieve long-term goals. 2. An estimate of expected sales for the budget period. 3. Budgets that indicate the cash resources needed for expected operations and planned capital expenditures. 4. The projection of potential sales for the industry and the company's expected share of such sales. 5. Management's plans expressed in financial terms for a specified future time period. 6. A projection of anticipated cash flows. 7. A group responsible for coordinating the preparation of the budget. 8. A projection of production requirements to meet expected sales. 9. A set of interrelated budgets that constitute a plan of action for a specified time period. 10. An estimate of the quantity and cost of direct materials to be purchased. Ans: N/A, LO: 1, 2,4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Answers to Matching 1. 2. 3. 4. 5.

H J B E A

6. 7. 8. 9. 10.

G C F D I

SHORT-ANSWER ESSAY QUESTIONS S-A E 209 (a) What is a budget? (b) How does a budget contribute to good management? .

Budgetary Planning

22 - 63

Ans: N/A, LO: 1, Bloom: K, Difficulty: Moderate, Min: 5, AACSB: Communication, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 209 (a) A budget is a formal written statement of management's plans for a specified future time period, expressed in financial terms. (b) A budget aids management in planning because it represents the primary means of communicating agreed-upon objectives throughout the organization. Once adopted, a budget becomes an important basis for evaluating performance. S-A E 210 Budgeting can be an important management tool if implemented properly. Identify several positive results when budgets are used properly. Since budgets affect people, identify several negative aspects if budgets are not implemented properly. Ans: N/A, LO: 1, Bloom: K, Difficulty: Moderate, Min: 5, AACSB: Communication, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 210 When budgets are used properly, positive results can include: managers are required to plan ahead, there are definite objectives for performance evaluation, there is an early warning system for potential problems, there is coordination of activities within the business, there is greater management awareness of the entity's overall operations, and there are positive behavior patterns by motivating personnel to meet planned objectives. However, if budgets are not implemented properly, negative results can include discouragement of additional effort to meet goals, poor morale of managers, and lack of commitment to budget goals. S-A E 211 Budgeting and long-range planning are both important aids to management in achieving a company's goals and objectives. Briefly distinguish between budgeting and long-range planning and indicate how they help managers perform their functions. Ans: N/A, LO: 1, Bloom: K, Difficulty: Moderate, Min: 5, AACSB: Communication, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 211 Budgeting is preparing a detailed formal written summary of management's plans for a specified future time period (usually one year), in financial terms. Long-range planning involves the selection of strategies to achieve long-term (at least five years) goals and the development of policies and plans to implement the strategies. Budgeting and long-range planning differ in time periods involved, emphasis, and the amount of detail presented. Budgets help managers in planning and controlling operations for the coming year, while long-range planning assists managers in broad long-term goal-setting, policy development, and planning. S-A E 212 What is participative budgeting? What are its potential benefits? What are its potential shortcomings? Ans: N/A, LO: 1, Bloom: K, Difficulty: Moderate, Min: 5, AACSB: Communication, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 212 Participative budgeting involves the use of a "bottom to top" approach, which requires input from lower level management during the budgeting process so as to involve employees from various levels and areas within the company. The potential benefits of this approach are lower level managers have more detailed knowledge of the specifics of their job, and thus should be able to provide better budgetary estimates. In addition, by involving lower level managers in the process, it is more likely that they will perceive the budget as being fair and reasonable. One disadvantage of participative budgeting is that it takes more time, and thus costs more. Another disadvantage of participative budgeting is that it may enable managers to game the system through such practices as budgetary slack. S-A E 213 (Ethics) Ashley Finn is a new production manager. After a great deal of effort, including considerable market research, she completes her budget and submits it to her boss, Keith Payne. Without even looking at it, he asks her what her "fudge factor" was, and which items contained the most slack. Ashley, very surprised, responds that she doesn't use any "fudge factor," and that all her figures are honest. Mr. Payne counters by asking her how she would respond if she had to cut about 20% from her budget, as it is. He tells her that most budgets are trimmed in committee, and she had better be ready. He returns the budget to her, and tells her to come back with something reasonable. Required: 1. Is it ethical to build slack into a budget? Explain. 2. Was it ethical for Mr. Payne to refuse to accept a budget without slack? Briefly explain. Ans: N/A, LO: 1, Bloom: K, Difficulty: Moderate, Min: 5, AACSB: Ethics, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Professional Behavior, IMA: Budget Preparation, Business Applications

Solution 213 1. Either answer may be correct. Slack may be seen as an estimate of how much the actual results may vary from the predictions. As such, it is perfectly legitimate to add some slack, as in this case. On the other hand, it is certainly possible that a great deal of padding may be added to a budget, with the manager preparing the budget hoping that the amount to be trimmed will not exceed the amount of the padding. The decision as to whether the addition of slack is unethical depends upon whether budgeting guidelines are followed. Any secretive method of adding padding to one's own budget would be unethical. 2. As Ashley Finn's superior, Mr. Payne has the obligation to correct her mistakes. Apparently, in this particular company, budgets are trimmed in committee, with the expectation that all budgets contain some expenses that could be removed without harm to the company. Ashley must continue to be honest. One way to do that would be for Ashley to submit her trimmed budget, and then note the costs that are most likely to exceed the budget, and by how much. This would give Mr. Payne the ability to intelligently defend her budget while in committee. S-A E 214 (Communication) At Boulder Industries, budgets are the responsibility of everyone. Each department collaborates in determining its expected needs, and sales personnel determine the likely sales volume. Bart Gray, one of the production managers, believes in building plenty of slack into everything, including his estimates of ending work in process inventory. Required: You are the accounting manager. Write a memo to Mr. Gray. Explain why the ending inventory figure should be extremely accurate, with as little slack as possible. .

Budgetary Planning

22 - 65

Ans: N/A, LO: 1, 2, Bloom: C, Difficulty: Moderate, Min: 5, AACSB: Communication, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 214 TO: Bart Gray FROM: Julie Jase SUBJECT: Budgets At our last budget meeting, you mentioned that you put plenty of slack into all your budgets, so that you could better survive budget reductions. You remember that I specifically asked about your ending inventory estimates, and you said that those had plenty of slack as well.

Please reconsider adding slack to the ending inventory estimates. Those estimates are used by all other departments in calculating their budgets. In other words, they rely on your figures being accurate. If you estimate much too high for inventory, the other departments will experience stockouts, as they will have counted on your having more goods ready than you will be able to produce. If, as is more likely, you understate the number of units you will have on hand, we will experience increased storage costs and related spoilage. We will also have spent money to produce more units than the next department can use. I understand your desire to ensure that your budgets are reasonable. However, I am sure also that you see that we depend upon your inventory numbers. Please make sure that these numbers are as precise as possible. (signed)

CHAPTER 23 BUDGETARY CONTROL AND RESPONSIBILITY ACCOUNTING CHAPTER LEARNING OBJECTIVES 1. Describe budgetary control and static budget reports. Budgetary control consists of (a) preparing periodic budget reports that compare actual results with planned objectives, (b) analyzing the differences to determine their causes, (c) taking appropriate corrective action, and (d) modifying future plans, if necessary. Static budget reports are useful in evaluating the progress toward planned sales and profit goals. They are also appropriate in assessing a manager’s effectiveness in controlling costs when (a) actual activity closely approximates the master budget activity level, and/or (b) the behavior of the costs in response to changes in activity is fixed. 2. Prepare flexible budget reports. To develop the flexible budget it is necessary to do the following: (a) Identify the activity index and the relevant range of activity. (b) Identify the variable costs, and determine the budgeted variable cost per unit of activity for each cost. (c) Identify the fixed costs, and determine the budgeted amount for each cost. (d) Prepare the budget for selected increments of activity within the relevant range. Flexible budget reports permit an evaluation of a manager’s performance in controlling production and costs. 3. Apply responsibility accounting to cost and profit centers. Responsibility accounting involves accumulating and reporting revenues and costs on the basis of the individual manager who has the authority to make the day-to-day decisions about the items. The evaluation of a manager’s performance is based on the matters directly under the manager’s control. In responsibility accounting, it is necessary to distinguish between controllable and noncontrollable fixed costs and to identify three types of responsibility centers: cost, profit, and investment. Responsibility reports for cost centers compare actual costs with flexible budget data. The reports show only controllable costs, and no distinction is made between variable and fixed costs. Responsibility reports show contribution margin, controllable fixed costs, and controllable margin for each profit center. 4. Evaluate performance in investment centers. The primary basis for evaluating performance in investment centers is return on investment (ROI). The equation for computing ROI for investment centers is Controllable margin ÷ Average operating assets. a

5. Explain the difference between ROI and residual income. ROI is controllable margin divided by average operating assets. Residual income is the income that remains after subtracting the minimum rate of return on a company’s average operating assets. ROI sometimes provides misleading results because profitable investments are often rejected when the investment reduces ROI but increases overall profitability.

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

TRUE-FALSE STATEMENTS 1.

Budget reports comparing actual results with planned objectives should be prepared only once a year.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

If actual results are different from planned results, every difference must be investigated by management to achieve effective budgetary control.

Ans: F, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Certain budget reports are prepared monthly while others are prepared more frequently depending on the activities being monitored.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

The master budget is not used in the budgetary control process.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

A master budget is most useful in evaluating a manager’s performance in controlling costs.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

A static budget is one that is prepared for one level of activity.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

A static budget is changed only when actual activity differs from the expected level of activity.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

A static budget is most useful for evaluating a manager’s performance in controlling variable costs.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

A flexible budget can be prepared for each of the types of budgets included in the master budget.

Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

10.

A flexible budget is a series of static budgets at different levels of activities.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

11.

Flexible budgeting relies on the assumption that unit variable costs will remain constant within the relevant range of activity.

Ans: T, LO: 2, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Budgetary Control And Responsibility Accounting 12.

23 - 3

Total budgeted fixed costs appearing on a flexible budget will be the same amount as total fixed costs on the master budget.

Ans: T, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

13.

A flexible budget is prepared before the master budget.

Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

14.

The activity index used in preparing a flexible budget should not influence the total variable costs that are being budgeted.

Ans: F, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

15.

One calculation used in developing a flexible budget is: Total budgeted cost = fixed cost + (total variable cost per unit × activity level).

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

16.

Flexible budgets are widely used in production and service departments.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

17.

A flexible budget report shows both actual and budgeted cost based on the actual activity level achieved.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

18.

Management by exception means that management will investigate areas where actual results differ from planned results if the items are material and controllable.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

19.

Differences between actual and planned results are generally more likely to be investigated for noncontrollable items than for controllable items.

Ans: F, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

20.

A distinction should be made between controllable and noncontrollable costs when reporting information under responsibility accounting.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

21.

Cost centers, profit centers, and investment centers can all be classified as responsibility centers.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

22.

More costs become controllable as one moves down to each lower level of managerial responsibility.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

23- 4

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

23.

In a responsibility accounting reporting system, as one moves up each level of responsibility in an organization, the responsibility reports become more summarized and show less detailed information.

Ans: T, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

24.

A cost center incurs costs and generates revenues and cost center managers are evaluated on the profitability of their centers.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

25.

The terms “direct fixed costs” and “indirect fixed costs” are synonymous with “traceable costs” and “common costs,” respectively.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

26.

Controllable margin is subtracted from controllable fixed costs to calculate net income for a profit center.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

27.

The denominator in the equation for calculating the return on investment includes operating and nonoperating assets.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

28.

The calculation for computing return on investment is controllable margin divided by average operating assets.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement a

29.

Residual income is a measure of the percentage return generated by the particular division being evaluated.

Ans: F, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement a

30.

Residual income generates a dollar amount that is the increase in net income to the company beyond the cost necessary to pay for the financing of assets.

Ans: T, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

31.

Budget reports provide feedback needed by management to see whether actual operations are on course.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

32.

A static budget is an effective means of evaluating a manager’s ability to control costs, regardless of the actual activity level.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

33.

The flexible budget report evaluates a manager’s performance in two areas: (1) production and (2) costs.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Budgetary Control And Responsibility Accounting 34.

23 - 5

The terms controllable costs and noncontrollable costs are synonymous with variable costs and fixed costs, respectively.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

35.

Most direct fixed costs are not controllable by the profit center manager.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

36.

The manager of an investment center can improve ROI by reducing average operating assets.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement a

37.

Residual income and ROI are used as performance evaluation methods for profit center performance

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

MULTIPLE CHOICE QUESTIONS 38.

What is budgetary control? a. Another name for a flexible budget b. The degree to which the CFO controls the budget c. The use of budgets in controlling operations d. The process of providing information on budget differences to lower level managers

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

39.

A major element in budgetary control is a. the preparation of long-term plans. b. the comparison of actual results with planned objectives. c. the valuation of inventories. d. approval of the budget by the stockholders.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

40.

Budget reports should be prepared a. daily. b. monthly. c. weekly. d. as frequently as needed.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

41.

On the basis of the budget reports, a. management analyzes differences between actual and planned results. b. management may take corrective action. c. management may modify the future plans. d. All of these answers are correct.

Ans: D, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

23- 6 42.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e The purpose of the departmental overhead cost report is to a. control indirect labor costs. b. control selling expense. c. determine the efficient use of materials. d. control overhead costs.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

43.

The purpose of the sales budget report is to a. control selling expenses. b. determine whether income objectives are being met. c. determine whether sales goals are being met. d. control sales commissions.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

44.

A comparison of differences between actual and planned results a. is done by the external auditors. b. appears on the company’s external financial statements. c. is usually done orally in departmental meetings. d. appears on periodic budget reports.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

45.

A static budget a. should not be prepared in a company. b. is useful in evaluating a manager’s performance by comparing actual variable costs and planned variable costs. c. shows planned results at the original budgeted activity level. d. is changed only if the actual level of activity is different than originally budgeted.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

46.

A static budget report a. shows costs at only two or three different levels of activity. b. is appropriate in evaluating a manager’s effectiveness in controlling variable costs. c. should be used when the actual level of activity is materially different from the master budget activity level. d. may be appropriate in evaluating a manager’s effectiveness in controlling costs when the behavior of the costs in response to changes in activity is fixed.

Ans: D, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

47.

A static budget is appropriate in evaluating a manager’s performance if a. actual activity closely approximates the master budget activity. b. actual activity is less than the master budget activity. c. the company prepares reports on an annual basis. d. the company is a not-for-profit organization.

Ans: A, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Budgetary Control And Responsibility Accounting 48.

23 - 7

When budgeted and actual results are not the same amount, there is a budget a. error. b. difference. c. anomaly. d. by-product.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

49.

Top management’s reaction to a difference between budgeted and actual sales often depends on a. whether the difference is favorable or unfavorable. b. whether management anticipated the difference. c. the materiality of the difference. d. the personality of the top managers.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

50.

If costs are not responsive to changes in activity level, then these costs can be best described as a. mixed. b. flexible. c. variable. d. fixed.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

51.

Assume that actual sales exceed the budgeted sales for the second quarter. This favorable difference is greater than the unfavorable difference reported for the first quarter sales. Which of the following statements about the sales budget report on June 30 is true? a. The year-to-date results will show a favorable difference. b. The year-to-date results will show an unfavorable difference. c. The difference for the first quarter can be ignored. d. The sales report is not useful if it shows a favorable and unfavorable difference for the two quarters.

Ans: A, LO: 1, Bloom: C, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

52.

A static budget is appropriate for a. variable overhead costs. b. direct materials costs. c. fixed overhead costs. d. None of these answers are correct.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

23- 8

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

53.

What is the primary difference between a static budget and a flexible budget? a. The static budget includes only fixed costs while the flexible budget includes only variable costs. b. The static budget is prepared for a single level of activity while a flexible budget is adjusted for different activity levels. c. The static budget is constructed using input from only upper level management while a flexible budget obtains input from all levels of management. d. The static budget is prepared only for units produced while a flexible budget reflects the number of units sold.

Ans: B, LO: 1, 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

54.

Another name for the static budget is the a. master budget. b. overhead budget. c. permanent budget. d. flexible budget.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

55.

The master budget of Windy Co. shows that the planned activity level for next year is expected to be 50,000 machine hours. At this level of activity, the following manufacturing overhead costs are expected: Indirect labor Machine supplies Indirect materials Depreciation on factory building Total manufacturing overhead A flexible budget for a level of activity manufacturing overhead costs of a. b. c. d.

$ 720,000 180,000 210,000 150,000 $1,260,000 of 60,000 machine hours would show total

$1,482,000. $1,260,000. $1,512,000. $1,362,000.

Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: ($720,000 + $180,000 + $210,000) / 50,000 = $22.20 x 60,000 = $1,332,000 + $150,000 = $1,482,000 ((Indirect Labor + Machine Supplies + Indirect Materials) / Master Level budgeted hours) X Flexible budget machine hours + Depreciation on factory building = Total Manufacturing Overhead

56.

Boland Manufacturing prepared a 2022 budget for 120,000 units of product. Actual production in 2022 was 130,000 units. To be most useful, what amounts should a performance report for this company compare? a. The actual results for 130,000 units with the original budget for 120,000 units b. The actual results for 130,000 units with a new budget for 130,000 units c. The actual results for 130,000 units with last year’s actual results for 134,000 units d. All of these comparisons are equally useful.

Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Budgetary Control And Responsibility Accounting 57.

23 - 9

A department has budgeted monthly manufacturing overhead cost of $540,000 plus $3 per direct labor hour. If a flexible budget report reflects $1,044,000 for total budgeted manufacturing cost for the month, the actual level of activity achieved during the month was a. 528,000 direct labor hours. b. 168,000 direct labor hours. c. 348,000 direct labor hours. d. Cannot be determined from the information provided.

Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement Solution: $1,044,000 - $540,000 = $504,000 / 3 = 168,000 (Total budgeted manufacturing cost – monthly manufacturing overhead) / Rate per direct labor hour = Direct Labor hours

58.

Which one of the following would be the same total amount on a flexible budget and a static budget if the activity level is different for the two types of budgets? a. Direct materials cost b. Direct labor cost c. Variable manufacturing overhead d. Fixed manufacturing overhead

Ans: D, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

59.

In developing a flexible budget within a relevant range of activity, a. only fixed costs are included. b. it is necessary to relate variable cost data to the activity index chosen. c. it is necessary to prepare a budget at 1,000 unit increments. d. variable and fixed costs are combined and are reported as a total cost.

Ans: B, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

60.

What amounts appear on a flexible budget report? a. Original budgeted amounts at the static budget activity level b. Actual costs for the budgeted activity level c. Budgeted amounts for the actual activity level achieved d. Actual costs for the estimated activity level

Ans: C, LO: 2, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

61.

The flexible budget a. is prepared before the master budget. b. is relevant both within and outside the relevant range. c. eliminates the need for a master budget. d. is a series of static budgets at different levels of activity.

Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

62.

A flexible budget can be prepared for which of the following budgets comprising the master budget? a. Sales b. Overhead c. Direct materials d. All of these answers are correct.

Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

23- 10

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

63.

A flexible budget a. is prepared when management cannot agree on objectives for the company. b. projects budget data for various levels of activity. c. is only useful in controlling fixed costs. d. cannot be used for evaluation purposes because budgeted data are adjusted to reflect actual results.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

64.

If a company plans to sell 48,000 units of product but sells 60,000 units, the most appropriate comparison of the cost data associated with the sales will be by a budget based on a. the original planned level of activity. b. 54,000 units of activity. c. 60,000 units of activity. d. 48,000 units of activity.

Ans: C, LO: 2, Bloom: C, Difficulty: Moderate, Min: 3, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

65.

Within the relevant range of activity, the behavior of total costs is assumed to be a. linear and upward sloping. b. linear and downward sloping. c. curvilinear and upward sloping. d. linear to a point and then level off.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

66.

Sales results that are evaluated by a static budget might show 1. favorable differences that are not justified. 2. unfavorable differences that are not justified. a. b. c. d.

1 2 both 1 and 2. neither 1 nor 2.

Ans: C, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

67.

The selection of levels of activity to depict a flexible budget 1. will be within the relevant range. 2. is largely a matter of judgement. 3. is governed by generally accepted accounting principles. a. b. c. d.

1 2 3 1 and 2

Ans: D, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Budgetary Control And Responsibility Accounting 68.

23 - 11

Management by exception a. causes managers to be buried under voluminous paperwork. b. means that all differences will be investigated. c. means that only unfavorable differences will be investigated. d. means that material differences will be investigated.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

69.

Under management by exception, which of the following differences between planned and actual results should be investigated? a. Material and noncontrollable b. Controllable and noncontrollable c. Material and controllable d. All differences should be investigated

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

70.

Best Shingle’s budgeted manufacturing costs for 50,000 squares of shingles are as follows: Fixed manufacturing costs Variable manufacturing costs

$12,000 $16.00 per square

Best produced 40,000 squares of shingles during March. How much are budgeted total manufacturing costs in March? a. $640,000 b. $812,000 c. $800,000 d. $652,000 Ans: D, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: ($16 x 40,000) + $12,000 = $652,000 (Variable manufacturing cost per square x # of squares produced) + Fixed manufacturing costs = Budgeted total manufacturing costs)

71.

A flexible budget depicted graphically a. is identical to a CVP graph. b. differs from a CVP graph in the way that fixed costs are shown. c. differs from a CVP graph in the way that variable costs are shown. d. differs from a CVP graph in that sales revenue is not shown.

Ans: D, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

72.

The activity index used in preparing the flexible budget a. is prescribed by generally accepted accounting principles. b. is only applicable to fixed manufacturing costs. c. is the same for all departments. d. should significantly influence the costs that are being budgeted.

Ans: D, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

23- 12

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

73.

A static budget is not appropriate in evaluating a manager’s effectiveness if a company has a. substantial fixed costs. b. substantial variable costs. c. planned activity levels that match actual activity levels. d. no variable costs.

Ans: B, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

74.

Shane Industries prepared a fixed budget of 60,000 direct labor hours with estimated overhead costs of $300,000 for variable overhead and $90,000 for fixed overhead. If Shane prepares a flexible budget at 57,000 direct labor hours, what is the total overhead costs at this level of activity? a. $285,000 b. $375,000 c. $370,500 d. $390,000

Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: (($300,000 / 60,000) + 57,000) + $90,000 = $375,000 ((Estimated overhead costs / fixed budget direct labor hours) x flexible budget direct labor hours) + Fixed overhead = Total overhead costs)

75.

For June, Gold Corp. estimated sales revenue at $600,000. It pays sales commissions that are 4% of sales. The sales manager’s salary is $285,000, estimated shipping expenses total 1% of sales, and miscellaneous selling expenses for the month are expected to be $15,000. If Gold prepares a flexible budget for the month of June, how much are budgeted selling expenses for the month of July if sales are expected to be $540,000? a. $297,000 b. $327,000 c. $270,000 d. $330,000

Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: ($540,000 x .04) + $285,000 + $15,000 + ($540,000 x .01) = $327,000 (Expected Sales x Commission rate) + Sales manager’s salary + Miscellaneous selling expenses + (Sales x % of shipping) = Budgeted selling expenses)

76.

Nikoto Steel Co. budgeted manufacturing costs for 50,000 tons of steel are as follows: Fixed manufacturing costs Variable manufacturing costs

$50,000 per month $12.00 per ton of steel

Nikoto produced 40,000 tons of steel during March. What is the flexible budget for total manufacturing costs for March? a. $520,000 b. $650,000 c. $480,000 d. $530,000 Ans: D, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: ($12.00 x 40,000) + $50,000 = $530,000 (Variable manufacturing cost per ton of steel x tons of steels produced) + Fixed manufacturing costs = Total manufacturing costs

Budgetary Control And Responsibility Accounting 77.

23 - 13

Smart Manufacturing budgeted costs for 50,000 linear feet of block are as follows: Fixed manufacturing costs Variable manufacturing costs

$24,000 per month $16.00 per linear foot

Smart installed 40,000 linear feet of block during March. What amount would be reported on a flexible budget for total manufacturing costs in March? a. $640,000 b. $824,000 c. $800,000 d. $664,000 Ans: D, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: ($16.00 x 40,000) + $24,000 = $664,000 (Variable manufacturing cost per linear foot x Linear feet installed) + Fixed manufacturing costs = Budgeted total manufacturing costs)

78.

In the Dichter Co., indirect labor is budgeted for $72,000 and factory supervision is budgeted for $24,000 at normal capacity of 160,000 direct labor hours. If 180,000 direct labor hours are worked, the flexible budget total for these costs is a. $96,000. b. $108,000. c. $105,000. d. $99,000.

Ans: C, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: (($72,000/ 160,000) x 180,000) + $24,000 = $105,000 ((Indirect labor / Direct labor hours (Static budget)) x direct labor hours worked: flexible budget) + factory supervision (fixed) = flexible budget costs)

79.

Stone Industries uses flexible budgets. At normal capacity of 16,000 units, budgeted manufacturing overhead is $48,000 for variable costs and $270,000 for fixed costs. If Stone had actual overhead costs of $321,000 for 18,000 units produced, what is the difference between actual and budgeted costs? a. $3,000 unfavorable b. $3,000 favorable c. $9,000 unfavorable d. $12,000 favorable

Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: ($48,000 / 16,000) x 18,000) + $270,000 = $324,000 - $321,000 = $3,000 favorable (Variable manufacturing overhead / units: budget) x actual units produced) + fixed manufacturing = Flexible budget; Flexible Budget – Actual = Difference (favorable)

23- 14

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

80.

A company’s planned activity level for next year is expected to be 100,000 machine hours. At this level of activity, the company budgeted the following manufacturing overhead costs: Variable Fixed Indirect materials $140,000 Depreciation $60,000 Indirect labor 200,000 Taxes 10,000 Factory supplies 20,000 Supervision 50,000 A flexible budget prepared at the 80,000 machine hours level of activity would show total manufacturing overhead costs of a. $458,000. b. $360,000. c. $384,000. d. $408,000.

Ans: D, LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: (($140,000 + $200,000 + $20,000) / 100,000) = $3.60 x 80,000 = $288,000 +( $60,000 + $10,000 + $50,000) = $408,000 ((Indirect materials + Indirect labor + Factory supplies) / Expected machine hours (master budget)) X Machine hours: Flexible budget) + Depreciation (Fixed) + Taxes + Supervision) = Total manufacturing overhead costs)

81.

In the Goblette Manufacturing Company, indirect labor is budgeted for $108,000 and factory supervision is budgeted for $36,000 at normal capacity of 160,000 direct labor hours. If 180,000 direct labor hours are worked, the flexible budget total for these costs is a. $144,000. b. $162,000. c. $157,500. d. $148,500.

Ans: C, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: (($108,000 / 160,000) x 180,000) + $36,000 = $157,500 (Budgeted Indirect labor / Budgeted direct labor hours)_ x Direct labor hours worked: flexible budget) + factory supervision (fixed) = Total flexible budget costs)

82.

Chambers, Inc. uses flexible budgets. At normal capacity of 16,000 units, budgeted manufacturing overhead is $64,000 for variable costs and $180,000 for fixed costs. If Chambers had actual overhead costs of $250,000 for 18,000 units produced, what is the difference between actual and budgeted costs? a. $2,000 unfavorable. b. $2,000 favorable. c. $6,000 unfavorable. d. $8,000 favorable.

Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement Solution: (($64,000 / 16,000) x 18,000) + $180,000 = $252,000 - $250,000 = $2,000 favorable (Variable manufacturing overhead / budgeted units) x actual units produced) + Fixed manufacturing overhead = Budgeted Costs; Budgeted Costs - Actual = Difference (Favorable))

Budgetary Control And Responsibility Accounting 83.

23 - 15

A company’s planned activity level for next year is expected to be 100,000 machine hours. At this level of activity, the company budgeted the following manufacturing overhead costs: Variable Fixed Indirect materials $120,000 Depreciation $50,000 Indirect labor 160,000 Taxes 10,000 Factory supplies 20,000 Supervision 40,000 A flexible budget prepared at the 90,000 machine hours level of activity would show total manufacturing overhead costs of a. $270,000. b. $360,000. c. $370,000. d. $300,000.

Ans: C, LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: (($120,000 + $160,000 + $20,000) / 100,000) x 90,000 = $270,000 + ($50,000 + $10,000 + $40,000) = $370,000 ((Indirect Materials (Variable) + Indirect labor (Variable) + Factory Supplies (Variable) / Budgeted machine hours) x Flexible Budget machine hours) + Depreciation (Fixed) + Taxes (Fixed) + Supervision (Fixed) = Total manufacturing overhead costs)

84.

Kevin Jarvis Industries produced 192,000 units in 90,000 direct labor hours. Production for the period was estimated at 198,000 units and 99,000 direct labor hours. A flexible budget would compare budgeted costs and actual costs, respectively, at a. 96,000 hours and 99,000 hours. b. 99,000 hours and 90,000 hours. c. 96,000 hours and 90,000 hours. d. 90,000 hours and 90,000 hours.

Ans: D, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

85.

A company’s planned activity level for next year is expected to be 100,000 machine hours. At this level of activity, the company budgeted the following manufacturing overhead costs: Variable Fixed Indirect materials $90,000 Depreciation $37,500 Indirect labor 120,000 Taxes 7,500 Factory supplies 15,000 Supervision 30,000 A flexible budget prepared at the 90,000 machine hours level of activity would show total manufacturing overhead costs of a. $202,500. b. $270,000. c. $277,500. d. $225,000.

Ans: C, LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: (($90,000 + $120,000 + $15,000) / 100,000) x 90,000 = $202,500 + ($37,500 + $7,500 + $30,000) = $277,500 (Indirect Materials (Variable) + Indirect Labor (Variable) + Factory Supplies (Variable)) / Budgeted Machine Hours) x Flexible Budget Machine Hours) + Depreciation (Fixed) + Taxes (Fixed) + Supervision (Fixed) = Total manufacturing overhead costs)

23- 16

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

86.

Kathleen Corp. produced 320,000 units in 150,000 direct labor hours. Production for the period was estimated at 330,000 units and 165,000 direct labor hours. A flexible budget would compare budgeted costs and actual costs, respectively, at a. 160,000 hours and 165,000 hours. b. 165,000 hours and 150,000 hours. c. 160,000 hours and 150,000 hours. d. 150,000 hours and 150,000 hours.

Ans: D, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

87.

At zero direct labor hours in a flexible budget graph, the total budgeted cost line intersects the vertical axis at $30,000. At 15,000 direct labor hours, a horizontal line drawn from the total budgeted cost line intersects the vertical axis at $90,000. Total fixed costs and unit variable costs are a. $30,000 fixed plus $4 per direct labor hour variable. b. $30,000 fixed plus $6 per direct labor hour variable. c. $60,000 fixed plus $2 per direct labor hour variable. d. $60,000 fixed plus $4 per direct labor hour variable.

Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: ($90,000 - $30,000) / 15,000 = $4; $30,000 plus $4 per direct labor hour variable (Total budgeted cost (horizontal) – Total budgeted cost (vertical)) / Direct labor hours; Total budgeted cost (vertical) (Fixed Cost) + Rate per direct labor hour (variable)

88.

At 18,000 direct labor hours, the flexible budget for indirect materials totaled $36,000. If $37,400 are incurred at 18,400 direct labor hours, the flexible budget report should show a difference for indirect materials of a. $1,400 unfavorable. b. $1,400 favorable. c. $600 favorable. d. $600 unfavorable.

Ans: D, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation Solution: ($36,000 / 18,000) = $2 x 18,400 = $36,800; $37,400 - $36,800 = $600 unfavorable ((Indirect Materials (Flexible) / direct labor hours (flexible)) x direct labor hours incurred) = Flexible budget Indirect Materials; Actual - Flexible budget = Variance (Unfavorable)

89.

The accumulation of accounting data on the basis of the individual manager who has the authority to make day-to-day decisions about activities in an area is called a. static reporting. b. flexible accounting. c. responsibility accounting. d. master budgeting.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Budgetary Control And Responsibility Accounting 90.

23 - 17

Power Manufacturing recorded operating data for its shoe division for the year as follows: Sales Contribution margin Controllable fixed costs Average total operating assets

$1,500,000 300,000 180,000 600,000

What is the controllable margin for the year? a. 20% b. 50% c. $300,000 d. $120,000 Ans: D, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement Solution: $300,000 - $180,000 = $120,000 (Contribution Margin – Controllable Fixed Costs = Controllable Margin)

91.

A cost is considered controllable at a given level of managerial responsibility if a. the manager has the power to manage the cost within a given time period. b. the cost has not exceeded the budget amount in the master budget. c. it is a variable cost, but it is uncontrollable if it is a fixed cost. d. it changes in magnitude in a flexible budget.

Ans: A, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

92.

As one moves up to each higher level of managerial responsibility, a. fewer costs are controllable. b. the responsibility for cost incurrence diminishes. c. a greater number of costs are controllable. d. performance evaluation becomes less important.

Ans: C, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

93.

A responsibility report should a. be prepared in accordance with generally accepted accounting principles. b. show only those costs that a manager can control. c. only show variable costs. d. only be prepared at the highest level of managerial responsibility.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

94.

Top management can control a. only controllable costs. b. only noncontrollable costs. c. all costs. d. some noncontrollable costs and all controllable costs.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

95.

Not-for-profit entities a. do not use responsibility accounting. b. utilize responsibility accounting in trying to maximize net income. c. utilize responsibility accounting in trying to minimize the cost of providing services. d. have only noncontrollable costs.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

23- 18

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Budgetary Control And Responsibility Accounting 96.

23 - 19

Which of the following is not a true statement? a. All costs are controllable at some level within a company. b. Responsibility accounting applies to both profit and not-for-profit entities. c. Fewer costs are controllable as one moves up to each higher level of managerial responsibility. d. The term segment is sometimes used to identify areas of responsibility in decentralized operations.

Ans: C, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: Governance Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

97.

Costs incurred indirectly and allocated to a responsibility level are considered to be a. nonmaterial. b. mixed. c. controllable. d. noncontrollable.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

98.

Management by exception a. is most effective at top levels of management. b. can be implemented at each level of responsibility within an organization. c. can only be applied when comparing actual results with the master budget. d. is the opposite of goal congruence.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

99.

Which types of responsibility centers generate both revenues and costs? a. Investment and profit centers b. Profit and cost centers c. Cost and investment centers d. Only profit centers

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

100.

The linens department of a large department store is a. a revenue center. b. a profit center. c. a cost center. d. an investment center.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

101.

A foreign subsidiary of a large corporation is a. a revenue center. b. a profit center. c. a cost center. d. an investment center.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

23- 20 102.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e The maintenance department of a manufacturing company is a(n) a. loss center. b. profit center. c. cost center. d. investment center.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

103.

Which of the following is not a correct match? 1. Incurs costs 2. Generates revenue 3. Controls investment funds a. Investment Center 1, 2, 3 b. Cost Center 1 c. Profit Center 1, 2, 3 d. All are correct matches.

Ans: C, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

104.

A cost center a. only incurs costs and does not directly generate revenues. b. incurs costs and generates revenues. c. is a responsibility center of a company which incurs losses. d. is a responsibility center which generates profits and evaluates the investment cost of earning the profit.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

105.

A manager of a cost center is evaluated mainly on a. the profit that the center generates. b. his or her ability to control costs. c. the amount of investment it takes to support the cost center. d. the amount of revenue that can be generated.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

106.

Performance reports for cost centers compare actual a. total costs with static budget costs. b. total costs with flexible budget costs. c. controllable costs with static budget costs. d. controllable costs with flexible budget costs.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

107.

In a performance report for a cost center, a. controllable and noncontrollable costs are reported. b. fixed costs are not reported. c. no distinction is made between fixed and variable costs. d. only materials and controllable costs are reported.

Ans: C, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Budgetary Control And Responsibility Accounting 108.

23 - 21

Of the following choices, which contain both a traceable fixed cost and a common fixed cost? a. Profit center manager’s salary and timekeeping costs for a responsibility center’s employees. b. Company president’s salary and company personnel department costs. c. Company personnel department costs and timekeeping costs for a responsibility center’s employees. d. Depreciation on a responsibility center’s equipment and supervisory salaries for the center.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

109.

Which of the following is not an indirect fixed cost? a. Company president’s salary b. Depreciation on the company building housing several profit centers c. Company personnel department costs d. Profit center supervisory salaries

Ans: D, LO: 3, Bloom: C, Difficulty: , Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

110.

A profit center is a. a responsibility center that always reports a profit. b. a responsibility center that incurs costs and generates revenues. c. evaluated by the rate of return earned on the investment allocated to the center. d. referred to as a loss center when operations do not meet the company’s objectives.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

111.

The best measure of the performance of a profit center manager is the a. rate of return on investment. b. success in meeting budgeted goals for controllable costs. c. controllable margin generated by the profit center. d. contribution margin generated by the profit center.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

112.

Controllable margin is defined as a. sales minus variable costs. b. sales minus contribution margin. c. contribution margin less controllable fixed costs. d. contribution margin less noncontrollable fixed costs.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

113.

Controllable margin is most useful for a. external financial reporting. b. preparing the master budget. c. performance evaluation of profit centers. d. break-even analysis.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

23- 22 114.

Which of the following will not result in an unfavorable controllable margin difference? a. Sales exceeding budget; costs under budget b. Sales exceeding budget; costs over budget c. Sales under budget; costs under budget d. Sales under budget; costs over budget

Ans: A, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

115.

Given below is an excerpt from a management performance report: Contribution margin Controllable fixed costs

Budget $1,000,000 $ 500,000

Actual $1,050,000 $ 450,000

Difference $50,000 $50,000

The manager’s overall performance a. is 20% below expectations. b. is 20% above expectations. c. is equal to expectations. d. cannot be determined from information given. Ans: B, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement Solution: {($1,050,000 - $450,000) – ($1,000,000 - $500,000)] / ($1,000,000 - $500,000) = 20% ((Actual: Contribution Margin – Actual: Controllable Fixed Costs) – (Budget: Contribution Margin – Budget: Controllable Fixed Costs)) / (Budget: Contribution Margin - Budget: Controllable Fixed Costs)) = Overall performance %)

116.

Which of the following are financial measures of performance? 1. Controllable margin 2. Product quality 3. Labor productivity a. b. c. d.

1 2 3 1 and 3

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

117.

Given below is an excerpt from a management performance report: Contribution margin Controllable fixed costs

Budget $600,000 $200,000

Actual $580,000 $220,000

Difference $20,000 U $20,000 U

The manager’s overall performance a. is 10% above expectations. b. is 10% below expectations. c. is equal to expectations. d. cannot be determined from the information provided. Ans: B, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement Solution:: {($580,000 - $220,000) – ($600,000 - $200,000)] / ($600,000 - $200,000) = 10% below expectations ((Actual: Contribution Margin – Actual: Controllable Fixed Costs) – (Budget: Contribution Margin – Budget: Controllable Fixed Costs)) / (Budget: Contribution Margin - Budget: Controllable Fixed Costs)) = Overall performance %)

Budgetary Control And Responsibility Accounting 118.

23 - 23

A responsibility report for a profit center will a. not show controllable fixed costs. b. not show indirect fixed costs. c. show noncontrollable fixed costs. d. not show cumulative year-to-date results.

Ans: B, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

119.

The dollar amount of the controllable margin a. is usually higher than the contribution margin. b. is usually lower than the contribution margin. c. is always equal to the contribution margin. d. cannot be a negative figure.

Ans: B, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

120.

Pippen Co. recorded operating data for its shoe division for the year. The company’s desired return is 5%. Sales Contribution margin Total direct fixed costs Average total operating assets

$1,000,000 200,000 120,000 400,000

What is the controllable margin for the year? a. 20% b. 50% c. $60,000 d. $80,000 Ans: D, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement Solution: $200,000 - $120,000 = $80,000 (Contribution Margin – Total Direct Fixed Costs = Controllable Margin)

121.

Las Sendas, Inc. had average operating assets of $4,000,000 and sales of $2,000,000 in 2022. If the controllable margin was $600,000, the ROI was a. 60% b. 50% c. 30% d. 15%

Ans: D, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement Solution: $600,000 / $4,000,000 = .15 or 15% (Controllable margin / Average operating assets = ROI)

122.

Trails and Paths, Inc. had average operating assets of $6,000,000 and sales of $3,000,000 in 2022. If the controllable margin was $600,000, the ROI was a. 50% b. 40% c. 20% d. 10%

Ans: D, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement Solution: $600,000 / $6,000,000 = .10 or 10% (Controllable margin /Average operating assets = ROI)

23- 24

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

123.

The area manager of the Red, White, and Brew Restaurants is considering two possible expansion alternatives. The required investments, expected controllable margins, and the ROIs of each are as follows: Project Phoenix Chicago

Investment $120,000 $540,000

Controllable Margin $30,000 $50,000

ROI 25% 9.25%

The Red, White, and Brew segment has currently $2,000,000 in average operating assets and a controllable margin of $250,000. Which one of following projects will increase the Red, White, and Brew division’s ROI? a. Both the Phoenix and Chicago options b. Only the Phoenix option c. Only the Chicago option d. Neither the Phoenix nor the Chicago options Ans: B, LO: 4, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement Solution: $250,000 / $2,000,000 = 12.5%; 25% is greater than 12.5% (Controllable margin / Invested capital = ROI)

124.

Bogey Co. recorded operating data for its Cheap division for the year as follows: Sales Controllable margin Total average assets Fixed costs

$ 1,400,000 160,000 4,000,000 100,000

Bogey requires its return to be 10%. What is the ROI for the year? a. 4% b. 35% c. 6% d. 1.5% Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement Solution: $160,000 / $4,000,000 = .04 or 4% (Controllable margin / Total average assets = ROI)

125.

Dingo Division’s operating results include controllable margin of $150,000, sales totaling $1,200,000, and average operating assets of $500,000. Dingo is considering a project with sales of $100,000, expenses of $86,000, and an investment of average operating assets of $200,000. Dingo’s required rate of return is 9%. Should Dingo accept this project? a. Yes, ROI will drop by 6.6% which is still above the minimum required rate of return. b. No, the return is less than the required rate of 9%. c. Yes, ROI still exceeds the cost of capital. d. No, ROI will decrease to 7%.

Ans: B, LO: 4, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement Solution; $150,000 / $500,000 = .30 or 30%; ($100,000 - $86,000) / $200,000 = .07 or 7%; 7% is less than 9% (Controllable margin / Average operating = ROI)

Budgetary Control And Responsibility Accounting 126.

23 - 25

Grown Industries reported the following for 2022: Income tax expense Contribution margin Controllable fixed costs Interest expense Total operating assets

$ 60,000 200,000 80,000 40,000 650,000

What is the controllable margin? a. $200,000 b. $120,000 c. $60,000 d. $20,000 Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement Solution; $200,000 - $80,000 = $120,000 (Contribution margin – Controllable fixed costs = Controllable margin)

127.

Griffin Corp. is evaluating its Piquette division, an investment center. The division has a $60,000 controllable margin and $400,000 of sales. What will Griffin’s average operating assets be when its return on investment is 10%? a. $600,000 b. $660,000 c. $400,000 d. $340,000

Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement Solution; $60,000 / x = .10; x = $600,000 (Controllable margin / average operating assets (x) = ROI)

128.

An investment center generated a contribution margin of $400,000, fixed costs of $200,000 and sales of $2,000,000. The center’s average operating assets were $800,000. How much is the return on investment? a. 25% b. 175% c. 50% d. 75%

Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement Solution: ($400,000 - $200,000) / $800,000 = .25 or 25% (Contribution – Fixed Costs) / Average Operating Assets = Return on Investment)

129.

Rhein Manufacturing recorded operating data for its auto accessories division for the year. Sales $750,000 Contribution margin 150,000 Total direct fixed costs 90,000 Average total operating assets 400,000 How much is ROI for the year if management is able to identify a way to improve the contribution margin by $30,000, assuming fixed costs are held constant? a. 45.0% b. 22.5% c. 15.0% d. 12.0%

Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement Solution: ($150,000 + $30,000 - $90,000) / $400,000 = .225 or 22.5%

23- 26

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

((Contribution margin + Improvement in Contribution Margin – Total direct fixed costs) / Average total operating assets = ROI)

130.

The current controllable margin for Henry Division is $93,000. Its current operating assets are $300,000. The division is considering purchasing equipment for $90,000 that will increase annual controllable margin by an estimated $15,000. If the equipment is purchased, what will happen to the return on investment for Henry Division? a. An increase of 16.1% b. A decrease of 13.3% c. A decrease of 3.3% d. A decrease of 7.2%

Ans: C, LO: 4, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement Solution: (before) $93,000 / $300,000 = .31 or 31%; ($93,000 + $15,000) / ($300,000 + $90,000) = 27.7%; 31% - 27.7% = 3.3% (Controllable margin + Increase in annual controllable margin) / current operating assets = ROI)

131.

Monte, Inc. recorded operating data for its Sandtrap division for the year as follows: Sales Controllable margin Total average assets Fixed costs

$1,000,000 180,000 600,000 60,000

Monte requires its return to be 9%. How much is ROI for the year? a. 10% b. 17% c. 20% d. 30% Ans: D, LO: 4, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement Solution: $180,000 / $600,000 = .30 or 30% (Contribution margin / Total average assets = ROI)

132.

Betsy Union is the Pika Division manager and her performance is evaluated by executive management based on Division ROI. The current controllable margin for Pika Division is $46,000. Its current operating assets total $210,000. The division is considering purchasing equipment for $40,000 that will increase contribution margin by an estimated $10,000, with annual depreciation of $10,000. If the equipment is purchased, how will the return on investment for the division change? a. An increase of 0.5% b. A decrease of 0.5% c. A decrease of 3.5% d. It will remain unchanged.

Ans: C, LO: 4, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement Solution: $46,000 / $210,000 = 21.9%; $46,000 / ($210,000 + $40,000) = 18.4%; 21.9% – 18.4% = 3.5% decrease (Controllable Margin / (Average operating assets + Equipment Purchase) = ROI)

133.

Benet Division of United Refinery Company’s operating results include: controllable margin, $200,000; sales $2,200,000; and operating assets, $800,000. The Benet Division’s ROI is 25%. Management is considering a project with sales of $100,000, variable expenses of $60,000, fixed costs of $40,000; and an asset investment of $150,000. Should management accept this new project? a. No, because ROI will decrease. b. Yes, because ROI will increase. c. Yes, because additional sales always mean more customers. d. No, because a loss will be incurred.

Ans: A, LO: 4, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement Solution: $200,000 / $800,000 = .25 or 25%; $200,000 / ($800,000 + $150,000) = 21% (ROI will be lowered) (Controllable margin / (Operating Assets + Asset Investment) = ROI)

Budgetary Control And Responsibility Accounting 134.

23 - 27

The Fulmar Division of Jayne Manufacturing had an ROI of 25% when sales were $3 million and controllable margin was $600,000. What were the average operating assets? a. $150,000 b. $750,000 c. $2,400,000 d. $12,000,000

Ans: C, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspectives, AICPA FC: Measurement, AICPA PC: None, IMA: Budget Preparation Solution: .25 = $600,000 / x = $2,400,000 (ROI = Controllable Margin / Average operating assets)

135.

Naples, Inc. recorded operating data for its shoe division for the year as follows: Sales Contribution margin Total fixed costs Average total operating assets

$750,000 135,000 90,000 300,000

What is the ROI for the year if management is able to identify a way to improve the contribution margin by $30,000, assuming fixed costs are held constant? a. 25% b. 18% c. 45% d. 12% Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement Solution: ($135,000 + $30,000 - $90,000) / $300,000 = .25 or 25% ((Contribution margin + Improvement in contribution margin – Total fixed costs) / Average total operating assets = ROI)

136.

A distinguishing characteristic of an investment center is that a. revenues are generated by selling and buying stocks and bonds. b. interest revenue is the major source of revenues. c. the profitability of the center is related to the funds invested in the center. d. it is a responsibility center which only generates revenues.

Ans: C, LO: 4, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

137.

A measure frequently used to evaluate the performance of the manager of an investment center is a. the amount of profit generated. b. the rate of return on funds invested in the center. c. the percentage increase in profit over the previous year. d. departmental gross profit.

Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

138.

Return on investment is calculated by dividing a. contribution margin by sales. b. controllable margin by sales. c. contribution margin by average operating assets. d. controllable margin by average operating assets.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

23- 28 139.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e Which one of the following will not increase return on investment? a. Variable costs are increased b. An increase in sales c. Average operating assets are decreased d. Variable costs are decreased

Ans: A, LO: 4, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

140.

If an investment center generated a controllable margin of $150,000 and sales of $600,000, what is the return on investment if average operating assets were $1,000,000 during the period? a. 15% b. 25% c. 45% d. 60%

Ans: A, LO: 4, Bloom: K, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement Solution; $150,000 / $1,000,000 = .15 or 15% (Controllable margin / Average operating assets = ROI)

141.

Which statement is true? a. An investment center is responsible for revenues and expenses as well as earning a return on assets. b. An investment center is only responsible for its investments. c. An investment center is only responsible for revenues and expenses. d. A profit center is evaluated on its contribution margin while an investment center is evaluated on its ROI.

Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

142.

The denominator in the calculation for return on investment is a. investment center controllable margin. b. dependent on the specific type of profit center. c. investment center average operating assets. d. sales for the period.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

143.

In the calculation for ROI, idle plant assets are a. included in the calculation of controllable margin. b. included in the calculation of operating assets. c. excluded in the calculation of operating assets. d. excluded from total assets.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

144.

In computing ROI, land held for future use a. will hurt the performance measurement of an investment center’s manager. b. is important in evaluating the performance of a profit center manager. c. is included in the calculation of operating assets. d. is considered a nonoperating asset.

Ans: D, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Budgetary Control And Responsibility Accounting 145.

23 - 29

Le Sud Retailers has a current return on investment of 10% and the company has established an 8% minimum rate of return for the division. The division manager has two investment projects available for which the following estimates have been made: Project A - Annual controllable margin = $24,000, operating assets = $400,000 Project B - Annual controllable margin = $60,000, operating assets = $550,000 Using on ROI, which project or projects should be funded? a. Both projects b. Project A c. Project B d. Neither project

Ans: C, LO: 4, Bloom: C, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement Solution: Project A: $24,000 / $400,000 = .06 or 6%; Project B: $60,000 / $550,000 = 10.9%; Fund only Project B (Controllable Margin / Operating Assets = ROI)

146.

If an investment center has a $90,000 controllable margin and $1,200,000 in sales, what average operating assets are needed to have a return on investment of 10%? a. $120,000 b. $210,000 c. $900,000 d. $1,200,000

Ans: C, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement Solution: .10 = $90,000 / x; x = $900,000 (Controllable Margin / Average operating assets (x) = ROI)

147.

Which of the following valuations of operating assets is not readily available from the accounting records? a. Cost b. Book value c. Market value d. Both cost and market value

Ans: C, LO: 4, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement a

148.

The following information is available for Halle Department Stores: Average operating assets Controllable margin Contribution margin Minimum rate of return

$600,000 60,000 150,000 8%

What is Halle’s residual income? a. $102,000 b. $540,000 c. $12,000 d. $48,000 Ans: C, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement Solution: $60,000 - ($600,000 x .08) = $12,000 ((Controllable margin – (Average operating assets x minimum rate of return) = Residual Income)

23- 30 a

149.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e What is the management’s goal with regard to residual income? a. To maximize the amount of costs which are controllable b. To maximize profits c. To maximize the total amount of residual income d. To maximize controllable margin

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement a

150.

Which one of the following is a correct statement about residual income? a. Management’s goal is to maximize profits of an investment center. b. Residual income is less effective for evaluating investment centers than ROI. c. Residual income is the ratio of controllable margin to the minimum rate of return on average operating assets. d. Residual income evaluates performance by comparing the return of an investment center with the company’s minimum rate of return.

Ans: D, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement a

151.

Which one of the following does not impact the amount of residual income? a. Contribution margin b. Net income c. Sales d. Controllable costs

Ans: B, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement a

152.

For what purpose do companies calculate residual income? a. To determine whether decentralization is possible or not b. To motivate managers through possible termination c. To evaluate management performance d. To measure company profits

Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement a

153.

Lew Co. had sales of $400,000, variable costs of $200,000, and direct fixed costs totaling $100,000. The company’s average operating assets total $800,000 and its required return is 10%. What is the company’s residual income? a. $120,000 b. $20,000 c. $80,000 d. $320,000

Ans: B, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement Solution: ($400,000 - $200,000 - $100,000) - ($800,000 x .10) = $20,000 ((Sales – Variable costs – Direct fixed costs) – (Operating assets x Required Return) = Residual Income) a

154. Quincy Corp. earned controllable margin of $500,000 on sales of $6,400,000. The division had average operating assets of $5,200,000. The company requires a return on investment of at least 8%. How much is residual income? a. $416,000 b. $84,000 c. $584,000 d. $512,000

Ans: B, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Budgetary Control And Responsibility Accounting Solution: $500,000 - ($5,200,000 x .08) = $84,000 Controllable Margin – (Average operating assets x Required Return) = Residual Income)

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155.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e The performance of the manager of Ottawa Division is measured by residual income. Which of the following would decrease the manager’s performance measure? a. Decrease in required rate of return b. Increase in minimum rate of return on investment c. Increase in sales d. Increase in contribution margin

Ans: B, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

156.

Which of the following would not be considered an aspect of budgetary control? a. It assists in the determination of differences between actual and planned results. b. It provides feedback value needed by management to see whether actual operations are on course. c. It assists management in controlling operations. d. It provides a guarantee for favorable results.

Ans: D, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

157.

A static budget is usually appropriate in evaluating a manager’s effectiveness in controlling a. fixed manufacturing costs and fixed selling and administrative expenses. b. variable manufacturing costs and variable selling and administrative expenses. c. fixed manufacturing costs and variable selling and administrative expenses. d. variable manufacturing costs and fixed selling and administrative expenses.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

158.

A static budget report is appropriate for a. only fixed manufacturing costs. b. only fixed selling and administrative expenses. c. variable selling and administrative expenses. d. both fixed manufacturing costs and fixed selling and administrative expenses.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

159.

Sydney, Inc. uses flexible budgets. At normal capacity of 16,000 units, budgeted manufacturing overhead includes $128,000 of variable costs and $360,000 of fixed costs. If Sydney had actual overhead costs of $500,000 for 18,000 units produced, what is the difference between actual and budgeted costs? a. $4,000 unfavorable b. $4,000 favorable c. $12,000 unfavorable d. $16,000 favorable

Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement Solution: $128,000 / 16,000 = $8 x 18,000 = $144,000 + $360,000 = $504,000; $500,000 - $504,000 = $4,000 favorable ((Variable Manufacturing Overhead / Budgeted units) x Flexible budget units) + Fixed Manufacturing Overhead = Budgeted Costs; Actual – Budgeted Costs = Variance (Favorable)

160.

To develop a flexible budget, management takes all of the following steps except to identify the a. activity index and the relevant range of activity. b. variable costs and determine the budgeted variable cost per unit. c. fixed costs and determine the budgeted fixed cost per unit. d. All of these options are steps in developing the flexible budget.

Ans: C, LO: 2, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Budgetary Control And Responsibility Accounting 161.

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A flexible budget is appropriate for a. b. c. d.

Direct Labor Costs No Yes Yes No

Manufacturing Overhead Costs No Yes No Yes

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

162.

All of the following statements are correct about management by exception except that it a. enables top management to focus on problem areas that need attention. b. requires that management investigate every budget difference. c. requires that guidelines for identifying an exception be applied. d. means that top management’s review of a budget report is focused primarily on differences between actual results and planned objectives.

Ans: B, LO: 2, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

163.

Controllable costs for responsibility accounting purposes are those costs that are directly influenced by a. a given manager within a given period of time. b. a change in activity. c. production volume. d. sales volume.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

164.

All of the following statements are correct about controllable costs except a. all costs are controllable at some level of responsibility within a company. b. all costs are controllable by top management. c. fewer costs are controllable as one moves up to each higher level of managerial responsibility. d. costs incurred directly by a level of responsibility are controllable at that level.

Ans: C, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

165.

Which of the following will cause an increase in ROI? a. An increase in variable costs b. An increase in average operating assets c. An increase in sales d. An increase in controllable fixed costs

Ans: C, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

166.

Costs that relate specifically to one center and are incurred for the sole benefit of that center are a. common fixed costs. b. direct fixed costs. c. indirect fixed costs. d. noncontrollable fixed costs.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

167.

If controllable margin is $300,000 and the average investment center operating assets are $2,000,000, the return on investment is a. .67%. b. 6.66%. c. 20%. d. 15%.

Ans: D, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement Solution: $300,000 / $2,000,000 = .15 or 15% (Controllable margin / Average investment center operating assets = ROI)

BRIEF EXERCISES BE 168 Devlin Manufacturing makes a single product. Budgeted manufacturing costs are as follows: Variable costs Direct materials Direct labor Manufacturing overhead

$6.50 per unit 2.40 per unit 1.10 per unit

Fixed costs per month Supervisory salaries Depreciation Other fixed costs

$13,600 5,500 2,200

Instructions Determine the amount of manufacturing costs for a flexible budget level of 3,200 units per month. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 168 (4 min.) 3,200 × ($6.50 + $2.40 + $1.10) + ($13,600 + $5,500 + $2,200) = $53,300 BE 169 Wind Productions uses flexible budgets. Amounts from the budget for March in which 3,000 units were produced and sold appear are as follows: Direct materials Indirect materials - variable Supervisor salaries Depreciation on factory equipment Direct labor Property taxes on factory

$18,000 2,000 15,000 4,000 10,000 1,000

Instructions If Wind prepares a flexible budget at 4,000 units, compute its total variable cost. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 169 (4 min.) Variable cost per unit: ($18,000 + $2,000 + $10,000) ÷ 3,000 = $10 per unit .

Budgetary Control And Responsibility Accounting

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Variable cost at 4,000 units: $10 × 4,000 = $40,000 BE 170 Cyber Construction’s manufacturing costs for August when production was 1,000 units are as follows: Direct material Direct labor Variable overhead Factory depreciation Factory supervisory salaries Other fixed factory costs

$12 per unit $7,500 6,000 9,000 7,800 2,500

Instructions Compute the flexible budget manufacturing cost amount for a month in which 900 units are produced. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 170 (5 min.) Direct material ($12 × 900) Direct labor [($7,500 ÷ 1,000) × 900] Variable overhead [($6,000 ÷ 1,000) × 900] Factory depreciation—fixed Factory supervisory salaries—fixed Other fixed factory costs—fixed Total

$10,800 6,750 5,400 9,000 7,800 2,500 $42,250

BE 171 Micro Miller Company’s budgeted sales for April were estimated at $700,000, sales commissions at 4% of sales, and the sales manager’s salary at $80,000. Shipping expenses were estimated at 1% of sales and miscellaneous selling expenses were estimated at $1,000, plus 0.5% of sales. Instructions Determine the budgeted selling expenses on a flexible budget for April. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 171 (5 min.) Sales commissions (4% × $700,000) Sales manager’s salary Shipping expenses (1% × $700,000) Miscellaneous selling: Fixed Variable: 0.5% × $700,000 Budgeted selling expenses

$ 28,000 80,000 7,000 1,000 3,500 $119,500

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

BE 172 Point, Inc. produces men’s shirts. The following budgeted and actual amounts are for 2022: Cost Direct materials Direct labor Fixed overhead

Budget at 2,500 units $65,000 70,000 35,000

Actual Amounts at 2,800 units $75,000 78,000 34,500

Instructions Prepare a performance report for Point, Inc. for the year. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Solution 172 (5 min.) POINT, INC. Manufacturing Performance Budget Report For the Year Ended December 31, 2022 Direct materials Direct labor Fixed overhead Total costs

Budget $ 72,800* 78,400** 35,000 $186,200

Actual $ 75,000 78,000 34,500 $187,500

Differences $2,200 U 400 F 500 F $1,300 U

*($65,000 ÷ 2,500) = $26 x 2,800 **($70,000 ÷ 2,500) = $28 x 2,800 BE 173 Moss Corp. reported the following items for 2022: Controllable fixed costs Contribution margin Interest expense Variable costs Total assets

$ 77,000 122,000 20,000 80,000 $925,000

Instructions Compute the controllable margin for 2022. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Solution 173 (2 min.) $122,000 – $77,000 = $45,000

Budgetary Control And Responsibility Accounting

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BE 174 The data for an investment center is as follows: January 1, 2022 $ 400,000 3,000,000

Current Assets Plant Assets

December 31, 2022 $ 800,000 3,800,000

The controllable margin is $440,000. Instructions Compute the return on investment for the center for 2022. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Solution 174 (4 min.) Average current assets ($400,000 + $800,000) ÷ 2 = $600,000 Plant assets ($3,000,000 + $3,800,000) ÷ 2 = $3,400,000 ROI = Controllable Margin ÷ Average Operating Assets = $440,000 ÷ $4,000,000 = 11% BE 175 Data for the Deluxe Division of Park Industries which is operated as an investment center is as follows: Sales Contribution Margin Controllable Fixed Costs Return on Investment

$6,000,000 800,000 440,000 12%

Instructions Calculate controllable margin and average operating assets. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Solution 175 (3 min.) Controllable Margin ($800,000 – $440,000) = $360,000 Average Operating Assets ($360,000 ÷ .12) = $3,000,000

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

23- 38 BE 176

Sage Division’s operating results include:   

Controllable margin, $300,000 Sales revenue, $2,400,000 Operating assets, $1,000,000

Sage is considering a project with sales of $240,000, expenses of $168,000, and an investment of $360,000. Sage’s required rate of return is 15%. Instructions Determine whether Sage should accept this project. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Solution 176 (5 min.) Current ROI = $300,000 ÷ $1,000,000 = 30% ROI of new project = $72,000 ÷ $360,000 = 20% New ROI with project = [$300,000 + $72,000] ÷ [$1,000,000 + $360,000] = 27.4% While ROI decreases, that does not make this a bad investment since many projects cause total ROI to fall even though they increase value of the division. The determination is based on how the ROI of the project compares to the required rate of return. The company is not willing to accept any projects with an investment less than 15%, so the 20% project should be accepted. BE 177 An investment center manager is considering three possible investments. The company’s required return is 10%. The required asset investment, controllable margins, and the ROIs of each investment are as follows: Project AA BB CC

Average Investment $160,000 140,000 220,000

Controllable Margin $32,000 16,000 66,000

The investment center is currently generating an ROI of 23% based on $1,200,000 in operating assets and a controllable margin of $276,000. Instructions If the manager can select only one project, determine which is the best choice to increase the investment center’s ROI by computing the investment center’s ROI for each of the investment alternatives Ans: N/A, LO: 4, Bloom: AN, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Budgetary Control And Responsibility Accounting

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Solution 177 (4 min.) CC is the best choice because it increases the ROI. Project AA BB CC

New ROI ($276,000 + $32,000) ÷ ($1,200,000 + $160,000) = 22.6% ($276,000 + $16,000) ÷ ($1,200,000 + $140,000) = 21.8% ($276,000 + $66,000) ÷ ($1,200,000 + $220,000) = 24.1%

BE 178

The owner of Denver Toy Manufacturing Company has recently expanded his business in order to add an additional product line. In addition to toys, the company now sells shirts. The company has a minimum rate of return of 11%. Sales Controllable margin Average operating assets

Toys $600,000 120,000 900,000

Shirts $200,000 10,000 200,000

Instructions Compute the residual income for both investment centers. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Solution 178 (5 min.) Controllable margin Average assets × 11% Residual income

Toys $120,000 99,000 $ 21,000

Shirts $ 10,000 22,000 $(12,000)

BE 179

Floors Direct has 4 divisions. The hardwood flooring division’s information follows for 2022: Sales Controllable margin Variable costs Average operating assets

$4,000,000 250,000 60,000 1,800,000

Instructions Floor’s required rate of return is 10%. How much is its residual income? Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Solution 179 (4 min.) $250,000 – (10% × $1,800,000) = $70,000

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

EXERCISES Ex. 180 Clark Company’s master budget reflects budgeted sales information for the month of June, 2022 as follows: Budgeted Quantity Budgeted Unit Sales Price Product A 40,000 $7 Product B 48,000 $9 During June, the company actually sold 39,000 units of Product A at an average unit selling price of $7.10 and 49,600 units of Product B at an average unit price of $8.90. Instructions Prepare a Sales Budget Report for the month of June for Clark Company which shows whether the company achieved its planned objectives. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 180 (10–15 min.) CLARK COMPANY Sales Budget Report For the Month Ended June 30, 2022 Product Line Product A Product B Total Sales

Budget $280,000 432,000 $712,000

Actual $276,900 441,440 $718,340

Difference $3,100 U 9,440 F $6,340 F

Supporting calculations: $280,000 = ($7 x 40,000) $276,900 = ($7.10 x 39,000) $432,000 = ($9 x 48,000) $441,440 = ($8.90 x 49,600) Ex. 181 Beal Manufacturing Co.’s static budget at 12,000 units of production includes $72,000 for direct labor and $12,000 for direct materials. Total fixed costs are $48,000. Instructions a. Determine the total costs on Beal’s flexible budget for 2022 if 18,000 units are produced and sold. b. How would this comparison differ if a static budget were used instead of a flexible budget for performance evaluation? Ans: N/A, LO: 1, 2, Bloom: AP, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

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Solution 181 (8–10 min.) a. Variable costs: Direct labor Direct materials Fixed costs Total costs b.

12,000 Units

Unit Variable Cost

18,000 Units

$72,000 12,000 84,000 48,000 $132,000

$6.00 1.00

$108,000 18,000 126,000 48,000 $174,000

If a static budget were used, budgeted variable costs would be only $84,000 because they would be based on the static budget level of 12,000 units. The company would appear way over budget since the costs incurred would be related to a higher level of activity.

Ex. 182 Cody Co. developed its annual manufacturing overhead budget for its master budget for 2022 as follows: Expected annual operating capacity Variable overhead costs Indirect labor Indirect materials Factory supplies Total variable Fixed overhead costs Depreciation Supervision Property taxes Total fixed Total costs

120,000 Direct Labor Hours $600,000 120,000 60,000 780,000 240,000 120,000 96,000 456,000 $1,236,000

The relevant range for monthly activity is expected to be between 8,000 and 12,000 direct labor hours. Instructions Prepare a flexible budget for a monthly activity level of 8,000 and 9,000 direct labor hours. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 182 (15–20 min.) CODY CO. Monthly Flexible Manufacturing Overhead Budget Activity level Direct labor hours Variable costs Indirect labor Indirect materials Factory supplies Total variable

8,000

9,000

$40,000 8,000 4,000 52,000

$45,000 9,000 4,500 58,500

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 182 (Cont’d) Fixed costs Depreciation Supervision Property taxes Total fixed Total costs

20,000 10,000 8,000 38,000 $90,000

20,000 10,000 8,000 38,000 $96,500

Supporting calculations: Indirect labor ($600,000 ÷ 120,000) = $5 Indirect materials ($120,000 ÷ 120,000) = $1 Factory supplies ($60,000 ÷ 120,000) = $.50 Depreciation ($240,000 ÷ 12) Supervision ($120,000 ÷ 12) Property taxes ($96,000 ÷ 12) Ex. 183 Copper Manufacturing has prepared the following monthly flexible manufacturing overhead budget for its Mixing Department: COPPER MANUFACTURING Monthly Flexible Manufacturing Overhead Budget Mixing Department Activity level Direct labor hours Variable costs Indirect materials Indirect labor Factory supplies Total variable Fixed costs Depreciation Supervision Property taxes Total fixed Total costs

3,000

4,000

$ 3,000 15,000 4,500 22,500

$ 4,000 20,000 6,000 30,000

20,000 12,000 15,000 47,000 $69,500

20,000 12,000 15,000 47,000 $77,000

Instructions Prepare a flexible budget at the 5,000 direct labor hours of activity. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Budgetary Control And Responsibility Accounting

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Solution 183 (15–20 min.) COPPER MANUFACTURING Monthly Flexible Manufacturing Overhead Budget Mixing Department Activity level Direct labor hours Variable costs Indirect materials Indirect labor Factory supplies Total variable Fixed costs Depreciation Supervision Property taxes Total fixed Total costs

5,000 $ 5,000 25,000 7,500 37,500 20,000 12,000 15,000 47,000 $84,500

Supporting calculations: Indirect materials. Indirect materials. Factory Supplies.

($3,000 ÷ 3,000) or ($4,000 ÷ 4,000) = $1 ($15,000 ÷ 3,000) or ($20,000 ÷ 4,000 = $5 ($4,500 ÷ 3,000) or ($6,000 ÷ 4,000 = $1.50

Ex. 184 Berne, Inc. uses a flexible budget for manufacturing overhead based on machine hours. Variable manufacturing overhead costs per machine hour are as follows: Indirect labor Indirect materials Maintenance Utilities

$5.00 2.50 .80 .30

Fixed overhead costs per month are: Supervision Insurance Property taxes Depreciation

$800 200 300 900

The company believes it will normally operate in a range of 2,000 to 4,000 machine hours per month. Instructions Prepare a flexible manufacturing overhead budget for the expected range of activity using increments of 1,000 machine hours. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 184 (15–20 min.) BERNE, INC. Monthly Flexible Manufacturing Overhead Budget Activity level Machine hours

2,000

3,000

4,000

Variable costs Indirect labor Indirect materials Maintenance Utilities Total variable

$10,000 5,000 1,600 600 17,200

$15,000 7,500 2,400 900 25,800

$20,000 10,000 3,200 1,200 34,400

Fixed costs Supervision Insurance Property taxes Depreciation Total fixed Total costs

800 200 300 900 2,200 $19,400

800 200 300 900 2,200 $28,000

800 200 300 900 2,200 $36,600

Ex. 185 Telemark Production’s budged manufacturing costs for July when production was projected to be 2,000 units appears below: Direct materials $10 per unit Factory depreciation $16,000 Variable overhead 10,000 Direct labor 4,000 Factory supervisory salaries 11,600 Other fixed factory costs 3,000 Instructions What is the total flexible budget manufacturing cost for a month when 2,200 units are produced? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 185 (8–10 min.) Direct materials ($10 × 2,200) Direct labor [($4,000 ÷ 2,000) × 2,200] Variable overhead [($10,000 ÷ 2,000) × 2,200] Factory depreciation—fixed Factory supervisory salaries—fixed Other fixed factory costs Total

$22,000 4,400 11,000 16,000 11,600 3,000 $68,000

Budgetary Control And Responsibility Accounting

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Ex. 186 Webb, Inc. uses a flexible budget for manufacturing overhead based on machine hours. Variable manufacturing overhead costs per machine hour are as follows: Indirect labor Indirect materials Maintenance Utilities

$5.00 2.50 .50 .30

Fixed overhead costs per month are: Supervision Insurance Property taxes Depreciation

$1,200 400 600 1,800

The company believes it will normally operate in a range of 4,000 to 8,000 machine hours per month. During the month of August, 2022, the company incurs the following manufacturing overhead costs: Indirect labor Indirect materials Maintenance Utilities Supervision Insurance Property taxes Depreciation

$28,000 16,200 2,800 1,900 1,440 400 600 1,860

Instructions Prepare a flexible budget report, assuming that the company used 6,000 machine hours during August. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Solution 186 (20–25 min.) WEBB, INC. Manufacturing Overhead Budget Report (Flexible) For the Month Ended August 31, 2022

Variable costs Indirect labor Indirect materials Maintenance Utilities Total variable

Budget at 6,000 hrs.

Actual at 6,000 hrs.

Difference Favorable F Unfavorable U

$30,000 15,000 3,000 1,800 49,800

$28,000 16,200 2,800 1,900 48,900

$2,000 1,200 200 100 900

F U F U F

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

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Solution 186 (Cont’d) Fixed Costs Supervision Insurance Property taxes Depreciation Total fixed Total costs

1,200 400 600 1,800 4,000 $53,800

1,440 400 600 1,860 4,300 $53,200

240 — — 60 300 $ 600

U U F

Ex. 187 Lapp Manufacturing uses flexible budgets to control its selling expenses. Monthly sales are expected to be from $400,000 to $480,000. Variable costs and their percentage relationships to sales are: Sales commissions Advertising Traveling Delivery

6% 4% 5% 1%

Fixed selling expenses consist of sales salaries $80,000 and depreciation on delivery equipment $20,000. Instructions Prepare a flexible budget for increments of $40,000 of sales within the relevant range. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 17, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 187 (17–22 min.) LAPP MANUFACTURING Monthly Flexible Selling Expense Budget Activity level Sales Variable expenses Sales commissions Advertising Traveling Delivery Total variable Fixed expenses Sales salaries Depreciation Total fixed Total costs

$400,000

$440,000

$480,000

$24,000 16,000 20,000 4,000 64,000

$26,400 17,600 22,000 4,400 70,400

$28,800 19,200 24,000 4,800 76,800

80,000 20,000 100,000 $164,000

80,000 20,000 100,000 $170,400

80,000 20,000 100,000 $176,800

Budgetary Control And Responsibility Accounting

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Ex. 188 Cadiz Co. uses flexible budgets to control its selling expenses. Monthly sales are expected to be from $300,000 to $360,000. Variable costs and their percentage relationships to sales are: Sales commissions Advertising Traveling Delivery

5% 4% 7% 1%

Fixed selling expenses consist of sales salaries $40,000 and depreciation on delivery equipment $10,000. The actual selling expenses incurred in February, 2022, by Cadiz are as follows: Sales commissions Advertising Traveling Delivery

$17,200 12,000 23,700 2,400

Fixed selling expenses consist of sales salaries $41,500 and depreciation on delivery equipment $10,000. Instructions Prepare a flexible budget performance report assuming that February sales were $330,000. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 17, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Solution 188 (17–22 min.) CADIZ CO. Selling Expense Budget Report (Flexible) For the Month Ended February 28, 2022

Variable expenses Sales commissions Advertising Traveling Delivery Total variable Fixed expenses Sales salaries Depreciation Total fixed Total expenses

Difference Favorable F Unfavorable U

Budget $330,000

Actual $330,000

$ 16,500 13,200 23,100 3,300 56,100

$ 17,200 12,000 23,700 2,400 55,300

$ 700 1,200 600 900 800

40,000 10,000 50,000 $106,100

41,500 10,000 51,500 $106,800

1,500 U — 1,500 U $ 700 U

U F U F F

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ex. 189 A flexible budget graph for the Assembly Department shows the following: 1. At zero direct labor hours, the total budgeted cost line intersects the vertical axis at $120,000. 2. At normal capacity of 50,000 direct labor hours, the line drawn from the total budgeted cost line intersects the vertical axis at $360,000. Instructions Develop the budgeted cost calculation for the Assembly Department and identify the fixed and variable costs. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 189 (5 min.) Budgeted Costs: Assembly $120,000 + $4.80/direct labor hour. Fixed costs are $120,000. Variable costs are $4.80 per labor hour. ($360,000 – $120,000) ÷ 50,000. Ex. 190 Ace Production Co. has two production departments, Fabricating and Assembling. At a department managers’ meeting, the controller uses flexible budget graphs to explain total budgeted costs. Separate graphs based on direct labor hours are used for each department. The graphs show the following. 1. At zero direct labor hours, the total budgeted cost line and the fixed cost line intersect the vertical axis at $100,000 in the Fabricating Department and $80,000 in the Assembling Department. 2. At normal capacity of 100,000 direct labor hours, the line drawn from the total budgeted cost line intersects the vertical axis at $360,000 in the Fabricating Department and $290,000 in the Assembling Department. Instructions (a) State the total budgeted cost calculation for each department. (b) Compute the total budgeted cost for each department, assuming actual direct labor hours worked were 106,000 and 94,000, in the Fabricating and Assembling Departments, respectively. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Budgetary Control And Responsibility Accounting

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Solution 190 (5 min.) (a) Fabricating Department = $100,000 fixed costs plus unit variable costs of $2.60 per direct labor hour [($360,000 – $100,000)  100,000]. Assembling Department = $80,000 fixed costs plus unit variable costs of $2.10 per direct labor hour [($290,000 – $80,000)  100,000]. (b) Fabricating Department = $100,000 + ($2.60  106,000) = $375,600 Assembling Department = $80,000 + ($2.10  94,000) = $277,400 Ex. 191 Hubbard, Inc.’s static budget at 3,000 units of production includes $12,000 for direct labor, $3,000 for utilities (variable), and total fixed costs of $24,000. Actual production and sales for the year was 9,000 units, with an actual cost of $70,800. Instructions Determine if Hubbard is over or under budget. Ans: N/A, LO: 2, 3, Bloom: AP, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

Solution 191 (8–10 min.) Variable costs: Direct labor Utilities Fixed costs Total costs

3,000 Units

Unit Variable Cost

9,000 Units

$12,000 3,000 15,000 24,000 $39,000

$4.00 1.00

$36,000 9,000 45,000 24,000 $69,000

The company is over budget by $1,800. The flexible budget amount allowed was $69,000, and the company incurred $70,800 of actual costs. Ex. 192 Campbell Clothing produces men’s athletic socks. The following budgeted and actual amounts are for 2022: Cost Direct materials Direct labor Equipment depreciation Indirect labor Indirect materials Rent and insurance

Budget at 5,000 Units $60,000 75,000 5,000 7,500 9,000 12,000

Actual Amounts at 5,800 Units $71,000 86,500 5,000 8,600 9,600 13,000

Instructions Prepare a flexible budget report for Campbell Clothing for the year. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 192 (8–10 min.) CAMPBELL CLOTHING Manufacturing Flexible Budget Report For the Year Ended December 31, 2022 Budget $ 69,600 87,000 5,000 8,700 10,440 12,000 $192,740

Direct materials Direct labor Equipment depreciation Indirect labor Indirect materials Rent and insurance Total costs

Actual $ 71,000 86,500 5,000 8,600 9,600 13,000 $193,700

Differences $1,400 U 500 F 0 100 F 840 F 1,000 U $ 960 U

Ex. 193 Data concerning manufacturing overhead for Wilson Industries are presented below. The Mixing Department is a cost center. An analysis of the overhead costs reveals that all variable costs are controllable by the manager of the Mixing Department and that 50% of supervisory costs are controllable at the department level. The flexible budget calculation and the cost and activity for the months of July and August are as follows: Flexible Budget per Direct Labor Hour Actual Costs and Activity July August Direct labor hours 6,000 7,000 Overhead costs Variable Indirect materials $3.50 $ 20,500 $ 25,100 Indirect labor 6.00 39,500 40,700 Factory supplies 1.00 7,600 8,200 Fixed Depreciation $20,000 15,000 15,000 Supervision 25,000 23,000 26,000 Property taxes 10,000 12,000 12,000 Total costs $117,600 $127,000 Instructions (a) Prepare the responsibility reports for the Mixing Department for each month. (b) Comment on the manager’s performance in controlling costs during the two month period. Ans: N/A, LO: 3, Bloom: AN, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Budgetary Control And Responsibility Accounting

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Solution 193 (20–25 min.) (a)

WILSON INDUSTRIES Mixing Department Manufacturing Overhead Cost Responsibility Report For the Months of July and August

Controllable Cost Indirect materials Indirect labor Factory supplies Supervision Total costs (b)

Budget 21,000 36,000 6,000 12,500 75,500

July Actual 20,500 39,500 7,600 11,500 79,100

Difference 500 F 3,500 U 1,600 U 1,000 F 3,600 U

Budget 24,500 42,000 7,000 12,500 86,000

August Actual 25,100 40,700 8,200 13,000 87,000

Difference 600 U 1,300 F 1,200 U 500 U 1,000 U

The manager did a better job of controlling costs in August ($1,000 U) than in July ($3,600 U).

Ex. 194 Strickland Corp.’s manufacturing overhead budget for the first quarter of 2022 contained the following data: Variable Costs Indirect materials Indirect labor Utilities Maintenance

$40,000 24,000 20,000 12,000

Fixed Costs Supervisor’s salary Depreciation Property taxes

$80,000 16,000 8,000

Actual variable costs for the first quarter were: Indirect materials Indirect labor Utilities Maintenance

$37,200 26,400 21,000 10,600

Actual fixed costs were as expected except for property taxes which were $9,000. All costs are considered controllable by the department manager except for the supervisor’s salary. Instructions Prepare a manufacturing overhead responsibility report for the first quarter. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

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Solution 194 (15–20 min.) STRICKLAND CORP. Manufacturing Overhead Responsibility Report For the Quarter Ended March 31, 2022 Controllable Costs Indirect materials Indirect labor Utilities Maintenance Depreciation Property taxes Total costs

Budget $ 40,000 24,000 20,000 12,000 16,000 8,000 $120,000

Actual $ 37,200 26,400 21,000 10,600 16,000 9,000 $120,200

Difference $2,800 F 2,400 U 1,000 U 1,400 F — 1,000 U $ 200 U

Ex. 195 The Deluxe Division, a profit center of Riley Manufacturing Company, reported the following data for the first quarter of 2022: Sales Variable costs Controllable direct fixed costs Noncontrollable direct fixed costs Indirect fixed costs

$9,000,000 6,300,000 1,200,000 530,000 300,000

Instructions (a) Prepare a responsibility report for the manager of the Deluxe Division. (b) What is the best measure of the manager’s performance? Why? (c) How would the responsibility report differ if the division was an investment center? Ans: N/A, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Solution 195 (15–20 min.) (a)

RILEY MANUFACTURING COMPANY Deluxe Division Management Responsibility Report For the Quarter Ended March 31, 2022 Sales ........................................................................................... Variable costs .............................................................................. Contribution margin ..................................................................... Controllable fixed costs................................................................ Controllable margin......................................................................

$9,000,000 6,300,000 2,700,000 1,200,000 $1,500,000

(b)

Controllable margin is the best measure of the manager’s performance because this amount equals the excess of controllable revenues over controllable costs.

(c)

For an investment center, the responsibility report would also show the return on investment for the period.

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Ex. 196 Danner Kicks Co. has three divisions which are operated as profit centers. Actual operating data for the divisions listed alphabetically are as follows. Operating Data

Women’s Shoes

Men’s Shoes

Children’s Shoes

Contribution margin

$280,000

(3)

$220,000

Controllable fixed costs Controllable margin

130,000 (1)

(4) $ 90,000

(5) 96,000

Sales Variable costs

800,000 (2)

480,000 330,000

(6) 250,000

Instructions (a) Compute the missing amounts. Show computations. (b) Prepare a responsibility report for the Women’s Shoe Division assuming (1) the data are for the month ended June 30, 2022, and (2) all actual data equal budgeted data except variable costs which are $20,000 over budget. Ans: N/A, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Solution 196 (10 min.) (a) (1) Controllable margin ($280,000 – $130,000)

$150,000

(2) Variable costs ($800,000 – $280,000)

520,000

(3) Contribution margin ($480,000 – $330,000)

150,000

(4) Controllable fixed costs ($150,000 – $90,000) (5) Controllable fixed costs ($220,000 – $96,000) (6) Sales ($250,000 + $220,000)

60,000 124,000 470,000

(b) DANNER KICKS CO. Women’s Shoe Division Responsibility Report For the Month Ended June 30, 2022

Budget $800,000 500,000 300,000 130,000 $170,000

Sales Variable costs Contribution margin Controllable fixed costs Controllable margin

Actual $800,000 520,000 280,000 130,000 $150,000

Difference Favorable F Unfavorable U $ 0 20,000 U 20,000 U 0 $20,000 U

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

23- 54 Ex. 197

The Real Estate Products Division of McKenzie Co. is operated as a profit center. Sales for the division were budgeted for 2022 at $1,250,000. The only variable costs budgeted for the division were cost of goods sold ($610,000) and selling and administrative ($80,000). Fixed costs were budgeted at $130,000 for cost of goods sold, $120,000 for selling and administrative costs, and $95,000 for noncontrollable fixed costs. Actual results for these items were as follows: Sales Cost of goods sold Variable Fixed Selling and administrative Variable Fixed Noncontrollable fixed

$1,175,000 545,000 140,000 82,000 100,000 105,000

Instructions (a) Prepare a responsibility report for the Real Estate Products Division for 2022. (b) Compute ROI assuming the division is an investment center, and average operating assets were $1,200,000. Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Solution 197 (15 min.) (a) MCKENZIE CO. Real Estate Products Division Responsibility Report 2022 Sales Variable costs Cost of goods sold Selling and administrative Total Contribution margin Controllable fixed costs Cost of goods sold Selling and administrative Total Controllable margin (b)

$308,000/ $1,200,000 = 25.7%

Budget $1,250,000

Actual $1,175,000

Difference $75,000 U

610,000 80,000 690,000 560,000

545,000 82,000 627,000 548,000

65,000 F 2,000 U 63,000 F 12,000 U

130,000 120,000 250,000 $310,000

140,000 100,000 240,000 $308,000

10,000 U 20,000 F 10,000 F $ 2,000 U

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Ex. 198 The Pacific Division of Henson Industries reported the following data for the current year: Sales Variable costs Controllable fixed costs Average operating assets

$4,000,000 2,600,000 800,000 5,000,000

Top management is unhappy with the investment center’s return on investment. It asks the manager of the Pacific Division to submit plans to improve ROI in the next year. The manager believes it is feasible to consider the following independent courses of action. 1. Increase sales by $400,000 with no change in the contribution margin percentage. 2. Reduce variable costs by $120,000. 3. Reduce average operating assets by 4% Instructions (a) Compute the return on investment for the current year. (b) Compute the ROI under each of the proposed courses of action. (Round to one decimal.) Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Solution 198 (10 min.) (a) Controllable margin = ($4,000,000 – $2,600,000 – $800,000) = $600,000 ROI = $600,000 ÷ $5,000,000 = 12% (b)

1. Contribution margin percentage is 35%, or ($1,400,000 ÷ $4,000,000) Increase in controllable margin = $400,000 × 35% = $140,000 ROI = ($600,000 + $140,000) ÷ $5,000,000 = 14.8% 2. ($600,000 + $120,000) ÷ $5,000,000 = 14.4% 3. $600,000 ÷ ($5,000,000 – $200,000) = 12.5%

Ex. 199 The Medford Burkett Company uses a responsibility reporting system to measure the performance of its three investment centers: Planes, Taxis, and Limos. Segment performance is measured using a system of responsibility reports and return on investment calculations. The allocation of resources within the company and the segment managers’ bonuses are based in part on the results shown in these reports. Recently, the company was the victim of a computer virus that deleted portions of the company’s accounting records. This was discovered when the current period’s responsibility reports were being prepared. The actual operating results appeared as follows. Service revenue Variable costs Contribution margin Controllable fixed costs Controllable margin Average operating assets Return on investment .

Planes $(3) 5,000,000 (2) 1,500,000 (1) 25,000,000 12%

Taxis $450,000 (6) 180,000 (5) 70,000 (4) 10%

Limos $(9) 320,000 380,000 (8) 176,000 1,600,000 (7)

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

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Ex. 199 (Cont’d) Instructions Determine the missing pieces of information above. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Solution 199 (10 min.) Planes: (1) ROI = Controllable margin ÷ Average operating assets 12% = Controllable margin ÷ $25,000,000 Controllable margin = $25,000,000 × 12% = $3,000,000 (2) Contribution margin = Controllable margin + Controllable fixed costs = $3,000,000 + $1,500,000 = $4,500,000 (3) Service revenue = Contribution margin + Variable costs = $4,500,000 + $5,000,000 = $9,500,000 Taxis: (4) ROI = Controllable margin ÷ Average operating assets 10% = $70,000 ÷ Average operating assets Average operating assets = $70,000 ÷ 10% = $700,000 (5) Controllable margin = Contribution margin – Controllable fixed costs $70,000 = $180,000 – Controllable fixed costs Controllable fixed costs = $180,000 – $70,000 = $110,000 (6) Contribution margin = Service revenue – Variable costs $180,000 = $450,000 – Variable costs Variable costs = $450,000 – $180,000 = $270,000 Limos: (7) ROI = Controllable margin ÷ Average operating assets = $176,000 ÷ $1,600,000 = 11% (8) Controllable margin = Contribution margin – Controllable fixed costs $176,000 = $380,000 – Controllable fixed costs Controllable fixed costs = $380,000 – $176,000 = $204,000 (9) Contribution margin = Service revenue – Variable costs $380,000 = Service revenue – $320,000 Service revenue

= $380,000 + $320,000 = $700,000

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Ex. 200 Perez Corp. reported the following: Beginning of year operating assets End of year operating assets Contribution margin Sales Controllable fixed costs

$3,200,000 3,000,000 1,000,000 5,000,000 643,000

Its required return is 10%. Instructions Compute the company’s ROI. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Solution 200 (3 min.) ($1,000,000 – $643,000) ÷ [($3,200,000 + $3,000,000) ÷ 2] = 11.5% Ex. 201 Lombard, Inc. has two investment centers and has developed the following information: Departmental controllable margin Average operating assets Sales ROI

Department A $120,000 (1) 800,000 10%

Department B (2) $400,000 250,000 12%

Instructions Answer the following questions about Department A and Department B. 1.

What was the amount of Department A’s average operating assets? $

What was the amount of Department B’s controllable margin? $

If Department B is able to reduce its operating assets by $100,000, Department B’s new ROI would be .

If Department A is able to increase its controllable margin by $60,000 as a result of reducing variable costs, Department A’s new ROI would be .

. .

Ans: N/A, LO: 4, Bloom: AN, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Solution 201 (8–12 min.) 1. 2. 3. 4.

$1,200,000 ($120,000 ÷ .10) $48,000 ($400,000 × .12) 16% [$48,000 ÷ ($400,000 – $100,000)] 15% [($120,000 + $60,000) ÷ $1,200,000]

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

23- 58 Ex. 202

The Atlantic Division of Stark Productions Company reported the following results for 2022: Sales Variable costs Controllable fixed costs Average operating assets

$4,000,000 3,200,000 300,000 2,500,000

Management is considering the following independent alternative courses of action in 2023 in order to maximize the return on investment for the division. 1. Reduce controllable fixed costs by 10% with no change in sales or variable costs. 2. Reduce average operating assets by 10% with no change in controllable margin. 3. Increase sales $500,000 with no change in the contribution margin percentage. Instructions (a) Compute the return on investment for 2022. (b) Compute the expected return on investment for each of the alternative courses of action. Ans: N/A, LO: 4, Bloom: AN, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Solution 202 (15–20 min.) (a)

Controllable margin Return on investment = ———————————— Average operating assets $500,000 2022 ROI = —————— = 20% $2,500,000

(b)

$530,000 (a) 1. ——————— = 21.2% $2,500,000 $500,000 2. ———————— = 22.2% $2,250,000 (b) $600,000 (c) 3. ——————— = 24% $2,500,000 (a)

$500,000 + ($300,000 × 10%) = $530,000.

(b)

$2,500,000 – ($2,500,000 × .10) = $2,250,000.

(c)

$4,000,000 – $3,200,000 Contribution margin 20% (———————————— ); $4,000,000 $500,000 + ($500,000 × 20%) = $600,000. .

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Ex. 203 Data for the following subsidiaries of Olive Manufacturing, which are operated as investment centers, are as follows: Fleming Company Oak Company Sales $3,000,000 $2,000,000 Controllable margin (1) (3) Average operating assets (2) 4,000,000 Contribution margin 1,200,000 800,000 Controllable fixed costs 500,000 200,000 Return on Investment 10% (4) Instructions Compute the missing amounts using the ROI calculation. Ans: N/A, LO: 4, Bloom: AN, Difficulty: Moderate, Min: 9, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Solution 203 (9–14 min.) (1) (2) (3) (4)

Controllable margin ($1,200,000 – $500,000) Average operating assets $700,000 ÷ .10) Controllable margin ($800,000 – $200,000) ROI ($600,000 ÷ $4,000,000)

= $700,000 = $7,000,000 = $600,000 = 15%

Ex. 204 The data for an investment center is given below. 1/1/22 $ 300,000 3,000,000 250,000 1,200,000

Current assets Plant assets Idle plant assets Land held for future use

12/31/22 $ 700,000 4,000,000 330,000 1,200,000

The controllable margin is $760,000. Instructions What is the return on investment for the center for 2022? Ans: N/A, LO: 4, Bloom: AN, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Solution 204 (4–5 min.) ROI = Controllable margin ÷ Average operating assets Plant assets Average current assets

($3,000,000 + $4,000,000) ÷ 2 ($300,000 + $700,000) ÷ 2

$3,500,000 500,000 $4,000,000

Note: Idle plant assets and land held for future use are not included in average operating assets. ROI = $760,000 ÷ $4,000,000 = 19%

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

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COMPLETION STATEMENTS 205. The use of budgets in controlling operations is known as

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

206. A major aspect of budgetary control is the use of budget reports that compare with . Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

207. In

analyzing

differences from planned objectives, or it could decide to modify

management

may

take

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

208. The master budget is a budgeted activity level.

budget which is based on operating at one

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

209. A

budget projects budget data for various levels of activity.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

210. Total costs will be the same on the master budget and on a flexible budget which reflects the actual level of activity. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

211. Under accounting, the evaluation of a manager’s performance is based on the costs and revenues directly under that manager’s control. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

212. A cost is at a given level of managerial responsibility if a manager has the authority to incur the cost in a given time period. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

213. In general, costs while costs that are .

are

directly by the level of responsibility are to the responsibility level

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

214. Responsibility centers are classified into three types: (1) (2) and, (3) . Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

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215. The primary basis for evaluating the performance of a manager of an investment center is . Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

216. Return on investment is calculated by dividing .

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Answers to Completion Statements 205. 206. 207. 208. 209. 210.

budgetary control actual results, planned objectives corrective action, future plans static flexible fixed

211. responsibility 212. controllable 213. incurred, controllable, allocated, noncontrollable 214. cost centers, profit centers, investment centers 215. return on investment (ROI) 216. controllable margin, average operating assets

MATCHING 217. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E. F.

Budgetary control Static budget Flexible budget Responsibility accounting Controllable costs Management by exception

G. H. I. J. K. L.

Responsibility reporting system Return on Investment Profit center Investment center Indirect fixed costs Direct fixed costs

1. The review of budget reports by top management directed entirely or primarily to significant differences between actual results and planned objectives 2. A part of management accounting that involves accumulating and reporting revenues and costs on the basis of the individual manager who has the authority to make the dayto-day decisions about the items 3. The preparation of reports for each level of responsibility shown in the company’s organization chart 4. A projection of budget data at one level of activity 5. Costs that a manager has the authority to adjust within a given period of time 6. The use of budgets to control operations 7. A projection of budget data for various levels of activity 8. A responsibility center that incurs costs, generates revenues, and has control over the investment funds available for use

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

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9. Costs that relate specifically to a responsibility center and are incurred for the sole benefit of the center 10. A responsibility center that incurs costs and also generates revenues. 11. Costs which are incurred for the benefit of more than one profit center 12. A measure of the profitability of an investment center computed by dividing controllable margin (in dollars) by average operating assets Ans: N/A, LO: 1–4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation, Performance Measurement

Answers to Matching 1. 2. 3. 4. 5. 6.

F D G B E A

7. 8. 9. 10. 11. 12.

C J L I K H

SHORT-ANSWER ESSAY QUESTIONS S-A E 218 Explain what is meant by responsibility reporting and the role of management by exception in such a system. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Communication, IMA: Budget Preparation

Solution 218 The system of responsibility reporting begins with the lowest level of responsibility and moves up through each level. At the lowest level each manager receives detailed information concerning the controllable costs for which they are responsible. At higher levels of responsibility the detail of the lower levels may be omitted but the report encompasses all the areas for which the higher level has responsibility. For example, a plant manager will receive reports concerning the controllable costs of each of the plant departments. Management by exception is possible in such a system because if management at the higher levels of responsibility identifies a significant variance, they can receive detailed reports for each lower level of responsibility. This allows management to investigate causes and remedies for variances as they feel necessary.

Budgetary Control And Responsibility Accounting

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S-A E 219 Brad Ventura is confused about how a flexible budget is prepared. Identify the steps for Brad. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Communication, IMA: Budget Preparation

Solution 219 The steps in preparing a flexible budget are: (1) Identify the activity index and the relevant range of activity. (2) Identify the variable costs and determine the budgeted variable cost per unit of activity for each cost. (3) Identify the fixed costs and determine the budgeted amount for each cost. (4) Prepare the budget for selected increments of activity within the relevant range. S-A E 220 Managers are motivated to accomplish objectives if they feel that their efforts will be fairly evaluated. Explain why an organization may use different bases for evaluating the performance of managers of different types of responsibility centers. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Performance Measurement

Solution 220 Because a manager should only be evaluated based on the performance results of matters that are controllable by the manager, it is necessary to use different bases for evaluation. An investment center manager can control the investment funds available as well as costs and revenues. Return on investment is therefore an appropriate basis for evaluation. A profit center, however, controls only revenues and expenses but not investment, so controllable margin is a more appropriate basis relating only to the areas controllable by the profit center. Similarly, because only costs are controllable for a cost center, such a center is evaluated only on the basis of its controllable costs. S-A E 221 What is responsibility accounting? Explain the purpose of responsibility accounting. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Communication, IMA: Performance Measurement

Solution 221 Responsibility accounting is a method of controlling operations that involves accumulating and reporting costs (and revenues, where relevant) on the basis of the manager who has the authority to make the day-to-day decisions about the items. The purpose of responsibility accounting is to evaluate a manager’s performance on the basis of matters directly under that manager’s control.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

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S-A E 222 (Ethics) Dixon Corporation evaluates its managers based on ROI. Kathryn Bricker and Lindsey Allan, managers of the electronics and housewares departments respectively, have recently suffered from declining profits in their departments. Over lunch, they discuss the problem and how they could improve performance. Most of the discussion centers around ways to increase sales. Near the end of the lunch period, however, Lindsey remarks that there are two components to consider, and that they have considered only one. She wonders whether there is some way to reduce investment, and by decreasing the denominator of the ROI fraction, improve the final result. Back at work, Kathryn continues to mull over Lindsey’s remarks. She decides to pursue the matter further, and before the end of the quarter she has sold quite a bit of older equipment and replaced it with equipment obtained with a short-term cancellable lease. Her performance, measured by ROI, is markedly improved, although sales continue to be disappointing. Required: 1. Who are the stakeholders in this situation? 2. Is Kathryn’s action ethical? Briefly explain. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, Ethics AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Communication, Ethical Conduct, IMA: Performance Measurement, Business Applications

Solution 222 1. The stakeholders include Kathryn Bricker Lindsey Allan managers of Dixon Corporation shareholders of Dixon Corporation 2. Kathryn’s action is probably not ethical. It appears that she has replaced equipment that had been purchased only because such a move would improve her ROI. Of course, it is possible that the leased equipment will allow her department to function better, resulting in a benefit for the company. Any action to promote one’s own benefit at the expense of the company’s welfare is unethical. S-A E 223

(Communication)

Eiger Manufacturing manufactures circuit boards for computer-controlled appliances for the home. The sales have been very volatile, sometimes stressing the plant’s capacity, and sometimes depressingly slow. During a recent slow period, Nathan Jones, a production supervisor, complained to Janet Smith, accounting manager, about the flexible budget. “I try as hard as I can to meet the budget,” he says, “and then I find out that just meeting the budget’s not good enough. Last month, when we sold 8,000 units, I was $10,000 under my budget, and then you all blow me out of the water with your report that I actually was $5,000 over, because sales were slow. I thought this responsibility accounting business was supposed to mean we are held accountable just for things we can control. How do we control sales? At the beginning of the year, you gave us all targets. Mine says that for an average monthly sales volume of 10,000 units, I should spend about $82,000. I spend less, and get an unfavorable budget report. What gives?”

Budgetary Control And Responsibility Accounting

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Required: Write a short memo to respond to Mr. Jones. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Process and Resource Management Perspectives, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Communication, IMA: Budget Preparation, Performance Measurement

Solution 223 TO:

Nathan Jones

FROM: Janet Smith RE:

Budget results

I appreciate your coming to me with your questions about the budget. I understand that the new procedures can be frustrating, especially when you receive an unfavorable report that you were not expecting. Actually, the flexible budget does mean that you are held accountable only for the costs that you can control. Last month, we calculated the cost of producing 8,000 units that were actually sold (and not the 10,000 that were estimated to be sold). Your costs were greater than that, although still less than the amount you would have been allowed had the full 10,000 been sold. Please check the individual items on your budget report. We noted which ones exceeded the budget. You can then focus attention on those items for cost control. Please contact the Accounting Department if you have further questions. (signed)

CHAPTER 24 STANDARD COSTS AND BALANCED SCORECARD CHAPTER LEARNING OBJECTIVES 1. Describe standard costs. Both standards and budgets are predetermined costs. The primary difference is that a standard is a unit amount, whereas a budget is a total amount. A standard may be regarded as the budgeted cost per unit of product. Standard costs offer a number of advantages. They (a) facilitate management planning, (b) promote greater economy (c) are useful in setting selling prices, (d) contribute to management control, (e) permit “management by exception,” and (f) simplify the costing of inventories and reduce clerical costs. The direct materials price standard should be based on the delivered cost of raw materials plus an allowance for receiving and handling. The direct materials quantity standard should establish the required quantity plus an allowance for waste and spoilage. The direct labor price standard should be based on current wage rates and anticipated adjustments such as COLAs. It also generally includes payroll taxes and employee benefits. Direct labor quantity standards should be based on required production time plus an allowance for rest periods, cleanup, machine setup, and machine downtime. For manufacturing overhead, a standard predetermined overhead rate is used. It is based on an expected standard activity index such as standard direct labor hours or standard machine hours. 2. Determine direct materials variances. The equations for direct materials variances are as follows: (Actual quantity × Actual price) – (Standard quantity × Standard price) = Total materials variance (Actual quantity × Actual price) – (Actual quantity × Standard price) = Materials price variance (Actual quantity × Standard price) – (Standard quantity × Standard price) = Materials quantity variance

3. Determine direct labor and total manufacturing overhead variances. The equations for the direct labor variances are as follows: (Actual hours × Actual rate) – (Standard hours × Standard rate) = Total labor variance (Actual hours × Actual rate) – (Actual hours × Standard rate) = Labor price variance (Actual hours × Standard rate) – (Standard hours × Standard rate) = Labor quantity variance

The equation for the total manufacturing overhead variance is as follows: (Actual overhead) – (Overhead applied at standard hours allowed) = Total overhead variance

4. Prepare variance reports and balanced scorecards. Variances are reported to management in variance reports. The reports facilitate management by exception by highlighting significant differences. Under a standard costing system, an income statement prepared for management will report cost of goods sold at standard cost and then disclose each variance separately, The balanced scorecard incorporates financial and nonfinancial measures in an integrated system that links performance measurement and a company’s strategic goals. It employs four perspectives: financial, customer, internal process, and learning and growth. Objectives are set within each of these perspectives that link to objectives within the other perspectives.

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

5. Identify the features of a standard cost accounting system. In a standard cost accounting system, companies journalize and post standard costs, and they maintain separate variance accounts in the ledger.

6. Compute overhead controllable and volume variances. The total overhead variance is generally analyzed through a price variance and a quantity variance. The name usually given to the price variance is the overhead controllable variance. The quantity variance is referred to as the overhead volume variance.

TRUE-FALSE STATEMENTS 1.

Inventories cannot be valued at standard cost in financial statements.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Standard cost is the industry average cost for a particular item.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

A standard is a unit amount while a budget is a total amount.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Standard costs may be incorporated into the accounts in the general ledger.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

An advantage of using standard costs is that it simplifies costing of inventories and reduces clerical costs.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Setting standard costs is relatively simple because it is done entirely by accountants.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Decision Modeling, AICPA PC: None, IMA: Cost Management

Normal standards should be rigorous but attainable.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Actual costs that vary from standard costs can indicate inefficiencies.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Ideal standards will generally result in favorable variances.

Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

10.

Normal standards incorporate expected contingencies of production into the standards.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

11.

Once set, normal standards should not be changed.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Standard Costs and Balanced Scorecard 12.

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In developing a standard cost for direct materials, a price element and a quantity element must be considered.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

13.

Another name for the direct labor price standard is the direct labor efficiency standard.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

14.

The standard activity index for the standard predetermined overhead rate can be based on direct labor hours or machine hours .

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

15.

Standard cost cards are the subsidiary ledger for the Work in Process account in a standard cost system.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

16.

A variance is the difference between actual costs and standard costs.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

17.

If actual costs are less than standard costs, the variance is favorable.

Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

18.

A materials quantity variance is calculated as the difference between the standard direct materials price and the actual direct materials price multiplied by the actual quantity of direct materials used.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

19.

An unfavorable labor quantity variance indicates that the actual number of direct labor hours worked was greater than the number of direct labor hours that should have been worked for the output produced.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

20.

The standard cost plus the price variance plus the quantity variance equals the budgeted cost.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

21.

The overhead controllable variance relates primarily to fixed overhead costs.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

22.

The overhead volume variance relates only to fixed overhead costs.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

23.

If production exceeds normal capacity, the overhead volume variance will be favorable.

Ans: T, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

24.

The production department may be responsible for a direct materials price variance. .

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

25.

The starting point for determining the causes of an unfavorable materials price variance is the purchasing department.

Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

26.

The total overhead variance is the difference between actual overhead costs and overhead costs applied to production.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

27.

Variance analysis facilitates the principle of "management by exception."

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

28.

A credit to a Materials Quantity Variance account indicates that the actual quantity of direct materials used was greater than the standard quantity of direct materials allowed.

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

29.

A standard cost system may be used with a job order cost system but not with a process cost system.

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

30.

A debit to the Overhead Volume Variance account indicates that the standard hours allowed for the output produced was greater than the standard hours at normal capacity.

Ans: F, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

31.

Conceptually, standards and budgets are essentially the same.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

32.

Standards may be useful in setting selling prices for finished goods.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

33.

The materials price standard is based on the purchasing department's best estimate of the cost of raw materials.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

34.

The materials price variance is normally caused by the production department.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

35.

The use of an inexperienced worker instead of an experienced employee can result in a favorable labor price variance but an unfavorable quantity variance.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

36.

In using variance reports, top management normally looks carefully at every variance.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

37.

The use of standard costs in inventory costing is prohibited in financial statements. .

Standard Costs and Balanced Scorecard

24 - 5

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

38.

The overhead controllable variance is the difference between the actual overhead costs incurred and the budgeted costs for the standard hours allowed.

Ans: T, LO: 6 Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

MULTIPLE CHOICE QUESTIONS 39.

What is a standard cost? a. The total number of units times the budgeted amount expected b. Any amount that appears on a budget c. The total amount that appears on the budget for product costs d. The amount management thinks should be incurred to produce a good or service

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

40.

A standard cost is a. the cost paid for a group of similar products. b. the average cost in an industry. c. a predetermined cost. d. the historical cost of producing a product last year.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

41.

The difference between a budget and a standard is that a. a budget expresses what costs were while a standard expresses what costs should be. b. a budget expresses management's plans while a standard reflects what actually happened. c. a budget expresses a total amount while a standard expresses a unit amount. d. standards are excluded from the cost accounting system while budgets are generally incorporated into the cost accounting system.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

42.

Standard costs may be used by a. universities. b. governmental agencies. c. charitable organizations. d. All of these answers are correct.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

43.

Which of the following statements is false? a. A standard cost is more accurate than a budgeted cost. b. A standard is a unit amount. c. Conceptually, standards and budgets are essentially the same. d. The standard cost of a product is equivalent to the budgeted cost per unit of product.

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

24 - 6 44.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e Budget data are not journalized in cost accounting systems with the exception of a. applied manufacturing overhead. b. direct labor budgets. c. direct materials budgets. d. cash budget data.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Budget Preparation

45.

Inventories may be reported in the financial statements at a. budgeted costs. b. standard costs. c. both budgeted and standard costs. d. None of these answers are correct.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

46.

A standard differs from a budget because a standard a. is a predetermined cost. b. contributes to management planning and control. c. is a unit amount. d. none of these; a standard does not differ from a budget.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

47.

Marburg Co. expects direct materials cost of $6 per unit for 100,000 units (a total of $600,000 of direct materials costs). Marburg’s standard direct materials cost and budgeted direct materials cost is Standard Budgeted a. $6 per unit $600,000 per year b. $6 per unit $6 per unit c. $600,000 per year $6 per unit d. $600,000 per year $600,000 per year

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

48.

The use of standard costs a. makes employees less “cost-conscious.” b. provides a basis for evaluating cost control. c. makes management by exception more difficult. d. increases clerical costs.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

49.

The use of standard costs a. can make management planning more difficult. b. promotes greater economy. c. does not help in setting prices. d. weakens management control.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

50.

If standard costs are incorporated into the accounting system, a. it may simplify the costing of inventories and reduce clerical costs. b. it can eliminate the need for the budgeting process. c. the accounting system will produce information which is less relevant than the historical cost accounting system. d. approval of the shareholders may be required. .

Standard Costs and Balanced Scorecard

24 - 7

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

51.

Standard costs a. can simplify costing of inventories. b. can help in setting prices. c. are the current budgeted cost per unit. d. All of these answers are correct.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

52.

Which of the following statements about standard costs is false? a. Properly set standards should promote efficiency. b. Standard costs facilitate management planning. c. Standards should not be used in "management by exception." d. Standard costs can simplify the costing of inventories.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

53.

Which of the following is not considered an advantage of using standard costs? a. Standard costs can reduce clerical costs. b. Standard costs can be useful in setting prices for finished goods. c. Standard costs can be used as a means of finding fault with performance. d. Standard costs can make employees "cost-conscious."

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

54.

If a company is concerned with the potential negative effects of establishing standards, it should a. set loose standards that are easy to fulfill. b. offer wage incentives to those meeting standards. c. not employ any standards. d. set tight standards in order to motivate people.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

55.

A standard which represents an efficient level of performance that is attainable under expected operating conditions is called a(n) a. ideal standard. b. loose standard. c. tight standard. d. normal standard.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

56.

Ideal standards a. are rigorous but attainable. b. are the standards generally used in a master budget. c. reflect optimal performance under perfect operating conditions. d. will always motivate employees to achieve the maximum output.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

24 - 8 57.

The final decision as to what standard costs should be is the responsibility of a. the quality control engineer. b. the managerial accountants. c. the purchasing agent. d. management.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

58.

The labor time requirements for standards may be determined by the a. sales manager. b. product manager. c. industrial engineers. d. payroll department manager.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

59.

The two levels at which standards may be set are a. normal and fully efficient. b. normal and ideal. c. ideal and less efficient. d. fully efficient and fully effective.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

60.

The is the most rigorous level of standard. a. normal standard b. realistic standard c. ideal standard d. conceivable standard

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

61.

Most companies that use standards set them at a. the normal level. b. a conceivable level. c. the ideal level. d. last year's level.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

62.

A managerial accountant 1. does not participate in the standard setting process. 2. provides knowledge of cost behaviors in the standard setting process. 3. provides input of historical costs to the standard setting process. a. b. c. d.

1 2 3 2 and 3

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Standard Costs and Balanced Scorecard 63.

24 - 9

The cost of freight-in a. is included in the standard cost of direct materials. b. is considered a selling expense. c. should have a separate standard apart from direct materials. d. should not be included in a standard cost system.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

64.

The direct materials quantity standard would not be expressed in a. pounds. b. barrels. c. dollars. d. board feet.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

65.

The direct materials quantity standard should a. exclude unavoidable waste. b. exclude quality considerations. c. allow for normal spoilage. d. always be expressed as an ideal standard.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

66.

The direct labor quantity standard is sometimes called the direct labor a. volume standard. b. effectiveness standard. c. efficiency standard. d. quality standard.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

67.

A manufacturing company would include the time needed for setup and downtime in their direct a. materials price standard. b. materials quantity standard. c. labor price standard. d. labor quantity standard.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

68.

An allowance for spoilage is part of the direct a. materials price standard. b. materials quantity standard. c. labor price standard. d. labor quantity standard.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

24 - 10 69.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e The total standard cost to produce one unit of product is shown a. at the bottom of the income statement. b. at the bottom of the balance sheet. c. on the standard cost card. d. in the Work in Process Inventory account.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

70.

An unfavorable materials quantity variance would occur if a. more materials were purchased than were used. b. actual pounds of materials used were less than the standard pounds allowed. c. actual labor hours used were greater than the standard labor hours allowed. d. actual pounds of materials used were greater than the standard pounds allowed.

Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

71.

Oxnard Industries produces a product that requires 2.6 pounds of materials per unit. The allowance for waste and spoilage per unit is .3 pounds and .1 pounds, respectively. The purchase price is $2 per pound, but a 2% discount is usually taken. Freight costs are $.10 per pound, and receiving and handling costs are $.07 per pound. The hourly wage rate is $12.00 per hour, but a raise which will average $.30 will go into effect soon. Payroll taxes are $1.20 per hour, and employee benefits average $2.40 per hour. Standard production time is 1 hour per unit, and the allowance for rest periods and setup is .2 hours and .1 hours, respectively. The standard direct materials price per pound is a. $1.96. b. $2.00. c. $2.13 d. $2.17

Ans: C, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($2.00 x .98) + .10 + .07 = $2.13 ((Purchase price per pound x (1- Discount Rate)) +Freight costs per pound + Receiving and handling costs per pound = Standard direct materials price per pound)

72.

Oxnard Industries produces a product that requires 2.6 pounds of materials per unit. The allowance for waste and spoilage per unit is .3 pounds and .1 pounds, respectively. The purchase price is $2 per pound, but a 2% discount is usually taken. Freight costs are $.10 per pound, and receiving and handling costs are $.07 per pound. The hourly wage rate is $12.00 per hour, but a raise which will average $.30 will go into effect soon. Payroll taxes are $1.20 per hour, and employee benefits average $2.40 per hour. Standard production time is 1 hour per unit, and the allowance for rest periods and setup is .2 hours and .1 hours, respectively. The standard direct materials quantity per unit is a. 2.6 pounds. b. 2.7 pounds. c. 2.9 pounds. d. 3.0 pounds.

Ans: D, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 2.6 + .3 + .1 = 3.0 pounds (Pounds of Materials per unit + Waste per unit + Spoilage per unit = Standard direct materials quantity per unit)

Standard Costs and Balanced Scorecard 73.

24 - 11

Oxnard Industries produces a product that requires 2.6 pounds of materials per unit. The allowance for waste and spoilage per unit is .3 pounds and .1 pounds, respectively. The purchase price is $2 per pound, but a 2% discount is usually taken. Freight costs are $.10 per pound, and receiving and handling costs are $.07 per pound. The hourly wage rate is $12.00 per hour, but a raise which will average $.30 will go into effect soon. Payroll taxes are $1.20 per hour, and employee benefits average $2.40 per hour. Standard production time is 1 hour per unit, and the allowance for rest periods and setup is .2 hours and .1 hours, respectively. The standard direct labor rate per hour is a. $ 12.00. b. $ 12.30. c. $15.60. d. $15.90.

Ans: D, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $12 + $.30 + $1.20 + $2.40 = $15.90 (Hourly wage rate + raise per hour + payroll taxes per hour + employee benefits per hour = standard direct labor rate per hour)

74.

Oxnard Industries produces a product that requires 2.6 pounds of materials per unit. The allowance for waste and spoilage per unit is .3 pounds and .1 pounds, respectively. The purchase price is $2 per pound, but a 2% discount is usually taken. Freight costs are $.10 per pound, and receiving and handling costs are $.07 per pound. The hourly wage rate is $12.00 per hour, but a raise which will average $.30 will go into effect soon. Payroll taxes are $1.20 per hour, and employee benefits average $2.40 per hour. Standard production time is 1 hour per unit, and the allowance for rest periods and setup is .2 hours and .1 hours, respectively. The standard direct labor hours per unit is a. 1 hour. b. 1.1 hours. c. 1.2 hours. d. 1.3 hours.

Ans: D, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 1.0 + .2 + .1 = 1.3 hours (Standard production time per hour + Rest periods per hour + Setup per hour = Standard direct labor hours per unit)

75.

The standard direct materials quantity does not include allowances for a. unavoidable waste. b. normal spoilage. c. unexpected spoilage. d. all of the above are included.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

76.

Allowances should not be made in the direct labor quantity standard for a. unexpected downtime. b. rest periods. c. cleanup. d. machine downtime.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

24 - 12 77.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e The standard predetermined overhead rate used in setting the standard overhead cost is determined by dividing a. budgeted overhead costs by an estimated standard activity index. b. actual overhead costs by an estimated standard activity index. c. budgeted overhead costs by actual activity. d. actual overhead costs by actual activity.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

78.

Hofburg’s standard quantities for one unit of product include 2 pounds of materials and 1.5 labor hours. The standard rates are $2 per pound and $20 per hour. The standard overhead rate is $8 per direct labor hour. The total standard cost per unit of Hofburg’s product is a. $14.50. b. $22.00. c. $34.00. d. $46.00.

Ans: D, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($2 x 2 ) + ($20 x 1.50) + ($8 x 1.5) = $4 + $30 + $12 = $46 (Material Standard rate per pound x pounds of material) + (Labor standard rate per hour x labor hours) + (Standard overhead rate x labor hours) = Total standard cost of product)

79.

Which of the following statements is true? a. Variances are the differences between total actual costs and total standard costs. b. When actual costs exceed standard costs, the variance is favorable. c. An unfavorable variance results when actual costs are decreasing but standards are not changed. d. All of the above are true.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

80.

Unfavorable materials price and quantity variances are generally the responsibility of the Price Variance Quantity Variance a. Purchasing department Purchasing Department b. Purchasing department Production Department c. Production department Production Department d. Production Department Purchasing Department

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

81.

Scorpion Production Company planned to use 1 yard of material per unit budgeted at $81 a yard. However, the material actually cost $80 per yard. The company actually made 3,900 units, although it had planned to make only 3,300 units. Total yards used for production were 3,960. What is the total materials variance? a. $48,600 U b. $4,860 U c. $3,960 F d. $900 U

Ans: D, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 3,960 x ($81- $80) = $3,960F; (3,960 – 3,900) x $81 = $4,860 U; $4,860 U + $3,960F = $900 U (Total yards used for production) x (Standard Rate – Actual Rate) = Materials Price Variance; (Total yards used in production – Planned units) x Standard Rate = Quantity Variance; Price Variance + Quantity Variance = Total Materials Variance

Standard Costs and Balanced Scorecard 82.

24 - 13

If actual direct materials costs are greater than standard direct materials costs, it means that a. actual costs were calculated incorrectly. b. the actual unit price of direct materials was greater than the standard unit price of direct materials. c. the actual unit price of direct materials or the actual quantities of direct materials used was greater than the standard unit price or standard quantities of direct materials expected. d. the purchasing agent or the production foreman is inefficient.

Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

83.

If actual costs are greater than standard costs, there is a(n) a. normal variance. b. unfavorable variance. c. favorable variance. d. error in the accounting system.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

84.

A total materials variance is analyzed in terms of a. price and quantity variances. b. buy and sell variances. c. quantity and quality variances. d. tight and loose variances.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

85.

A company developed the following per-unit standards for its product: 2 pounds of direct materials at $4 per pound. Last month, 1,500 pounds of direct materials were purchased for $5,700 and entered into production. The direct materials price variance for last month was a. $5,700 favorable. b. $300 favorable. c. $150 favorable. d. $300 unfavorable.

Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($5,700 ÷ 1,500) = $3.80; ($3.80 - $4.00) x 1,500 = $300 favorable (Actual Rate per pound– Standard rate per pound) X (Pounds purchased (actual) = direct materials price variance (favorable)

86.

The per-unit standards for direct materials are 2 gallons at $4 per gallon. Last month, 11,200 gallons of direct materials that actually cost $42,400 were used to produce 6,000 units of product. The direct materials quantity variance for last month was a. $3,200 favorable. b. $2,400 favorable. c. $3,200 unfavorable. d. $5,600 unfavorable.

Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: [(6,000 x 2) – 11,200) x $4] = $3,200 favorable (Standard quantity – Actual quantity) x Standard price per unit = Direct materials quantity variance (favorable))

24 - 14 87.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e The purchasing agent of the Poplin, Inc. ordered materials of lower quality in an effort to economize on price. Which of the following variances will most likely result? a. Favorable materials quantity variance b. Favorable total materials variance c. Unfavorable materials price variance d. Unfavorable materials quantity variance

Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

88.

The per-unit standards for direct labor are 2 direct labor hours at $15 per hour. If in producing 1,800 units, the actual direct labor cost was $48,000 for 3,000 direct labor hours worked, the total direct labor variance is a. $1,800 unfavorable. b. $6,000 favorable. c. $3,750 unfavorable. d. $6,000 unfavorable.

Ans: B, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (1,800 x 2) x $15 = $54,000; $54,000 - $48,000 = $6,000 favorable (Standard Direct Labor Cost – Actual Direct Labor Cost = Total Direct Labor Variance (favorable))

89.

The standard rate of pay is $20 per direct labor hour. If the actual direct labor payroll was $117,600 for 6,000 direct labor hours worked, the direct labor price variance is a. $2,400 unfavorable. b. $2,400 favorable. c. $3,000 unfavorable. d. $3,000 favorable.

Ans: B, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($117,600 ÷ 6,000) = $19.60; ($20 - $19.60) x 6,000 = $2,400 favorable (Standard labor rate – Actual labor rate) x (Direct labor hours worked) = direct labor price (rate) variance (favorable))

90.

The standard number of hours that should have been worked for the output attained is 6,000 direct labor hours and the actual number of direct labor hours worked was 6,300. If the direct labor price variance was $3,150 unfavorable and the standard rate of pay was $9 per direct labor hour, what was the actual rate of pay for direct labor? a. $8.50 per direct labor hour b. $7.50 per direct labor hour c. $9.50 per direct labor hour d. $9.00 per direct labor hour

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $3,150U = (X - $9) x 6,300; X = $9.50 (Labor price variance = (Actual rate (x) – Standard rate) x actual direct labor hours worked)

91.

Which one of the following statements is true? a. If the materials price variance is unfavorable, then the materials quantity variance must also be unfavorable. b. If the materials price variance is unfavorable, then the materials quantity variance must be favorable. c. Price and quantity variances move in the same direction. If one is favorable, the others will be as well. d. There is no correlation of favorable or unfavorable for price and quantity variances.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Standard Costs and Balanced Scorecard 92.

24 - 15

Variances from standards are a. expressed in total dollars. b. expressed on a per-unit basis. c. expressed on a percentage basis. d. All of these answers are correct.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

93.

A favorable variance a. indicates that the company is not operating in an optimal manner. b. implies a positive result if quality control standards are met. c. implies a positive result if standards are flexible. d. means that standards are too loosely specified.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

94.

The total materials variance is equal to the a. materials price variance. b. difference between the materials price variance and labor quantity variance. c. product of the materials price variance and the materials quantity variance. d. sum of the materials price variance and the materials quantity variance.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

95.

Information on Jayhawk's direct labor costs for the month of August is as follows: Actual labor rate Standard hours Actual hours Direct labor price variance—unfavorable

$10 11,000 10,000 $4,000

What was the standard labor rate for August? a. $9.96 b. $9.60 c. $10.40 d. $10.04 Ans: B, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $4,000 U = ($10 – X) x 10,000; X = $9.60 (Direct price variance (unfavorable) = (Actual Rate- Standard Rate (X)) x Actual Hours)

96.

The total variance is $35,000 unfavorable. The total materials variance is $14,000 unfavorable. The total labor variance is twice the total overhead variance. What is the total overhead variance? a. $3,500 U b. $7,000 U c. $10,500 U d. $14,00 U

Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $35,000 = $14,000 + X + 2 X; X = $7,000 (Total variance = Material Variance + Labor Variance + Overhead Variance (X))

24 - 16 97.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e The equation for the materials price variance is a. (AQ × SP) – (SQ × SP). b. (AQ × AP) – (AQ × SP). c. (AQ × AP) – (SQ × SP). d. (AQ × SP) – (SQ × AP).

Ans: B, LO: 2, Bloom: K, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

98.

The equation for the materials quantity variance is a. (SQ × AP) – (SQ × SP). b. (AQ × AP) – (AQ × SP). c. (AQ × SP) – (SQ × SP). d. (AQ × AP) – (SQ × SP).

Ans: C, LO: 2, Bloom: K, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

99.

A company uses 8,400 pounds of materials and exceeds the standard quantity by 300 pounds. The quantity variance is $1,800 unfavorable. What is the standard materials price? a. $2 b. $4 c. $6 d. Cannot be determined from the data provided.

Ans: C, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $1,800 U = (8,400 – 8,100) x; X = $6 (Quantity variance = (Actual Quantity – Standard Quantity) x Standard Price (X))

100.

A company purchases 20,000 pounds of materials. The materials price variance is $4,000 favorable. What is the difference between the standard price and the actual price paid for the materials? a. $1.00 b. $0.20 c. $5.00 d. Cannot be determined from the data provided.

Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution; 4,000 = 20,000 x; x = $.20 (Materials Price Variance = Actual quantity purchased (Actual Price – Standard Price); X = (Actual Price – Standard Price)

101.

A company uses 20,000 pounds of materials for which it paid $6.00 a pound. The materials price variance was $15,000 unfavorable. What is the standard price per pound for the materials? a. $0.75 b. $5.25 c. $6.00 d. $6.75

Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $15,000 U = 20,000 x ($6 – X); X = $5.25 (Materials price variance = Actual Quantity used x (Actual Price – Standard Price (X)

Standard Costs and Balanced Scorecard 102.

24 - 17

If the materials price variance is $3,600 favorable and the materials quantity and labor variances are each $2,700 unfavorable, what is the total materials variance? a. $3,600 F b. $2,700 U c. $900 F d. $4,050 U

Ans: C, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $3,600 F - $2,700 U = $900 F (Materials price variance + Materials quantity variance) = Total materials variance

103.

Edgar, Inc. has a materials price standard of $2.00 per pound. Six thousand pounds of materials were purchased at $2.20 a pound. The actual quantity of materials used was 6,000 pounds although the standard quantity allowed for the output was 5,400 pounds. Edgar, Inc.'s materials price variance is a. $120 U. b. $1,200 U. c. $1,080 U. d. $1,200 F.

Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($2.20 - $2.00) x 6,000 = $1,200 U (Actual price- Standard price) x Actual quantity used = materials price variance (unfavorable))

104.

Edgar, Inc. has a materials price standard of $2.00 per pound. Six thousand pounds of materials were purchased at $2.20 a pound. The actual quantity of materials used was 6,000 pounds while the standard quantity allowed for the output was 5,400 pounds. Edgar, Inc.'s materials quantity variance is a. $1,200 U. b. $1,200 F. c. $1,320 F. d. $1,320 U.

Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (6,000 – 5,400) x $2.00 = $1,200 U (Actual quantity – Standard quantity allowed) x (Standard price per pound) = materials quantity variance (favorable/unfavorable))

105.

Edgar, Inc. has a materials price standard of $2.00 per pound. Six thousand pounds of materials were purchased at $2.20 a pound. The actual quantity of materials used was 6,000 pounds while the standard quantity allowed for the output was 5,400 pounds. Edgar, Inc.'s total materials variance is a. $2,400 U. b. $2,400 F. c. $2,520 U. d. $2,520 F.

Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($2.00 x 5,400) – ($2.20 x 6,000) = $2,400 U (Standard price per pound x Standard quantity allowed) – (Actual price purchased per pound) x Actual quantity of materials used per pound) = total materials variance)

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

106.

The standard quantity allowed for the units produced during a period was 4,500 pounds. The standard price was $2.50 per pound and the materials quantity variance was $375 favorable. Each unit uses 1 pound of materials. How many units were actually produced during the period? a. 4,350 b. 4,500 c. 11,625 d. 4,650

Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $375F = $2.50 (x – 4,500); x = 4,350 (Materials quantity variance = Standard price per pound x (Actual quantity (X) – Standard quantity allowed for units produced))

107.

The matrix approach to variance analysis a. will yield slightly different variances than the equation approach. b. is more accurate than the equation approach. c. does not separate the price and quantity variance calculations. d. provides a convenient structure for determining each variance.

Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

108.

Labor efficiency is measured by the a. materials quantity variance. b. total labor variance. c. labor quantity variance. d. labor rate variance.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

109.

An unfavorable labor quantity variance may be caused by a. paying workers higher wages than expected. b. higher pay rates mandated by union contracts. c. worker fatigue or carelessness. d. All of these may cause an unfavorable labor quantity variance.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

110.

The investigation of materials price variances usually begins with the a. first production department. b. purchasing department. c. controller's office. d. accounts payable department.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

111.

The investigation of materials quantity variances usually begins with the a. production department. b. purchasing department. c. sales department. d. controller's department.

Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Standard Costs and Balanced Scorecard 112.

24 - 19

If the labor quantity variance is unfavorable and the cause is the inefficient use of direct labor, the responsibility rests with the a. sales department. b. production department. c. budget office. d. controller's department.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

113.

Monster Company produces a product requiring 3 direct labor hours at $16.00 per hour. During January, 2,000 products are produced using 6,300 direct labor hours. Monster’s actual payroll for direct labor during January was $98,280. What is the labor quantity variance for the month? a. $2,280 U b. $4,800 F c. $2,520 F d. $4,800 U

Ans: D, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (6.300 – 6,000) x $16 = $4,800 U (Actual quantity used – Standard quantity) x Standard rate per hour = Labor quantity variance (unfavorable))

114.

A company developed the following per-unit standards for its product: 2 gallons of direct materials at $8 per gallon. Last month, 3,000 gallons of direct materials were purchased for $22,800. The direct materials price variance for last month was a. $22,800 favorable. b. $600 favorable. c. $1,200 favorable. d. $1,200 unfavorable.

Ans: C, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $22,800 / 3,000 = $7.60; ($7.60-$8.00) x 3,000; $1,200 F (Actual price / Actual quantity purchased) = Actual cost per unit; (Actual cost per unit – Standard cost per unit) x Actual quantity used) = Direct materials price variance)

115.

The per-unit standards for direct materials are 2 pounds at $5 per pound. Last month, 11,200 pounds of direct materials that actually cost $53,000 were used to produce 6,000 units of product. The direct materials quantity variance for last month was a. $4,000 favorable. b. $3,000 favorable. c. $4,000 unfavorable. d. $7,000 unfavorable.

Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (12,000 – 11,200) x $5 = $4,000 F ((Standard quantity – Actual quantity) x Standard price per unit = Direct materials quantity variance (favorable)

116.

The per-unit standards for direct labor are 1.5 direct labor hours at $15 per hour. If in producing 2,400 units, the actual direct labor cost was $46,000 for 3,000 direct labor hours worked, the total direct labor variance is a. $2,400 unfavorable. b. $8,000 favorable. c. $5,000 unfavorable. d. $8,000 unfavorable.

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

(Standard direct labor – Actual direct labor) = Total direct labor variance (favorable))

117.

The standard rate of pay is $12 per direct labor hour. If the actual direct labor payroll was $47,040 for 4,000 direct labor hours worked, the direct labor price (rate) variance is a. $960 unfavorable. b. $960 favorable. c. $1,200 unfavorable. d. $1,200 favorable.

Ans: B, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $47,040 / 4,000 = $11.76; ($12- $11.76) x 4,000 = $960 F (Actual direct labor payroll / Actual direct labor hours) = Actual direct rate of pay; (Standard rate of pay – Actual direct rate of pay) x Actual direct labor hours worked) = direct labor price (rate) variance)

118.

The standard number of hours for the output attained is 10,000 direct labor hours and the actual number of direct labor hours worked was 10,500. If the direct labor price variance was $10,500 unfavorable and the standard rate of pay was $12 per direct labor hour, what was the actual rate of pay for direct labor? a. $11 per direct labor hour b. $9 per direct labor hour c. $13 per direct labor hour d. $12 per direct labor hour

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $10,500 U = 10,500 x (X - $12); X = $13 (Direct labor price variance = (Actual rate of pay - Standard rate of pay) x (Actual direct labor hours worked)

119.

A company purchases 12,000 pounds of materials. The materials price variance is $6,000 favorable. What is the difference between the standard and actual price paid for the materials? a. $1.00 b. $.50 c. $2.00 d. $6.00

Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $6,000 = 12,000 x; x = $.50 (Materials price variance = Actual quantity purchased x (Difference between the standard and actual price paid for the materials (X))

120.

A company uses 40,000 gallons of materials for which they paid $7.00 a gallon. The materials price variance was $80,000 favorable. What is the standard price per gallon? a. $2 b. $5 c. $7 d. $9

Ans: D, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $80,000 F = ($7.00 – X) x 40,000; X = $9 (Material price variance = (Actual price per gallon - Standard price per gallon (X)) x Actual gallons used)

Standard Costs and Balanced Scorecard 121.

24 - 21

All Urban Company produces a product requiring 4 pounds of material with a standard cost of $3.50 per pound. During December, All Urban purchased 4,200 pounds of material for $14,112 and used the material to produce 1,000 products. What was the materials price variance for December? a. $560 F b. $588 F c. $112 U d. $672 U

Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $14,112 / 4,200 = $3.36; ($3.36 - $3.50) x 4,200 = $588 F (Actual material purchased / Actual pounds of material) = Actual price per pound; (Actual price per pound – Standard price per pound) x Actual material purchased = Material price variance (favorable)

122.

Shipp, Inc. manufactures a product that requires two pounds of direct material. During 2022, Shipp purchases 24,000 pounds of material for $99,200 when the standard price per pound is $4. During 2022, Shipp uses 22,000 pounds to make 12,000 products. The standard direct material cost per unit of finished product is a. $8.27. b. $9.01. c. $8.00. d. $8.53.

Ans: C, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $4 x 2 = $8.00 (Standard price per pound x pounds of direct material required = material cost per unit of finished goods)

123.

Clark Company manufactures a product with a standard direct labor cost of two hours at $18.00 per hour. During July, 2,000 units were produced using 4,200 hours at $18.30 per hour. The labor quantity variance was a. $3,660 F. b. $3,600 U. c. $2,460 U. d. $3,660 U.

Ans: B, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (4,200 – 4,000) x $18 = 3,600 U (Actual hours- Standard hours) x Standard labor rate per hour = labor quantity variance (unfavorable))

124.

Clark Company manufactures a product with a standard direct labor cost of two hours at $18.00 per hour. During July, 2,000 units were produced using 4,200 hours at $18.30 per hour. The labor price variance was a. $1,260 U. b. $4,860 U. c. $4,860 F. d. $3,600 U.

Ans: A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($18.30 - $18.00) x 4,200 = $1,260 U (Actual labor rate- Standard labor rate) x Actual labor hours = labor price variance (unfavorable))

24 - 22

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

125.

A company developed the following per unit materials standards for its product: 3 pounds of direct materials at $5 per pound. If 12,000 units of product were produced last month and 37,500 pounds of direct materials were used, the direct materials quantity variance was a. $4,500 favorable. b. $7,500 unfavorable. c. $4,500 unfavorable. d. $7,500 favorable.

Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (37,500 – 36,000) X $5 = $7,500 U (Actual quantity used – Standard quantity) x Standard price per pound = direct materials quantity variance (unfavorable))

126.

The standard direct labor cost for producing one unit of product is 5 direct labor hours at a standard rate of pay of $20. Last month, 15,000 units were produced and 73,500 direct labor hours were actually worked at a total cost of $1,350,000. The direct labor quantity variance was a. $30,000 unfavorable. b. $45,000 unfavorable. c. $45,000 favorable. d. $30,000 favorable.

Ans: D, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 15,000 x 5 = 75,000; (73,500 – 75,000) x $20 = $30,000 F (Actual direct labor hours – Standard direct labor hours) x Standard rate of pay = direct labor quantity variance (favorable))

127.

Atkins, Inc. produces a product requiring 8 pounds of material at $1.50 per pound. Atkins produced 10,000 units of this product during 2022 resulting in a $30,000 unfavorable materials quantity variance. How many pounds of direct material did Atkins use during 2022? a. 100,000 pounds b. 80,000 pounds c. 160,000 pounds d. 125,000 pounds

Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $30,000 U = $1.50 x (X – 80,000); X = 100,000 pounds (Material quantity variance = Standard price per unit x (Actual Quantity used (X) – Standard Quantity)

128.

Dillon has a standard of 1.5 pounds of materials per unit, at $6 per pound. In producing 2,000 units, Dillon used 3,100 pounds of materials at a total cost of $18,135. Dillon's total variance is a. $450 F. b. $135 U. c. $465 U. d. $600 U.

Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 2,000 x 1.5 x $6 = $18,000; $18,135 - $18,000 = $135 U (Actual materials used – Standard materials = Total variance (unfavorable))

Standard Costs and Balanced Scorecard 129.

24 - 23

Dillon has a standard of 1.5 pounds of materials per unit, at $6 per pound. In producing 2,000 units, Dillon used 3,100 pounds of materials at a total cost of $18,135. Dillon's materials price variance is a. $135 U. b. $465 F. c. $600 F. d. $1,050 F.

Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $18,135 / 3,100 = $5.85; $6 - $5.85 = $.15 x 3,100 = $465F (Actual materials cost / Actual quantity used = Actual price per pound; (Actual price per pound – Standard price pound) x Actual quantity used = Material price variance)

130.

Dillon has a standard of 1.5 pounds of materials per unit, at $6 per pound. In producing 2,000 units, Dillon used 3,100 pounds of materials at a total cost of $18,135. Dillon's materials quantity variance is a. $135 F. b. $465 U. c. $600 U. d. $1,050 U.

Ans: C, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (2,000 x 1.5) = 3,000; (3,100 – 3,000) x $6 = $600 U (Actual quantity used – Standard quantity) x Standard price per pound = Materials quantity variance)

131.

Dillon has a standard of 2 hours of labor per unit, at $12 per hour. In producing 2,000 units, Dillon used 3,850 hours of labor at a total cost of $46,970. Dillon's total labor variance is a. $1,030 U. b. $800 U. c. $1,030 F. d. $1,930 F.

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (2 x $12 x 2,000) = $48,000; $48,000 - $46,970 - $1,030 F (Standard labor cost – Actual labor cost = total labor variance)

132.

Dillon has a standard of 2 hours of labor per unit, at $12 per hour. In producing 2,000 units, Dillon used 3,850 hours of labor at a total cost of $46,970. Dillon's labor price variance is a. $770 U. b. $800 U. c. $1,030 F. d. $1,930 F.

Ans: A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $46,970 / 3,850 = $12.20; ($12.20 - $12.00) x 3,850 = 770 U (Actual labor cost / Actual labor hours) = Actual labor rate per hour; (Actual labor rate per hour – Standard rate per hour) x Actual labor hours = Labor price variance (unfavorable))

24 - 24

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

133.

Dillon has a standard of 2 hours of labor per unit, at $12 per hour. In producing 2,000 units, Dillon used 3,850 hours of labor at a total cost of $46,970. Dillon's labor quantity variance is a. $770 U. b. $770 F. c. $1,800 F. d. $1,930 F.

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (4,000 – 3,850) x $12 = $1,800 F ((Standard labor hours – Actual labor hours) x Standard labor rate per hour = Labor quantity variance)

134.

Which one of the following describes the total overhead variance? a. The difference between what was actually incurred and the flexible budget amount b. The difference between what was actually incurred and overhead applied c. The difference between the overhead applied and the flexible budget amount d. The difference between what was actually incurred and the total production budget

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

135.

Manufacturing overhead costs are applied to work in process on the basis of a. actual hours worked. b. standard hours allowed. c. ratio of actual variable to fixed costs. d. actual overhead costs incurred.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

136.

The total overhead variance is the difference between the a. actual overhead costs and overhead costs applied based on standard hours allowed. b. actual overhead costs and overhead costs applied based on actual hours. c. overhead costs applied based on actual hours and overhead costs applied based on standard hours allowed. d. the actual overhead costs and the standard direct labor costs.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

137.

The predetermined overhead rate for Zane Company is $5, comprised of a variable overhead rate of $3 and a fixed rate of $2. The amount of budgeted overhead costs at normal capacity of $150,000 was divided by normal capacity of 30,000 direct labor hours, to arrive at the predetermined overhead rate of $5. Actual overhead for June was $9,500 variable and $6,050 fixed, and standard hours allowed for the product produced in June was 3,000 hours. The total overhead variance is a. $3,050 F. b. $550 F. c. $550 U. d. $3,050 U.

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $5 x 3,000 = $15,000 – ($9,500 + $6,050) = 550 U (Applied overhead – Actual overhead (variable and fixed) = Total overhead variance (unfavorable))

Standard Costs and Balanced Scorecard 138.

24 - 25

The predetermined overhead rate for Zane Company is $5, comprised of a variable overhead rate of $3 and a fixed rate of $2. The amount of budgeted overhead costs at normal capacity of $150,000 was divided by normal capacity of 30,000 direct labor hours, to arrive at the predetermined overhead rate of $5. Actual overhead for June was $8,900 variable and $5,400 fixed, and 1,500 units were produced. The direct labor standard is 2 hours per unit produced. The total overhead variance is a. $1,800 F. b. $700 F. c. $700 U. d. $1,800 U.

Ans: B, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($5 x 1,500 x 2) – ($8,900 + $5,400) = $700 F (Applied Overhead – Actual overhead (variable and fixed) = Total overhead variance)

139.

Which of the following is true? a. The form, content, and frequency of variance reports vary considerably among companies. b. The form, content, and frequency of variance reports do not vary among companies. c. The form and content of variance reports vary considerably among companies, but the frequency is always weekly. d. The form and content of variance reports are consistent among companies, but the frequency varies.

Ans: A, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

140.

Denmark Corporation’s variance report for the purchasing department reports 1,000 units of material A purchased and 2,400 units of material B purchased. It also reports standard prices of $2 for Material A and $3 for Material B. Actual prices reported are $2.10 for Material A and $2.80 for Material B. Denmark should report a total price variance of a. $380 F. b. $340 F. c. $340 U. d. $380 U.

Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (($2.10 - $2.00) x 1,000 = $100U; ($3 - $2.80) x 2,400 = $480 F; $480F - $100 U = $380F (Actual price per unit – Standard price per unit) x Actual quantity purchased = Total price variance (favorable or unfavorable))

141.

When is a variance considered to be 'material'? a. When it is large compared to the standard cost b. When it is infrequent c. When it is unfavorable d. When it could have been controlled more effectively

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

142.

Variance reports are a. external financial reports. b. SEC financial reports. c. internal reports for management. d. All of these answers are correct.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

24 - 26 143.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e In using variance reports, management looks for a. total assets invested. b. significant variances. c. competitors’ costs in comparison to the company's costs. d. more efficient ways of valuing inventories.

Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

144.

Parnell Company prepared its income statement for internal use. How would amounts for cost of goods sold and variances appear? a. Cost of goods sold would be at actual costs, and variances would be reported separately. b. Cost of goods sold would be combined with the variances, and the net amount reported at standard cost. c. Cost of goods sold would be at standard costs, and variances would be reported separately. d. Cost of goods sold would be combined with the variances, and the net amount reported at actual cost.

Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

145.

Alex Co. prepared its income statement for management using a standard cost accounting system. Which of the following is reported at the “standard” amount? a. Sales b. Selling expenses c. Sales discounts d. Cost of goods sold

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

146.

Reporting inventories at standard cost in external financial statements is a. not permitted. b. preferable to reporting inventories at actual costs. c. not in accordance with generally accepted accounting principles because there are no significant differences between actual and standard costs. d. in accordance with generally accepted accounting principles if there are no significant differences between actual and standard costs.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

147.

Income statements prepared internally for management often show cost of goods sold at standard cost with variances a. separately disclosed. b. deducted as other expenses and revenues. c. added to cost of goods sold. d. closed directly to retained earnings.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Standard Costs and Balanced Scorecard 148.

24 - 27

In Zero Company’s income statement, gross profit of $55,000 was reported at standard cost in addition to the following variances: Materials price Materials quantity Labor price Labor quantity Overhead

$ 420 F 600 F 420 U 1,000 F 900 F

Zero’s actual gross profit is a. $51,660. b. $52,500. c. $57,500. d. $58,340. Ans: C, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $55,000 + 420 + 600 – 420 + 1,000 + 900 = $57,500 (Gross profit + Materials price variance + Materials quantity variance – Labor price variance + Labor quantity variance + Overhead variance = Actual gross profit)

149.

In Zero Company’s income statement, actual gross profit of $52,500 was reported along with the following variances: Materials price Materials quantity Labor price Labor quantity Overhead

$ 420 600 420 1,000 900

F F U F F

Zero’s gross profit at standard cost is a. $46,660. b. $47,500. c. $55,000. d. $53,340. Ans: C, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $52,500 + $420 + $600 + $1,000 + $900 - $420 = $55,000 (Actual gross profit + Materials price variance + Materials quantity variance + Labor quantity variance + Overhead variance – Labor price variance = Standard gross profit)

150.

The balanced scorecard a. incorporates financial and nonfinancial measures in an integrated system. b. is based solely on financial measures. c. is based solely on nonfinancial measures. d. does not use financial or nonfinancial measures.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

151.

Which is not one of the four most commonly used perspectives on a balanced scorecard? a. The financial perspective b. The customer perspective c. The external process perspective d. The learning and growth perspective

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

24 - 28

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

152.

The balanced scorecard approach a. uses only financial measures to evaluate performance. b. uses rather vague, open statements when setting objectives in order to allow managers and employees flexibility. c. normally sets the financial objectives first, and then sets the objectives in the other perspectives to accomplish the financial objectives. d. evaluates performance using about 10 different perspectives in order to effectively incorporate all areas of the organization.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

153.

The customer perspective of the balanced scorecard approach a. is the most traditional view of the company. b. evaluates the internal operating processes critical to the success of the organization. c. evaluates how well the company develops and retains its employees. d. evaluates the company from the viewpoint of the consumers who buy its products or services.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

154.

The perspectives included in the balanced scorecard approach include all of the following except the a. internal process perspective. b. capacity utilization perspective. c. learning and growth perspective. d. customer perspective.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

155.

If 10,000 pounds of direct materials are purchased for $9,300 on account and the standard cost is $.90 per pound, the journal entry to record the purchase is a. Raw Materials Inventory...................................................... 9,300 Accounts Payable....................................................... 9,300 b. Work In Process Inventory .................................................. 9,300 Accounts Payable....................................................... 9,000 Materials Quantity Variance ....................................... 300 c. Raw Materials Inventory...................................................... 9,300 Accounts Payable....................................................... 9,000 Materials Price Variance............................................. 300 d. Raw Materials Inventory...................................................... 9,000 Materials Price Variance ..................................................... 300 9,300 Accounts Payable.......................................................

Ans: D, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: 10,000 x .90 = 9,000 (Actual pounds x Standard cost per unit = Raw Materials Inventory) a

156.

Debit balances in variance accounts represent a. unfavorable variances. b. favorable variances. c. favorable for price variances; unfavorable for quantity variances. d. favorable for quantity variances; unfavorable for price variances. .

Standard Costs and Balanced Scorecard

24 - 29

Ans: A, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

157.

If a company purchases materials on account for $19,830 when the standard cost is $18,900, it will a. debit Materials Price Variance for $930. b. credit Materials Price Variance for $930. c. debit Materials Quantity Variance for $930. d. credit Material Quantity Variance for $930.

Ans: A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $19,830 - $18,900 = $930 (Material Price Variance) (Actual materials purchased – Standard cost) = Material Price Variance) a

158.

If a company issues materials to production at a cost of $18,900 when the standard cost is $18,300, it will a. debit Materials Price Variance for $600. b. credit Materials Price Variance for $600. c. debit Materials Quantity Variance for $600. d. credit Material Quantity Variance for $600.

Ans: C, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $18,900 - $18,300 = $600 (Materials Quantity Variance) (Actual direct materials issued – Standard cost = Materials Quantity Variance) a

159.

If a company incurs direct labor cost of $82,000 when the standard cost is $84,000, it will a. debit Labor Price Variance for $2,000. b. credit Labor Price Variance for $2,000. c. debit Labor Quantity Variance for $2,000. d. credit Labor Quantity Variance for $2,000.

Ans: B, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $82,000 - $84,000 = $2,000 (Labor Price Variance) (Actual direct labor cost incurred – Standard cost = Labor price variance) a

160.

If a company assigns factory labor to production at a cost of $84,000 when standard cost is $80,000, it will a. debit Labor Price Variance for $4,000. b. credit Labor Price Variance for $4,000. c. debit Labor Quantity Variance for $4,000. d. credit Labor Quantity Variance for $4,000.

Ans: C, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $84,000 - $80,000 = $4,000 (Labor Quantity Variance) (Actual factory labor assigned - Standard cost = Labor quantity variance) a

161.

The overhead variances measure whether overhead costs a. b. c. d.

Are Effectively Managed Controllable Controllable Controllable and Volume Volume

Were Used Effectively Controllable and Volume Volume Controllable Controllable

Ans: B, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

24 - 30 a

162.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e The overhead volume variance is a. actual overhead less overhead budgeted for actual hours. b. actual overhead less overhead budgeted for standard hours allowed. c. overhead budgeted for actual hours less applied overhead. d. the fixed overhead rate times the difference between normal capacity hours and standard hours allowed.

Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

163. Budgeted overhead for Cinnabar Industries at normal capacity of 30,000 direct labor hours is $6 per hour for variable overhead and $4 per hour for fixed overhead. In May, $310,000 of overhead was incurred in working 31,500 hours when 32,000 was the standard hours allowed. The overhead controllable variance is a. $5,000 favorable. b. $2,000 favorable. c. $10,000 favorable. d. $10,000 unfavorable.

Ans: B, LO: 6, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $310,000 – (($6 x 32,000) + (30,000 x $4)) = $2,000 Favorable (Actual overhead incurred – ((Budgeted variable manufacturing overhead per hour x standard hours allowed) + (budged fixed per hour x standard direct labor hours)) = Overhead controllable variance)

164. Budgeted overhead for Cinnabar Industries at normal capacity of 30,000 direct labor hours is $6 per hour for variable overhead and $4 per hour for fixed overhead. In May, $310,000 of overhead was incurred in working 31,500 hours when 32,000 was the standard hours allowed. The overhead volume variance is a. $8,000 favorable. b. $11,000 favorable. c. $5,000 favorable. d. $10,000 favorable.

Ans: A, LO: 6, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (32,000 - 30,000) x $4 = $8,000 favorable (Standard hours allowed – Normal capacity hours) x budgeted fixed overhead rate = Overhead volume variance)

165. Budgeted overhead for Haft, Inc. at normal capacity of 60,000 direct labor hours is $3 per hour for variable overhead and $2 per hour for fixed. In May, $310,000 of overhead was incurred in working 63,000 hours when 64,000 was the standard hours allowed. The overhead controllable variance is a. $5,000 favorable. b. $2,000 favorable. c. $10,000 favorable. d. $10,000 unfavorable.

Ans: B, LO: 6, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (64,000 x $3) + (60,000 x $2) - $310,000 = $2,000 favorable ((Standard hours allowed x Budgeted variable direct labor per hour) + (Normal capacity hours x budgeted fixed rate per hour) = Overhead controllable variance)

Standard Costs and Balanced Scorecard

24 - 31

166. Budgeted overhead for Haft, Inc. at normal capacity of 60,000 direct labor hours is $3 per hour for variable overhead and $2 per hour for fixed. In May, $310,000 of overhead was incurred in working 63,000 hours when 64,000 was the standard hours allowed. The overhead volume variance is a. $8,000 favorable. b. $11,000 favorable. c. $5,000 favorable. d. $10,000 favorable.

Ans: A, LO: 6, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: (64,000 – 60,000) x $2 = $8,000 favorable ((Standard hour allowed – Normal capacity hours) x Fixed overhead rate per hour = Overhead volume variance) a

167.

An overhead volume variance is calculated as the difference between normal capacity hours and standard hours allowed a. times the total predetermined overhead rate. b. times the predetermined variable overhead rate. c. times the predetermined fixed overhead rate. d. divided by actual number of hours worked.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

168. Which of the following statements is false? a. The overhead volume variance indicates whether plant facilities were used efficiently during the period. b. The costs that cause the overhead volume variance are usually controllable costs. c. The overhead volume variance relates solely to fixed costs. d. The overhead volume variance is favorable if standard hours allowed for output are greater than the standard hours at normal capacity.

Ans: B, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

169.

If the standard hours allowed are less than the standard hours at normal capacity, a. the overhead volume variance will be unfavorable. b. variable overhead costs will be underapplied. c. the overhead controllable variance will be favorable. d. variable overhead costs will be overapplied.

Ans: A, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

170.

Which of the following statements about overhead variances is false? a. Standard hours allowed is used in calculating the controllable variance. b. Standard hours allowed is used in calculating the volume variance. c. The controllable variance pertains solely to fixed costs. d. The total overhead variance pertains to both variable and fixed costs.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

171.

The overhead volume variance relates only to a. variable overhead costs. b. fixed overhead costs. c. both variable and fixed overhead costs. d. all manufacturing costs.

Ans: B, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

24 - 32

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Standard Costs and Balanced Scorecard a

172.

24 - 33

What does the controllable variance measure? a. Whether a company incurred more or less fixed overhead costs compared to the amount of overhead applied b. Whether a company incurred more or less overhead costs than allowed c. The efficiency of using variable overhead resources d. Whether the production manager is able to control the production facility

Ans: B, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

173.

The overhead controllable variance is calculated as the difference between actual overhead costs incurred and the budgeted a. overhead costs for the standard hours allowed. b. overhead costs applied to the product. c. overhead costs at the normal level of activity. d. fixed overhead costs.

Ans: A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

174.

If the standard hours allowed are less than the standard hours at normal capacity, the volume variance a. cannot be calculated. b. will be favorable. c. will be unfavorable. d. will be greater than the controllable variance.

Ans: C, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

175.

The budgeted overhead costs for standard hours allowed and the overhead costs applied to the product are the same amount a. for both variable and fixed overhead costs. b. only when standard hours allowed are less than normal capacity. c. for variable overhead costs. d. for fixed overhead costs.

Ans: C, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

176.

The following information was taken from the annual manufacturing overhead cost budget of Fergie Manufacturing. Variable manufacturing overhead costs $92,400 Fixed manufacturing overhead costs $55,440 Normal production level in labor hours 23,100 Normal production level in units 5,775 Standard labor hours per unit 4 During the year, 5,600 units were produced, 18,340 hours were worked, and the actual manufacturing overhead was $151,200. Actual fixed manufacturing overhead costs equaled budgeted fixed manufacturing overhead costs. Overhead is applied on the basis of direct labor hours. Fergie's total overhead rate is a. $2.40. b. $4.00. c. $6.40. d. $6.53. .

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

24 - 34

Ans: C, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($92,400 + $55,440) / (5,775 x 4) = $6.40 ((Variable manufacturing overhead costs + Fixed manufacturing overhead costs) / (Normal production level in units x Standard labor hours per unit)) = Total overhead rate) a

177. The following information was taken from the annual manufacturing overhead cost budget of Fergie Manufacturing. Variable manufacturing overhead costs $92,400 Fixed manufacturing overhead costs $55,440 Normal production level in labor hours 23,100 Normal production level in units 5,775 Standard labor hours per unit 4 During the year, 5,600 units were produced, 18,340 hours were worked, and the actual manufacturing overhead was $151,200. Actual fixed manufacturing overhead costs equaled budgeted fixed manufacturing overhead costs. Overhead is applied on the basis of direct labor hours. Fergie's total overhead variance is a. b. c. d.

$1,680 U. $6,160 U. $7,840 U. $22,400 U.

Ans: C, LO: 6, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: ($92,400 + $55,440) / (5775 x 4) = $6.40; $151,200 – ($6.40 x 5,600 x 4) = $7,840 U ((Variable manufacturing overhead costs + Fixed manufacturing overhead cost) / (Normal production level in units x Standard labor hours per unit) = total overhead rate; Actual manufacturing overhead – (Actual production level in units x Standard labor hours per unit x Total overhead rate) = total overhead variance) a

178. The following information was taken from the annual manufacturing overhead cost budget of Fergie Manufacturing. Variable manufacturing overhead costs $92,400 Fixed manufacturing overhead costs $55,440 Normal production level in labor hours 23,100 Normal production level in units 5,775 Standard labor hours per unit 4 During the year, 5,600 units were produced, 18,340 hours were worked, and the actual manufacturing overhead was $151,200. Actual fixed manufacturing overhead costs equaled budgeted fixed manufacturing overhead costs. Overhead is applied on the basis of direct labor hours. Fergie's controllable overhead variance is a. b. c. d.

$1,680 U. $6,160 U. $7,840 U. $22,400 U.

Ans: B, LO: 6, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: $92,400 / (5,775 x 4) = $4; $151,200 – ($4 x (5,600 x 4) + $55,440) = $6,160 U (Variable manufacturing overhead costs / (Normal production level in units x Standard labor hours per unit) = Variable rate per hour; (Actual overhead – (Variable rate per hour x Units Produced x Standard labor hours per unit) + Fixed manufacturing overhead costs) = Controllable overhead variance)

Standard Costs and Balanced Scorecard a

179.

24 - 35

The following information was taken from the annual manufacturing overhead cost budget of Fergie Manufacturing. Variable manufacturing overhead costs $92,400 Fixed manufacturing overhead costs $55,440 Normal production level in labor hours 23,100 Normal production level in units 5,775 Standard labor hours per unit 4 During the year, 5,600 units were produced, 18,340 hours were worked, and the actual manufacturing overhead was $151,200. Actual fixed manufacturing overhead costs equaled budgeted fixed manufacturing overhead costs. Overhead is applied on the basis of direct labor hours. Fergie's volume overhead variance is a. $1,680 U. b. $6,160 U. c. $7,840 U. d. $22,400 U.

Ans: A, LO: 6, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management Solution: [$55,440 / (5,775 4)] = $2.40; [(5,775 x 4) – (5,600 x 4) x $2.40 = $1,680 U ((Fixed manufacturing overhead / (Normal production level x standard labor hours per unit) = fixed rate per hour; ((Normal production level in units x Standard labor hours per unit) - (Units Produced x Standard hours per unit)) x fixed rate per hour))

180.

All of the following are advantages of standard costs except that standard costs a. facilitate management planning. b. are useful in setting selling prices. c. simplify costing in inventories. d. increase net income.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

181.

Standards based on the optimum level of performance under perfect operating conditions are a. attainable standards. b. ideal standards. c. normal standards. d. practical standards.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

182.

The direct materials price standard should include an amount for all of the following except a. receiving costs. b. storing costs. c. handling costs. d. normal spoilage costs.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

24 - 36 183.

The standard unit price is used in the calculation of which of the following variances? a. b. c. d.

Materials Price Variance No No Yes Yes

Materials Quantity Variance No Yes No Yes

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

184.

The difference between the actual labor rate multiplied by the actual labor hours worked and the standard labor rate multiplied by the standard labor hours is the a. total labor variance. b. labor price variance. c. labor quantity variance. d. labor efficiency variance.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

185.

The equation for the labor price variance is a. (AH) x (SR) less (SH) x (SR). b. (AH) x (AR) less (AH) x (SR). c. (AH) x (AR) less (SH) x (SR). d. (AH) x (SR) less (AH) x (SR).

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

186.

Which department is usually responsible for a labor price variance attributable to the misallocation of workers? a. Quality control b. Purchasing c. Engineering d. Production

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

187.

In reporting variances, a. promptness is relatively unimportant. b. management normally investigates all variances. c. the reports should facilitate management by exception. d. the reports are not departmentalized.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

188.

A standard cost system may be used in a. b. c. d.

Job Order Costing No Yes No Yes

Process Costing No No Yes Yes

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Standard Costs and Balanced Scorecard a

189.

24 - 37

The equation for computing the overhead volume variance is a. fixed overhead rate times (actual hours less standard hours allowed). b. variable overhead rate times (actual hours less standard hours allowed). c. fixed overhead rate times (normal capacity hours less standard hours allowed). d. variable overhead rate times (normal capacity hours less standard hours allowed).

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

190.

The overhead controllable variance is the difference between the a. budgeted overhead based on standard hours allowed and the overhead applied to production. b. budgeted overhead based on standard hours allowed and budgeted overhead based on actual hours worked. c. actual overhead and the overhead applied to production. d. actual overhead and budgeted overhead based on standard hours allowed.

Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

BRIEF EXERCISES BE 191 Seven Manufacturing Corporation uses both standards and budgets. The company estimates that production for the year will be 100,000 units of Product Fast. To produce these units of Product Fast, the company expects to spend $600,000 for materials and $800,000 for labor. Instructions Compute the estimates for (a) standard cost and (b) budgeted cost. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 191

(5 min.)

(a) Standards are stated as a per unit amount. Thus, the standards are materials $6, ($600,000 ÷ 100,000), and labor $8, ($800,000 ÷ 100,000). (b) Budgets are stated as a total amount. Thus, the budgeted costs for the year are materials $600,000 and labor $800,000. BE 192 Curling Company’s labor data for making one pound of finished product are as follows: (1) Price— hourly wage rate $11.00, payroll taxes $1.80, and employee benefits $1.20. (2) Quantity—actual production time 1.1 hours, rest periods and clean up 0.25 hours, and setup and downtime 0.15 hours. Instructions Compute the following: (a) Standard direct labor rate per hour. (b) Standard direct labor hours per pound. (c) Standard cost per pound. .

24 - 38

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ans: N/A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 192

(5 min.)

(a) Standard direct labor rate per hour = $14.00 ($11.00 + $1.80 + $1.20). (b) Standard direct labor hours per pound =1.5 hours (1.1 +.25 +.15). (C) Standard labor cost per pound = $21.00 ($14.00 × 1.5). BE 193 During March, Patt, Inc. purchases and uses 8,800 pounds of materials costing $35,640 to make 4,000 tiles. Patt’s standard material cost per tile is $8 (2 pounds of material × $4.00). Instructions Compute the total, price, and quantity material variances for Patt, Inc. for March. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 193

(5 min.)

Total materials variance = $3,640 U, (8,800 × $4.05) – (8,000 × $4.00). (Actual quantity × Actual price) – (Standard quantity × Standard price) = Total materials variance Materials price variance = $440 U, (8,800 × $4.05) – (8,800 × $4.00). (Actual quantity × Actual price) – (Actual quantity × Standard price) = Materials price variance Materials quantity variance = $3,200 U, (8,800 × $4.00) – (8,000 × $4.00). (Actual quantity × Standard price) – (Standard quantity × Standard price) = Materials quantity variance BE 194 During January, Ajax Co. incurs 1,850 hours of direct labor at an hourly cost of $11.80 to produce 1,000 units of its finished product. Ajax’s standard labor cost per unit of output is $22 (2 hours x $11.00). Instructions Compute the total, price, and quantity labor variances for Ajax Co. for January. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 194

(5 min.)

Total labor variance = $170 F, (1,850 × $11.80) – (2,000 × $11.00). (Actual hours × Actual rate) – (Standard hours × Standard rate) = Total labor variance Labor price variance = $1,480 U, (1,850 × $11.80) – (1,850 × $11.00). (Actual hours × Actual rate) – (Actual hours × Standard rate) = Labor price variance Labor quantity variance = $1,650 F, (1,850 × $11.00) – (2,000 × $11.00). (Actual hours × Standard rate) – (Standard hours × Standard rate) = Labor quantity variance .

Standard Costs and Balanced Scorecard

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BE 195 In October, Glazier Inc. reports 42,000 actual direct labor hours and incurs $194,000 of manufacturing overhead costs. Standard hours allowed for the month’s production is 40,000 hours. Glazier’s predetermined overhead rate is $5.00 per direct labor hour. Instructions Compute the total manufacturing overhead variance. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 195

(2 min.)

Actual Overhead – Overhead Applied = Total overhead Variance $194,000 – $200,000* = $6,000 F *40,000 × $5 = $200,000 a

BE 196

In October, Glazier Inc. reports 42,000 actual direct labor hours and incurs $194,000 of manufacturing overhead costs. Standard hours allowed for the month’s production is 40,000 hours. Glazier’s predetermined overhead rate is $5.00 per direct labor hour. The flexible manufacturing overhead budget shows that budgeted costs are $3.80 variable per direct labor hour and $60,000 fixed. Instructions Compute the manufacturing overhead controllable variance. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

Solution 196

(3 min.)

Actual overhead – Overhead Budgeted = Overhead Controllable Variance $194,000 – $212,000* = $18,000 F *(40,000 × $3.80) + $60,000 = $212,000 a

BE 197

In October, Glazier Inc. reports 42,000 actual direct labor hours and incurs $194,000 of manufacturing overhead costs. Standard hours allowed for the month’s production is 40,000 hours. Glazier’s predetermined overhead rate is $5.00 per direct labor hour. The flexible manufacturing overhead budget shows that budgeted costs are $3.80 variable per direct labor hour and $60,000 fixed. Compute the manufacturing overhead volume variance. Normal capacity was 50,000 direct labor hours. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

Solution 197

(3 min.)

Fixed Overhead Rate × (Normal Capacity Hours – Standard Hours Allowed) = Overhead Volume Variance .

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

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$1.20/hr. × (50,000 – 40,000) = $12,000 U BE 198 Jet Industries purchased 6,000 units of direct material on account for $17,600, when the standard cost was $18,000. Later in the month, Jet Industries issued 5,600 units of direct materials for production, when the standard units were 5,800. a

Instructions Journalize the transactions for Jet Industries to account for this activity. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

Solution 198 (a)

(b)

(5 min.)

Raw Materials Inventory ............................................................. Materials Price Variance ................................................... Accounts Payable .............................................................

18,000

Work in Process Inventory (5,800 × $3*)..................................... Materials Quantity Variance .............................................. Raw Materials Inventory (5,600 × $3)................................

17,400

400 17,600 600 16,800

*$3 = $18,000 ÷ 6,000 units a

BE 199 Pedra, Inc. incurred direct labor costs of $54,000 for 6,000 hours. The standard labor cost was $55,200. Direct labor for the month was 6,000 direct labor hours costing $54,000. The standard hours were 6,200. Instructions Journalize the transactions for Pedra, Inc. to account for this activity. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

Solution 199 (a)

(b)

(5 min.)

Factory Labor ........................................................................... Labor Price Variance....................................................... Factory Wages Payable ..................................................

55,200

Work in Process Inventory (6,200 × $9.20*).............................. Labor Quantity Variance ................................................. Factory Labor..................................................................

57,040

1,200 54,000 1,840 55,200

*$9.20 = $55,200 ÷ 6,000 hours a

BE 200

Manufacturing overhead data for the production of Product B by North Bank, Inc. are as follows. Overhead incurred for 69,000 actual direct labor hours worked Overhead rate (variable $2.00; fixed $1.00) at normal capacity of 72,000 direct labor hours Standard hours allowed for work done Instructions Compute the controllable and volume overhead variances. .

$206,000 $3.00 69,000

Standard Costs and Balanced Scorecard

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Ans: N/A, LO: 6, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

Solution 200

(5 min.)

Overhead controllable variance: Actual Overhead – Overhead Budgeted $206,000 – $210,000 [(69,000 × $2) + $72,000]

= $4,000 F

Overhead volume variance: Fixed Overhead Rate × Normal Capacity Hours = Standard Hours Allowed $1.00 × (72,000 – 69,000) = $3,000 U

EXERCISES Ex 201 Sonic, Inc. is planning to produce 2,500 units of product in 2022. Each unit requires 3 pounds of materials at $6 per pound and a half hour of labor at $16 per hour. The overhead rate is 75% of direct labor. Instructions (a) Compute the budgeted amounts for 2022 for direct materials to be used, direct labor, and applied overhead. (b) Compute the standard cost of one unit of product. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 201

(5 min.)

(a)

Direct materials: (2,500  3)  $6 $45,000 Direct labor: (2,500  1/2)  $16 $20,000 Overhead: $20,000  75% $15,000

(b)

Direct materials: 3  $6 Direct labor: 1/2  $16 Overhead: $8  75% Standard cost:

$18 8 6 $32

Ex. 202 Pane Corp. manufactures and sells a nutrition drink for children. It wants to develop a standard cost per gallon. The following are required for production of a 100 gallon batch: 1,960 ounces of lime Kool-Drink at $.12 per ounce 40 pounds of powdered honey at $.60 per pound 63 kiwi fruit at $.50 each 100 protein tablets at $.90 each 4,000 ounces of water at $.003 per ounce Pane estimates that 2% of the lime Kool-Drink is wasted, 20% of the powdered honey is lost, and 10% of the kiwis cannot be used. Instructions .

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

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Compute the standard cost of the ingredients for one gallon of the nutrition drink. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 202

(15–20 min.)

Ingredient Lime Kool-Drink Powdred Honey Kiwis Protein Tablets Water

Lime Kool-Drink Powdered Honey Kiwis Protein Tablets Water

(a) (b) (c)

Amount Per Gallon 19.6 oz. .40 lb. .63 1 40 oz.

Standard Waste 2% 20% 10% 0% 0%

Standard Usage Standard Price (a) 20.00 oz. $ .12 (b) .50 lb. .60 (c) .70 .50 1 .90 40 oz. .003 Standard Cost per Gallon

.98X = 19.6 ounces .80X = .40 pounds .90X = .63 kiwis

Standard Cost $2.40 .30 .35 .90 .12 $4.07

X = 20.00 X= .50 X= .70

Ex. 203 Engines Done Right Co. is trying to establish the standard labor cost of a typical engine tune-up. The following data have been collected from time and motion studies conducted over the past month. Actual time spent on the tune-up 1.0 hour Hourly wage rate $16 Payroll taxes 10% of wage rate Setup and downtime 10% of actual labor time Cleanup and rest periods 20% of actual labor time Employee benefits 25% of wage rate Instructions (a) Determine the standard direct labor hours per tune-up (b) Determine the standard direct labor hourly rate. (c) Determine the standard direct labor cost per tune-up. (d) If a tune-up took 1.5 hours at the standard hourly rate, what was the direct labor quantity variance? Ans: N/A, LO: 1, 3, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 203

(15 min.)

(a)

Actual service time Setup and downtime Cleanup and rest periods Standard direct labor hours per tune-up

(b)

Hourly wage rate

1.0 hours 0.1 hours 0.2 hours 1.3 hours $16.00

Standard Costs and Balanced Scorecard Payroll taxes ($16  10%) Employee benefits ($16  25%) Standard direct labor hourly rate Solution 203 (c)

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1.60 4.00 $21.60

(Cont’d)

Standard direct labor cost per tune-up = 1.30 hours  $21.60 per hour = $28.08

Direct labor quantity variance = (1.50 hours  $21.60) – (1.30 hours  $21.60) = $32.40 – $28.08 = $4.32 U Ex. 204 (d)

Riggins, Inc. manufactures one product called tybos. The company uses a standard cost system and sells each tybo for $8. At the start of monthly production, Riggins estimated 9,500 tybos would be produced in March. Riggins has established the following material and labor standards to produce one tybo: Standard Quantity 2.5 pounds 0.6 hours

Direct materials Direct labor

Standard Price $3 per pound $10 per hour

During March 2022, the following activity was recorded by the company relating to the production of tybos: 1. 2. 3. 4.

The company produced 9,000 units during the month. A total of 24,000 pounds of materials were purchased at a cost of $66,000. A total of 24,000 pounds of materials were used in production. 5,000 hours of labor were incurred during the month at a total wage cost of $55,000.

Instructions Calculate the following variances for March for Riggins, Inc. (a) Materials price variance (b) Materials quantity variance (c) Labor price variance (d) Labor quantity variance Ans: N/A, LO: 2, 3, Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 204

(10 min.)

(a) Materials price variance = (Actual quantity × Actual price) – (Actual quantity × Standard price) = (24,000 × $2.75) – (24,000 × $3) = $6,000 favorable (b) Materials quantity variance = (Actual quantity × Standard price) – (Standard quantity × Standard price) = (24,000 × $3) – [(9,000 × 2.5) × $3] = $4,500 unfavorable (c) Labor price variance = (Actual hours x Actual rate) – (Actual hours × Standard rate) = (5,000 × $11) – (5,000 × $10) = $5,000 unfavorable .

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

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(d) Labor quantity variance = (Actual hours × Standard rate) – (Standard hours × Standard rate) = (5,000 × $10) – [(0.6 × 9,000) × $10] = $4,000 favorable Ex. 205 The following direct labor data pertain to the operations of Pearce Corp. for the month of November: Actual labor rate Actual hours used Standard labor rate Standard hours allowed

$12.25 per hr. 18,000 $12.00 per hr. 17,100

Instructions Prepare a matrix and calculate the labor variances.

Price Variance

Quantity Variance

Total Labor Variance

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 205

(15–20 min.)

Actual Hours × Actual Rate 18,000 × $12.25 = $220,500

Actual Hours × Standard Rate 18,000 × $12.00 = $216,000

Standard Hours × Standard Rate 17,100 × $12.00 = $205,200

Price Variance

Quantity Variance

$4,500 U

$10,800 U

Standard Costs and Balanced Scorecard

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$15,300 U Ex. 206 The following direct materials data pertain to the operations of Wright Co. for the month of December. Standard materials price Actual quantity of materials purchased and used

$5.00 per pound 16,500 pounds

The standard cost card shows that a finished product contains 4 pounds of materials. The 16,500 pounds were purchased in December at a discount of 4% from the standard price. In December, 4,000 units of finished product were manufactured. Instructions Prepare a matrix for materials and calculate the materials variances.

Price Variance

Quantity Variance

Total Materials Variance

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 13, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 206

(13–18 min.)

Actual Quantity × Actual Price 16,500 × $4.80 = $79,200

Actual Quantity × Standard Price 16,500 × $5.00 = $82,500

Standard Quantity × Standard Price 16,000 × $5.00 = $80,000

Price Variance

Quantity Variance

$3,300 F

$2,500 U

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e Materials Variance $800 F

Ex. 207 Seacoast Company provided the following information about its standard costing system for 2022: Standard Data Materials Labor Budgeted production

Actual Data 10 lbs. @ $4 per lbs. Produced 4,000 units 3 hrs. @ $21 per hr. Materials purchased 50,000 lbs. costing $215,000 3,500 units Materials used 41,000 lbs. Labor worked 11,000 hrs. costing $220,000

Instructions Calculate the labor price variance and the labor quantity variance. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Hard, Min: 8, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 207

(8 min.)

Labor price (rate) variance = (Actual hours x Actual rate) – (Actual hours x Standard rate) = (11,000 × $20) – (11,000 × $21) = $11,000 favorable Labor quantity (efficiency) variance = (Actual hours × Standard rate) – (Standard hours × Standard rate) = (11,000 × $21) – (3 × 4,000 × $21) = $21,000 favorable Ex. 208 Lumberman Manufacturing provided the following information about its standard costing system for 2022: Standard Data Materials Labor Budgeted production

10 lbs. @ $4 per lbs. 3 hrs. @ $21 per hr. 3,500 units

Actual Data Produced 4,000 units Materials purchased 50,000 lbs. for $215,000 Materials used 41,000 lbs. Labor worked 11,000 hrs. costing $220,000

Instructions Determine the amount of the materials price variance. By how much will the materials price variances differ if the price variance is determined at the time of production? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 6, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 208

(6 min.)

Identification of price variances at the time of purchase: Materials price variance = (Actual quantity purchased × Actual price) – (Actual quantity purchased x Standard price) = (50,000 × $4.30) – (50,000 × $4) = $15,000 Unfavorable

Identification of price variances at the time of production: Materials price variance = (Actual quantity used × Actual price) – (Actual quantity used × Standard price) = (41,000 × $4.30) – (41,000 × $4) = $12,300 Unfavorable .

Standard Costs and Balanced Scorecard

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Difference = $15,000 – $12,300 = $2,700 Unfavorable Ex. 209 Shep Corporation estimated it would produce 6,200 compost bins, though actual production was 6,000 during August. The standard labor cost is based on producing 2 bins per hour at $18.00 per hour. Actual cost per hour was $18.40 with a total labor cost of $53,360. Instructions Determine the amounts of the labor price and the labor quantity variances for August. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 209

(8 min.)

Labor price (rate) variance = (Actual hours × Actual rate) – (Actual hours × Standard rate) = (2,900 × $18.40) – (2,900 × $18) = $1,160 Unfavorable Labor quantity (efficiency) variance = (Actual hours × Standard rate) – (Standard hours × Standard rate) = (2,900 × $18) – [(6,000 × 1/2 × $18) = $1,800 Favorable Ex. 210 Purvis Manufacturing, which produces a single product, has prepared the following standard cost sheet for one unit of the product. Direct materials (6 pounds at $2 per pound) Direct labor (2 hours at $12 per hour)

$12 $24

During the month of April, the company manufactures 300 units and incurs the following actual costs. Direct materials purchased and used (1,850 pounds) Direct labor (620 hours)

$4,070 $7,130

Instructions Compute the total, price, and quantity variances for materials and labor. Ans: N/A, LO: 2, 3, Bloom: AP, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 210

(15 min.)

Total materials variance: (AQ  AP ) – (SQ  SP) (1,850  $2.20*) – (1,800**  $2) $4,070 – $3,600 = $470 U Materials price variance: (AQ  AP ) – (AQ  SP) (1,850  $2.20) – (1,850  $2) $4,070 – $3,700

= $370 U

*$4,070  1,850

**300  6

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 210

(Cont’d)

Materials quantity variance: (AQ  SP) – (SQ  SP) (1,850  $2) – (1,800  $2) $3,700 – $3,600

= $100 U

Total labor variance: (AH  AR ) – (SH  SR) (620  $11.50*) – (600**  $12) $7,130 – $7,200

= $70 F

*$7,130  620

**300  2

Labor price variance: (AH  AR) – (AH  SR) (620  $11.50) – (620  $12) $7,130 – $7,440

= $310 F

Labor quantity variance: (AH  SR) – (SH  SR) (620  $12) – (600  $12) $7,440 – $7,200

= $240 U

Ex. 211 Platt Company produces one product, a putter called PAR-putter. Platt uses a standard cost system and determines that it should take one hour of direct labor to produce one PAR-putter. The normal production capacity for the putter is 100,000 units per year. The total budgeted overhead at normal capacity is $500,000 comprised of $200,000 of variable costs and $300,000 of fixed costs. Platt applies overhead on the basis of direct labor hours. During the current year, the company produced 85,000 putters, paid employees for 89,000 direct labor hours, and incurred variable overhead costs of $160,000 and fixed overhead costs of $300,000. Instructions (a) Compute the predetermined variable overhead rate and the predetermined fixed overhead rate. (b) Compute the applied overhead for Platt for the year. (c) Compute the total overhead variance. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Standard Costs and Balanced Scorecard Solution 211

(15 min.)

(a)

Overhead Budget (at normal capacity) $200,000 300,000

Variable Fixed (b)



Standard Hours Allowed 85,000

Direct Labor Hours (at normal capacity) 100,000 100,000



Predetermined Overhead Rate $2 $3

Predetermined Overhead Rate $5



Overhead Applied $425,000



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– –

Total Overhead  Variance  $35,000 U

Overhead Applied $425,000 (85,000  $5)

Ex. 212 Hector Company has developed the following standard costs for its product for 2022: HECTOR COMPANY Standard Cost Card Product A Cost Component Standard Quantity Direct materials 4 pounds Direct labor 3 hours Manufacturing overhead 3 hours

Standard Price $3 8 4

Standard Cost $12 24 12 $48

The company expected to produce 30,000 units of Product A in 2022 using 90,000 direct labor hours. Actual results for 2022 are as follows:  31,000 units of Product A were produced.  Actual direct labor costs were $746,200 for 91,000 direct labor hours worked.  Actual direct materials purchased and used during the year cost $346,500 for 126,000 pounds.  Actual variable overhead incurred was $155,000 and actual fixed overhead incurred was $205,000. Instructions Compute the following variances showing all computations to support your answers. Indicate whether the variances are favorable or unfavorable. (a) Materials quantity variance. (b) Total direct labor variance. (c) Direct labor quantity variance. (d) Direct materials price variance. (e) Total overhead variance. Ans: N/A, LO: 2, 3, Bloom: AN, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 212

(20–25 min.)

(a) Materials quantity variance = $6,000 unfavorable. (AQ × SP) – (SQ × SP) = Materials quantity variance (126,000 × $3) – (124,000 × $3) = $378,000 – $372,000 = $6,000 unfavorable SQ = 31,000 × 4 = 124,000 pounds (b) Total direct labor variance = $2,200 unfavorable. (AH × AR) – (SH × SR) = Total direct labor variance (91,000 × $8.20*) – (93,000 × $8) = $746,200 – $744,000 = $2,200 unfavorable SH = 31,000 × 3 = 93,000 direct labor hours *($746,200 ÷ 91,000)

(c) Direct labor quantity variance = $16,000 favorable. (AH × SR) – (SH × SR) = Direct labor quantity variance (91,000 × $8) – (93,000 × $8) = $728,000 – $744,000 = $16,000 favorable (d) Direct materials price variance = $31,500 favorable. (AQ × AP) – (AQ × SP) = Direct materials price variance (126,000 × $2.75*) – (126,000 × $3) = $346,500 – $378,000 = $31,500 favorable *($346,500 ÷ 126,000)

(e) Total overhead variance = $12,000 favorable. (Actual overhead) – (Overhead applied) = Total overhead variance ($155,000 + $205,000) – (93,000 × $4) = $360,000 – $372,000 = $12,000 favorable Standard hours = 31,000 × 3 = 93,000 direct labor hours Ex. 213 Dart Company developed the following standard costs for its product for 2022: DART COMPANY Standard Cost Cost Components Direct materials Direct labor Variable overhead Fixed overhead

Standard Quantity 4 pounds 2 hours 2 hours 2 hours

Standard Price $ 5 10 4 2

Standard Cost $20 20 8 4 $52

The company expected to work at the 120,000 direct labor hours level of activity and produce 60,000 units of product. Actual results for 2022 were as follows:  56,800 units of product were actually produced.  Direct labor costs were $1,092,000 for 112,000 direct labor hours actually worked.  Actual direct materials purchased and used during the year cost $1,108,800 for 231,000 pounds.  Total actual manufacturing overhead costs were $680,000. Instructions .

Standard Costs and Balanced Scorecard

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Compute the following variances for Dart Company for 2022 and indicate whether the variance is favorable or unfavorable. 1. Direct materials price variance. 2. Direct materials quantity variance. 3. Direct labor price variance. 4. Direct labor quantity variance. a 5. Overhead controllable variance. a 6. Overhead volume variance. Ans: N/A, LO: 2, 3, 6, Bloom: AN, Difficulty: Moderate, Min: 20, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 213

(20–25 min.)

1. Direct materials price variance = $46,200 favorable. (AQ × AP) – (AQ × SP) = Materials price variance (231,000 × $4.80*) – (231,000 × $5) = $1,108,800 – $1,155,000 = $46,200 favorable *($1,108,800 ÷ 231,000)

2. Direct materials quantity variance = $19,000 unfavorable. (AQ × SP) – (SQ × SP) = Materials quantity variance (231,000 × $5) – (227,200 × $5) = $1,155,000 – $1,136,000 = $19,000 unfavorable SQ = 56,800 products × 4 lbs. = 227,200 lbs. 3. Direct labor price variance = $28,000 favorable. (AH × AR) – (AH × SR) = Labor price variance (112,000 × $9.75*) – (112,000 × $10) = $1,092,000 – $1,120,000 = $28,000 favorable *($1,092,000 ÷ 112,000)

4. Direct labor quantity variance = $16,000 favorable. (AH × SR) – (SH × SR) = Labor quantity variance (112,000 × $10) – (113,600 × $10) = $1,120,000 – $1,136,000 = $16,000 favorable SH = 56,800 units × 2 hrs. = 113,600 direct labor hours a

5. Overhead controllable variance = $14,400 favorable. Actual overhead – Budgeted overhead for = Controllable overhead variance standard hours allowed $680,000 – $694,400 = $14,400 favorable Budgeted overhead for 113,600 direct labor hours allowed (56,800 x 2) Variable overhead (113,600 × $4) = $454,400 Fixed overhead = 240,000 $694,400

6. Overhead volume variance = $12,800 unfavorable. Volume variance: (120,000 – 113,600) × $2/SH = $12,800 unfavorable

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ex. 214 Flagstaff, Inc. uses standard costing for its one product, baseball bats. The standards call for 3 board-feet of wood at $1.40 per board-foot, and 45 minutes of work at $12 per hour per bat. Total manufacturing overhead costs were estimated at $9,450, of which the variable portion was $0.50 per bat and the fixed portion was $1.00 per bat with an estimate of 6,300 bats to be produced. Flagstaff identifies price variances at the earliest possible point in time. During March, the company had the following results: Direct labor used = 4,800 hours at a cost of $56,400 Actual manufacturing overhead fixed costs = $6,000 Actual manufacturing overhead variable costs = $3,100 Bats produced = 6,000 Instructions Compute the following variances for March. 1. Labor quantity variance 2. Total labor variance a 3. Overhead controllable variance a 4. Overhead volume variance Ans: N/A, LO: 3, 6, Bloom: AP, Difficulty: Moderate, Min: 12, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 214

(12 min.)

1. Labor quantity variance = (Actual hours × Standard rate) – (Standard hours × Standard rate) = (4,800 × $12) – [(3/4 × 6,000) × $12] = $3,600 Unfavorable 2. Total labor variance = (Actual hours × Actual rate) – (Standard hours × Standard rate) = (4,800 × $11.75*) – [(3/4 × 6,000) × $12 = $2,400 Unfavorable *(56,400 ÷ 4,800) a

3. Overhead controllable variance = Actual overhead – Overhead budgeted = ($3,100 + $6,000) – [($0.50 × 6,000) + $6,300] = $200 Favorable

4. Overhead volume variance = (Normal hours – Standard hours) × Fixed overhead rate = [(6,300 × 3/4) – 4,500*] × $1.33** = $299 Unfavorable *(6,000 x ¾) **$1.00 ÷ 3/4 hr./bat

Standard Costs and Balanced Scorecard

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Ex. 215 Prescott Manufacturing manufactures widgets for distribution. The standard costs for the manufacture of widgets follow: Standard Cost Actual Cost Direct materials 3 lbs. per widget at 31,000 lbs. at $34 $35 per pound per pound Direct labor

Factory overhead

2.5 hours per widget at $11 per hour

22,500 hours at $11.80 per hour

Variable cost, $24/widget Fixed cost, $40/widget

$241,500 variable cost $381,250 fixed cost

Budgeted factory overhead was $640,000. Overhead applied is based on the number of widgets produced. The company estimated that 10,000 widgets would be produced; however, only 9,600 were produced. Instructions Calculate the following amounts. 1. Rate at which total factory overhead is applied 2. Materials price variance 3. Total materials variance a 4. Overhead volume variance a 5. Overhead controllable variance Ans: N/A, LO: 2, 6, Bloom: AP, Difficulty: Hard, Min: 12, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 215

(12 min.)

1. Budgeted overhead cost/budgeted activity = $640,000 ÷ 10,000 = $64 per widget 2. Materials price variance = (Actual quantity × Actual price) – (Actual quantity × Standard price) = (31,000 × $34) – (31,000 × $35) = $31,000 Favorable 3. Total materials variance = (Actual quantity × Actual price) – (Standard quantity × Standard price) = (31,000 × $34) – [(3 × 9,600) × $35] = $46,000 Unfavorable a

4. Overhead volume variance = (Normal hours – Standard hours) × Fixed overhead rate = (25,000 – 24,000*) × $16** = $16,000 Unfavorable *(2.5 x 9,600) **$40 ÷ 2.5

5. Overhead controllable variance = Actual overhead – Overhead budgeted = [$241,500 + $381,250] – [($24 × 9,600) + ($40 × 10,000)] = $7,650 Favorable

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

24 - 54 Ex. 216

More Hits Company manufactures aluminum baseball bats that it sells to university athletic departments. It has developed the following per unit standard costs for 2022 for each baseball bat: Manufacturing Direct Materials Direct Labor Overhead Standard Quantity 2 Pounds (Aluminum) 1/2 hour 1/2 hour Standard Price $4.00 $10.00 $6.00 Unit Standard Cost $8.00 $5.00 $3.00 In 2022, the company planned to produce 120,000 baseball bats at a level of 60,000 hours of direct labor. Actual results for 2022 are presented below: 1. Direct materials purchases were 220,000 pounds of aluminum which cost $913,000. 2. Direct materials used were 220,000 pounds of aluminum. 3. Direct labor costs were $575,260 for 58,700 direct labor hours actually worked. 4. Total manufacturing overhead was $352,000. 5. Actual production was 114,000 baseball bats. Instructions (a) Compute the following variances: 1. Direct materials price. 2. Direct materials quantity. 3. Direct labor price. 4. Direct labor quantity. 5. Total overhead variance. a

(b) Prepare the journal entries to record the transactions and events in 2022.

Ans: N/A, LO: 2, 3, 5, Bloom: AP, Difficulty: Hard, Min: 40, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 216

(40–45 min.)

(a) 1. Direct materials price variance = $36,900 Unfavorable. (AQ × AP) – (AQ × SP) (220,000 × $4.15) – (220,000 × $4.00) = $913,000 – $880,000 = $33,000 U 2. Direct materials quantity variance = $32,000 Favorable. (AQ × SP) – (SQ × SP) (220,000 × $4.00) – (228,000* × $4.00) = $880,000 – $912,000 = $32,000 F *SQ = 114,000 × 2 pounds = 228,000 pounds 3. Direct labor price variance = $11,740 Favorable. (AH × AR) – (AH × SR) (58,700 × $9.80*) – (58,700 × $10.00) = $575,260 – $587,000 = $11,740 F * $575,260 ÷ 58,700

4. Direct labor quantity variance = $17,000 Unfavorable. (AH × SR) – (SH × SR) (58,700 × $10.00) – (57,000* × $10.00) = $587,000 – $570,000 = $17,000 U *SH = 114,000 × 1/2 hour = 57,000 hours

5. Actual overhead – Overhead applied = Total overhead variance. $352,000 – $342,000* = $10,000 Unfavorable *SH = 57,000 × $6.00 = $342,000

Standard Costs and Balanced Scorecard Solution 216

24 - 55

(Cont’d)

(b) 1. Raw Materials Inventory.......................................................... Materials Price Variance ......................................................... Accounts Payable ............................................................ (To record purchase of materials)

880,000 33,000

2. Work in Process Inventory ...................................................... Materials Quantity Variance ............................................. Raw Materials Inventory .................................................. (To record issuance of direct materials)

912,000

3. Factory Labor.......................................................................... Labor Price Variance ....................................................... Factory Wages Payable ................................................... (To record direct labor costs)

587,000

4. Work in Process Inventory ...................................................... Labor Quantity Variance ........................................................ Factory Labor .................................................................. (To assign factory labor to jobs)

570,000 17,000

913,000

32,000 880,000

11,740 575,260

587,000

5. Manufacturing Overhead .............................................................. 352,000 Accounts Payable/Cash etc. ............................................ (To record overhead incurred)

352,000

6. Work in Process Inventory ............................................................ 342,000 Manufacturing Overhead ................................................. (To assign overhead to jobs)

342,000

7. Finished Goods Inventory (114,000 × $16.00*) .......................... 1,824,000 Work in Process Inventory ............................................... (To record transfer of completed work to finished goods)

1,824,000

*($8 + $5 + $3)

Ex. 217 The standard cost of Product 245 manufactured by Albert Industries includes 2 pounds of direct materials at $4.00 per pound. During September, 40,000 pounds of direct materials are purchased at a cost of $3.85 per pound, and all of the direct materials are used to produce 19,000 units of Product 245. Instructions (a) Compute the materials price and quantity variances. a

(b) Journalize the purchase of the materials and the issuance of the materials, assuming a standard cost system is used.

Ans: N/A, LO: 2, 5, Bloom: AP, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 217

(15–20 min.)

(a) Materials Price Variance: $154,000 – $160,000 = (40,000 × $3.85) (40,000 × $4.00)

$6,000 F

Materials Quantity Variance: $160,000 – $152,000 = (40,000 × $4.00) *(38,000 × $4.00)

$8,000 U

*19,000 × 2 pounds = 38,000 a

(b) Raw Materials Inventory................................................................ Materials Price Variance....................................................... Accounts Payable.................................................................

160,000

Work in Process Inventory ............................................................ Materials Quantity Variance .......................................................... Raw Materials Inventory .......................................................

152,000 8,000

6,000 154,000

160,000

Ex. 218 Aztec, Inc.'s standard labor cost of producing one unit of product is 2 hours at the rate of $14.00 per hour. During February, 52,000 hours of labor are incurred at a cost of $13.80 per hour to produce 25,000 units of product. Instructions (a) Compute the labor price and labor quantity variances. a

(b) Journalize the incurrence of the labor costs and the assignment of direct labor to production, assuming a standard cost system is used.

Ans: N/A, LO: 3, 5, Bloom: AP, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 218

(15–20 min.)

(a) Labor Price Variance: $717,600 – $728,000 = $10,400 F (52,000 × $13.80) (52,000 × $14.00) Labor Quantity Variance: $728,000 – $700,000 = $28,000 U (52,000 × $14.00) (50,000 × $14.00) a

(b) Factory Labor................................................................................ Labor Price Variance ............................................................ Factory Wages Payable .......................................................

728,000

Work in Process Inventory ............................................................ Labor Quantity Variance ............................................................... Factory Labor .......................................................................

700,000 28,000

10,400 717,600

728,000

Standard Costs and Balanced Scorecard

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Ex. 219 The following direct labor data pertain to the operations of Murray Industries for the month of November: Standard labor rate Actual hours incurred

$15.00 per hr. 9,000

Standard costs are 2.5 direct labor hours to complete one unit of product. The actual labor rate incurred exceeded the standard rate by 10%. Four thousand units were manufactured in November. Instructions (a) Construct a matrix to calculate the price, quantity, and total labor variances. a (b) Journalize the entries to record the labor variances. Ans: N/A, LO: 3, 5, Bloom: AP, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 219 (a)

(15–20 min.)

Actual Hours × Actual Rate 9,000 × $16.50 = $148,500

Actual Hours × Standard Rate 9,000 × $15.00 = $135,000

Standard Hours × Standard Rate 10,000 × $15.00 = $150,000

Price Variance

Quantity Variance

$13,500 U

$15,000 F

Total Labor Variance $1,500 F a

(b) Factory Labor ............................................................................... Labor Price Variance .................................................................... Factory Wages Payable ................................................................

135,000 13,500

Work in Process Inventory ............................................................ Labor Quantity Variance....................................................... Factory Labor .......................................................................

150,000

148,500 15,000 135,000

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

24 - 58 a

Ex. 220

North Coast Manufacturing provided the following information about its standard costing system for 2022: Standard Data Actual Data Labor Budgeted fixed overhead Budgeted variable overhead Budgeted production

2 hrs. @ $21 per hr. $100,000 $30 per unit 10,000 units

Produced Labor worked Actual overhead

9,000 units 17,000 hrs. costing $340,000 $375,000

North Coast applies fixed overhead at $10 per unit produced. Instructions Determine the amounts of the overhead variances. Ans: N/A, LO: 3, 6, Bloom: AP, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

Solution 220

(8 min.)

Overhead controllable variance = Actual overhead - Overhead budgeted = $375,000 – [($100,000 + (9,000 × $30)] = $5,000 Unfavorable Overhead volume variance = (Normal hours – Standard hours) × Fixed overhead rate = [(10,000 × 2) – (9,000 × 2)] × $5/hr. = $10,000 Unfavorable Total overhead variance = Actual overhead – Overhead applied = $375,000 – [($30 + $10) × 9,000] = $15,000 Unfavorable Ex. 221 Caroline, Inc. planned to produce 20,000 units of product and work 100,000 direct labor hours in 2022. Manufacturing overhead at the 100,000 direct labor hours level of activity was estimated to be: Variable manufacturing overhead Fixed manufacturing overhead Total manufacturing overhead

$ 700,000 300,000 $1,000,000

At the end of 2022, 19,000 units of product had been produced and 98,000 actual direct labor hours had been worked. Total actual overhead costs for 2022 were $935,000. Instructions (a) Compute the total overhead variance. a (b) Compute the overhead controllable variance. a (c) Compute the overhead volume variance. Ans: N/A, LO: 3, 6, Bloom: AP, Difficulty: Moderate, Min: 11, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Standard Costs and Balanced Scorecard Solution 221

24 - 59

(11–16 min.)

(a) Actual overhead $935,000

– –

Overhead applied $950,000

= Total overhead variance = $15,000 favorable

Overhead applied = 19,000 units × 5 hrs. = 95,000 standard hours allowed 95,000 × $10 = $950,000 a

(b) Actual overhead $935,000

– Overhead budgeted = Overhead controllable variance – $965,000 = $30,000 favorable

Overhead budgeted at 95,000 actual direct labor hours allowed. Variable overhead (95,000 × $7) Fixed overhead

$ 665,000 300,000 $965,000

(c) (Normal capacity hours – Standard hours allowed)× Fixed overhead rate= Overhead volume variance (100,000 – 95,000) × $3/hour = $15,000 unfavorable

Ex. 222

Jackson Manufacturing planned to produce 20,000 units of product and work at the 60,000 direct labor hours level of activity for 2022. Manufacturing overhead at this level of activity and the predetermined overhead rate are as follows: Predetermined Overhead Rate per Direct Labor Hour Variable manufacturing overhead $300,000 $5 Fixed manufacturing overhead 120,000 2 Total manufacturing overhead $420,000 $7 At the end of 2022, 21,000 units were actually produced and 61,500 direct labor hours were actually worked. Total actual manufacturing overhead costs were $430,000. Instructions Using a two-variance analysis of manufacturing overhead, calculate the following variances and indicate whether they are favorable or unfavorable: (a) Overhead controllable variance. (b) Overhead volume variance. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Moderate, Min: 12, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

Solution 222

(12–17 min.)

(a) Overhead controllable variance = $5,000 favorable. Overhead budgeted for standard hours allowed Variable overhead (63,000* × $5) Fixed overhead Actual overhead incurred Overhead controllable variance *[(60,000 ÷ 20,000) x 21,000]

= =

$315,000 120,000 435,000 430,000 $ 5,000 favorable

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

(Cont’d)

Solution 222

(b) Overhead volume variance = $6,000 favorable. Overhead volume variance: (Normal capacity hours – Standard hours allowed) × Fixed overhead rate (60,000 – 63,000) × $2/hr. = $6,000 favorable Ex. 223 Adam Corporation prepared the following variance report. ADAM CORPORATION Variance Report—Purchasing Department for Week Ended January 9, 2022 Type of Materials Brown Green White

Quantity Purchased ? lbs. 8,000 oz. 22,000 units

Actual Price $5.25 ? $0.45

Standard Price $5.00 3.25 ?

Price Variance $6,000 ? 1,600 U 660 F

Explanation Price increase Rush order Bought larger quantity

Instructions Fill in the appropriate amounts or letters for the question marks in the report. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 223

(15 min.) ADAM CORPORATION Variance Report – Purchasing Department For Week Ended January 9, 2022

Type of Materials Brown Green White

Quantity Purchased 24,000 lbs. 8,000 oz. 22,000 units

Actual Price $5.25 $3.45 $0.45

Standard Price $5.00 $3.25 $0.48

Price Variance $6,000 U $1,600 U $ 660 F

Explanation Price increase Rush order Bought larger quantity

24,000 = $6,000/($5.25 – $5.00). $6,000 U because the actual price ($5.25) exceeds the standard price ($5.00). $1,600/8,000 = $0.20; $3.25 + $0.20 = $3.45 $660/22,000 = $0.03; $0.45 + $0.03 = $0.48

Standard Costs and Balanced Scorecard

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Ex. 224 Pepper Industries uses a standard cost accounting system. During March, 2022, the company reported the following manufacturing variances: Materials price variance Materials quantity variance Labor price variance Labor quantity variance Overhead controllable Overhead volume

$1,600 2,400 600 2,200 500 3,000

F U U U F U

In addition, 15,000 units of product were sold at $18 per unit. Each unit sold had a standard cost of $14. Selling and administrative expenses for the month were $15,000. Instructions Prepare an income statement for management for the month ending March 31, 2022. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 224

(15–20 min.) PEPPER INDUSTRIES Income Statement For the Month Ended March 31, 2022

Sales (15,000 × $18)............................................................................ Cost of goods sold (15,000 × $14) ....................................................... Gross profit (at standard) ..................................................................... Variances: Materials price ............................................................................. Materials quantity ........................................................................ Labor price .................................................................................. Labor quantity ............................................................................. Overhead controllable ................................................................. Overhead volume ........................................................................ Total variances (unfavorable) ............................................. Gross profit (actual) ............................................................................. Selling and administrative expenses .................................................... Net income...........................................................................................

$270,000 210,000 60,000 $(1,600) 2,400 600 2,200 (500) 3,000 6,100 53,900 15,000 $ 38,900

Ex. 225

Howard, Inc. developed the following standards for 2022: Howard, Inc. Standard Cost Card Cost Components Direct materials Direct labor Manufacturing overhead

Standard Quantity 5 pounds 1 hour 1 hour

Standard Price $ 5 $18 $10

Standard Cost $25 18 10 $53

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ex. 225 (Cont’d)

The company planned to produce 120,000 units of product and work at the 120,000 direct labor level of activity in 2022. The company uses a standard cost accounting system which records standard costs in the accounts and recognizes variances in the accounts at the earliest opportunity. During 2022, 116,000 actual units of product were produced. Instructions Prepare the journal entries to record the following transactions for Howard, Inc. during 2022. (a) Purchased 588,000 pounds of direct materials for $4.90 per pound on account. (b) Actual direct labor payroll amounted to $2,108,000 for 114,000 actual direct labor hours worked. Factory labor cost is to be recorded and distributed to production. (c) Direct materials issued for production amounted to 588,000 pounds which actually cost $4.90 per pound. (d) Actual manufacturing overhead costs incurred were $1,152,000 in 2022. (e) Manufacturing overhead was applied when the 116,000 units were completed. (f) Transferred the 116,000 completed units to finished goods. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 20, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

Solution 225

(20–25 min.)

(a) Raw Materials Inventory ..................................................................2,940,000 Materials Price Variance ..................................................... Accounts Payable ............................................................... (To record purchase of materials) (b) Factory Labor ..................................................................................2,052,000 Labor Price Variance..................................................................... 56,000 Factory Wages Payable ...................................................... (To record direct labor costs) Work in Process Inventory ...............................................................2,088,000 Labor Quantity Variance ..................................................... Factory Labor...................................................................... (To assign factory labor to jobs) (c) Work In Process Inventory ...............................................................2,900,000 Materials Quantity Variance .......................................................... 40,000 Raw Materials Inventory...................................................... (To record issuance of direct materials)

58,800 2,881,200

2,108,000

36,000 2,052,000

2,940,000

(d) Manufacturing Overhead .................................................................1,152,000 Accounts Payable/Cash/Acc. Depreciation ......................... (To record overhead incurred)

1,152,000

(e) Work In Process Inventory ...............................................................1,160,000 Manufacturing Overhead..................................................... (To assign overhead to jobs)

1,160,000

(f)

Finished Goods Inventory ................................................................6,148,000 Work In Process Inventory .................................................. (To record transfer of completed units to finished goods) .

6,148,000

Standard Costs and Balanced Scorecard

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Ex. 226

Presented below is a flexible manufacturing overhead budget for Ganem Manufacturing, which manufactures fine timepieces: Activity Index: Standard direct labor hours Variable costs Indirect materials Indirect labor Utilities Total variable Fixed costs Supervisory salaries Rent Total fixed Total costs

2,800

3,200

3,600

4,000

$ 5,600 3,220 7,280 16,100

$ 6,400 3,680 8,320 18,400

$ 7,200 4,140 9,360 20,700

$ 8,000 4,600 10,400 23,000

1,000 3,000 4,000 $20,100

1,000 3,000 4,000 $22,400

1,000 3,000 4,000 $24,700

1,000 3,000 4,000 $27,000

The company applies the overhead on the basis of direct labor hours at $7.00 per direct labor hour and the standard hours per timepiece is 1/2 hour each. The company's actual production was 5,400 timepieces with 2,700 actual hours of direct labor. Normal capacity is 3,200 hours. Actual overhead was $20,200. Instructions (a) Compute the controllable and volume overhead variances. a

(b) Prepare the entries for manufacturing overhead during the period and the entry to recognize the overhead variances at the end of the period.

Ans: N/A, LO: 5, 6, Bloom: AP, Difficulty: Moderate, Min: 16, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

Solution 226

(16–21 min.)

(a) Computation of variances: Actual overhead – Budgeted overhead $20,200 – [(5,400 × 1/2 × $5.75*) + $4,000]

= =

Controllable overhead variance $675 Unfavorable

* $16,100 ÷ 2,800

Overhead volume variance: (Normal hours – Standard hours) × Fixed overhead rate (3,200 – 2,700) × ($4,000  3,200) = $625 Unfavorable (b) 1. Manufacturing Overhead......................................................... Accounts Payable, Cash, Etc. ......................................... (To record overhead incurred)

20,200

2. Work in Process Inventory ..................................................... Manufacturing Overhead ................................................ (To assign overhead to production)

18,900

3. Overhead Controllable Variance ............................................ Overhead Volume Variance ...................................................

675 625

20,200

18,900

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

24 - 64

Manufacturing Overhead ................................................. (To recognize overhead variances)

1,300

Ex. 227 The following information was taken from the annual manufacturing overhead cost budget of Cinnamon Manufacturing: Variable manufacturing overhead costs Fixed manufacturing overhead costs Normal production level in direct labor hours Normal production level in units

$186,000 $124,000 62,000 31,000

During the year, 30,000 units were produced, 64,000 hours were worked and actual manufacturing overhead costs were $322,000. The actual fixed manufacturing overhead costs did not deviate from the budgeted fixed manufacturing overhead costs. Overhead is applied on the basis of direct labor hours. Instructions (a) Compute the total, fixed, and variable predetermined manufacturing overhead rates. a

(b) Compute the total, controllable, and volume overhead variances.

Ans: N/A, LO: 3, 6, Bloom: AP, Difficulty: Moderate, Min: 13, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 227

(13–18 min.)

(a) Item Variable Overhead Fixed Overhead Total Overhead

Amount $186,000 124,000 $310,000

Hours 62,000 62,000 62,000

Rate $3 2 $5

(b) Total overhead variance: Actual overhead – Overhead applied ($322,000) (60,000* hours × $5.00)

= $22,000 U

*[(62,000 ÷ 31,000) x 30,000]

Overhead controllable variance: Actual overhead – Overhead budgeted = $18,000 U ($322,000) [(60,000 × $3) + $124,000] Overhead volume variance: (Normal capacity hours – Standard hours allowed) × Fixed overhead rate (62,000 – 60,000) × $2/hr. = $4,000 U

Standard Costs and Balanced Scorecard

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Ex. 228 Monte Industries uses a standard costing system. The following data are available for July: a. b. c. d. e.

Actual manufacturing overhead cost incurred: $22,000 Actual machine hours worked: 1,600 Overhead volume variance: $3,600 Unfavorable Total overhead variance: $2,000 Unfavorable Overhead is assigned to production on the basis of machine hours

Instructions Determine the amount of (1) the controllable overhead variance and (2) the overhead applied. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Moderate, Min: 6, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 228

(6 min.)

(1) Volume variance plus controllable variance = total overhead variance $3,600 U + X = $2,000 U; so controllable variance = $1,600 F (2) Overhead applied = $20,000 ($22,000 – $2,000)

COMPLETION STATEMENTS 229. A is expressed as a unit amount while a expressed as a total amount.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

230. Standards that reflect optimum performance under perfect operating conditions are called standards, but most companies use standards which are rigorous but attainable. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

231. In developing a standard cost for direct materials used in making a product, consideration should be given to two factors: (1) per unit of direct materials and (2) the of direct materials to produce one unit of product. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

232. The difference between actual hours times the actual pay rate and actual hours times the standard pay rate is the labor variance. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

233. The standard number of hours allowed times the predetermined overhead rate is the amount of to the products produced. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

234. The difference between actual quantity of materials times the standard price and standard quantity times the standard price is the materials variance. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

24 - 66

235. If the actual direct labor hours worked is greater than the standard hours, the labor quantity variance will be . The labor rate variance will be if the standard rate of pay is greater than the actual rate of pay. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

236. In using variance reports, top management normally looks for variances. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

237. A two-variance approach to analyzing overhead variances requires the calculation of the overhead variance and the overhead variance.

Ans: N/A, .LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management a

238. The overhead variance is the difference between normal capacity hours and standard hours allowed times the fixed overhead rate.

Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Answers to Completion Statements 229. 230. 231. 232. 233. 234. 235. 236. a 237. a 238.

standard, budget ideal, normal price, quantity price overhead applied quantity unfavorable, favorable significant controllable, volume volume

MATCHING 239. Match the items in the two columns below by entering the appropriate code letter in the space provided. A. B. a C. D. E.

Variances Standard costs Standard cost accounting system Normal standards Ideal standards

F. G. a H. a I. J.

Materials price variance Labor quantity variance Overhead controllable variance Overhead volume variance Standard hours allowed

1. The difference between actual overhead incurred and overhead budgeted for the standard hours allowed. 2. The hours that should have been worked for the units produced. 3. The difference between the actual quantity times the actual price and the actual quantity times the standard price. 4. The difference between total actual costs and total standard costs. .

Standard Costs and Balanced Scorecard

24 - 67

5. The difference between actual hours times the standard rate and standard hours times the standard rate. 6. Predetermined unit costs that are measures of performance. 7. The difference between normal capacity hours and standard hours allowed times the fixed overhead rate. 8. Standards based on an efficient level of performance that are attainable under expected operating conditions. 9. Standards based on the optimum level of performance under perfect operating conditions. 10. A double-entry system of accounting in which standard costs are used in making entries and variances are recognized in the accounts. Ans: N/A, LO: 1-3, 5, 6, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Answers to Matching a

1. 2. 3. 4. 5.

6. 7. 8. 9. 10.

H J F A G

B I D E C

SHORT-ANSWER ESSAY QUESTIONS S-A E 240 (a) Explain the similarities and differences between standards and budgets. (b) Contrast the accounting for standard and budgets. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 240 (a) Standards and budgets are similar in that both are predetermined costs and both contribute significantly to management planning and control. The two terms differ in that a standard is a unit amount and a budget is a total amount. (b)

There are important accounting differences between budgets and standards. Except in the application of manufacturing overhead to jobs and processes, budget data are not journalized in cost accounting systems. In contrast, standard costs may be incorporated into cost accounting systems. It is possible for a company to report inventories at standard costs in its financial statements, but it is not possible to report inventories at budgeted costs.

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

S-A E 241 Star Industries computes variances as a basis for evaluating the performance of managers responsible for controlling costs. For several months, the labor quantity variance has been unfavorable. Briefly explain what could be causing the unfavorable labor quantity variance and indicate what type of corrective action, if any, might be taken. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 241 Since labor quantity variances relate to the efficiency of labor, the cause of an unfavorable variance could be poor training, poor maintenance of machinery, fatigue, carelessness, or similar problems that affect efficiency. The management of Star Company would need to identify the likely causes of the variance and correct the situation with additional training, improved maintenance, better scheduling or similar appropriate actions. S-A E 242 In reviewing the activities of the Mixing Department for the month of June, the manager of the department notices that there was an unfavorable materials price variance for the month and there was an unfavorable materials quantity variance. Under what circumstances, if any, can the responsibility for each variance be placed on (a) the purchasing department and (b) the production department? Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 242 (a)

Purchasing department. The investigation of a materials price variance usually begins with this department. If the price standard has been properly set, purchasing is responsible. However, it should be recognized that in a period of inflation, prices may rise faster than expected. Also, there may be extenuating circumstances such as oil cartel price increases. The purchasing department may be responsible for an unfavorable quantity variance if it purchased direct materials of inferior quality.

(b)

Production department. Ordinarily, responsibility for an unfavorable quantity variance rests with this department. For example, production is responsible if the variance is caused by inexperienced workers, faulty machinery, or carelessness. The production department may be responsible for an unfavorable price variance when the materials must be ordered on a rush basis at a higher price than planned.

Standard Costs and Balanced Scorecard

24 - 69

S-A E 243 What are the four perspectives used in the balanced scorecard? Discuss the nature of each, and how the perspectives are linked. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 243 The four perspectives of the balanced scorecard are: financial, customer, internal process, and learning and growth. The financial perspective employs financial measures of performance used by most firms. The customer perspective evaluates the company from the viewpoint of those people who buy its products or services in terms of price, quality, product innovation, customer service, and other dimensions. The internal process perspective evaluates the value chain—product development, production, delivery and after-sale service—to ensure that the company is operating effectively and efficiently. The learning and growth perspective evaluates how well the company develops and retains its employees. The four perspectives are linked in that the results in one perspective influence the results in the next. S-A E 244 (Ethics) Fulmar Manufacturing Co. is the manufacturer of miniature model automobiles with historical interest. The company is developing new standard costs. Patrick Webb suggests that the new standards for materials should not include any waste for liquid plastics that spill out of the molds. "After all," he says, "we're trying to be a world class company. When we build in waste, we tell the workers it's okay to waste some." Sharon Berry, another manager, disagrees. "If we don't allow for some normal human error," she says, "we'll have a mighty unhappy work force. Also, I think that these kinds of perfection standards exploit the workers. I certainly wouldn't want to be held up to perfection every day—what could I do but fail?" The argument continued. Finally, the standards were prepared. All standards were prepared according to normal expected performance, except that for materials, an ideal standard was used. Sharon, still maintaining the unfairness of the system, refused to hold her workers accountable for materials quantity variances. Required: 1. Are ideal standards unethical? Explain briefly. 2. Is it unethical for Sharon to refuse to support the standards? Explain. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: Ethical Conduct, IMA: Cost Management

Solution 244 1. Ideal standards are not necessarily unethical. They may be used unethically, such as in the case in which employees are denied bonuses or other rewards because of not meeting a standard which was out of their reach. If they are used as a guide to maximum attainable performance, however, and not tied directly to the reward system, they may be ethical. 2. It is unethical for Sharon simply to refuse to accept a particular standard. However, if the company intends to use the standard unethically, she may refuse to hold her workers accountable to it while she pursues a permanent disposition of the matter. If she simply refuses to accept it, she may be indirectly sabotaging the company by hindering it from accomplishing its legitimate objectives. This would be unethical. .

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

24 - 70

S-A E 245 (Communication) Vincent Bassani has come to the accounting department for help in interpreting his variance report. He says that he understands that last month was not a very good one for output, but he really thought everyone put forth good effort, so he is confused about the existence of an unfavorable labor efficiency variance. He cites as an example the workers' willingness to work extra hours to get full output, even when a whole week's worth of production had to be scrapped. He knew that his materials costs would be higher, and that overtime would make his rate variance unfavorable, but he certainly didn't think his workers had been inefficient. Required: Write a short note to Vincent explaining the probable cause of the unfavorable labor efficiency variance. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Governance Perspective, AICPA FN: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Cost Management

Solution 245

Vincent, Last month was a tough one for all of us, wasn't it? Your workers certainly did go the extra mile, no doubt about it. You asked about your efficiency variance. When we calculate it, we count the number of hours it took to get good output. Since we had such high spoilage, we got fewer units, but used more hours. That is why your efficiency variance was negative. It does not imply that you didn't do your best. It just means that we investigate to see what happened. Good luck, and I hope this month is a better one for all of us. (signed)

CHAPTER 25 PLANNING FOR CAPITAL INVESTMENTS

CHAPTER LEARNING OBJECTIVES 1. Describe capital budgeting inputs and apply the cash payback technique. Management gathers project proposals from each department; a capital budget committee screens the proposals and recommends worthy projects. Company officers decide which projects to fund, and the board of directors approves the capital budget. In capital budgeting, estimated cash inflows and outflows, rather than accrual-accounting numbers, are the preferred inputs. The cash payback technique identifies the time period required to recover the cost of the investment. The equation when net annual cash flows are equal is: Cost of capital investment ÷ Estimated net annual cash flow = Cash payback period. The shorter the payback period, the more attractive the investment. 2. Use the net present value method. The net present value method compares the present value of future cash flows with the capital investment to determine net present value. The NPV decision rule is: Accept the project if net present value is zero or positive. Reject the project if net present value is negative. 3. Identify capital budgeting challenges and refinements. Intangible benefits are difficult to quantify and thus are often ignored in capital budgeting decisions. This can result in incorrectly rejecting some projects. One method for considering intangible benefits is to calculate the NPV, ignoring intangible benefits. If the resulting NPV is below zero, evaluate whether the benefits are worth at least the amount of the negative net present value. Alternatively, intangible benefits can be incorporated into the NPV calculation, using conservative estimates of their value. The profitability index is a tool for comparing the relative merits of alternative capital investment opportunities. It is computed as Present value of net cash flows ÷ Initial investment. The higher the index, the more desirable the project. A post-audit is an evaluation of a capital investment’s actual performance. Post-audits create an incentive for managers to make accurate estimates. Post-audits also are useful for determining whether a company should continue, expand, or terminate a project. Finally, postaudits provide feedback that is useful for improving estimation techniques. 4. Use the internal rate of return method. The objective of the internal rate of return method is to find the interest yield of the potential investment, which is expressed as a percentage rate. The IRR decision rule is: Accept the project when the internal rate of return is equal to or greater than the required rate of return. Reject the project when the internal rate of return is less than the required rate of return. 5. Use the annual rate of return method. The annual rate of return uses accrual accounting data to indicate the profitability of a capital investment. It is calculated as Expected annual net income ÷ Amount of the average investment. The higher the rate of return, the more attractive the investment.

25-2 Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

TRUE-FALSE STATEMENTS 1.

Capital budgeting decisions usually involve large investments and often have significant impacts on a company's future profitability.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

The capital budgeting committee ultimately approves the annual capital expenditure budget.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

For purposes of capital budgeting, estimated cash inflows and cash outflows are the preferred inputs for capital budgeting decision tools.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

The cash payback technique is a quick way to calculate a project's net present value.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

The cash payback period is computed by dividing the cost of the capital investment by the net annual cash flow.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

The cash payback method is frequently used as a screening tool but it does not take into consideration the profitability of a project.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

The cost of capital is a weighted average of the rates paid on borrowed funds as well as on funds provided by investors in the company's stock.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

When the net present value method is used, a net present value of zero indicates that the project would not be acceptable.

Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

The net present value method can only be used in capital budgeting if the expected cash flows from a project are an equal amount each year.

Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

Planning for Capital Investments

10.

25-3

If intangible benefits are not considered, capital budgeting techniques might incorrectly eliminate projects that could be financially beneficial to the company.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

11.

To avoid accepting projects that actually should be rejected, a company should ignore intangible benefits in calculating net present value.

Ans: F, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

12.

One way of incorporating intangible benefits into the capital budgeting decision is to project conservative estimates of the value of the intangible benefits and include them in the NPV calculation.

Ans: T, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

13. The profitability index is calculated by dividing a project’s total cash flows by its initial investment. Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

14.

The profitability index allows comparison of the relative desirability of projects that require differing initial investments.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

15.

Sensitivity analysis uses a number of outcome estimates to get a sense of the variability among potential returns.

Ans: T, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

16.

A well-run organization should perform an evaluation, called a post-audit, of its investment projects before their completion.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

17.

Post-audits create an incentive for managers to make accurate estimates since managers know that their results will be evaluated.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

18.

A post-audit is an evaluation of how well a project's actual performance matches the projections made when the project was proposed. .

25-4 Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

19.

The internal rate of return method is, like the NPV method, a discounted cash flow technique.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Business Applications

20.

The interest yield of a project is a rate that will cause the present value of the proposed capital expenditure to equal the present value of the expected annual cash flows.

Ans: T, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

21.

Using the internal rate of return method, a project is rejected if its rate of return is greater than or equal to the required rate of return.

Ans: F, LO: 4, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

22.

Using the annual rate of return method, a project is acceptable if its rate of return is greater than management's minimum rate of return.

Ans: T, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

23.

The annual rate of return method requires dividing a project's annual cash flows by the economic life of the project.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

24.

A major advantage of the annual rate of return method is that it considers the time value of money.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

25.

An advantage of the annual rate of return method is that it relies on accrual accounting numbers rather than actual cash flows.

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

MULTIPLE CHOICE QUESTIONS 26.

The annual capital budget is approved by a company's a. board of directors. b. capital budgeting committee. c. officers. d. stockholders. .

Planning for Capital Investments

25-5

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

27.

All of the following groups are involved in the capital budgeting evaluation process except a company's a. board of directors. b. capital budgeting committee. c. officers. d. stockholders.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

28.

Most of the capital budgeting methods use a. accrual accounting numbers. b. cash flow numbers. c. net income. d. accrual accounting revenues.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

29.

The first step in the capital budgeting evaluation process is to a. request proposals for projects. b. screen proposals by a capital budgeting committee. c. determine which projects are worthy of funding. d. approve the capital budget.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

30.

The capital budgeting decision depends in part on the a. availability of funds. b. relationships among proposed projects. c. risk associated with a particular project. d. All of these answers are correct.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

31.

Capital budgeting is the process a. used in sell or process further decisions. b. of determining how much capital stock to issue. c. of making capital expenditure decisions. d. of eliminating unprofitable product lines.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

32.

Net annual cash flow can be estimated by a. deducting credit sales from net income. b. adding depreciation expense to net income. .

25-6 Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

c. deducting credit purchases from net income. d. adding advertising expense to net income. Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

33.

Which of the following is not a typical cash flow related to equipment purchase and replacement decisions? a. Operating costs b. Overhaul of equipment c. Salvage value of equipment when project is complete d. Depreciation expense

Ans: D, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

34.

Capital expenditure proposals are initially screened by a company’s a. board of directors. b. executive committee. c. capital budgeting committee. d. stockholders.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

35.

Capital budgeting decisions depend in part on all of the following except the a. relationships among proposed projects. b. profitability of the company. c. company’s basic decision making approach. d. risks associated with a particular project.

Ans: B, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

36.

All of the following are capital budgeting decisions except a. Replacing equipment b. Purchasing new equipment c. Scrapping old equipment that is no longer used d. All of these are capital budgeting decisions.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

37.

Which of the following is not a capital budgeting decision? a. Constructing new studios b. Replacing old equipment c. Scrapping obsolete inventory d. Remodeling an office building

Ans: C, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

Planning for Capital Investments 38.

25-7

Which of the following is a disadvantage of the cash payback technique? a. It is difficult to calculate b. It relies on the time value of money c. It can only be calculated when there are equal annual net cash flows d. It ignores the expected profitability of a project

Ans: D, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

39.

The payback period is often compared to an asset’s a. estimated useful life. b. warranty period. c. net present value. d. internal rate of return.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

40.

Which of the following techniques ignores the time value of money? a. Internal rate of return b. Profitability index c. Net present value d. Cash payback

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

41.

Brady Corp. is considering the purchase of a piece of equipment that costs $20,000. Projected net annual cash flows over the project’s life are: Year Net Annual Cash Flow 1 $ 3,000 2 8,000 3 15,000 4 9,000 The cash payback period is a. 2.29 years. b. 2.60 years. c. 2.40 years. d. 2.31 years.

Ans: B, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: 2.0 + (9,000 / 15,000) = 2.60 years

42.

Bradshaw Inc. is contemplating a capital investment of $88,000. The cash flows over the project’s four years are: Expected Annual Expected Annual Year 1

Cash Inflows $30,000 .

Cash Outflows $12,000

25-8 Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

2 45,000 3 60,000 4 50,000 The cash payback period is a. 3.59 years. b. 3.50 years. c. 2.37 years. d. 3.20 years.

20,000 25,000 30,000

Ans: B, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: 3.0 + (10,000/20,000) = 3.5 (Year 3 + (Cum Year 3 / Year 4 Cash Flow) = Cash payback period)

43.

Soldier Creek Corp. is considering the purchase of a piece of equipment and has compiled the following information Initial cost One-time training cost Salvage value Useful life

$120,000 15,000 20,000 5 years

Projected net annual cash flows over the project’s life are: Year 1 2 3 4 5

Net Annual Cash Flow $ 35,000 55,000 55,000 65,000 75,000

Soldier Creek uses the cash payback method as an initial screening tool and has a policy that the payback period should not be more than half of the asset’s useful life. Based on this, should Soldier Creek move forward with further evaluation of the equipment purchase? a. No, because the cash payback period of 2.55 years is longer than half of the asset’s 5year useful life. b. Yes, because the cash payback period of 2.36 years is less than half of the asset’s 5year useful life. c. No, because the cash payback 2.82 years is longer than half of the asset’s 5-year useful life. d. Yes, because the cash payback period of 2.82 years is less than the asset’s 5-year useful life of the asset. Ans: C, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: 2.0 + (45,000 / 55,000) = 2.82 years (Year 2 + (Year 2 Cum/ Year 3 Cash flow) = Cash payback period)

44.

Sally Inc. is considering the purchase of a piece of equipment and has compiled the following information Initial cost One-time set-up fee .

$200,000 20,000

Planning for Capital Investments Salvage value Useful life

25-9

30,000 6 years

Projected net annual cash flows over the project’s life are: Year 1 2 3 4 5 6

Net Annual Cash Flow $60,000 80,000 80,000 70,000 70,000 60,000

Sally uses the cash payback method as an initial screening tool and has a policy that the payback period should not be more than half of the asset’s useful life. Based on this, should Sally move forward with further evaluation of the equipment purchase? a. yes, because the cash payback period of 2.75 years is less than half of the asset’s 6year useful life . b. No, because the cash payback period of 3.14 years is longer than half of the asset’s 6year useful life. c. Yes, because the cash payback period of 3 years is less than the asset’s 6-year useful life. d. Yes, because the cash payback period is equal to half of the asset’s 6-year useful life of the asset. Ans: D, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: 3 years (Year 2 + (Year 2 Cum/ Year 3 Cash flow) = Cash payback period)

45.

Jordan Company is considering the purchase of a machine and has compiled the following data: Initial cost $150,000 One-time training cost 12,000 Annual maintenance costs 15,000 Annual cost savings 75,000 Salvage value 20,000 The asset’s cash payback period is a. 2.70 years. b. 2.50 years. c. 2.37 years. d. 2.17 years.

Ans: A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution; ($150,000 + $12,000) / ($75,000 - $15,000) = 2.70 years ((Initial Cost + One time training cost) / (Annual cost savings – Annual maintenance costs) = Cash payback period)

46.

If project A has a lower payback period than project B, this may indicate that project A may have a a. lower NPV and be less profitable. b. higher NPV and be less profitable. .

25-10 Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

c. higher NPV and be more profitable. d. lower NPV and be more profitable. Ans: C, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

47.

Which of the following techniques does not consider a company’s required rate of return? a. Net present value b. Internal rate of return c. Annual rate of return d. Cash payback

Ans: D, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

48.

The cash payback technique a. considers cash flows over the life of a project. b. cannot be used with uneven cash flows. c. is superior to the net present value method. d. may be useful as an initial screening device.

Ans: D, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

49.

An asset costs $240,000 and is expected to have a $40,000 salvage value at the end of its ten-year life. Straight-line depreciation will be used. The asset is expected to generate net cash flows of $40,000 each year. The cash payback period for the asset is a. 7 years. b. 6 years. c. 5 years. d. 4 years.

Ans: B, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: $240,000 / $40,000 = 6 years (Asset cost / Annual net cash flows= Cash payback period)

50.

If a payback period for a project is greater than its expected useful life, the a. project will always be profitable. b. entire initial investment will not be recovered. c. project would only be acceptable if the company's cost of capital was low. d. project's return will always exceed the company's cost of capital.

Ans: B, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

51.

The cash payback technique a. should be used as a final screening tool. b. can be the only basis for the capital budgeting decision. c. is relatively easy to compute and understand. d. considers the expected profitability of a project. .

Planning for Capital Investments

25-11

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

52.

The cash payback period is computed by dividing the cost of the capital investment by the a. annual net income. b. net annual cash flow. c. present value of the cash flow. d. present value of the net income.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

53.

When using the cash payback technique, the payback period is expressed in terms of a. a percent. b. dollars. c. years. d. months.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

54.

A disadvantage of the cash payback technique is that it a. ignores obsolescence factors. b. ignores the cost of an investment. c. is complicated to use. d. ignores the time value of money.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

55.

Bark Company is considering buying a machine for $240,000 with an estimated life of ten years and no salvage value. The straight-line method of depreciation will be used. The machine is expected to generate net income of $6,000 each year. The cash payback period on this investment is a. 20 years. b. 10 years. c. 8 years. d. 4 years.

Ans: C, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: $240,000 / ($6,000 + ($240,000 / 10)) = 8 years (Cash flow = Net Income + Depreciation: Machine cost / Cash flow = Cash payback period)

56.

A company is considering purchasing a machine that costs $400,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the machine is purchased, annual revenues are expected to be $100,000 and annual operating expenses exclusive of depreciation expense are expected to be $38,000. The straight-line method of depreciation would be used. The cash payback period on the machine is a. 8.0 years. b. 7.5 years.

25-12 Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

c. 6.5 years. d. 3.2 years. Ans: C, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: ($100,000 - $38,000) = $62,000; $400,000 / $62,000 = 6.45 or 6.5 years (Cash flow = Net Income + Depreciation; Machine cost / Cash flow = Cash payback period)

Planning for Capital Investments 57.

12-13

Anchor Inc. is considering purchasing a machine that costs $200,000 and is estimated to have no salvage value at the end of its 4-year useful life. The straight-line method of depreciation is to be used. Projected annual cash inflows and outflows are as follows: Expected Annual Expected Annual Year Cash Inflows Cash Outflows 1 $80,000 $20,000 2 100,000 30,000 3 100,000 30,000 4 80,000 25,000 The cash payback period is a. 2.59 years. b. 3.00 years. c. 2.25 years. d. 3.20 years.

Ans: B, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: 3.0 years (Year 2 + (Cum Year 2 / Year 3 Cash Flow) = Cash payback period)

58.

Perdido Beach Realty Inc. is contemplating a capital investment of $20,000. The cash flows over the project’s five year life are projected as follows: Expected Annual Expected Annual Year Cash Inflows Cash Outflows 1 $6,000 $1,000 2 8,000 2,000 3 10,000 2,500 4 12,000 3,000 5 15,000 2,500 The asset will be depreciated using the straight-line method with no expected salvage value. The cash payback period is a. 2.59 years. b. 2.50 years. c. 2.60 years. d. 3.17 years.

Ans: D, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: 3.0 + ($1,500/ $9,000) = 3.17 (Year 3 + (Cum Year 3 / Year 4 Cash Flow) = Cash payback period)

59.

Nance Company is considering buying a machine for $90,000 with an estimated life of ten years and no salvage value. The straight-line method of depreciation will be used. The machine is expected to generate net income of $3,000 each year. The cash payback on this investment is a. 15 years. b. 10 years. c. 7.5 years. d. 6 years.

Ans: C, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: $90,000 / $3,000 + ($90,000 / 10) = 7.5 years (Cash flow = Net Income + Depreciation; Machine cost / Cash flow = Cash payback period)

25-14 Test Bank for Financial & Managerial Accounting, Fourth Edition

60.

Giraldi Company has identified that the cost of a new manufacturing equipment will be $48,000, but with the use of the new equipment, net income will increase by $5,000 a year. If depreciation expense is $3,000 a year, the cash payback period is: a. 24.0 years. b. 16.0 years. c. 9.6 years. d. 6.0 years.

Ans: D, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: $48,000 / ($5,000 + $3,000) = 6.0 years (Cash flow = Net Income + Depreciation; Machine cost / Cash flow = Cash payback period)

61.

Richman Co. purchased equipment 3 years ago. The company's required rate of return is 12%, and the net present value of the project was $(900). Annual cost savings were: $10,000 for year 1; $8,000 for year 2; and $6,000 for year 3. The amount of the initial investment was Present Value PV of an Annuity Year of 1 at 12% of 1 at 12% 1 .893 .893 2 .797 1.690 3 .712 2.402 a. b. c. d.

$20,478. $18,316. $20,116. $18,678.

Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: ($10,000 x .893) + ($8,000 x .797) + ($6,000 x .712) = $8,930 + $6,376 + $4,272 – (-$900) = $20,478 (Net present value + [(Annual Cost Savings Year 1 x PV of 1 at 12% factor) + (Annual Cost Savings Year 2 x PV of 1 at 12% factor) + (Annual Cost Savings Year 3 x PV of 1 at 12% factor) = Amount of the initial investment)

62.

A company has a minimum required rate of return of 9%. It is considering investing in a project which costs $350,000 and is expected to generate cash flows of $140,000 at the end of each year for three years. Given the present value factors in the following table, what is the net present value of this project?

a. b. c. d.

Present Value of an Annuity of 1 8% 9% 10% .926 .917 .909 1.783 1.759 1.736 2.577 2.531 2.487

Period 1 2 3 $5,340 $7,000 $5,436 $4,340

Planning for Capital Investments

12-15

(Net Cash Flow x PV of an Annuity of 1 (9%)) – Initial Investment = Net Present Value)

63.

The discount rate is referred to by all of the following alternative names except the a. accounting rate of return. b. cutoff rate. c. hurdle rate. d. required rate of return.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

64.

The rate that a company must pay to obtain funds from creditors and stockholders is known as the a. hurdle rate. b. cost of capital. c. cutoff rate. d. All of these answers are correct.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

65.

The higher the risk element in a project, the a. more attractive the investment. b. higher the net present value. c. higher the cost of capital. d. higher the discount rate.

Ans: D, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

66.

If a company's required rate of return is 10% and, in using the net present value method, a project's net present value is zero, this indicates that the a. project's rate of return exceeds 10%. b. project's rate of return is less than the minimum rate required. c. project earns a rate of return of 10%. d. project earns a rate of return of 0%.

Ans: C, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

67.

Using the profitability index method, the present value of cash flows for Project Flower is $88,000 and the present value of cash flows for Project Plant is $48,000. If Project Flower and Project Plant require initial investments of $90,000 and $40,000, respectively, and have the same useful lives, the project that should be accepted is a. Project Flower. b. Project Plant. c. Either project may be accepted. d. Neither project should be accepted.

Ans: B, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 1, AACSB: Analysis, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: Profitability Index = Present Value of Net Cash Flows ÷ Project Investment

25-16 Test Bank for Financial & Managerial Accounting, Fourth Edition Project Flower = 88,000 ÷ 90,000 = .98; Project Plant = 48,000 ÷ 40,000 = 1.2; Project Plant selected because it has highest profitability index and is greater than 1.

68.

The primary capital budgeting method that uses discounted cash flow techniques is the a. net present value method. b. cash payback technique. c. annual rate of return method. d. profitability index method.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

69.

When the annual cash flows from an investment are unequal, the appropriate table to use is the a. future value of 1 table. b. future value of annuity table. c. present value of 1 table. d. present value of annuity table.

Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

70.

A company's cost of capital refers to the a. rate the company must pay to obtain funds from creditors and stockholders. b. total cost of a capital project. c. cost of printing and registering common stock shares. d. rate of return earned on common stock.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

71.

When a capital budgeting project generates a positive net present value, this means that the project earns a return higher than the a. internal rate of return. b. annual rate of return. c. required rate of return. d. profitability index.

Ans: C, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

72.

A negative net present value indicates that the a. project is acceptable. b. wrong discount rate was used. c. project’s annual rate of return exceeds the discount rate. d. Present value of net annual cash flows less initial investment.

Ans: D, LO: 2, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

73.

A company’s discount rate is based on its a. cost of capital and the internal rate of return. .

Planning for Capital Investments

12-17

b. cost of capital and the risk element. c. cut-off rate and the risk element. d. cut-off rate and the internal rate of return. Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

74.

The discount rate that will result in the lowest net present value for a project is a. any rate lower that the cost of capital. b. any rate higher than the cost of capital. c. the lowest rate used to evaluate the project. d. the highest rate used to evaluate the project.

Ans: D, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

75.

The discount rate that will result in the highest net present value for a project is a. any rate lower that the cost of capital. b. any rate higher than the cost of capital. c. the lowest rate used to evaluate the project. d. the highest rate used to evaluate the project.

Ans: C, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interp retation, AICPA PC: None, IMA: Investment Decisions

76.

Which of the following will increase the net present value of a project? a. An increase in the initial investment b. A decrease in annual cash flows c. An increase in the discount rate d. A decrease in the discount rate

Ans: D, LO: 2, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

77.

A project with a zero net present value indicates that the project is a. unacceptable. b. profitable. c. acceptable. d. going to have an acceptable cash payback period.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

78.

Companies often assume that the risk element in the discount rate is a. zero. b. greater that zero. c. less than zero. d. known with certainty.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

25-18 Test Bank for Financial & Managerial Accounting, Fourth Edition 79.

If a project has a salvage value greater than zero, the salvage value will a. have no effect on the net present value. b. increase the net present value. c. increase the payback period. d. decrease the net present value.

Ans: B, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

80.

Sloan Inc. recently invested in a project with a 3-year life span. The net present value was $9,000 and net annual cash flows were $21,000 for year 1; $24,000 for year 2; and $27,000 for year 3. The initial investment for the project, assuming a 15% required rate of return, was Present Value PV of an Annuity Year of 1 at 15% of 1 at 15% 1 .870 .870 2 .756 1.626 3 .658 2.283 a. $45,792. b. $45,180. c. $29,232. d. $38,376.

Ans: B, LO: 2, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: ($21,000 x .870) + ($24,000 x .756) + ($27,000 x .658) = $18,270 + $18,144 + $17,766 = $54,180 – $9,000 = $45,180 (Net present value + [(Net Annual Cash Flows Year 1 x PV of 1 at 15% factor) + (Annual Cost Savings Year 2 x PV of 1 at 15% factor) + (Annual Cost Savings Year 3 x PV of 1 at 15% factor) = Amount of the initial investment)

81.

Mini Inc. is contemplating a capital project costing $47,019. The project will provide annual cost savings of $18,000 for 3 years and have a salvage value of $3,000. The company’s required rate of return is 10%. The company uses straight-line depreciation. Present Value PV of an Annuity Year of 1 at 10% of 1 at 10% 1 .909 .909 2 .826 1.736 3 .751 2.487 This project is a. unacceptable because it earns a rate less than 10%. b. acceptable because it has a positive NPV. c. unacceptable because it has a negative NPV. d. acceptable because it has a zero NPV.

Ans: D, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: ($18,000 x 2.487) + ($3,000 x .751) = $44,766 + $2,253 = $47,019; $47,019 - $47,019 = 0 ((Net Annual Cash Flow x PV of an Annuity of 1 (10%)) + (Salvage Value x PV of 1 at 10%) – Initial Investment = Net Present Value)

82.

Johnson Corp. has an 8% required rate of return. It’s considering a project that would provide annual cost savings of $50,000 for 5 years. The most that Johnson would be willing to spend on this project is .

Planning for Capital Investments

Present Value of 1 at 8% .926 .857 .794 .735 .681

Year 1 2 3 4 5 a. $125,910. b. $165,600. c. $199,650. d. $34,050.

12-19

PV of an Annuity of 1 at 8% .926 1.783 2.577 3.312 3.993

Ans: C, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: $50,000 x 3.993 = $199,650 (Net annual cash flows x Present Value of an Annuity of 1(8%) = Present value of future cash flows)

83.

Benaflek Co. purchased some equipment 3 years ago. The company’s required rate of return is 12%, and the net present value of the project was $(1,800). Annual cost savings were: $20,000 for year 1; $16,000 for year 2; and $12,000 for year 3. The amount of the initial investment was Present Value PV of an Annuity Year of 1 at 12% of 1 at 12% 1 .893 .893 2 .797 1.690 3 .712 2.402 a. $40,956. b. $36,632. c. $40,232. d. $37,356.

Ans: A, LO: 2, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: ($20,000 x .893) + ($16,000 x .797) + ($12,000 x .712) = $17,860 + $12,752 + $8,544 = $39,156; $39,156 + $1,800 = $40,956 (Net present value + [(Annual Cost Savings Year 1 x PV of 1 at 12% factor) + (Annual Cost Savings Year 2 x PV of 1 at 12% factor) + (Annual Cost Savings Year 3 x PV of 1 at 12% factor) = Amount of the initial investment)

84.

Monk Inc. is contemplating the purchase of an asset costing $50,000 which will provide cost savings of $18,000 in year 1, $20,000 in year 2 and $22,000 in year 3. The asset will have a salvage value of $5,000. The company’s required rate of return is 10%. The company uses straight-line depreciation. Present Value Year of 1 at 10% 1 .909 .909 2 .826 1.736 3 .751 This net present value of this project is a. $3,885. b. $5,234. c. ($260). .

PV of an Annuity of 1 at 10% 2.487

25-20 Test Bank for Financial & Managerial Accounting, Fourth Edition d. $3,159. Ans: D, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: ($18,000 x .909) + ($20,000 x .826) + ($22,000 + $5,000 x .751) - $50,000 = $3,159 ((Year 1 Net Cash Flow x PV of 1 (n= 1) (10%)) + (Year 2 Net Cash Flow x PV of 1 (n= 2) (10%) + (Year 3 Net Cash Flow + Salvage Value x PV of 1 (n=3) (10%) – Initial Investment = Net Present Value))

85.

Lillian Inc. is contemplating a capital project with a cost of $148,000. The project will generate net cash flows of $45,000 for year 1, $55,000 for year 2 and $60,000 for year 3. The asset has a salvage value of $10,000 and straight-line depreciation will be used. The company’s required rate of return is 10%. Present Value PV of an Annuity Year of 1 at 10% of 1 at 10% 1 .909 .909 2 .826 1.736 3 .751 2.487 This project is a. unacceptable because it earns a rate of return less than 10%. b. acceptable because it has a positive NPV. c. acceptable because it has a return of greater than 10%. d. unacceptable because it has a zero NPV.

Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: ($45,000 x .909) + ($55,000 x .826) + ($60,000 + $10,000 x .751) - $148,000 = ($9,095) ((Year 1 Net Cash Flow x PV of 1 (n= 1) (10%)) + (Year 2 Net Cash Flow x PV of 1 (n= 2) (10%) + (Year 3 Net Cash Flow + Salvage Value x PV of 1 at 10%) – Initial Investment = Net Present Value))

86.

Dolphin Inc. recently invested in a project with a 3-year life span. The net present value was $9,000 and annual cash flows were $21,000 for year 1; $24,000 for year 2; and $27,000 for year 3. The initial investment for the project, assuming a 15% required rate of return, was Present Value Year of 1 at 15% 1 .870 .870 2 .756 1.626 3 .658 a. b. c. d.

PV of an Annuity of 1 at 15% 2.283

$45,792. $45,180. $29,232. $38,376.

Ans: B, LO: 2, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: ($21,000 x .870) + ($24,000 x .756) + ($27,000 x .658) = $18,270 + $18,144 + $17,766 = $54,180 – $9,000 = $45,180 (Net present value + [(Net cash flows Year 1 x PV of 1 at 15% factor) + (Net cash flows Year 2 x PV of 1 at 15% factor) + (Net cash flows Year 3 x PV of 1 at 15% factor) = Amount of the initial investment)

87.

Windy Inc. is considering a project with a 3-year life. The net present value of the investment is $9,000 and net cash flows are projected to be $21,000 for year 1; $24,000 .

Planning for Capital Investments

12-21

for year 2; and $27,000 for year 3. If Windy’s required rate of return is 15%, what is the initial investment for the project? Present Value PV of an Annuity Year of 1 at 15% of 1 at 15% 1 .870 .870 2 .756 1.626 3 .658 2.283 a. $45,792. b. $45,180. c. $29,232. d. $38,376. Ans: B, LO: 2, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: ($21,000 x .870) + ($24,000 x .756) + ($27,000 x .658) = $18,270 + $18,144 + $17,766 = $54,180 – $9,000 = $45,180 (Net present value + [(Net cash flow Year 1 x PV of 1 at 15% factor) + (Net cash flow Year 2 x PV of 1 at 15% factor) + (Net cash flow Year 3 x PV of 1 at 15% factor) = Amount of the initial investment)

88.

In capital budgeting, intangible benefits should be a. excluded entirely. b. included using optimistic estimated values. c. included using conservative estimated values. d. included only when benefits are known with certainty.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

89.

Miles, Inc. is considering the purchase of a new machine for $600,000 that has an estimated useful life of 5 years and no salvage value. The machine will generate net annual cash flows of $105,000. It is believed that the new machine will reduce downtime because of its reliability. Assume the discount rate is 8%. %. At what amount would the present value of the reduction in downtime have to be valued in order to accept the project? Present Value Year of 1 at 8% 1 .926 .926 2 .857 1.783 3 .794 2.577 4 .735 3.312 5 .681 3.993 a. b. c. d.

PV of an Annuity of 1 at 8%

$23,958 per year. $49,662 per year. $18,264 per year. $45,263 per year.

Ans: D, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: $141,147 x 3.993 = $419,265; $563,600; ($105,000+$45,263) x 3.993 = 600,000 ((Net Annual cash inflow x PV of an Annuity of 1 at 8%) – Initial Investment = Net present value; Net present value / useful life = Reduction in Downtime)

90.

Intangible benefits in capital budgeting would include all of the following except increased a. product quality. b. employee loyalty. .

25-22 Test Bank for Financial & Managerial Accounting, Fourth Edition c. salvage value. d. product safety. Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

91.

Intangible benefits in capital budgeting a. should be ignored because they are difficult to determine. b. include increased quality or employee loyalty. c. are not considered because they are usually not relevant to the decision. d. have a rate of return in excess of the company’s cost of capital.

Ans: B, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

92.

To avoid rejecting projects that actually should be accepted, 1. Intangible benefits should be ignored. 2. Conservative estimates of the intangible benefits' value should be incorporated into the NPV calculation. 3. Net present value should be calculated without regard to intangible benefits and then, if the NPV is negative, the present value of the intangible benefits should be estimated and compared to the amount of the negative NPV. a. 1 b. 2 c. 3 d. both 2 and 3 are correct.

Ans: D, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interp retation, AICPA PC: None, IMA: Investment Decisions

93.

All of the following statements about intangible benefits in capital budgeting are correct except that they a. include increased quality and employee loyalty. b. are difficult to quantify. c. are often ignored in capital budgeting decisions. d. cannot be incorporated into the NPV calculation.

Ans: D, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interp retation, AICPA PC: None, IMA: Investment Decisions

94.

In evaluating high-tech projects, a. only tangible benefits should be considered. b. only intangible benefits should be considered. c. both tangible and intangible benefits should be considered. d. neither tangible nor intangible benefits should be considered.

Ans: C, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

95.

Using a number of outcome estimates to get a sense of the variability among potential returns is a. financial analysis. .

Planning for Capital Investments

12-23

b. post-audit analysis. c. sensitivity analysis. d. outcome analysis. Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

96.

If a company's required rate of return is 9%, and in using the profitability index method, a project's index is greater than 1, this indicates that the project's rate of return is a. equal to 9%. b. greater than 9%. c. less than 9%. d. unacceptable for investment purposes.

Ans: B, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

97.

The profitability index is computed by dividing the a. total cash flows by the initial investment. b. present value of net cash flows by the initial investment. c. initial investment by the total cash flows. d. initial investment by the present value of cash flows.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

98.

The capital budgeting method that takes into account both the size of the original investment and the discounted cash flows is the a. cash payback method. b. internal rate of return method. c. annual rate of return. d. profitability index.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

99.

The profitability index a. does not take into account the discounted cash flows. b. is calculated by dividing total cash flows by the initial investment. c. allows comparison of the relative desirability of projects that require differing initial investments. d. will never be greater than 1.

Ans: C, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interp retation, AICPA PC: None, IMA: Investment Decisions

100.

The capital budgeting method that allows comparison of the relative desirability of projects that require differing initial investments is the a. cash payback method. .

25-24 Test Bank for Financial & Managerial Accounting, Fourth Edition b. internal rate of return method. c. net present value method. d. profitability index. Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

101.

The following information is available for a potential investment for Panda Company: Initial investment $95,000 Net annual cash flow 20,000 Net present value 36,224 Salvage value 10,000 Useful life 10 years The potential investment’s profitability index is a. 4.75. b. 3.22. c. 2.62. d. 1.38.

Ans: D, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: ($36,224 + $95,000) / $95,000 = 1.38 ((Net present value + Initial investment) / Initial investment = Profitability index)

102.

Dauphine Company is contemplating an investment in a project with a 3-year life span. The initial investment is $45,180 and net annual cash flows were $21,000 for year 1; $24,000 for year 2; and $27,000 for year 3. The salvage value is $0 and straight-line depreciation will be used. Assuming a 15% required rate of return, what is the potential investment’s profitability index? Present Value PV of an Annuity Year of 1 at 15% of 1 at 15% 1 .870 .870 2 .756 1.626 3 .658 2.283 a. 1.2 b. 2.18 c. 1.6 d. 1.98

Ans: A, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: 18,270+18,144+17,766 = 54,180 as the PV of future net annual cash flows. 54,180/45,180 = 1.2. ([(Annual Cost Savings Year 1 x PV of 1 at 15% factor) + (Annual Cost Savings Year 2 x PV of 1 at 15% factor) + (Annual Cost Savings Year 3 x PV of 1 at 15% factor) + Initial investment))/ Initial Investment

103.

Millicent Inc. is considering a capital project costing $47,020. The project is projected to provide annual cost savings of $18,000 for the first 2 years and $15,000 for the third year. The expected salvage value is $0 and the company uses straight-line depreciation. Assuming a 10% rate of return, what is the project’s profitability index? Present Value Year of 1 at 10% 1 .909 .909 2 .826 1.736 .

PV of an Annuity of 1 at 10%

Planning for Capital Investments 3 a. b. c. d.

.751

12-25

2.487

2.04 1.04 1.95 .90

Ans: D, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: (($18,000 x 1.736) + ($15,000 x .751)/ $47,020 = ( $31,248 +$11.265 )/ $47,020 = .90 ((Net Cash Flow for years 1 and 2 x PV of an Annuity of 1 at 10%) + (Net Cash Flow for year 3 x PV of 1 at 10%) / Initial Investment = Profitability Index

104.

Johanna Corp. has an 8% required rate of return. It’s considering the purchase of a capital asset with an initial cost of $200,000 that would provide annual cost savings of $50,000 for the first two years and $60,000 for the third and fourth years of its life. What is the profitability index for this potential investment? Present Value PV of an Annuity Year

of 1 at 8%

.926

.857

1.783

.794

2.577 4

of 1 at 8%

.735

3.312 a. 2.0 b. 1.1 c. .9

d. 1.3 Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: (($50,000 x 1.783) + ($60,000 x .794) + ($60,000 x .735) + $200,000)/ $200,000 = ($89,150 + $47,640 + $44,100/ $200,000 = .9 ((Cash flows for years 1 and 2 x Present Value of an Annuity of 1 at 18%) + (Cash flow for year 3 x Present value of $1 at 18%) + (Cash flow for year 4 x Present value of $1 at 18%) / Initial Investment = Profitability Index

105.

Beltway Co. is considering purchasing equipment that has an initial investment of $41,000. The company’s required rate of return is 12%. Annual cost savings are projected to be $20,000 for year 1, $16,000 for year 2, and $12,000 for year 3. What is the investment’s profitability index? Present Value PV of an Annuity Year of 1 at 12% of 1 at 12% 1 .893 .893 2 .797 1.690 3 .712 2.402 a. .96 b. 1.96 c. 1.92 d. 1.90

Ans: A, LO: 3, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution:(($20,000 x .893) + ($16,000 x .797) + ($12,000 x .712) )/ $41,000 = ($17,860 + $12,752 + $8,544)/ $41,000 = .96 (Net present value + [(Annual Cost Savings Year 1 x PV of 1 at 12% factor) + (Annual Cost Savings Year 2 x PV of 1 at 12% factor) + (Annual Cost Savings Year 3 x PV of 1 at 12% factor) = Amount of the initial investment)

25-26 Test Bank for Financial & Managerial Accounting, Fourth Edition 106.

An approach that uses a number of outcome estimates to get a sense of the variability among potential returns is a. the discounted cash flow technique. b. the net present value method. c. risk analysis. d. sensitivity analysis.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

107.

If a project’s profitability index is greater than 1, then the a. project should always be accepted. b. project’s net present value is negative. c. project’s internal rate of return is less than the discount rate. d. project should be accepted if funds are available.

Ans: D, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interp retation, AICPA PC: None, IMA: Investment Decisions

108.

If a project’s profitability index is less than 1, then a. its net present value is zero. b. its net present value is positive. c. it should be rejected. d. its internal rate of return is greater than the discount rate.

Ans: C, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interp retation, AICPA PC: None, IMA: Investment Decisions

109.

If a project’s profitability index is equal to 1, then a. its net present value is zero. b. its net present value is positive. c. it should be rejected. d. its internal rate of return is greater than the discount rate.

Ans: A, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

110.

A project with an initial investment of $70,000 and a profitability index of 1.239 also has an internal rate of return of 12%. The present value of net cash flows is a. $78,400. b. $86,730. c. $56,497. d. $70,000.

Ans: B, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: X / $70,000 = 1.239; X = $86,730 (Present Value of net cash flows (X) / initial investment = Profitability index)

111.

A project with a profitability index of 1.156 also has net cash flows with a present value of .

Planning for Capital Investments

12-27

$69,360. The project’s internal rate of return was 10%. The initial investment was a. $66,000. b. $80,180. c. $60,000. d. $62,424. Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: $69,360 / x = 1.156; x = $60,000 (Present Value of net cash flows / initial investment (x) = Profitability index)

112.

Selena Inc. is comparing several alternative capital budgeting projects as shown below: A B investment $80,000 $120,000 Present value of net cash flows

$160,000 90,000

Projects C

Initial

110,000

200,000

Using the profitability index, the projects rank as a. A, C, B. b. A, B, C. c. C, A, B. d. C, B, A. Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: (A) $90,000 / $80,000 = 1.125; (B) $110,000 / $120,000 = .92; (C) $200,000 / 160,000 = 1.25 (Present Value of net cash flows / Initial Investment = Profitability index)

113.

Selena Inc. is comparing several alternative capital budgeting projects as shown below:

Initial investment Present value of net cash flows

Projects A B $80,000 $120,000 90,000 110,000

C $160,000 200,000

Using the profitability index, how many of the projects are acceptable? a. 3 b. 2 c. 1 d. 0 Ans: B, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: (A) $90,000 / $80,000 = 1.125 (Yes); (B) $110,000 / $120,000 = .92; (C) $200,000 / 160,000 = 1.25 (Yes) (Present Value of net cash flows / Initial Investment = Profitability index)

114.

If a project has a negative net present value, its profitability index will be a. one. b. greater than one. c. less than one. d. undeterminable. .

25-28 Test Bank for Financial & Managerial Accounting, Fourth Edition Ans: C, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interp retation, AICPA PC: None, IMA: Investment Decisions

115.

If a project has a positive net present value, its profitability index will be a. one. b. greater than one. c. less than one. d. undeterminable.

Ans: B, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

116.

If a project has a zero net present value, its profitability index will be a. one. b. greater than one. c. less than one. d. undeterminable.

Ans: A, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

117.

If a project has a profitability index of 1.20, then the project’s internal rate of return is a. equal to the discount rate. b. less than the discount rate. c. greater than the discount rate. d. equal to 20%.

Ans: C, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interp retation, AICPA PC: None, IMA: Investment Decisions

118.

Cleaners, Inc. is considering purchasing equipment costing $60,000 with a 6-year useful life. The equipment will provide cost savings of $14,600 and will be depreciated straight line over its useful life with no salvage value. Cleaners requires a 10% rate of return. Present Value of an Annuity of 1 Period 8% 9% 10% 11% 12% 15% 6 4.623 4.486 4.355 4.231 4.111 3.784 What is the approximate net present value of this investment? a. $27,600 b. $3,583 c. $1,772 d. $5,496

Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: ($14,600 x 4.355) = $63,583 - $60,000 = $3,583 ((Cost savings x PV of an Annuity of 1 at 10%) – Initial Investment = Approximate net present value)

Planning for Capital Investments 119.

12-29

Present Value of an Annuity of 1 Period 8% 9% 10% 11% 12% 15% 6 4.623 4.486 4.355 4.231 4.111 3.784 What is the approximate profitability index associated with this equipment? a. 1.23 b. 1.03 c. 1.06 d. .73 Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: ($14,600 x 4.355) = $63,583; $63,583 / $60,000 = 1.06 (Present Value of net cash flows / Initial Investment = Profitability index)

120.

Cleaners, Inc. is considering purchasing equipment costing $60,000 with a 6-year useful life. The equipment will provide cost savings of $14,600 and will be depreciated straight line over its useful life with no salvage value. Cleaners requires a 10% rate of return. Present Value of an Annuity of 1 Period 8% 9% 10% 11% 12% 6 4.623 4.486 4.355 4.231 4.111 What is the approximate internal rate of return for this investment? a. 9% b. 10% c. 11% d. 12%

15% 3.784

Ans: D, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: $60,000 ÷ $14,600 = 4.11 IRR factor which is closest to the factor (4.111) for 12%. (Net Annual cash flow x PV of an Annuity of 1 at 10%) – Initial Investment = Net present value (find closest to zero))

121.

A Company has a minimum required rate of return of 9%. It is considering investing in a project that costs $210,000 and is expected to generate cash flows of $84,000 at the end of each year for three years. Present Value of an Annuity of 1 8% 9% 10% .926 .917 .909 1.783 1.759 1.736 2.577 2.531 2.487

Periods 1 2 3

The net present value of this project is a. $212,604. b. $42,000. c. $21,261. d. $2,604. Ans: D, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: ($84,000 x 2.531) = $212,604; $212,604 - $210,000 = $2,604

25-30 Test Bank for Financial & Managerial Accounting, Fourth Edition ((Net Annual cash flow x PV of an Annuity of 1 at 9%) – Initial Investment = Net present value)

122.

A Company has a minimum required rate of return of 10%. It is considering investing in a project that costs $50,000 and is expected to generate cash flows of $25,000 at the end of each year for three years. Present Value of an Annuity of 1 Periods 8% 9% 10% 1 .926 .917 .909 2 1.783 1.759 1.736 3 2.577 2.531 2.487 The profitability index for this project is a. .80. b. 1.00. c. 1.24. d. 1.27.

Ans: C, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: ($25,000 x 2.487) / $50,000 = 1.24 (Present Value of net cash flows / Initial Investment = Profitability index)

123.

A Company has a minimum required rate of return of 8%. It is considering investing in a project that costs $91,116 and is expected to generate cash flows of $36,000 each year for three years. Present Value of an Annuity of 1 Periods 8% 9% 10% 1 .926 .917 .909 2 1.783 1.759 1.736 3 2.577 2.531 2.487 The approximate internal rate of return on this project is a. 8%. b. 9%. c. 10%. d. less than the required 8%.

Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: $91,116 ÷ $36,000 = 2.531 IRR factor which is the factor for 3 years at 9%. (Net Annual cash flow x PV of an Annuity of 1 at 9%) – Initial Investment = Net present value (find closest to zero))

Planning for Capital Investments 124.

12-31

Carr Company is considering two capital investment proposals. Estimates regarding each project are provided below:

Initial investment Annual net income Net annual cash flow Estimated useful life Salvage value

Project Soup $400,000 30,000 110,000 5 years -0-

Project Nuts $600,000 46,000 146,000 6 years -0-

The company requires a 10% rate of return on all new investments. Present Value of an Annuity of 1 Periods 9% 10% 11% 12% 5 3.890 3.791 3.696 3.605 6 4.486 4.355 4.231 4.111 The cash payback period for Project Nuts is a. 13.3 years. b. 6.7 years. c. 5.0 years. d. 4.1 years. Ans: D, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: $600,000 / $146,000 = 4.1 years (Initial Investment/ Net annual cash flow = Cash payback period)

125.

Carr Company is considering two capital investment proposals. Estimates regarding each project are provided below:

Initial investment Annual net income Net annual cash flow Estimated useful life Salvage value

Project Soup $400,000 30,000 110,000 5 years -0-

Project Nuts $600,000 46,000 146,000 6 years -0-

The company requires a 10% rate of return on all new investments. Periods 5 6

Present Value of an Annuity of 1 9% 10% 11% 12% 3.890 3.791 3.696 3.605 4.486 4.355 4.231 4.111

The net present value for Project Nuts is a. $635,830. b. $200,330. c. $100,000. d. $35,830. .

25-32 Test Bank for Financial & Managerial Accounting, Fourth Edition

Ans: D, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: $146,000 x 4.355 = $635,830; $635,830 - $600,000 = $35,830 ((Net Annual cash flow x PV of an Annuity of 1 at 10%) – Initial Investment = Net present value)

126.

Carr Company is considering two capital investment proposals. Estimates regarding each project are provided below:

Initial investment Annual net income Net annual cash flow Estimated useful life Salvage value

Project Soup $400,000 30,000 110,000 5 years -0-

Project Nuts $600,000 46,000 146,000 6 years -0-

The company requires a 10% rate of return on all new investments. Present Value of an Annuity of 1 Periods 9% 10% 11% 12% 5 3.890 3.791 3.696 3.605 6 4.486 4.355 4.231 4.111 The internal rate of return for Project Nuts is approximately a. 11%. b. 12%. c. 10%. d. 9%. Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: $600,000 ÷ $146,000 = 4.11 IRR factor which is the factor for 6 years at 12% (Net Annual cash flow x PV of an Annuity of 1 at 12%) – Initial Investment = Net present value (find closest to zero))

127.

Carr Company is considering two capital investment proposals. Estimates regarding each project are provided below:

Initial investment Annual net income Net annual cash flow Estimated useful life Salvage value

Project Soup $400,000 30,000 110,000 5 years -0-

Project Nuts $600,000 46,000 146,000 6 years -0-

The company requires a 10% rate of return on all new investments. Present Value of an Annuity of 1 Periods 9% 10% 11% 12% 5 3.890 3.791 3.696 3.605 6 4.486 4.355 4.231 4.111

Planning for Capital Investments

12-33

The annual rate of return for Project Soup is a. 7.5%. b. 15.0%. c. 27.5%. d. 55%. Ans: B, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: $30,000 / $200,000 = .15 or 15% (Annual net income / Average Investment = Annual rate of return)

128.

A post-audit should be performed using a. a different evaluation technique than that used in making the original decision. b. the same evaluation technique used in making the original decision. c. estimated amounts instead of actual figures. d. an independent CPA.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

129.

A thorough evaluation of how well a project's actual performance matches the projections made when the project was proposed is called a a. pre-audit. b. post-audit. c. risk analysis. d. sensitivity analysis

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

130.

Performing a post-audit is important because a. managers will be more likely to submit reasonable data when they make investment proposals if they know their estimates will be compared to actual results. b. it provides a formal mechanism by which the company can determine whether existing projects should be terminated. c. it improves the development of future investment proposals because managers improve their estimation techniques by evaluating their past successes and failures. d. all of these.

Ans: D, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interp retation, AICPA PC: None, IMA: Investment Decisions

131.

A capital budgeting method that takes into consideration the time value of money is the a. annual rate of return method. b. return on stockholders' equity method. c. cash payback technique. d. internal rate of return method.

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

25-34 Test Bank for Financial & Managerial Accounting, Fourth Edition 132.

The internal rate of return is the interest rate that results in a a. positive NPV. b. negative NPV. c. zero NPV. d. positive or negative NPV.

Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

133.

In using the internal rate of return method, the internal rate of return factor was 4.0 and the equal annual cash flows were $18,000. The initial investment in the project must have been a. $18,000. b. $4,500. c. $72,000. d. $36,000.

Ans: C, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: $18,000 x 4 = $72,000 (Annual cash flows x IRR Factor = Initial Investment of the project)

134.

The capital budgeting technique that finds the interest yield of the potential investment is the a. annual rate of return method. b. internal rate of return method. c. net present value method. d. profitability index method.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

135.

All of the following statements about the internal rate of return method are correct except that it a. recognizes the time value of money. b. is widely used in practice. c. is easy to interpret. d. can be used only when the cash flows are equal.

Ans: D, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

136.

If the internal rate of return is used as the discount rate in the net present value calculation, the net present value will be a. zero. b. positive. c. negative. d. undeterminable.

Ans: A, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

137.

If a project costing $80,000 has a profitability index of 1.00 and the discount rate was 12%, then the present value of the net cash flows was a. $80,000. .

Planning for Capital Investments

12-35

b. less than $80,000. c. greater than $80,000. d. undeterminable. Ans: A, LO: 4, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

138.

If a project costing $40,000 has a profitability index of 1.00 and the discount rate was 8%, then the project’s internal rate of return was a. less than 8%. b. equal to 8%. c. greater than 8%. d. undeterminable.

Ans: B, LO: 4, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

139.

The internal rate of return factor is equal to the a. capital investment divided by the net annual cash flows. b. present value of net cash annual flows divided by the capital investment. c. present value of net annual cash flows divided by the profitability index. d. capital investment divided by the present value of the net annual cash flows.

Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

140.

If a 2-year capital project has an internal rate of return factor equal to 1.690 and net annual cash flows of $60,000, the initial capital investment was a. $101,400. b. $75,503. c. $60,700. d. $71,007.

Ans: A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: Solution should be revised to X/$60,000 = 1.690; X = $35,503. (Net annual cash flows / IRR Factor = Initial capital investment)

141.

If a 3-year capital project costing $77,310 has an internal rate of return factor equal to 2.577, the net annual cash flows assuming straight-line depreciation are a. $25,770. b. $30,000. c. $32,577. d. $38,655.

Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: $77,310 / X = $2.577; X = $30,000. (Project cost / IRR Factor = Net annual cash flows)

142.

If a project has a negative net present value, the internal rate of return will be a. less than the discount rate. b. greater than the discount rate. .

25-36 Test Bank for Financial & Managerial Accounting, Fourth Edition c. equal to the discount rate. d. a negative rate of return. Ans: A, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

143.

If a project has a zero net present value, then the internal rate of return will be a. less than the discount rate. b. greater than the discount rate. c. equal to the discount rate. d. a negative rate of return.

Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

144.

Which of the following will cause the internal rate of return to increase? a. An increase in the annual net cash flows b. A decrease in the annual net cash flows c. An increase in the discount rate d. A decrease in the discount rate

Ans: A, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

145.

If project A has a lower internal rate of return than project B, then project A will have a a. shorter payback period. b. longer payback period. c. lower NPV. d. higher NPV.

Ans: C, LO: 4, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interp retation, AICPA PC: None, IMA: Investment Decisions

146.

The internal rate of return factor is also the a. annual rate of return. b. profitability index. c. cash payback period. d. present value factor for a single amount.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

147.

Use the following table to determine the approximate internal rate of return for the following project: Present Value of an Annuity of 1 Period 8% 9% 10% 1 .926 .917 .909 2 1.783 1.759 1.736 3 2.577 2.531 2.487 .

Planning for Capital Investments

12-37

A company has a minimum required rate of return of 8%. It is considering investing in a project that costs $379,650 and is expected to generate cash flows of $150,000 each year for three years. a. 8%. b. 9%. c. 10%. d. The IRR on this project cannot be approximated. Ans: B, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: $379,650 ÷ $150,000 = 2.531 IRR factor which is the factor for 3 years at 9%. (Project Cost – (Generated Cash flows x Present Value of an Annuity of 1 at 9%) = Net present value (closest to zero)

148.

A company is considering purchasing a machine that costs $280,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the machine is purchased, annual revenues are expected to be $100,000 and annual operating expenses exclusive of depreciation expense are expected to be $38,000. The straight-line method of depreciation would be used. If the machine is purchased, the expected annual rate of return on this machine is a. 22.1%. b. 44.3%. c. 9.6%. d. 19.3%.

Ans: D, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: $100,000 - $38,000 – $35,000 = $27,000; $27,000 / ($280,000 / 2) = 19.3% (Annual income / Average investment = Annual rate of return)

149.

A company projects an increase in net income of $135,000 each year for the next five years if it invests $900,000 in new equipment. The equipment has a five-year life and an estimated salvage value of $300,000. What is the annual rate of return on this investment? a. 15.0% b. 22.5% c. 30.0% d. 34.5%

Ans: B, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: $135,000 / (($900,000 + $300,000) / 2) = .225 or 22.5% (Annual income / Average investment = Annual rate of return)

150.

Garza Company is considering buying equipment for $320,000 with a useful life of five years and an estimated salvage value of $16,000. If annual expected income is $28,000, the denominator in computing the annual rate of return is a. $320,000. b. $160,000. c. $168,000. d. $336,000.

Ans: C, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: ($320,000 + $16,000) / 2 = $168,000 (Annual income / Average investment (X) = Annual rate of return; Average Investment (X) = (Initial investment + Value at end of useful life) / 2)

25-38 Test Bank for Financial & Managerial Accounting, Fourth Edition

151.

Mussina Company had an investment which cost $250,000 and had a salvage value at the end of its useful life of zero. If Mussina's expected annual net income is $15,000, the annual rate of return is: a. 6.0%. b. 10.2%. c. 12.0%. d. 15.0%.

Ans: C, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: $15,000 / ($250,000 / 2) = .12 or 12% (Annual income / Average investment = Annual rate of return)

152.

Discounted cash flow techniques include all of the following except a. profitability index. b. annual rate of return. c. internal rate of return. d. net present value.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

153.

Which of the following is based directly on accrual accounting data rather than cash flows? a. Profitability index b. Internal rate of return c. Net present value d. Annual rate of return

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

154.

When calculating the annual rate of return, the average investment is equal to a. (initial investment plus $0) divided by 2. b. initial investment divided by life of project. c. initial investment divided by 2. d. (initial investment plus salvage value) divided by 2.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

155.

A project has an annual rate of return of 15%. The project cost $120,000, has a 5-year useful life, and no salvage value. Straight-line depreciation is used. The annual net income, exclusive of depreciation, is a. $42,000. b. $33,000. c. $47,700. d. $18,000. .

Planning for Capital Investments

12-39

Ans: B, LO: 5, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: .15 = X / ($120,000/2) = $9,000; $120,000/5 = $24,000; $24,000 + $9,000 = $33,000 (Annual net income (X) / Average investment = Annual rate of return)

156.

A project that cost $75,000 has a useful life of 5 years and a salvage value of $3,000. The internal rate of return is 12% and the annual rate of return is 18%. The annual net income is a. $7,020. b. $6,480. c. $4,680. d. $4,320.

Ans: A, LO: 5, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: .18 = X /(($75,000 + $3,000)/2) = $7,020 (Annual net income (X)/ Average investment = Annual rate of return)

157.

A project has annual income exclusive of depreciation of $80,000. The annual rate of return is 15% and annual depreciation is $20,000. There is no salvage value. The internal rate of return is 12%. The initial cost of the project was a. $400,000. b. $500,000. c. $1,000,000. d. $800,000.

Ans: D, LO: 5, Bloom: AN, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: .15 = ($80,000 - $20,000) / x ; x = $400,000 x 2 = $800,000 (Annual income / Average investment (X) = Annual rate of return); Average Investment x 2 = Initial cost of the project)

158.

A project that cost $80,000 with a useful life of 5 years is being considered. Straight-line depreciation is being used and salvage value is $5,000. The project will generate annual cash flows of $21,375. The annual rate of return is a. 15%. b. 50.3%. c. 16%. d. 17%.

Ans: A, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: ($80,000 + $5,000) / 5 = $42,500; ($80,000 - $5,000) / 5 = $15,000; $21,375 - $15,000 = $6,375; $6,375 / $42,500 = .15 or 15% (Annual income / Average investment = Annual rate of return)

159.

A company is considering purchasing factory equipment that costs $480,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the equipment is purchased, annual revenues are expected to be $135,000 and annual operating expenses exclusive of depreciation expense are expected to be $39,000. The straight-line method of depreciation would be used. .

25-40 Test Bank for Financial & Managerial Accounting, Fourth Edition

If the equipment is purchased, the annual rate of return expected on this equipment is a. 40.0%. b. 7.5%. c. 15.0%. d. 20.0%. Ans: C, LO: 5, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: ($135,000 - $39,000 – ($480,000 / 8) = $36,000; $36,000 / ($480,000 / 2) = .15 or 15% (Annual income / Average investment = Annual rate of return)

160.

Ans: C, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: $480,000 / ($135,000 - $39,000) = 5.0 years (Initial Investment/ Net annual cash flow = Cash payback period)

161.

The capital budgeting technique that indicates the profitability of a capital expenditure is the a. profitability index method. b. net present value method. c. internal rate of return method. d. annual rate of return method.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

162.

The annual rate of return method is based on a. accounting data. b. the time value of money data. c. market values. d. cash flow data.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

163.

Disadvantages of the annual rate of return method include all of the following except that a. it relies on accrual accounting numbers instead of actual cash flows. b. it does not consider the time value of money. .

Planning for Capital Investments

12-41

c. no consideration is given as to when the cash flows occur. d. management is unfamiliar with the information used in the computation. Ans: D, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interp retation, AICPA PC: None, IMA: Investment Decisions

164.

A company projects an increase in net income of $30,000 each year for the next five years if it invests $300,000 in new equipment. The equipment has a five-year life and an estimated salvage value of $100,000. What is the annual rate of return on this investment? a. 10% b. 15% c. 20% d. 25%

165.

Colaw Company is considering buying equipment for $240,000 with a useful life of five years and an estimated salvage value of $12,000. If annual expected income is $21,000, the denominator in computing the annual rate of return is a. $240,000. b. $120,000. c. $126,000. d. $252,000.

Ans: C, LO: 5, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: ($240,000 + $12,000) / 2 = $126,000 (Annual income / Average investment = Annual rate of return; Average Investment = (Initial investment + Value at end of useful life) / 2)

166.

The annual rate of return is computed by dividing expected annual a. cash flows by average investment. b. net income by average investment. c. cash flows by original investment. d. net income by original investment.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

167.

All of the following statements about the annual rate of return method are correct except that it a. indicates the profitability of a capital expenditure. b. ignores the salvage value of an investment. c. does not consider the time value of money. d. compares the annual rate of return to management’s minimum rate of return.

Ans: B, LO: 5, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

25-42 Test Bank for Financial & Managerial Accounting, Fourth Edition

BRIEF EXERCISES BE 168 Diamond Company is considering investing in new equipment that will cost $1,400,000 with a 10year useful life. The new equipment is expected to produce annual net income of $90,000 over its useful life. Depreciation expense, using the straight-line rate, is $140,000 per year. Instructions Compute the cash payback period. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

Solution 168 $1,400,000 ÷ ($90,000 + $140,000) = 6.1 years BE 169 Rubicon Company is considering investing in new equipment that will cost $500,000 with a 5-year useful life. The new equipment is expected to produce annual cost savings of $190,000 for the first two years and $220,000 for the last three years of its useful life. Instructions Compute the cash payback period. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

Solution 169 $500,000 - $190,000 = $310,000; $310,000 - $190,000 = $120,000; $120,000/ $220,000 = .55; 2.55 years

BE 170 Madeline Company is proposing to spend $200,000 to purchase a machine that will provide annual cash flows of $38,000. The appropriate present value factor for 10 periods is 5.65. Instructions Compute the proposed investment’s net present value and indicate whether the investment should be made by Madeline Company. Ans: N/A, LO: 2, Bloom: E, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

Solution 170 Cash flows ($38,000 × 5.65) Cash outflow—investment Net present value

Present Value $214,700 (200,000) $ 14,700

Planning for Capital Investments

12-43

The investment should be made because the net present value is positive.

BE 171 LakeFront Company is considering investing in a new dock that will cost $560,000. The company expects to use the dock for 5 years, after which it will be sold for $300,000. LakeFront anticipates annual cash flows of $110,000 resulting from the new dock. The company’s borrowing rate is 8%, while its cost of capital is 10%. Instructions Calculate the net present value of the dock and indicate whether LakeFront should make the investment. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

Solution 171 Present value of annual cash flows Present value of salvage value

Cash Flows × 10% Discount Factor $110,000 × 3.79079 300,000 × .62092

= = =

Present Value $416,987 186,276 603,263

Less: Capital investment

560,000

Net present value Since the net present value is positive, LakeFront should accept the project.

$ 43,263

BE 172 Mobil Company has hired a consultant to propose a way to increase the company’s revenues. The consultant has evaluated two mutually exclusive projects with the following information provided for each: Project Turtle Project Snake Capital investment $1,105,000 $625,000 Annual cash flows 180,000 105,000 Estimated useful life 10 years 10 years Mobil Company uses a discount rate of 9% to evaluate both projects. Instructions (a) Calculate the net present value of both projects. (b) Calculate the profitability index for each project. (c) Which project should Mobil accept? Ans: N/A, LO: 2, 3, Bloom: E, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

Solution 172 Project Turtle (a) and (b)

Cash Flows × .

9% Discount Factor

Present Value

25-44 Test Bank for Financial & Managerial Accounting, Fourth Edition Present value of annual cash flows Present value of salvage value

$180,000 0

× ×

6.41766 .42241

= =

Less: Capital investment Net present value

$1,155,179 0 1,155,179 1,105,000 $ 50,179

Profitability index = $1,155,179 ÷ $1,105,000 = 1.05 Project Snake (a) and (b) Present value of annual cash flows Present value of salvage value

Cash Flows × 9% Discount Factor $105,000 × 6.41766 0 × .42241

= = =

Less: Capital investment Net present value

Present Value $673,854 0 673,854 625,000 $ 48,854

Profitability index = $673,854 ÷ $625,000 = 1.08 (c) Project Snake has a lower net present value than Project Turtle, but because of its lower capital investment, it has a higher profitability index. Based on its profitability index, Project Snake should be accepted.

BE 173 Carlson Bottling Corporation is considering the purchase of a new bottling machine. The machine would cost $300,000 and has an estimated useful life of 8 years with zero salvage value. Management estimates that the new bottling machine will provide net annual cash flows of $52,500. Management also believes that the new bottling machine will save the company money because it is expected to be more reliable than other machines, and thus will reduce downtime. How much would the reduction in downtime have to be worth in order for the project to be acceptable? Carlson’s discount rate is 9%. Ans: N/A, LO: 2, 3, Bloom: E, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

Solution 173

Present value of annual cash flows Present value of salvage value Less: Capital investment Net present value

Cash Flows × 9% Discount Factor $52,500 × 5.53482 0 × .50187

= = =

Present Value $290,578 0 290,578 300,000 $ (9,422)

The reduction in downtime would have to have a present value of at least $9,422 in order for the project to be acceptable. .

Planning for Capital Investments

12-45

BE 174 Stanton Company is performing a post-audit of a project completed one year ago. The initial estimates were that the project would cost $490,000, would have a useful life of 9 years, zero salvage value, and would result in net annual cash flows of $90,000 per year. Now that the investment has been in operation for 1 year, revised figures indicate that it actually cost $510,000, will have a useful life of 11 years, and will produce net annual cash flows of $77,000 per year. Evaluate the success of the project. The company’s discount rate is 10%. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 12, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

Solution 174 Original estimate: Cash Flows × 10% Discount Factor

Present Value

= =

Less: Capital investment

$518,312 0 518,312 490,000

Net present value

$ 28,312

Present value of net annual cash flows Present value of salvage value

$90,000 0

× ×

5.75902 .42410

Revised estimate: Cash Flows × 10% Discount Factor

Present Value

= =

Less: Capital investment

$500,120 0 500,120 510,000

Net present value

$ (9,880)

Present value of net annual cash flows Present value of salvage value

$77,000 0

× ×

6.49506 .35049

The original net present value was projected to be a positive $28,312; however, the revised estimate is a negative $9,880. The project is not a success. BE 175 Mint Company is contemplating an investment costing $135,000. The investment will have a life of 8 years with no salvage value and will produce annual cash flows of $25,305. Instructions What is the approximate internal rate of return associated with this investment? Ans: N/A, LO: 4, Bloom: AN, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

25-46 Test Bank for Financial & Managerial Accounting, Fourth Edition

Solution 175 When net annual cash flows are expected to be equal, the internal rate of return can be approximated by dividing the capital investment by the net annual cash flows to determine the discount factor and then locating this discount factor on the present value of an annuity table. $135,000 ÷ $25,305 = 5.33 By tracing across on the 8-year row, we see that the discount factor of 10% is 5.33493. Thus the internal rate of return on this project is approximately 10%. BE 176 Salt Company is considering investing in a new facility to extract and produce salt. The facility will increase revenues by $220,000, but it will also increase annual expenses by $160,000. The facility will cost $980,000 to build, and it will have a $20,000 salvage value at the end of its useful life. Instructions Calculate the annual rate of return on this facility. Ans: N/A, LO: 5, Bloom: E, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

Solution 176 The annual rate of return is calculated by dividing expected annual income by the average investment. The company’s annual income is $220,000 – $160,000 = $60,000. Its average investment is ($980,000 + $20,000) ÷ 2 = $500,000. Therefore, it annual rate of return is $60,000 ÷ $500,000 = 12%.

EXERCISES Ex. 177 Corn Doggy, Inc. produces and sells corn dogs. The corn dogs are dipped by hand. Austin Beagle, production manager, is considering purchasing a machine that will make the corn dogs. Austin has shopped for machines and found that the machine he wants will cost $215,000. In addition, Austin estimates that the new machine will increase the company’s annual net cash flows by $33,000. The machine will have a 12-year useful life and no salvage value. Instructions (a) Calculate the cash payback period. (b) Calculate the machine’s internal rate of return. (c) Calculate the machine’s net present value using a discount rate of 10%. (d) Assuming Corn Doggy, Inc.’s cost of capital is 10%, is the investment acceptable? Why or why not? Ans: N/A, LO: 1, 2, 3, 4, Bloom: E, Difficulty: Moderate, Min: 13, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

Solution 177 (a) Cash payback period: $215,000 ÷ $33,000 = 6.5 years .

Planning for Capital Investments

12-47

(b) Internal rate of return: Scanning the 12-year line, a factor of 6.5 represents an internal rate of return of approximately 11%. (c) Net present value using a discount rate of 10%: Time Period -01-12

Cash Flow PV Factor $(215,000) 1.00000 33,000 6.81369 Net Present Value

Present Value $(215,000) 224,852 $ 9,852

(d) Yes, the investment is acceptable. Indications are that the investment will earn a greater return than 10%. The internal rate of return is estimated to be 11%, and the net present value is positive.

25-48 Test Bank for Financial & Managerial Accounting, Fourth Edition Ex. 1 78 Cepeda Manufacturing Company is considering three new projects, each requiring an equipment investment of $22,000. Each project will last for 3 years and produce the following cash flows. Year 1 2 3 Total

AA $ 7,000 9,000 15,000 $31,000

BB $ 9,500 9,500 9,500 $28,500

CC $11,000 10,000 9,000 $30,000

The salvage value for each of the projects is zero. Cepeda uses straight-line depreciation. Cepeda will not accept any project with a payback period over 2.2 years. Cepeda's minimum required rate of return is 12%. Instructions (a) Compute each project's payback period, indicating the most desirable project and the least desirable project using this method. (Round to two decimals.) (b) Compute the net present value of each project. Does your evaluation change? (Round to nearest dollar.) Ans: N/A, LO: 1, 2, Bloom: E, Difficulty: Moderate, Min: 25, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

Solution 178 (a)

1 2 3

AA Annual Net Year Cash Flow $ 7,000 $ 7,000 9,000 16,000 15,000 31,000

Cash payback 2.40 years

Cumulative Net Cash Flow

$22,000 – $16,000 = $6,000; $6,000 ÷ $15,000 = .40

BB $22,000 ÷ $9,500 = 2.32 years CC Year 1 2 3

$11,000 10,000 9,000

$11,000 21,000 30,000 $22,000 – $21,000 = $1,000; $1,000 ÷ $9,000 = .1

Cash payback 2.1 years

Planning for Capital Investments

12-49

The most desirable project is CC because it has the shortest payback period. The least desirable project is AA because it has the longest payback period. As indicated, only CC is acceptable because its cash payback is 2.1 years.

Solution 178 (Con’t) (b) AA Net Annual Discount Cash Year Factor Flow 1 .89286 $ 7,000 $ 9,821 2 .79719 9,000 3 .71178 15,000 Total present value Less: Capital Investment Net present value

Present Value $ 6,250 7,175 10,677 24,102 22,000 $ 2,102

BB Net Annual Cash Flow $9,500 9,500 9,500

Present Value $ 8,482 7,573

22,000 $ 817

Net Cash Present Flow Value $11,000 10,000 9,000

7,972

22,000 $ 2,199

(1) This total may also be obtained from Table 4 (Present Value of an Annuity at 12% for 3 years.): $9,500 2.40183 = $22,817. Project CC is still the most desirable project. Also, on the basis of net present values, all of the projects are acceptable. Project BB is the least desirable. Ex. 179 Gantner Company is considering a capital investment of $300,000 in additional productive facilities. The new machinery is expected to have a useful life of 5 years with no salvage value. Depreciation is computed by the straight-line method. During the life of the investment, annual net income and cash flows are expected to be $27,000 and $87,000, respectively. Gantner has a 12% cost of capital rate, which is the minimum acceptable rate of return on the investment. Instructions (Round to two decimals.) (a) Compute (1) the annual rate of return and (2) the cash payback period on the proposed capital expenditure. (b) Using the discounted cash flow technique, compute the net present value. Ans: N/A, LO: 1, 2, 5, Bloom: AP, Difficulty: Moderate, Min: 16, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

Solution 179 (a)

(1)

Annual rate of return: $27,000 ÷ [($300,000 + $0) ÷ 2] = 18% .

25-50 Test Bank for Financial & Managerial Accounting, Fourth Edition Ex. 1 (2)

Cash payback: $300,000 ÷ $87,000 = 3.45 years.

(b)

Item Net annual cash flows Less: Capital investment Positive net present value

Amount $ 87,000 $300,000

Years 1-5 Now

PV Factor at 12% Present Value 3.60478 $313,616 1.00000 300,000 $ 13,616

80 Top Growth Farms, a farming cooperative, is considering purchasing a tractor for $551,500. The machine has a 10-year life and an estimated salvage value of $36,000. Delivery costs and set-up charges will be $12,100 and $400, respectively. Top Growth uses straight-line depreciation and has a required rate of return of 9%. Top Growth estimates that the tractor will be used five times a week with the average charge to the individual farmers of $400. Fuel is $50 for each use of the tractor. The present value of an annuity of 1 for 10 years at 9% is 6.418. Instructions For the new tractor, compute the: (a) cash payback period. (b) net present value. (c) annual rate of return. Ans: N/A, LO: 1, 2, 5, Bloom: AP, Difficulty: Moderate, Min: 12, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

Solution 180 (a)

Cost of the tractor: $551,500 + $12,100 + $400 = $564,000 Annual Cash Flow: Number of uses: 52 × 5 = 260 Net cash flows: $400 – $50 = $350 Total annual net cash flow: 260 × $350 = $91,000 $564,000 Cash payback: ———— = 6.2 years $91,000

(b)

Present value of cash flow ($91,000 × 6.418) = Plus: PV of salvage value ($36,000 x .42241) = 15,207 Less: Capital investment 564,000 Net present value $ 35,245

(c)

$564,000 + $36,000 Average Investment: ————————— = $300,000 .

$584,038

Planning for Capital Investments

12-51

2 $564,000 – $36,000 Annual Depreciation: ————————— = $52,800 10 years Annual Net Income: $91,000 – $52,800 = $38,200 $38,200 Average Annual Rate of Return: ———— = 12.73% $300,000 Ex. 181 Tom Bat became a baseball enthusiast at a very early age. All of his baseball experience has provided him valuable knowledge of the sport, and he is thinking about going into the batting cage business. He estimates the construction of a state-of-the-art building and the purchase of necessary equipment will cost $840,000. Both the facility and the equipment will be depreciated over 12 years using the straight-line method and are expected to have zero salvage values. His required rate of return is 9% (present value factor of 7.1607). Estimated annual net income is as follows: $350,500 Revenue Less: Utility cost

$ 40,000

Supplies

8,000

Labor

141,000

Depreciation

70,000

Other Net income

38,500

297,500 $ 53,000

Instructions For this investment, calculate: (a) The net present value. (b) The internal rate of return. (c) The cash payback period. Ans: N/A, LO: 1, 2, 4, Bloom: AN, Difficulty: Moderate, Min: 12, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

Solution 181 (a) Net present value of the investment: Item Present value of net cash flow Less: Capital Investment .

Amount $123,000* 840,000

PV Factor 7.1607 1.0000

Present Value $880,766 840,000

25-52 Test Bank for Financial & Managerial Accounting, Fourth Edition Ex. 1 Net present value * net income + depreciation = $53,000 + $70,000 = $123,000

$ 40,766

(b) Internal rate of return of the investment: $840,000 ÷ $123,000 = 6.8293 Scanning the 12-year line, a factor of 6.8293 represents an IRR of approximately 10%. (c) Cash payback period of the investment: $840,000 ÷ $123,000 = 6.83 years. 82 Mimi Company is considering a capital investment of $275,000 in new equipment. The equipment is expected to have a 5-year useful life with no salvage value. Depreciation is computed by the straight-line method. During the life of the investment, annual net income and cash flows are expected to be $25,000 and $80,000, respectively. Mimi's minimum required rate of return is 10%. The present value of 1 for 5 periods at 10% is .621 and the present value of an annuity of 1 for 5 periods at 10% is 3.791. Instructions Compute each of the following: (a) Cash payback period. (b) Net present value. (c) Annual rate of return. Ans: N/A, LO: 1, 2, 5, Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

Solution 182

(10–15 min.)

(a) Cash payback period = $275,000 ÷ $80,000 = 3.44 years (b) Present value of cash flows ($80,000 × 3.791) = $303,280 Less: Capital investment 275,000 Net present value $ 28,280 (c) Annual rate of return = $25,000 ÷ [($275,000 + $0) ÷ 2] = 18.2%

Ex. 183 Savanna Company is considering two capital investment proposals. Relevant data on each project are as follows: Project Red Project Blue Capital investment $440,000 $640,000 Annual net income 25,000 60,000 Estimated useful life 8 years 8 years .

Planning for Capital Investments

12-53

Depreciation is computed by the straight-line method with no salvage value. Savanna requires an 8% rate of return on all new investments. The present value of 1 for 8 periods at 8% is .540 and the present value of an annuity of 1 for 8 periods is 5.747. Instructions (a) Compute the cash payback period for each project. (b) Compute the net present value for each project. (c) Compute the annual rate of return for each project. (d) Which project should Savanna select? Ans: N/A, LO: 1, 2, 5, Bloom: E, Difficulty: Moderate, Min: 14, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

Solution 183 (a) Annual net income Annual depreciation Annual cash flow

Project Red $25,000 55,000* $80,000

*($440,000 ÷ 8)

Project Blue $ 60,000 80,000** $140,000

**($640,000 ÷ 8)

Cash payback period:

$440,000 ———— = 5.5 years $80,000

(b) Present value of cash flows: Less: Capital investment Net present value *($80,000 × 5.747)

Project Red $459,760* 440,000 $ 19,760

$640,000 ———— = 4.6 years $140,000 Project Blue $804,580** 640,000 $164,580

**($140,000 × 5.747)

Project Red $25,000 ————————— = 11.4% ($440,000 + $0) ÷ 2

Project Blue $60,000 ————————— = 18.8% ($640,000 + $0) ÷ 2

(d) Savanna should select Project Blue because it has a larger positive net present value and a higher annual rate of return. In addition, Project Blue has a slightly shorter cash payback period.

Ex. 184 Yappy Company is considering a capital investment of $320,000 in additional equipment. The new equipment is expected to have a useful life of 8 years with no salvage value. Depreciation is computed by the straight-line method. During the life of the investment, annual net income and cash flows are expected to be $22,000 and $62,000, respectively. Yappy requires a 10% return on all new investments. Present Value of an Annuity of 1 .

25-54 Test Bank for Financial & Managerial Accounting, Fourth Edition Ex. 1 Period 8

8% 5.747

9% 5.535

10% 5.335

11% 5.146

12% 4.968

15% 4.487

Instructions (a) Compute each of the following: 1. Cash payback period. 2. Net present value. 3. Profitability index. 4. Internal rate of return. 5. Annual rate of return. (b) Indicate whether the investment should be accepted or rejected. Ans: N/A, LO: 1, 2, 3, 4, 5, Bloom: E, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

25-55 Test Bank for Financial & Managerial Accounting, Fourth Edition Solution 184 (a)

Cash payback period: $320,000 ÷ $62,000 = 5.16 years

Present value of cash flows ($62,000 × 5.335) $330,770 Less: Capital investment Net present value

320,000 $ 10,770

Profitability index: $330,770 ÷ $320,000 = 1.03

Internal rate of return factor: $320,000 ÷ $62,000 = 5.16 11% (5.146 factor)

Annual rate of return: $22,000 ÷ [($320,000 + $0) ÷ 2] = 13.75%

(b)

Yappy should accept the investment, since its net present value is positive and its internal rate of return of 11% is greater than the company's required rate of return of 10%. In addition, its cash payback period of 5.16 years is significantly shorter than the equipment's useful life of 8 years.

Internal rate of return =

Ex. 185 Laramie Service Center just purchased an automobile hoist for $16,900. The hoist has a 5-year life and an estimated salvage value of $1,250. Installation costs were $3,770, and freight charges were $960. Laramie uses straight-line depreciation. The new hoist will be used to replace mufflers on automobiles. Laramie estimates that the new hoist will enable his mechanics to replace four extra mufflers per week. Each muffler sells for $85 installed. The cost of a muffler is $46, and the labor cost to install a muffler is $13. Instructions (a) Compute the payback period for the new hoist. (b) Compute the annual rate of return for the new hoist. (Round to one decimal.) Ans: N/A, LO: 1, 5, Bloom: AP, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

Solution 185 (a) Cost of hoist: $16,900 + $3,770 + $960 = $21,630. Net annual cash flow: Number of extra mufflers: 4 × 52 weeks Net cash flows per muffler ($85 – $46 – $13) Total net annual cash flow: (a) × (b) Cash payback = $21,630 ÷ $5,408 = 4 years.

(a) (b)

208 $ 26 $5,408

(b) Average investment: ($21,630 + $1,250) ÷ 2 = $11,440. Annual depreciation: ($21,630 – $1,250) ÷ 5 = $4,076. Annual net income: $5,408 – $4,076 = $1,332. Average annual rate of return = $1,332 ÷ $11,440 = 11.6% (rounded).

25-56 Test Bank for Financial & Managerial Accounting, Fourth Edition Ex. 1 86 Sophie’s Pet Shop is considering the purchase of a new delivery van. Sophie Smith, owner of the shop, has compiled the following estimates in trying to determine whether the delivery van should be purchased: Cost of the van Annual net cash flows Salvage value Estimated useful life Cost of capital Present value of an annuity of 1 Present value of 1

$35,000 6,000 4,000 8 years 10% 5.335 .467

Sophie's assistant manager is trying to convince Sophie that the van has other benefits that she hasn't considered in the initial estimates. These additional benefits, including the free advertising the store's name painted on the van's doors will provide, are expected to increase net cash flows by $500 each year. Instructions (a) Calculate the net present value of the van, based on the initial estimates. Should the van be purchased? (b) Calculate the net present value, incorporating the additional benefits suggested by the assistant manager. Should the van be purchased? (c) Determine how much the additional benefits would have to be worth in order for the van to be purchased. Ans: N/A, LO: 2, 3, Bloom: E, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

Solution 186 (a) Present value of annual cash flows ($6,000 × 5.335) Present value of salvage value ($4,000 × .467)

$32,010 1,868 33,878 Less: Capital investment 35,000 Net present value $( 1,122) Based on the negative net present value of $1,122, the van should not be purchased.

(b) Present value of annual cash flows [($6,000 + $500) × 5.335] $34,678 Present value of salvage value ($4,000 × .467) 1,868 36,546 Less: Capital investment 35,000 Net present value $ 1,546 Incorporating the additional benefits of $500/year into the calculation produces a positive net present value of $1,546. Therefore, the van should be purchased.

Planning for Capital Investments

12-57

Ex. 1 (c) The additional benefits would need to have a total present value of at least $1,122 in order for the van to be purchased.

87 Vista Company is considering two new projects, each requiring an equipment investment of $97,000. Each project will last for three years and produce the following cash flows: Year 1 2 3

Cool Hot $ 38,000 $ 42,000 43,000 42,000 48,000 42,000 $129,000 $126,000

The equipment will have no salvage value at the end of its three-year life. Vista Company uses straight-line depreciation and requires a minimum rate of return of 12%. Present value data are as follows: Present Value of 1 Period Period

Present Value of an Annuity of 1 1

2 3

1 .797 .712

2 3

1.690 2.402

Instructions (a) Compute the net present value of each project. (b) Compute the profitability index of each project. (c) Which project should be selected? Why? Ans: N/A, LO: 2, 3, Bloom: E, Difficulty: Moderate, Min: 12, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

Solution 187 (a) Year 1 2 3

Project Cool Annual Cash Flows Present Value of 1 $ 38,000 .893 $ 33,934 43,000 .797 34,271 48,000 .712 34,176 $129,000

Present value of cash flows Less: Capital investment Net present value

Present Value

$102,381 $102,381 97,000 $ 5,381

25-58 Test Bank for Financial & Managerial Accounting, Fourth Edition Ex. 1 Project Hot Present value of cash flows ($42,000 × 2.402) Less: Capital investment Net present value (b)

Cool

$100,884 97,000 $ 3,884

Hot $102,381 ÷ $97,000 = 1.06

Profitability index: ($100,884 ÷ $97,000) =

1.04 (c)

Both projects are acceptable because both show a positive net present value. Project Cool is the preferred project because its net present value is greater than project Hot's net present value and it has a slightly higher profitability index. 88

KSU Corp. is considering purchasing one of two new diagnostic machines. Either machine would make it possible for the company to bid on jobs that it currently isn't equipped to do. Estimates regarding each machine are provided below.

Original cost Estimated life Salvage value Estimated annual cash inflows Estimated annual cash outflows

Machine A $106,000 8 years -0$30,000 $10,000

Machine B $175,000 8 years -0$45,000 $15,000

KSU requires a 9% return on all new investments. Present Value of an Annuity of 1 Period 8% 9% 10% 11% 12% 8 5.747 5.535 5.335 5.146 4.968

15% 4.487

Instructions Calculate the net present value and profitability index of each machine. Which machine should be purchased? Ans: N/A, LO: 2, 3, Bloom: E, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

Solution 188 Machine A: Cash Flows × Present value of net annual .

9% Discount Factor

Present Value

Planning for Capital Investments Ex. 1 cash flows Present value of salvage value

$20,000 0

× ×

5.53482 .50187

= =

12-59

$110,696 0 110,696

Less: Capital investment

106,000

Net present value

$ 4,696

Profitability index = $110,696/$106,000 = 1.04 Machine B: Cash Flows × Present value of net annual cash flows Present value of salvage value

$30,000 0

9% Discount Factor

Present Value

5.53482 .50187

= =

$166,045 0 166,045

× ×

Less: Capital investment

175,000

Net present value

$( 8,955)

Profitability index = $166,045/$175,000 = .95 Machine B has a negative net present value, and also a lower profitability index. Machine B should be rejected and machine A should be purchased. 89 Santana Company is considering investing in a project that will cost $151,000 and have no salvage value at the end of its 5-year life. It is estimated that the project will generate annual cash flows of $40,000 each year. The company requires a 9% rate of return and uses the following compound interest table: Present Value of an Annuity of 1 Period 5

6% 4.212

8% 3.993

9% 3.890

10% 3.791

11% 3.696

12% 3.605

15% 3.352

Instructions (a) Compute (1) the net present value and (2) the profitability index of the project. (b) Compute the internal rate of return on this project. (c) Should Santana invest in this project? Ans: N/A, LO: 1, 3, 4, Bloom: E, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

Solution 189 (a)

(1)

Present value of cash flows ($40,000 × 3.890)

$155,600

25-60 Test Bank for Financial & Managerial Accounting, Fourth Edition Ex. 1 Less: Capital investment Net present value (2) (b)

151,000 $ 4,600

Profitability index: $155,600 ÷ $151,000 = 1.03 Capital Investment —————————— Net Annual Cash Flow

= Internal Rate of Return Factor

$151,000 ———— = 3.78 $40,000 Since the calculated internal rate of return factor of 3.78 is very near the factor 3.791 for five periods and 10% interest, this project has an approximate interest yield of 10%. (c)

Santana should invest in this project because it has a positive net present value, a profitability index above 1, and its internal rate of return of approximately 10% is greater than the company's 9% required rate of return. 90

Johnson Company is considering purchasing one of two new machines. The following estimates are available for each machine: Machine 1 Machine 2 Initial cost $152,000 $169,000 Annual cash flows 50,000 60,000 Annual cash outflows 15,000 20,000 Estimated useful life 6 years 6 years The company's minimum required rate of return is 9%.

Period 6

8% 4.623

Present Value of an Annuity of 1 9% 10% 11% 12% 4.486 4.355 4.231 4.111

15% 3.784

Instructions (a) Compute the (1) net present value, (2) profitability index, and (3) internal rate of return for each machine. (b) Which machine should be purchased? Ans: N/A, LO: 1, 3, 5, Bloom: E, Difficulty: Moderate, Min: 12, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

Solution 190 (a)

Machine 1 .

Machine 2

Planning for Capital Investments Ex. 1 (1)

Present value of net cash flows $179,440** Less: Capital investment 152,000 Net present value $ 5,010 *($35,000 × 4.486) **($40,000 × 4.486) Machine 1 $157,010 Profitability index $152,000

(2)

Machine 1 Internal rate of return factor $152,000 ———— = 4.34 ———— = 4.23 $35,000 $40,000 Internal rate of return

(b)

$157,010* 169,000 $ 10,440

Machine 2 $179,440 ———— = 1.03 $169,000

(3)

12-61

———— = 1.06

Machine 2 $169,000

10% (4.355 factor)

11% (4.231 factor)

Both machines are acceptable because both show a positive net present value, have a profitability index above 1, and have an internal rate of return greater than the company's minimum required rate of return. Machine 2 is preferred because its net present value, profitability index, and internal rate of return are all greater than Machine 1's amounts. 91

Platoon Company is performing a post-audit of a project that was estimated to cost $420,000, have a useful life of 6 years with a zero salvage value, and result in annual net cash flows of $100,000 per year. The company’s required rate of return is 10%. After the investment was in operation for a year, revised figures indicate that it actually cost $470,000, will have a 9-year useful life, and will produce annual net cash flows of $77,000. The present value of an annuity of 1 for 6 years at 10% is 4.355 and for 9 years is 5.759. Instructions Determine whether the project should have been accepted based on (a) the original estimates and then on (b) the actual amounts. Ans: N/A, LO: 2, 3, Bloom: E, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

Solution 191 (a) Present value of the estimated net cash flows ($100,000 × 4.355) Less: Estimated capital investment .

$435,500 420,000

25-62 Test Bank for Financial & Managerial Accounting, Fourth Edition Ex. 1 Net present value

$ 15,500

Yes, Platoon Company should have invested in the project based on the original estimates, since the net present value is positive. (b) Present value of the actual net cash flows ($77,000 × 5.759) $443,443 Less: Actual capital investment Net present value

470,000 $ (26,557)

Platoon should not have invested in the project based on the actual amounts, since the net present value is negative. The decrease of $42,057 in net present value was caused due to a decrease of $23,000 per year in net cash flows and a $50,000 increase in the cost of the capital investment. This more than offsets the 3-year increase in useful life.

Ex. 192 Shilling Corp. is thinking about opening a baseball camp in Florida. In order to start the camp, the company would need to purchase land, build five baseball fields, and a dormitory-type sleeping with a dining facility to house 100 players. Each year the camp would be run for 10 sessions of 1 week each. The company would hire college baseball players as coaches. The camp attendees would be baseball players age 12-18. Property values in Florida have enjoyed a steady increase in value. It is expected that after using the facility for 20 years, Shilling can sell the property for more than the amount for which it was originally purchased. The following amounts have been estimated: Cost of land $ 630,000 Cost to build dorm and dining facility 2,100,000 Annual cash flows assuming 100 players and 10 weeks 2,520,000 Annual cash outflows 2,260,000 Estimated useful life 20 years Salvage value 4,400,000 Discount rate 10% Present value of an annuity of 1 8.514 Present value of 1 .149

Planning for Capital Investments

12-63

Instructions (a) Calculate the net present value of the project. (b) To gauge the sensitivity of the project to these estimates, assume that if only 80 campers attend each week, revenues will be $2,085,000 and expenses will be $1,865,000. What is the net present value using these alternative estimates? Discuss your findings. (c) Assuming the original facts, what is the net present value if the project is actually riskier than first assumed, and a 12% discount rate is more appropriate? The present value of 1 at 12% is .104 and the present value of an annuity of 1 is 7.469. Ans: N/A, LO: 2, 4, Bloom: E, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

Solution 192 (a) Present value of net cash flows ($260,000 × 8.514) $2,213,640 Present value of salvage value ($4,400,000 × .149) 655,600 2,869,240 Less: Capital investment ($630,000 + $2,100,000) 2,730,000 Net present value $ 139,240 (b) Present value of net cash flows ($220,000 × 8.514) Present value of salvage value 2,528,680 Less: Capital investment Net present value

$1,873,080 655,600 2,730,000 $ (201,320)

If the number of campers attending each week is only 80 instead of 100, the net present value decreases by $340,560 (from a positive $139,240 to a negative $201,320). This indicates that the investment should not be made unless the number attending is closer to 100. (c) Present value of net cash flows ($260,000 × 7.469) Present value of salvage value ($4,400,000 × .104) $2,399,540 Less: Capital investment Net present value

$1,941,940 457,600 2,730,000 $ (330,460)

Ex. 193 Ace Corporation recently purchased a new machine for its factory operations at a cost of $950,000. The investment is expected to generate $250,000 in annual cash flows for a period of five years. The required rate of return is 8%. The new machine is expected to have zero salvage value at the end of the five-year period. Instructions Calculate the internal rate of return. (Table 4 from Appendix C is needed.) Ans: N/A, LO: 4, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

25-64 Test Bank for Financial & Managerial Accounting, Fourth Edition

Solution 193 IRR = Capital investment ÷ Annual cash flows = Factor $950,000 ÷ $250,000 = 3.80. This factor is found in the PVA table at n = 5 periods. IRR = 10% (approximately)

COMPLETION STATEMENTS 194. For purposes of capital budgeting, estimated

and outflows are preferred for

inputs into the capital budgeting decision tools. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

195. The technique which identifies the time period required to recover the cost of the investment is called the

method.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

196. The two discounted cash flow techniques used in capital budgeting are (1) the method and (2) the

method.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

197. Under the net present value method, the interest rate to be used in discounting the future cash flows is the

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

198. In using the net present value approach, a project is acceptable if the project's net present value is

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

199. A project’s

, such as increased quality or safety, are often incorrectly

ignored in capital budgeting decisions. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

Planning for Capital Investments

200. The

12-65

is a method of comparing alternative projects that takes into account

both the size of the investment and its discounted future cash flows. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

201. A well-run organization should perform an evaluation, called a

, of its

investment projects after their completion. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

202. The internal rate of return method differs from the net present value method in that it results in finding the

of the potential investment.

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

203. A major limitation of the annual rate of return approach is that it does not consider the of money. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

Answers to Completion Statements 194. 195. 196. 197. 198. 199. 200. 201. 202. 203.

cash flows cash payback net present value, internal rate of return required rate of return zero, positive intangible benefits profitability index post-audit interest yield time value

MATCHING 204. Match the items below by entering the appropriate code letter in the space provided. A. Profitability index B. Internal rate of return method C. Discounted cash flow techniques .

E. Annual rate of return method F. Cash payback technique G. Cost of capital

25-66 Test Bank for Financial & Managerial Accounting, Fourth Edition D. Capital budgeting

H. Net present value method

1. A capital budgeting technique that identifies the time period required to recover the cost of a capital investment from the annual net cash flow produced by the investment. 2. Capital budgeting techniques that consider both the estimated total cash flows from the investment and the time value of money. 3. A method used in capital budgeting in which cash flows are discounted to their present value and then compared to the capital outlay required by the capital investment. 4. A method of comparing alternative projects that takes into account both the size of the investment and its discounted cash flows. 5. A method used in capital budgeting that results in finding the interest yield of the potential investment. 6. The weighted- average rate of return that the firm must pay to obtain borrowed and equity funds. 7. The determination of the profitability of a capital expenditure by dividing expected annual net income by the average investment. 8. The process of making capital expenditure decisions in business. Ans: N/A, LO: 1-5, Bloom: K, Difficulty: Easy, Min: 4, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions

Answers to Matching 1. 2. 3. 4.

F C H A

5. 6. 7. 8.

B G E D

SHORT-ANSWER ESSAY QUESTIONS S-A E 205 Management uses several capital budgeting methods in evaluating projects for possible investment. Identify those methods that are more desirable from a conceptual standpoint, and briefly explain what features these methods have that make them more desirable than other methods. Also identify the least desirable method and explain its major weaknesses. Ans: N/A, LO: 1, 2, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communication, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Communication, IMA: Investment Decisions

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Solution 205 From a conceptual standpoint, the discounted cash flow methods (net present value and internal rate of return) are considered more desirable because they consider both the estimated cash flows and the time value of money. The time value of money is critical because of the long-term impact of capital budgeting decisions. Capital budgeting methods which do not consider the time value of money include annual rate of return and cash payback. The cash payback method is the least desirable because it also ignores the expected profitability of the project. S-A E 206 Manny Perez is trying to understand the term "cost of capital." Define the term, and indicate its relevance to the decision rule under the annual rate of return technique. Ans: N/A, LO: 2, 5, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communication, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Communication, IMA: Investment Decisions

Solution 207 Cost of capital is the rate of return that management expects to pay on all borrowed and equity funds. The decision rule is: A project is acceptable if its annual rate of return is greater than or equal to management's minimum rate of return (which often is its cost of capital), and the project is unacceptable when the rate of return is less than the minimum rate of return.

S-A E 207 (Ethics) Sam Stanton is on the capital budgeting committee for his company, Canton Tile. Ed Rhodes is an engineer for the firm. Ed expresses his disappointment to Sam that a project that was given to him to review before submission looks extremely good on paper. "I really hoped that the cost projections wouldn't pan out," he tells his friend. "The technology used in this is pie in the sky kind of stuff. There are a hundred things that could go wrong. But the figures are very convincing. I haven't sent it on yet, though I probably should." "You can keep it if it's really that bad," assures Sam. "Anyway, you can probably get it shot out of the water pretty easily, and not have the guy who submitted it mad at you for not turning it in. Just fix the numbers. If you figure, for instance, that a cost is only 50% likely to be that low, then double it. We do it all the time, informally. Best of all, the rank and file don't get to come to those sessions. Your engineering genius need never know. He'll just think someone else's project was even better than his." Required: 1. Who are the stakeholders in this situation? 2. Is it ethical to adjust the figures to compensate for risk? Explain. 3. Is it ethical to change the proposal before submitting it? Explain. Ans: N/A, LO: 1, Bloom: E, Difficulty: Easy, Min: 3, AACSB: Ethics, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Communication, Ethical Conduct, IMA: Investment Decisions

Solution 207 1. The stakeholders include: .

25-68 Test Bank for Financial & Managerial Accounting, Fourth Edition Ed Rhodes Canton Tile the engineer who submitted the proposal. 2. It is ethical, in general, to adjust projections to compensate for risk. However, it should be clearly stated that the projections have been adjusted for risk, and the method used should be available for review. Otherwise, the entire selection process is undermined, and it becomes entirely subjective. 3. It is probably not ethical to modify a proposal at all; certainly not in the way described. The person submitting the proposal should have the right to know about any changes that were made, and should have the right to review those changes.

S-A E 208

(Communication)

You are the general accountant for Word Systems, Inc., a typing service based in Los Angeles, California. The company has decided to upgrade its equipment. It currently has a widely used version of a word processing program. The company wishes to invest in more up-to-date software and to improve its printing capabilities. Two options have emerged. Option #1 is for the company to keep its existing computer system, and upgrade its word processing program. The memory of each work station would be enhanced, and a larger, more efficient printer would be used. Better telecommunications equipment would allow for the electronic transmission of some documents as well. Option #2 would be for the company to invest in an entirely different computer system. The software for this system is impressive, and it comes with individual laser printers. However, the company is not well known, and the software does not connect well with well-known software. The net present value information for these options follows: Option #1 Initial Investment $(95,000) Returns Year 1 55,000 Year 2 30,000 Year 3 10,000 Net present value 0

Option #2 $(270,000) 90,000 90,000 90,000 0

Required: Prepare a brief report for management in which you make a recommendation for one system or the other, using the information given. Ans: N/A, LO: 2, Bloom: AN, Difficulty: Easy, Min: 3, AACSB: Communication, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Communication, IMA: Investment Decisions

Solution 208 The company should accept Option #1, to purchase upgrades to its present system and to buy a more efficient printer. In the first place, the change\s will be easier to implement because the equipment is similar to that which is already in use. Secondly, the company will have less money .

Planning for Capital Investments

12-69

invested in the project, which decreases the risk of loss should the project fail. Option #2 appears to be too risky.

APPENDIX: TEST BANK TIME VALUE OF MONEY APPENDIX LEARNING OBJECTIVES 1. Compute interest and future values. Simple interest is computed on the principal only, while compound interest is computed on the principal and any interest earned that has not been withdrawn. To solve for future value of a single amount, prepare a time diagram of the problem. Identify the principal amount, the number of compounding periods, and the interest rate. Using the future value of 1 table, multiply the principal amount by the future value factor specified at the intersection of the number of periods and the interest rate. To solve for future value of an annuity, prepare a time diagram of the problem. Identify the amount of the periodic payments (receipts), the number of payments, and the interest rate. Using the future value of an annuity of 1 table, multiply the amount of the payments by the future value factor specified at the intersection of the number of periods and the interest rate. 2. Compute present values. The following three variables are fundamental to solving present value problems: (1) the future amount, (2) the number of periods, and (3) the interest rate (the discount rate). To solve for present value of a single amount, prepare a time diagram of the problem. Identify the future amount, the number of discounting periods, and the discount (interest) rate. Using the present value of a single amount table, multiply the future amount by the present value factor specified at the intersection of the number of periods and the discount rate. To solve for present value of an annuity, prepare a time diagram of the problem. Identify the amount of future periodic receipts or payment (annuities), the number of discounting periods, and the discount (interest) rate. Using the present value of an annuity of 1 table, multiply the amount of the annuity by the present value factor specified at the intersection of the number of periods and the interest rate. To compute the present value of notes and bonds, determine the present value of the principal amount: Multiply the principal amount (a single future amount) by the present value factor (from the present value of 1 table) intersecting at the number of periods (number of interest payments) and the discount rate. To determine the present value of the series of interest payments: Multiply the amount of the interest payment by the present value factor (from the present value of an annuity of 1 table) intersecting at the number of periods (number of interest payments) and the discount rate. Add the present value of the principal amount to the present value of the interest payments to arrive at the present value of the note or bond. 3. Compute the present value in capital budgeting situations. Compute the present values of all cash inflows and all cash outflows related to the capital budgeting proposal (an investmenttype decision). If the net present value is positive, accept the proposal (make the investment). If the net present value is negative, reject the proposal (do not make the investment).

Test Bank

4. Use technological tools to solve time value of money problems. Technological tools, such as financial calculators and Excel, can be used to solve the same and additional problems as those solved with time value of money tables. When using a financial calculator, you will enter into the financial calculator the amounts for all of the known elements of a time value of money problem (periods, interest rate, payments, future or present value), and it solves for the unknown element. Particularly useful situations involve interest rates and compounding periods not presented in the tables. When using Excel, each function will require some combination of the following inputs: Rate, Nper, Pmt, PV or FV, and Type. The advantage of Excel is that it allows users to quickly modify inputs to understand how changes in inputs such as the interest rate might impact the present value. Difficulties: Easy: 29 Medium: 50 Hard: 0

Question List by Section Interest and Future Values Nature of Interest: 1 Simple Interest Compound Interest: 2, 13 Future Value of a Single Amount: 3, 14,, 15, 16, 17, 46, 47, 48, 49, 50 Future Value of an Annuity: 4. 18, 19, 20, 21, 22, 51, 52, 53, 54, 55 56, 75, 76 Present Values Present Value Variables: 5, 6, 23, 24, 25, 77 Present Value of a Single Amount: 26, 27, 28, 29, 31, 32, 33, 34, 35, 36, 57, 58, 59, 60, 61, 62, 63 Present Value of an Annuity: 7, 9, 37, 38, 40, 41, 64, 65, 66, 67, 68, 69, 70, 71 Time Periods and Discounting: 30 Present Value of a Long-term Note or Bond: 8, 39, 42, 72, 78 Capital Budgeting Situations: 10, 11, 43, 44, 73 Using Technological Tools: 12, 45, 74

Time Value of Money

TRUE-FALSE STATEMENTS 1.

Interest is the difference between the amount borrowed and the principal.

Ans: F, LO: 1, Topic: Interest and Future Values, Subtopic: Nature of Interest, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

Compound interest is computed on the principal and any interest earned that has not been paid or received.

Ans: T, LO: 1, Topic: Interest and Future Values, Subtopic: Compound Interest, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

The future value of a single amount is the value at a future date of a given amount invested now, assuming compound interest.

Ans: T, LO: 1, Topic: Interest and Future Values, Subtopic: Future Value of a Single Amount, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

When the periodic payments are not equal in each period, the future value can be computed by using a future value of an annuity table.

Ans: F, LO: 1, Topic: Interest and Future Values, Subtopic: Future Value of an Annuity, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

The process of determining the present value is referred to as discounting the future amount.

Ans: T, LO: 2, Topic: Present Values, Subtopic: Present Value Variables, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

A higher discount rate produces a higher present value.

Ans: F, LO: 2, Topic: Present Values, Subtopic: Present Value of a Single Amount, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

In computing the present value of an annuity, it is not necessary to know the number of discount periods.

Ans: F, LO: 2, Topic: Present Values, Subtopic: Present Value of an Annuity, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

The present value of a long-term note or bond is a function of two variables.

Ans: F, LO: 2, Topic: Present Values, Subtopic: Present Value of a Long-term Note or Bond, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

The present value of an annuity is the value now of a series of future receipts or payments, discounted assuming compound interest.

Ans: T, LO: 2, Topic: Present Values, Subtopic: Present Value of an Annuity, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

10.

The decision to make long-term capital investments is best evaluated without recognizing the time value of money.

Ans: F, LO: 3, Topic: Capital Budgeting Situations, Subtopic: None, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

11.

In a capital budgeting decision, a positive net present value means the decision to invest should be accepted.

Ans: T, LO: 3, Capital Budgeting Situations, Subtopic: None, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

Test Bank

4 12.

With Excel or a financial calculator, one can solve for any interest rate or for any number of periods in a time value of money problem.

Ans: T, LO: 4, Topic: Using Technological Tools, Subtopic: None, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Technology and Tools, AICPA PC: None, IMA: Reporting & Control

MULTIPLE-CHOICE QUESTIONS Note: Students will need future value and present value tables for some questions. 13.

Compound interest is the return on principal a. only. b. for one or more periods. c. plus interest for two or more periods. d. for one period.

Ans: c, LO: 1, Topic: Interest and Future Values, Subtopic: Compound Interest, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

14.

The factor 1.08160 is taken from the 4% column and 2 periods row in a certain table. From what table is this factor taken? a. Future value of 1 b. Future value of an annuity of 1 c. Present value of 1 d. Present value of an annuity of 1

Ans: a, LO: 1, Topic: Interest and Future Values, Subtopic: Future Value of a Single Amount, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control

15.

If $40,000 is put in a savings account paying interest of 4% compounded annually, what amount will be in the account at the end of 5 years? a. $32,878 b. $48,000 c. $48,620 d. $48,666

Ans: d, LO: 1, Topic: Interest and Future Values, Subtopic: Future Value of a Single Amount, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control Solution: Use Table 1: ($40,000 × 1.21665) Dep. × FV of 1, n = 5, i = 4)

16.

The future value of 1 factor will always be a. equal to 1. b. greater than 1. c. less than 1. d. equal to the interest rate.

Ans: b, LO: 1, Topic: Interest and Future Values, Subtopic: Future Value of a Single Amount, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

17.

All of the following are necessary to compute the future value of a single amount except the a. interest rate. b. number of periods. c. principal. d. maturity value.

Ans: d, LO: 1, Topic: Interest and Future Values, Subtopic: Future Value of a Single Amount, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

Time Value of Money

18.

Which table has a factor of 1.00000 for 1 period at every interest rate? a. Future value of 1 b. Future value of an annuity of 1 c. Present value of 1 d. Present value of an annuity of 1

Ans: b, LO: 1, Topic: Interest and Future Values, Subtopic: Future Value of an Annuity, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

19.

Acme Company deposits $20,000 in a fund at the end of each year for 5 years. The fund pays interest of 4% compounded annually. The balance in the fund at the end of 5 years is computed by multiplying a. $20,000 by the future value of 1 factor. b. $100,000 by 1.04. c. $100,000 by 1.20. d. $20,000 by the future value of an annuity factor.

Ans: d, LO: 1, Topic: Interest and Future Values, Subtopic: Future Value of an Annuity, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

20.

The future value of an annuity factor for 2 periods is equal to a. 1 plus the interest rate. b. 2 plus the interest rate. c. 2 minus the interest rate. d. 2.

Ans: b, LO: 1, Topic: Interest and Future Values, Subtopic: Future Value of an Annuity, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

21.

If $30,000 is deposited in a savings account at the end of each year and the account pays interest of 5% compounded annually, what will be the balance of the account at the end of 10 years? a. $48,867 b. $315,000 c. $377,337 d. $450,000

Ans: c, LO: 1, Topic: Interest and Future Values, Subtopic: Future Value of an Annuity, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control Solution: Use Table 2: ($30,000 × 12.57789) (Ann. × FV of annuity, n = 10, i = 5)

22.

Which of the following is not necessary to know in computing the future value of an annuity? a. Amount of the periodic payments b. Interest rate c. Number of compounding periods d. Year the payments begin

Ans: d, LO: 1, Topic: Interest and Future Values, Subtopic: Future Value of an Annuity, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

6 23.

Test Bank

In present value calculations, the process of determining the present value is called a. allocating. b. pricing. c. negotiating. d. discounting.

Ans: d, LO: 2, Topic: Present Values, Subtopic: Present Value Variables, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

24.

Present value is based on the a. dollar amount to be received. b. length of time until the amount is received. c. interest rate. d. All of the answers are correct.

Ans: d, LO: 2, Topic: Present Values, Subtopic: Present Value Variables, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

25.

Which of the following accounting problems does not involve a present value calculation? a. The determination of the market price of a bond. b. The determination of the declining-balance depreciation expense. c. The determination of the amount to report for long-term notes payable. d. The determination of the amount to report for lease liability.

Ans: b, LO: 2, Topic: Present Values, Subtopic: Present Value Variables, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

26.

If you can earn an 8% rate of return, what amount would you need to invest to have $30,000 one year from now? a. $27,747 b. $27,778 c. $27,273 d. $29,700

Ans: b, LO: 2, Topic: Present Values, Subtopic: Present Value of a Single Amount, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control Solution: ($30,000 ÷ 1.08) (Dep. ÷ (1 + int. rate) Solution Using the Present Value of 1 Table 3: ($30,000 × .92593) (FV × PV of 1 factor, n = 1, i = 8%)

27.

If you can earn a 15% rate of return, what amount would you need to invest to have $15,000 one year from now? a. $14,852 b. $13,125 c. $12,750 d. $13,044

Ans: d, LO: 2, Topic: Present Values, Subtopic: Present Value of a Single Amount, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control Solution: ($15,000 ÷ 1.15) (Dep. ÷ (1 + int. rate) Solution Using the Present Value of 1 Table 3: ($15,000 × .86957) (FV × PV of 1 factor, n = 1, i = 15%)

Time Value of Money

28.

If the single amount of $2,000 is to be received in 2 years and discounted at 11%, its present value is a. $1,818. b. $1,623. c. $1,802. d. $2,754.

Ans: b, LO: 2, Topic: Present Values, Subtopic: Present Value of a Single Amount, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control Solution: Use Table 3: ($2,000 × .81162) (FV × PV of 1, n = 2, i = 11)

29.

If the single amount of $3,000 is to be received in 3 years and discounted at 6%, its present value is a. $2,519. b. $2,830. c. $2,600. d. $2,820.

Ans: a, LO: 2, Topic: Present Values, Subtopic: Present Value of a Single Amount, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control Solution: Use Table 3: ($3,000 × .83962) (FV × PV of 1, n = 3, i = 6)

30.

Which of the following discount rates will produce the smallest present value? a. 8% b. 9% c. 10% d. 4%

Ans: c, LO: 2, Topic: Present Values, Subtopic: Time Periods and Discounting, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control

31.

Suppose you have a winning lottery ticket and are given the option of accepting $3,000,000 three years from now or taking the present value of the $3,000,000 now. The sponsor of the prize uses a 6% discount rate. If you elect to receive the present value of the prize now, the amount you will receive is a. $2,518,860. b. $2,591,520. c. $2,670,000. d. $3,000,000.

32.

The amount you must deposit now in your savings account, paying 6% interest, to accumulate $6,000 for a down payment 5 years from now on a new car is a. $1,200. b. $4,484. c. $4,477. d. $4,200.

Ans: b, LO: 2, Topic: Present Values, Subtopic: Present Value of a Single Amount, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control Solution: Use Table 3: ($6,000 × .74726) (FV × PV of 1, n = 5, i = 6)

8 33.

Test Bank

The amount you must deposit now in your savings account, paying 5% interest, to accumulate $10,000 for your first tuition payment when you start college in 3 years is a. $8,500. b. $7,830. c. $8,638. d. $8,860.

Ans: c, LO: 2, Topic: Present Values, Subtopic: Present Value of a Single Amount, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control Solution: Use Table 3: ($10,000 × .86384) (FV × PV of 1, n = 3, i = 5)

34.

The present value of $10,000 to be received in 5 years will be smaller if the discount rate is a. increased. b. decreased. c. not changed. d. equal to the stated rate of interest.

Ans: a, LO: 2, Topic: Present Values, Subtopic: Time Periods and Discounting, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control

35.

If Kim Kardashian invests $10,514.81 now and she will receive $30,000 at the end of 11 years, what annual rate of interest will she be earning on her investment? a. 8% b. 8.5% c. 9% d. 10%

Ans: d, LO: 2, Topic: Present Values, Subtopic: Present Value of a Single Amount, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control Solution: Use Table 3: ($10,514.81 ÷ $30,000 = .35049) (PV ÷ FV = PV of 1, n = 11, i = 10)

36.

Katy Perry has been offered the opportunity of investing $73,540 now. The investment will earn 8% per year and at the end of its life will return $200,000 to Katy. How many years must Katy wait to receive the $200,000? a. 10 b. 11 c. 12 d. 13

Ans: d, LO: 2, Topic: Present Values, Subtopic: Present Value of a Single Amount, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control Solution: Use Table 3: ($73,540 ÷ 200,000 = .3677) (PV ÷ FV = PV of 1, n = 13, i = 8)

37.

Ryan Seacrest invests $35,516.80 now for a series of $5,000 annual returns beginning one year from now. Ryan will earn 10% on the initial investment. How many annual payments will Ryan receive? a. 10 b. 12 c. 13 d. 15

Ans: c, LO: 2, Topic: Present Values, Subtopic: Present Value of an Annuity, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control Solution: Use Table 4: ($35,516.80 ÷ $5,000 = 7.10336) (PV ÷ Ann. = PV ann., n = 13, i = 10)

Time Value of Money

38.

In order to compute the present value of an annuity, it is necessary to know the 1. discount rate. 2. number of discount periods and the amount of the periodic payments or receipts. a. b. c. d.

1 2 both 1 and 2 something in addition to 1 and 2

Ans: c, LO: 2, Topic: Present Values, Subtopic: Present Value of an Annuity, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control

39.

A $10,000, 6%, 5-year note payable that pays interest quarterly would be discounted back to its present value by using tables that would indicate which one of the following periodinterest combinations? a. 5 interest periods, 6% interest b. 20 interest periods, 6% interest c. 20 interest periods, 1.5% interest d. 5 interest periods, 1.5% interest

Ans: c, LO: 2, Topic: Present Values, Subtopic: Present Value of a Long-term Note or Bond, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control

40.

A1 Service Company has just purchased equipment that requires annual payments of $40,000 to be paid at the end of each of the next 4 years. The appropriate discount rate is 15%. What is the present value of the payments? a. $114,199 b. $160,000 c. $46,975 d. $150,135

Ans: a, LO: 2, Topic: Present Values, Subtopic: Present Value of an Annuity, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control Solution: Use Table 4: ($40,000 × 2.85498) (Ann. × PV ann., n = 4, i = 15)

41.

Acme Wholesale Company has purchased equipment that requires annual payments of $30,000 to be paid at the end of each of the next 6 years. The appropriate discount rate is 12%. What amount will be used to record the equipment? a. $180,000 b. $123,342 c. $165,772 d. $115,650

Ans: b, LO: 2, Topic: Present Values, Subtopic: Present Value of an Annuity, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control Solution: Use Table 4: ($30,000 × 4.11141) (Ann. × PV ann., n = 6, i = 12)

10 42.

Test Bank

The selling price of a $1,000,000, ten-year, 12% bond that pays interest semi-annually and which was sold to yield an effective rate of 10% is a. $1,122,890. b. $1,124,623. c. $1,133,270. d. $1,872,360.

Ans: b, LO: 2, Topic: Present Values, Subtopic: Present Value of a Long-term Note or Bond, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control Use Tables 3 and 4. Solution: ($1,000,000 × .06 = $60,000); ($60,000 × 12.46221) + ($1,000,000 × .37689) = $1,124,623. (Face × st. rate ÷ 2 = semi. Int. pmt), (Semi. Int. pmt × PV ann., n = 20, i = 5) + (Face × PV 1, n = 20, i = 5)

43.

Ace Supply Company is considering an investment in equipment. The present value of cash inflows includes a. the present value of annual net operating cash flows and the present value of the salvage value. b. the present value of annual net operating cash flows, but not the present value of the salvage value. c. neither the present value of annual net operating cash flows nor the present value of the salvage value. d. the present value of the salvage value, but not the present value of annual net operating cash flows.

Ans: a, LO: 3, Topic: Capital Budgeting Situations, Subtopic: NA, Bloom Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control

44.

Acme Discount Retail Company is considering purchasing equipment. The equipment will produce the following cash flows: Year 1 $120,000 Year 2 $200,000 Ace requires a minimum rate of return of 10%. What is the maximum price Dexter should pay for this equipment? a. $274,381 b. $165,290 c. $320,000 d. $160,000

Ans: a, LO: 3, Topic: Capital Budgeting Situations, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control Solution: Use Table 3: ($120,000 × .90909) + ($200,000 × .82645) = $274,381. (Cash flow Yr 1 × PV of 1, n = 1, i = 10) + (Cash flow Yr 2 × PV of 1, n = 2, i =10)

45.

Which can be computed using Excel or a financial calculator? a. the future value of a single sum and the future value of an annuity. b. the future value of a single sum but not the future value of an annuity. c. neither the future value of a single sum nor the future value of an annuity. d. the future value of an annuity but not the future value of a single sum.

Ans: a, LO: 4, Topic: Using Technological Tools, Subtopic: None, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Technology and Tools, AICPA PC: Decision-Making, IMA: Reporting & Control

Time Value of Money

EXERCISES Ex. 46 Katy Perry deposited $10,000 in an account paying interest of 4% compounded annually. What amount will be in the account at the end of 4 years? Ans: N/A, LO: 1, Topic: Interest and Future Values, Subtopic: Future Value of a Single Amount, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control

Solution 46 Use Table 1. $10,000 × 1.16986 (4 periods and 4%) = $11,698.60 Ex. 47 Acme Company borrowed $90,000 on January 2, 2025. This amount plus accrued interest of 6% compounded annually will be repaid at the end of 3 years. What amount will Acme repay at the end of the third year? Ans: N/A, LO: 1, Topic: Interest and Future Values, Subtopic: Future Value of a Single Amount, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control

Solution 47 Use Table 1. $90,000 × 1.19102 (3 periods and 6%) = $107,191.80 Ex. 48 A1 Service Company has decided to begin accumulating a fund for plant expansion. The company deposited $80,000 in a fund on January 2, 2025. A1 will also deposit $40,000 annually at the end of each year, starting in 2025. The fund pays interest at 4% compounded annually. What is the balance of the fund at the end of 2029 (after the 2029 deposit)? Ans: N/A, LO: 1, Topic: Interest and Future Values, Subtopic: Future Value of a Single Amount, Future Value of an Annuity, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control

Solution 48 Use Tables 1 and 2. $80,000 × 1.21665 (5 periods and 4%; Table 1) = $ 97,332.00 $40,000 × 5.41632 (5 periods and 4%; Table 2) = 216,652.80 Fund Balance at 12/31/29 $313,984.80 Ex. 49 Kim Kardashian plans to buy an automobile and can deposit $3,000 toward the purchase today. If the annual interest rate is 8%, how much can Mandy expect to have as a down payment in 3 years? Ans: N/A, LO: 1, Topic: Interest and Future Values, Subtopic: Future Value of a Single Amount, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control

Solution 49 Use Table 1 (i = 8%, n = 3). $3,000 × 1.25971 = $3,779.13.

Test Bank

Ex. 50 Luke Bryan plans to buy a home and can deposit $15,000 for the purchase today. If the annual interest rate is 8%, how much can Luke expect to have for a down payment in 5 years? Ans: N/A, LO: 1, Topic: Interest and Future Values, Subtopic: Future Value of a Single Amount, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control

Solution 50 Use Table 1 (i = 8%, n = 5). $15,000 × 1.46933 = $22,039.95. Ex. 51 Meghan Markle and Prince Harry plan to invest $2,500 a year in an educational IRA for their daughter, Lilibet. They will make these deposits on December 31 of each year. Meghan and Harry feel they can safely earn 8%. How much will be in this account on December 31 of the 18th year? Ans: N/A, LO: 1, Topic: Interest and Future Values, Subtopic: Future Value of an Annuity, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control

Solution 51 Use Table 2 (i = 8%, n = 18). $2,500 × 37.45024 = $93,625.60. Ex. 52 Matt Damon acquired a bad habit of smoking in high school. Matt spends approximately $70 a month or $840 a year on cigarettes. He is not concerned with health issues, but he is keenly aware of financial issues. Show Matt how much he would have at retirement in 20 years if he invested $840 a year at 8% instead of smoking. Ans: N/A, LO: 1, Topic: Interest and Future Values, Subtopic: Future Value of an Annuity, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control

Solution 52 Use Table 2 (i = 8%, n = 20). $840 × 45.76196 = $38,440.05. Ex. 53 The cost of Katy Perry’s phone is $40 a month. She can upgrade to the newest model for an additional $10 a month ($120 a year). Katy thinks it would be “cool” to have the latest model and after all $10 a month is not so much. Show Katy how much she will have in 20 years if she invests this $120 a year at 9% instead of accepting the upgrade. Ans: N/A, LO: 1, Topic: Interest and Future Values, Subtopic: Future Value of an Annuity, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control

Solution 53 Use Table 2 (i = 9%, n = 20). $120 × 51.16012 = $6,139.21.

Time Value of Money

Ex. 54 Acme Company deposited $15,000 annually for 6 years in an account paying 5% interest compounded annually. What is the balance of the account at the end of the 6th year? Ans: N/A, LO: 1, Topic: Interest and Future Values, Subtopic: Future Value of an Annuity, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control

Solution 54 Use Table 2 (i = 5%, n = 6). $15,000 × 6.80191 = $102,028.65 Ex. 55 A1 Company issued $900,000, 10-year bonds and agreed to make annual sinking fund deposits of $72,000. The deposits are made at the end of each year to a fund paying 5% interest compounded annually. What amount will be in the sinking fund at the end of the 10 years? Ans: N/A, LO: 1, Topic: Interest and Future Values, Subtopic: Future Value of an Annuity, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control

Solution 55 Use Table 2 (i = 5%, n = 10). $72,000 × 12.57789 = $905,608.08 Ex. 56 Compute the future value of $6,000 invested every year at an interest rate of 9%. You invest the money for 20 years with the first payment made at the end of the year. Ans: N/A, LO: 1, Topic: Interest and Future Values, Subtopic: Future Value of an Annuity, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control

Solution 56 Use Table 2 (i = 9%, n = 20). $6,000 × 51.16012 = $306,960.72. Ex. 57 Ace Service Company is considering an investment that will return a lump sum of $2,500,000 six years from now. What amount should Ace pay for this investment to earn an 11% return? Ans: N/A, LO: 2, Topic: Present Values, Subtopic: Present Value of a Single Sum, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control

Solution 57 Use Table 3 (i = 11%, n = 6). $2,500,000 × .53464 = $1,336,600 Ex. 58 Acme Supply Company earns 12% on an investment that will return $400,000 eleven years from now. What is the amount Acme should invest now to earn this rate of return? .

Test Bank

Ans: N/A, LO: 2, Topic: Present Values, Subtopic: Present Value of a Single Sum, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control

Solution 58 Use Table 3 (i = 12%, n = 11). $400,000 × .28748 = $114,992 Ex. 59 If Lionel Richie invests $11,970 now, he will receive $40,000 at the end of 14 years. What annual rate of return will Lionel earn on his investment? Ans: N/A, LO: 2, Topic: Present Values, Subtopic: Present Value of a Single Sum, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control

Solution 59 Use Table 3. Answer: 9% $11,970 ÷ $40,000 = .29925

Read across the 14-period row in Table 3 to find .29925 in the 9% column.

Ex. 60 Ryan Seacrest wants to buy a car in 3 years. He will need $3,000 for a down payment. The annual interest rate is 9%. How much money must Ryan invest today for the purchase? Ans: N/A, LO: 2, Topic: Present Values, Subtopic: Present Value of a Single Sum, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control

Solution 60 Use Table 3 (i = 9%, n = 3). $3,000 × .77218 = $2,316.54. Ex. 61 Meghan Markle plans to buy a surround sound stereo system for $1,100 after 3 years. If the interest rate is 6%, how much money should Meghan set aside today for the purchase? Ans: N/A, LO: 2, Topic: Present Values, Subtopic: Present Value of a Single Sum, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control

Solution 61 Use Table 3 (i = 6%, n = 3). $1,100 × .83962 = $923.58. Ex. 62 (a) (b)

What is the present value of $90,000 due 7 years from now, discounted at 9%? What is the present value of $150,000 due 5 years from now, discounted at 12%?

Ans: N/A, LO: 2, Topic: Present Values, Subtopic: Present Value of a Single Sum, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control

Solution 62 Use Table 3. (a) $90,000 × .54703 (7 periods and 9%) = $49,232.70 (b) $150,000 × .56743 (5 periods and 12%) = $85,114.50

Time Value of Money

Ex. 63 Kim Kardashian plans to buy a truck for $24,000 after 3 years. If the interest rate is 6%, how much money should Kim set aside today for the purchase? Ans: N/A, LO: 2, Topic: Present Values, Subtopic: Present Value of a Single Sum, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control

Solution 63 Use Table 3 (i = 6%, n = 3). $24,000 × .83962 = $20,150.88 Ex. 64 Ace Manufacturing Company leases a building for 20 years. The lease requires 20 annual payments of $12,000 each, with the first payment due immediately. The interest rate in the lease is 10%. What is the present value of the cost of leasing the building? Ans: N/A, LO: 2, Topic: Present Values, Subtopic: Present Value of an Annuity, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control

Solution 64 Use Table 4 (i = 10%, n = 19). $12,000 + ($12,000  8.36492) = $112,379.04 Ex. 65 Acme Discount Retail Company is considering investing in an annuity contract that will return $50,000 annually at the end of each year for 20 years. What amount should Acme pay for this investment if it earns an 8% return? Ans: N/A, LO: 2, Topic: Present Values, Subtopic: Present Value of an Annuity, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control

Solution 65 Use Table 4 (i = 8%, n = 20). $50,000  9.81815 = $490,907.50 Ex. 66 Katy Perry purchased an investment for $40,260.48. From this investment, she will receive $6,000 annually for the next 10 years starting one year from now. What rate of interest will Katy be earning on her investment? Ans: N/A, LO: 2, Topic: Present Values, Subtopic: Present Value of an Annuity, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control

Solution 66 Use Table 4. Answer: 8% $40,260.48  $6,000 = 6.71008 (10 periods and 8%) = 6.71008

Test Bank

Ex. 67 You are purchasing a car for $25,000, and you obtain financing as follows: $2,500 down payment, 12% interest, semiannual payments over 5 years. Instructions Compute the payment you will make every 6 months. Ans: N/A, LO: 2, Topic: Present Values, Subtopic: Present Value of an Annuity, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control

Solution 67 Use Table 4 (i = 12%, n = 5). $25,000 cost – $2,500 down payment = $22,500 Payment  7.36009 = $22,500 Payment = $22,500 ÷ 7.36009 = $3,057.03 Ex. 68 A1 Marine Supply Company is considering investing in an annuity contract that will return $50,000 annually at the end of each year for 20 years. What amount should A1 pay for this investment if it earns an 8% return? Ans: N/A, LO: 2, Topic: Present Values, Subtopic: Present Value of an Annuity, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control

Solution 68 Use Table 4 (i = 8%, n = 20) $50,000 × 9.81815 = $490,907.50. Ex. 69 Kim Kardashian purchased an investment for $49,090.75. From this investment, she will receive $5,000 annually for the next 20 years starting one year from now. What rate of interest will Kim be earning on her investment? Ans: N/A, LO: 2, Topic: Present Values, Subtopic: Present Value of an Annuity, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control

Solution 69 Use Table 4. Answer: 8% ($49,090.75 ÷ $5,000) = 9.81815

Read across the 20-period row in Table 4 to find 9.81815 in the 8% column.

Ex. 70 Britney has just won the lottery and will receive an annual payment of $100,000 every year for the next 20 years. If the annual interest rate is 8%, what is the present value of the winnings? Ans: N/A, LO: 2, Topic: Present Values, Subtopic: Present Value of an Annuity, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control

Solution 70 Use Table 4 (i = 8%, n = 20). $100,000 × 9.81815 = $981,815.

Time Value of Money

Ex. 71 Suppose that CVS leases a building for 20 years. The lease requires 20 annual payments of $10,000 each, with the first payment due immediately. The interest rate in the lease is 10%. What is the present value of the cost of leasing the building? Ans: N/A, LO: 2, Topic: Present Values, Subtopic: Present Value of an Annuity, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Reporting & Control

Solution 71 Use Table 4 (i = 10%, n = 20). $10,000 + ($10,000 × 8.51356) = $95,135.60. Ex. 72 On January 2, 2025, A1 Corporation issues $6,000,000 (par value) 8%, 10-year bonds. The bonds pay interest annually on January 1. The current market rate on bonds with similar risk characteristics is 10%. What is the selling price of the bonds? Ans: NA, LO: 2, Topic: Present Values, Subtopic: Present Value of a Long-term Note or Bond, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Reporting & Control

Solution 72 Use Tables 3 and 4 (i = 10%, n = 10). $6,000,000 × .08 = $480,000 (annual interest payment) ($480,000 × 6.14457) + ($6,000,000 × .38554) = $5,262,633.60 Ex. 73 Acme Auto Repair Company owns a garage and is contemplating purchasing a tire retreading machine. Acme projects a net cash inflow from the retreading machine of $10,000 annually for 7 years. It feels it could sell the machine for $8,000 when done using it. Acme hopes to earn a return of 10% on such investments. Should Acme purchase the retreading machine if it costs $50,000? Ans: N/A, LO: 3, Topic: Capital Budgeting Situations, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Strategy, Planning & Performance

Solution 73 Present value of annual net operating cash flows ($10,000 × 4.86842) Present value of salvage value ($8,000 × .51316) Present value of cash inflows Purchase price Net present value Purchase the retreading machine, since net present value is positive.

$48,684.20 4,105.28 52,789.48 50,000.00 $ 2,789.48

Ex. 74 To buy a house, Ryan Seacrest has signed a mortgage note to pay the American National Bank and Trust Co. with a payment of $9,000 every 6 months for 20 years. On the date the mortgage is signed, the purchase price was $230,000 and Ryan made a down payment of $20,000. The first payment will be made 6 months after the date the mortgage is signed. Using Excel or a financial calculator, compute the exact rate of interest earned on the mortgage by the bank. Ans: N/A, LO: 4, Topic: Using Technological Tools, Subtopic: Mortgage Loan Amount, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: None, AICPA AC: Technology and Tools, AICPA PC: Decision-Making, IMA: Reporting & Control

Test Bank

Solution 74 Inputs:

N = 40 I=? PV = -$210,000 PMT = $9,000 FV = $0

Solution: 5.8%

COMPLETION STATEMENTS 75.

Payments or receipts of equal dollar amounts are referred to as

Ans: N/A, LO: 1, Topic: Interest and Future Values, Subtopic: Future Value of an Annuity, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Business Economics

76.

The of an annuity is the sum of all the payments plus the accumulated compound interest on them.

77.

The process of determining the present value is referred to as future amount.

the

Ans: N/A, LO: 2, Topic: Present Values, Subtopic: Present Value Variables, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control

78.

The

of a long-term note or bond is a function of three variables.

Ans: N/A, LO: 2, Topic: Present Values, Subtopic: Present Value of a Long-term Note or Bond, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Business Economics

Answers to Completion Statements 75. 76. 77. 78.

annuities future value discounting present value (or market price)

Time Value of Money

MATCHING 79.

Match the items below by entering the appropriate code letter in the space provided. A. Compound interest B. Future value of a single amount C. Future value of an annuity

D. Present value of a single amount E. Present value of an annuity

1. The value today of a future amount to be received or paid. 2. The value at a future date of a given amount invested. 3. Return on principal plus interest for two or more periods. 4. Value today of a series of future amounts to be received or paid. 5. The sum of all the payments or receipts plus the accumulated compound interest on them. Ans: N/A, LO: 1, 2 Topic: Interest and Future Values, Present Values, Subtopic: None, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control

Answers to Matching 1. D 2. B 3. A

4. E 5. C

Test Bank

APPENDIX: TEST BANK REPORTING AND ANALYZING INVESTMENTS APPENDIX LEARNING OBJECTIVES 1. Explain how to account for debt investments. Corporations invest for three common reasons: (a) They have excess cash. (b) They view investment income as a significant revenue source, and (c) They have strategic goals such as gaining control of a competitor or supplier or moving into a new line of business. Entries for investments in debt securities are required when companies purchase bonds, receive or accrue interest, and sell bonds. 2. Explain how to account for stock investments. Entries for investments in common stock are required when companies purchase stock, receive dividends, and sell stock. When ownership is less than 20%, the cost method is used–the investment is recorded at cost. When ownership is between 20% and 50%, the equity method should be used–the investor records its share of the net income of the investee in the year it is earned. When ownership is more than 50%, consolidated financial statements should be prepared. When a company owns more than 50% of the common stock of another company, consolidated financial statements are usually prepared. These statements are especially useful to the stockholders, board of directors, and management of the parent company. 3. Discuss how debt and stock investments are reported in the financial statements. Investments in debt securities are classified as trading, available-for-sale, or held-to-maturity for valuation and reporting purposes. Trading securities are reported as current assets at fair value, with changes from cost reported in net income. Available-for-sale securities are also reported at fair value, with the changes from cost reported as items of other comprehensive income. Available-for-sale securities are classified as short-term or long-term depending on their expected realization. Short-term investments are securities held by a company that are readily marketable and intended to be converted to cash within the next year or operating cycle, whichever is longer. Investments that do not meet both criteria are classified as long-term investments.

Test Bank

Difficulties: Easy: 123 Medium: 87 Hard: 2

Question List by Section Accounting for Debt Investments Why Corporations Invest: 1, 2, 3, 4, 5, 41, 42, 44, 45, 46, 47, 190, 203 Accounting for Debt Investments: 6, 7, 8, 10, 43, 48, 191 Recording Acquisition of Bonds: 49, 52, 56, 62, 72, 74, 75, 169, 175, 176 Recording Bond Interest: 50, 53, 54, 55, 57, 58, 59, 60, 61, 63, 64, 68, 69, 70, 175, 176 Recording Sale of Bonds: 9, 51, 65, 66, 67, 71, 73, 175, 176 Accounting for Stock Investments: 82, 85, 125, 126, 180, 181 Holdings of Less than 20%: 94, 97, 98, 99, 102, 117, 118, 194, 206 Recording Acquisition of Stock: 75, 76, 83, 84, 90, 92, 170, 171, 172, 177, 178, 182, 183 Recording Dividends: 11, 16, 17, 91, 93, 95, 96, 107, 110, 170, 171, 172, 177, 178, 182, 183 Recording Sale of Stock: 75, 77, 86, 87, 88, 89, 120, 124, 129, 170, 171, 177, 178, 182, 183 Holdings Between 20% and 50%: 13, 14, 18, 23, 78, 79, 80, 81, 100, 101, 103, 104, 105, 106, 108, 109, 111,112, 113, 114, 115,116, 119, 121, 122, 123, 127, 128,192, 193, 204, 205, 206 Recording Acquisition of Stock: 19, 20, 173, 185 Recording Revenue and Dividends: 12, 15, 21, 22, 173, 185 Holdings of More than 50%: 24, 25, 26, 130, 131, 132, 133, 134, 135, 136, 195, 207 Reporting Investments in Financial Statements: 28, 139, 142, 143, 186, 187, 188, 211 Debt Securities: 152 Trading Securities: 30, 32, 36, 138, 140, 141, 156, 158, 196 Available-for-Sale Securities: 27, 148, 149, 157, 160 Equity Securities: 162 Illustration of Stock Holdings Less than 20%: 144, 145, 146, 147, 154, 155, 174, 179, 184 Balance Sheet Presentation Short-term Investments: 37, 38, 39, 40, 137, 163, 164, 165, 166, 167, 168, 201 Long-term Investments: 207, 211 Presentation of Realized and Unrealized Gain or Loss: 29, 31, 33, 34, 35, 139, 150, 151, 153, 156, 159, 161, 189, 197, 198, 199, 200, 208, 209, 210, 212

Reporting and Analyzing Investments

TRUE-FALSE STATEMENTS 1.

Corporations purchase investments in debt or equity securities generally for several reasons.

Ans: T, LO: 1, Topic: Accounting for Debt Investments, Subtopic: Why Corporations Invest, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

A reason some companies purchase investments is because they generate a significant portion of their earnings from investment income.

Avoiding takeover offers is a reason companies regularly invest.

Ans: F, LO: 1, Topic: Accounting for Debt Investments, Subtopic: Why Corporations Invest, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

Some companies attempt to generate investment income through speculative investments.

When investing excess cash for short periods of time, corporations invest in debt securities and stock securities.

Following the historical cost principle, brokerage fees should be added to the cost of a debt investment.

Ans: T, LO: 1, Topic: Accounting for Debt Investments, Subtopic: Accounting for Debt Investments, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

Under the historical cost principle, the cost of debt investments includes brokerage fees and accrued interest.

Ans: F, LO: 1, Topic: Accounting for Debt Investments, Subtopic: Accounting for Debt Investments, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

The accounting for short-term debt investments and long-term debt investments is similar.

Ans: T, LO: 1, Topic: Accounting for Debt Investments, Subtopic: Accounting for Debt Investments, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

When investments in bonds are sold, any difference between the sales price and the fair value of the bonds is recorded as a gain or loss.

Ans: F, LO: 1, Topic: Accounting for Debt Investments, Subtopic: Recording Sale of Bonds, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

10.

Debt investments are investments in government and corporation bonds.

11.

Dividends received on stock investments of less than 20% should be credited to the Stock Investments account.

Ans: F, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Dividends, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

4 12.

Test Bank

Dividends received on investments are accounted for in the same way under the cost and the equity methods.

Ans: F, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Revenue and Dividends, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

13.

Unless there is evidence to the contrary, an investor owning 25% of the stock of an investee is assumed to have significant influence.

Ans: T, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Holdings Between 20% and 50%, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

14.

If the cost method is used to account for a stock investment, the Stock Investments account is increased by the amount of dividends received during the period.

Ans: F, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Holdings Between 20% and 50%, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

15.

Under the equity method the investor records a proportionate share of the investee’s income in the year when it is earned.

Ans: T, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Revenue and Dividends, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

16.

When the cost method is used to account for a stock investment, dividends received are accounted for as a reduction in the investment account.

17.

Using the cost method of accounting for a stock investment, the journal entry to record the receipt of dividends involves a credit to Dividend Revenue.

Ans: T, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Dividends, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

18.

If an investor owns between 20% and 50% of an investee's common stock, it is presumed that the investor has significant influence on the investee.

19.

The Stock Investments account is debited at acquisition under both the equity method and cost method of accounting for investments in common stock.

Ans: T, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Acquisition of Stock, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

20.

Under the equity method, the investment in common stock is initially recorded at cost, and the Stock Investments account is adjusted at least annually.

Ans: T, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Holdings Between 20% and 50%, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

21.

Under the equity method, the receipt of dividends from the investee company increases the Stock Investments account.

Ans: F, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Revenue and Dividends, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

22.

Under the equity method, the receipt of dividends from the investee company results in a credit to the Dividend Revenue account.

Ans: F, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Revenue and Dividends, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

Reporting and Analyzing Investments

23.

In accounting for stock investments of less than 20%, the equity method is typically used.

Ans: F, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Holdings of Less Than 20%, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

24.

Consolidated financial statements are prepared in place of the financial statements for the parent and subsidiary companies.

Ans: F, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Holdings of More than 50%, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

25.

Consolidated financial statements should be prepared only when a subsidiary company has a controlling interest in the parent company.

26.

Consolidated financial statements are appropriate when an investor controls an investee by ownership of more than 50% of the investee's common stock.

Ans: T, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Holdings of More than 50%, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

27.

If the fair value of an available-for-sale security exceeds its cost, the security should be written up to fair value and a realized gain should be recognized.

Ans: F, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Available-for-Sale Securities, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

28.

The Fair Value Adjustment account can only have a credit balance or a zero balance.

Ans: F, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: NA, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

29.

Unrealized gains and losses are recognized on trading securities.

Ans: T, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Trading Securities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

30.

Trading securities are valued on the balance sheet at market value.

31.

Unrealized gains and losses on available-for-sale securities are reported on the income statement.

Ans: F, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Available-for-Sale Securities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

32.

The valuation of available-for-sale securities is similar to the procedures followed for trading securities, except that changes in fair value are not recognized in current income.

Ans: T, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Available-for-Sale Securities, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

33.

An unrealized gain or loss on trading securities is reported as a separate component of stockholders' equity.

Ans: F, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Trading Securities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

34.

For available-for-sale securities, the unrealized gain or loss account is carried forward to future periods.

Ans: T, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Available-for-Sale Securities, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

6 35.

Test Bank

The account Fair Value Adjustment—Trading appears as a contra account in the income statement.

Ans: F, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Trading Securities, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

36.

A decline in the fair value of a trading security is recorded by debiting an unrealized loss account and crediting the Fair Value Adjustment account.

Ans: T, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Trading Securities, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

37.

To be classified as a short-term investment, the investment must be readily marketable and intended to be converted into cash within the next year or operating cycle.

Ans: T, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Short-term Investments, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

38.

An investment in short-term equity securities should be charged to a nominal account since the investment is temporary.

Ans: F, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Short-term Investments, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

39.

An investment is readily marketable if management intends to sell the investment.

Ans: F, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Short-term Investments, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

40.

Stocks traded on the New York Stock Exchange are considered readily marketable.

Ans: T, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Short-term Investments, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

Reporting and Analyzing Investments

MULTIPLE CHOICE QUESTIONS 41.

Corporations invest in other companies for all of the following reasons except to a. house excess cash until needed. b. generate earnings. c. meet strategic goals. d. increase trading of the other companies’ stock.

Ans: D, LO: 1, Topic: Accounting for Debt Investments, Subtopic: Why Corporations Invest, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

42.

When investing excess cash for short periods of time, corporations primarily invest in a. stocks of companies in a related industry. b. debt securities. c. low-risk, highly liquid securities. d. stock securities.

Ans: C, LO: 1, Topic: Accounting for Debt Investments, Subtopic: Why Corporations Invest, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Risk Analysis, AICPA PC: None, IMA: Strategy, Planning & Performance

43.

In accounting for debt investments, companies make entries for each of the following except: a. acquisition b. interest revenue c. sale d. share of investee income

Ans: D, LO: 1, Topic: Accounting for Debt Investments, Subtopic: Accounting for Debt Investments, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

44.

Banks and financial institutions often purchase debt securities to a. house excess cash until needed. b. generate earnings. c. meet strategic goals. d. improve their public image.

Ans: B, LO: 1, Topic: Accounting for Debt Investments, Subtopic: Why Corporations Invest, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

45.

Which of the following is not a reason that corporations typically invest in debt or equity securities? a. They have excess cash. b. They want to generate earnings from interest and dividends. c. They invest for strategic reasons. d. They have excess payables.

Ans: D, LO: 1, Topic: Accounting for Debt Investments, Subtopic: Why Corporations Invest, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Risk Analysis, AICPA PC: None, IMA: Strategy, Planning & Performance

46.

Why do companies invest in debt and equity securities? a. They have excess cash. b. They want to generate earnings from investment income. c. They invest for strategic reasons. d. All of these are reasons why companies invest.

8 47.

Test Bank

Which is not a strategic reason to invest? a. There has been a change in the economic climate. b. To establish a presence in a related industry. c. To exercise some influence over a customer or supplier. d. To enter a new industry without starting from scratch.

Ans: A, LO: 1, Topic: Accounting for Debt Investments, Subtopic: Why Corporations Invest, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA AC: Risk Analysis, AICPA PC: None, IMA: Strategy, Planning & Performance

48.

A company acquired fifty 4%, 7 year, convertible $1,000 bonds on January 1, 2025 for $65,000. The journal entry to record this investment includes a debit to a. Cash for $50,000. b. Debt Investments for $65,000. c. Discount on Bonds Payable for $15,000. d. Premium on Bonds Payable for $15,000.

Ans: B, LO: 1, Topic: Accounting for Debt Investments, Subtopic: Recording Acquisition of Bonds, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

49.

Ace Company acquires 80 A1 Enterprise’s 10%, 5 year, $1,000 bonds on January 1, 2025 for $80,000. The journal entry to record this investment includes a debit to a. Debt Investments for $88,000. b. Debt Investments for $80,000. c. Cash for $80,000. d. Stock Investments for $80,000.

50.

Ace Company acquires 80 A1 Enterprise’s 10%, 5 year, $1,000 bonds on January 1, 2025 for $80,000. Assume A1 Enterprise pays interest annually on January 1. Ace’s journal entry at December 31, 2025, would include a credit to a. Interest Receivable for $4,000. b. Interest Receivable for $8,000. c. Interest Expense for $8,000. d. Interest Revenue for $8,000.

Ans: D, LO: 1, Topic: Accounting for Debt Investments, Subtopic: Recording Bond Interest, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control Solution: $80,000  .10  $8,000 (Inv. cost  int. rate)

51.

Ace Company acquires 80 A1 Enterprise’s 10%, 5 year, $1,000 bonds on January 1, 2025 for $80,000. If Ace sells all of its A1 Enterprise’s Bonds for $78,900 what gain or loss is recognized? a. Loss of $9,100 b. Loss of $1,100 c. Gain of $1,100 d. Gain of $9,100

Ans: B, LO: 1, Topic: Accounting for Debt Investments, Subtopic: Recording Sale of Bonds, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control Solution: $78,900  $80,000  $1,100 (Sell.pr.  inv. cost)

Reporting and Analyzing Investments

52.

At the time of acquisition of a debt investment a. no journal entry is required. b. the historical cost principle applies. c. the Stock Investments account is debited when bonds are purchased. d. the investment account is credited for its cost plus brokerage fees.

Ans: B, LO: 1, Topic: Accounting for Debt Investments, Subtopic: Recording Acquisition of Bonds, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

53.

On January 1, 2025, the Acme Company purchased at face value, a $1,000, 4%, bond that pays interest on January 1. Acme Company has a calendar year-end. The entry for the receipt of interest on January 1, 2026, is a. Cash 40 Interest Receivable 40 b. Cash 40 Interest Revenue 40 c. Interest Receivable 40 Cash 40 d. Interest Receivable 40 Interest Revenue 40

Ans: A, LO: 1, Topic: Accounting for Debt Investments, Subtopic: Recording Bond Interest, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control Solution: $1,000 × .04  $40 (Face val. × int. rate)

54.

On January 1, 2025, the Acme Company purchased at face value, a $1,000, 4%, bond that pays interest on January 1. Acme Company has a calendar year-end. The adjusting entry on December 31, 2025, is a. not required. b. Cash 40 Interest Revenue 40 c. Interest Receivable 40 Interest Revenue 40 d. Interest Receivable 40 Debt Investments 40

Ans: C, LO: 1, Topic: Accounting for Debt Investments, Subtopic: Recording Bond Interest, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control Solution: $1,000 × .04  $40 (Face val. × int. rate)

55.

On January 1, 2025, the Acme Company purchased at face value, a $1,000, 5%, bond that pays interest on January 1. Acme Company has a calendar year-end. The entry for the receipt of interest on January 1, 2026, is a. Cash 55 Interest Revenue 55 b. Cash 55 Interest Receivable 55 c. Cash 50 Interest Revenue 50 d. Cash 50 Interest Receivable 50

10 56.

Test Bank

Suppose that on January 1, 2025, Target purchased at face value, a $1,000, 6%, bond that pays interest on January 1. Target has a calendar year-end. The entry on January 1, 2025, is a. Cash 60 Interest Revenue 60 b. Debt Investments 1,000 Cash 1,000 c. Cash 1,000 Debt Investments 1,000 d. Interest Receivable 60 Interest Revenue 60

57.

Suppose that on January 1, 2025, Target purchased at face value, a $1,000, 6%, bond that pays interest on January 1. Target has a calendar year-end. The adjusting entry on December 31, 2025, is a. not required. b. Cash 60 Interest Revenue 60 c. Interest Receivable 60 Interest Revenue 60 d. Interest Receivable 60 Debt Investments 60

58.

On January 1, 2025, Target purchased at face value, a $1,000, 6%, bond that pays interest on January 1. Target has a calendar year-end. The entry for the receipt of interest on January 1, 2026, is a. Interest Receivable 60 Interest Revenue 60 b. Interest Receivable 60 Cash 60 c. Cash 60 Interest Revenue 60 d. Cash 60 Interest Receivable 60

Reporting and Analyzing Investments

59.

On January 1, 2025, A1 Supply Company purchased at face value, a $1,000, 5%, bond that pays interest annually on January 1. A1 has a calendar year-end. The entry on January 1, 2025, is a. Debt investments 1,000 Cash 1,000 b. Cash 1,000 Interest Revenue 1,000 c. Interest Receivable 50 Interest Revenue 50 d. Cash 1,000 Debt Investments 1,000

Ans: A, LO: 1, Topic: Accounting for Debt Investments, Subtopic: Recording Acquisition of Bonds, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control Solution: $1,000 cost

60.

On January 1, 2025, A1 Supply Company purchased at face value, a $1,000, 5%, bond that pays interest annually on January 1. A1 has a calendar year-end. The adjusting entry on December 31, 2025, is a. not required. b. Cash 50 Interest Revenue 50 c. Interest Receivable 50 Interest Revenue 50 d. Interest Receivable 50 Debt Investments 50

61.

On January 1, 2025, A1 Supply Company purchased at face value, a $1,000, 5%, bond that pays interest annually on January 1. A1 has a calendar year-end. The entry for the receipt of interest on January 1, 2026, is a. Cash 50 Interest Revenue 50 b. Cash 50 Interest Receivable 50 c. Cash 55 Interest Revenue 55 d. Cash 55 Interest Receivable 55

Ans: B, LO: 1, Topic: Accounting for Debt Investments, Subtopic: Recording Bond Interest, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control Solution: $1,000 × .05  $50 (Inv. cost × int. rate)

12 62.

Test Bank

Company A purchased 80, 5% Company B bonds for $80,000 cash. Interest is payable annually on January 1. The entry to record the purchase would include a debit to a. Debt Investments for $82,000. b. Cash for $84,000. c. Debt Investments for $80,000. d. Stock Investments for $80,000.

Ans: C, LO: 1, Topic: Accounting for Debt Investments, Subtopic: Recording Acquisition of Bonds, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

63.

Company A purchased 60, 6% Company B bonds on January 1, 2025, for $60,000 cash. Interest is payable annually on January 1. The entry to record the January 1, 2026, annual interest payment would include a a. debit to Interest Receivable for $3,600. b. credit to Interest Receivable for $3,600. c. credit to Interest Revenue for $3,600. d. credit to Debt Investments for $3,600.

64.

Company A purchased 60, 6% Company B bonds on January 1, 2025, for $60,000 cash. Interest is payable annually on January 1. The entry to record the December 31 interest accrual would include a a. debit to Interest Receivable for $3,600. b. debit to Interest Revenue for $3,600. c. credit to Cash Revenue for $3,600. d. debit to Debt Investments for $3,600.

65.

Company A purchased 80, 6% Company B bonds for $80,000 cash. Interest is payable annually on January 1. If 40 of the securities are sold January 1 for $41,000 the entry would include a credit to Gain on Sale of Debt Investments of a. $500. b. $1,200. c. $5,400. d. $1,000.

Ans: D, LO: 1, Topic: Accounting for Debt Investments, Subtopic: Recording Sale of Bonds, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control Solution: $41,000  ($80,000 ÷ 2)  $1,000 (Sell. pr.  (Cost ÷ 2))

Reporting and Analyzing Investments

66.

On January 1, Acme Company purchased as an investment a $1,000, 6% bond for $1,000. The bond pays interest on January 1. The bond is sold on July 1 for $1,100 plus accrued interest. Interest has not been accrued since the last interest payment date. What is the entry to record the cash proceeds at the time the bond is sold? a. Cash 1,100 Debt Investments 1,100 b. Cash 1,130 Debt Investments 1,000 Gain on Sale of Debt Investments 100 Interest Revenue 30 c. Cash 1,130 Debt Investments 1,100 Interest Revenue 30 d. Cash 1,130 Debt Investments 1,000 Interest Revenue 130

Ans: B, LO: 1, Topic: Accounting for Debt Investments, Subtopic: Recording Sale of Bonds, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control Solution: $1,000 × .06 × 6/12  $30; $1,100  $1,000  $100 (Face val. × int. rate × 6/12); (Sell. pr.  face val,)

67.

On January 1, A1 Enterprise purchased as an investment a $1,000, 7% bond for $1,000. The bond pays interest on January 1. The bond is sold on July 1 for $1,120 plus accrued interest. Interest has not been accrued since the last interest payment date. What is the entry to record the cash proceeds at the time the bond is sold? a. Cash 1,120 Debt Investments 1,120 b. Cash 1,155 Debt Investments 1,000 Gain on Sale of Debt Investments 120 Interest Revenue 35 c. Cash 1,155 Debt Investments 1,120 Interest Revenue 35 d. Cash 1,155 Debt Investments 1,000 Interest Revenue 155

Ans: B, LO: 1, Topic: Accounting for Debt Investments, Subtopic: Recording Sale of Bonds, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control Solution: $1,000 × .07 × 6/12 = $35; $1,120  $1,000  $120 (Face val. × int. rate × 6/12); (Sell. pr. face  val.)

14 68.

Test Bank

Suppose that on January 1, Old Navy purchased as an investment a $1,000, 8% bond for $1,000. The bond pays interest on January 1. What is the entry to record the interest accrual on December 31? a. Interest Receivable 80 Debt Investments 80 b. Cash 80 Interest Revenue 80 c. Interest Receivable 80 Interest Revenue 80 d. Cash 80 Debt Investments 80

69.

On January 1, Acme Supply Company purchased as an investment a $1,000, 7% bond for $1,000. The bond pays interest on January 1. What is the entry to record the interest accrual on December 31? a. Cash 70 Interest Receivable 70 b. Debt Investments 70 Interest Revenue 70 c. Interest Receivable 70 Interest Revenue 70 d. Cash 70 Interest Revenue 70

70.

On January 1, 2024, Ace Service Company purchased as an investment a $1,000, 4% bond for $1,000. The bond pays interest on January 1. The company has a December 31 yearend. What is the entry to record the cash receipt of interest on January 1, 2025? a. Cash 40 Interest Receivable 40 b. Cash 40 Interest Revenue 40 c. Interest Receivable 40 Interest Revenue 40 d. Interest Expense 40 Cash 40

Reporting and Analyzing Investments

71.

On January 1, Acme Service Company purchased as an investment a $1,000, 5% bond for $1,000. The bond pays interest on January 1. The bond is sold on July 1 for $1,070 plus accrued interest. Interest has not been accrued since the last interest payment date. What is the entry to record the cash proceeds at the time the bond is sold? a. Cash 1,070 Debt Investments 1,070 b. Cash 1,095 Debt Investments 1,000 Gain on Sale of Debt Investments 70 Interest Revenue 25 c. Cash 1,095 Debt Investments 1,070 Interest Revenue 25 d. Cash 1,070 Debt Investments 1,000 Interest Revenue 70

Ans: B, LO: 1, Topic: Accounting for Debt Investments, Subtopic: Recording Sale of Bonds, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control Solution: $1,000 × .05 × 6/12; $1,070  $1,000  $70 (Inv. cost × int. rate × 6/12; (sell. pr.  inv. cost)

72.

Which of the following is not a true statement about accounting for long-term debt investments? a. The investment is initially recorded at cost. b. The cost includes any brokerage fees. c. Debt investments include investment in government and corporation bonds. d. The cost includes any accrued interest.

Ans: D, LO: 1, Topic: Accounting for Debt Investments, Subtopic: Recording Acquisition of Bonds, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

73.

If a debt investment is sold, the investment account is a. debited for the book value of the bonds at the sale date. b. credited for the cost of the bonds at the sale date. c. credited for the fair value of the bonds at the sale date. d. debited for the cost of the bonds at the sale date.

Ans: B, LO: 1, Topic: Accounting for Debt Investments, Subtopic: Recording Sale of Bonds, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

16 74.

Test Bank

Ace Supply Company purchased a debt investment for $80,000 on January 1, 2025. On January 1, 2026, Ace received cash for $4,000 for interest on the investment. Which of the following correctly presents the journal entries for the purchase and the receipt of interest? a. 1-1-25 Debt Investments 80,000 Cash 80,000 1-1-26 Cash 4,000 Interest Receivable 4,000 b. 1-1-25 Cash 80,000 Debt Investments 80,000 1-1-26 Interest Revenue 4,000 Cash 4,000 c. 1-1-25 Debt Investments 80,000 Cash 80,000 1-1-26 Interest Revenue 4,000 Cash 4,000 d. 1-1-25 Cash 80,000 Debt Investments 80,000 1-1-26 Cash 4,000 Interest Revenue 4,000

Ans: A, LO: 1, Bloom: K, Topic: Accounting for Debt Investments, Subtopic: N/a. Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

75.

On August 1, Company A buys 2,000 shares of Company B common stock for $61,500 cash. On December 1, the stock investments are sold for $71,000 in cash. Which of the following are the correct journal entries of record for the purchase and sale of the common stock? a. Aug. 1 Cash 61,500 Stock Investments 61,500 Dec. 1 Cash 71,000 Stock Investments 61,500 Gain on Sale of Stock Investments 9,500 b. Aug. 1 Stock Investments 61,500 Cash 61,500 Dec. 1 Cash 71,000 Stock Investments 61,500 Gain on Sale of Stock Investments 9,500 c. Aug 1 Stock Investments 61,500 Cash 61,500 Dec. 1 Stock Investment 71,000 Cash 60,000 Gain on Sale of Stock Investments 9,000 d. Aug. 1 Cash 61,500 Stock Investments 61,500 Dec 1 Stock Investments 71,000 Cash 61,500 Gain on Sale of Stock Investments 9,500

Ans: B, LO: 2, Topic: Accounting for Stock Investments, Subtopic: N/A, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control Solution: $71,000  $61,500  $9,500 (sell. pr. – inv. cost)

Reporting and Analyzing Investments

76.

Company A owns 40% of Company B. For the current year, Company B reports net income of $250,000 and declares and pays a $70,000 cash dividend. Which of the following correctly presents the journal entries to record Company A’s equity in Company B’s net income and the receipt of dividends from Company B? a. Dec. 31 Stock Investments 100,000 Revenue from Stock Investments 100,000 Dec. 31 Cash 28,000 Stock Investments 28,000 b. Dec. 31 Stock Investments 100,000 Revenue from Stock Investments 100,000 Dec. 31 Cash 70,000 Stock Investments 70,000 c. Dec. 31 Stock Investments 72,000 Revenue from Stock Investments 72,000 d. Dec. 31 Revenue from Stock Investments 100,000 Stock Investments 100,000 Dec. 31 Stock Investments 28,000 Cash 28,000

Ans: A, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Revenue and Dividends, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control Solution: .40 × $250,000 .40 × $70,000  $28,000 ((Own. % × Net inc.); Own. % × div. pd.)

77.

On January 1, 2025, Company A paid $750,000 for 100,000 shares of Company B's common stock, which represents 25% of Company B’s outstanding common stock. Company B reported income of $300,000 and paid cash dividends of $80,000 during 2025 Company A should report the investment in Company B on its December 31, 2025, balance sheet at a. $750,000 b. $825,000 c. $770,000 d. $805,000

Ans: D, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Revenue and Dividends, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control Solution: $750,000 + (.25 × $300,000)  (.25 × $80,000)  $805,000 (Inv. cost + (own. % × Net inc.) – (own. % × div. pd.)

78.

Ace Inc. earns $1,350,000 and pays cash dividends of $450,000 during 2025. A1 Corporation owns 70,000 of the 210,000 outstanding shares of Ace. What amount should A1 show in the investment account at December 31, 2025, if the beginning of the year balance in the account was $150,000? a. $450,000 b. $300,000 c. $420,000 d. $600,000

Ans: A, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Revenue and Dividends, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control Solution: $150,000 + ((70 ÷ 210) × $1,350,000) – ((70 ÷ 210) × $450,000) (Inv. bal. + (Net inc. × (70 ÷ 210)) − (div. pd. × (70 ÷ 210))

18 79.

Test Bank

Ace Inc. earns $1,350,000 and pays cash dividends for $450,000 during 2025. A1 Corporation owns 70,000 of the 210,000 outstanding shares of Ace. How much revenue from this investment should A1 report in 2025? a. $150,000 b. $300,000 c. $450,000 d. $600,000

Ans: C, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Revenue and Dividends, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control Solution: (70 ÷ 210) × $1,350,000  $450,000 (sh. own. ÷ sh. out.) × Net inc.

80.

All of the following factors would be signs of an investor's significant influence over an investee except a. the investor has representation on the investee's board of directors. b. the investor participates in the investee's policy-making process. c. there are immaterial transactions between the investor and the investee. d. the common stock held by other stockholders is dispersed.

Ans: C, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Holdings Between 20% and 50%, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Risk Analysis, AICPA PC: None, IMA: Reporting & Control

81.

On January 1, 2025, Company A acquired a 20% interest in Company B through the purchase of 12,000 shares of Company B common stock for $640,000. In 2025, Company B paid $160,000 in dividends and reported a net loss of $200,000. Company A is able to exert significant influence on Company B. However, Company A mistakenly records these transactions using the cost method rather than the equity method of accounting. Which of the following would show the correct presentation for Company A’s investment using the equity method? Investment 2025 Net Account at 12/31/25 Earnings (loss) a. $640,000 ($20,000) b. $568,000 ($40,000) c. $640,000 ($40,000) d. $620,000 ($20,000)

Ans: B, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Revenue and Dividends, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control Solution: $640,000  (.20  $200,000)  (.20 × $160,000)  $568,000 (Inv. cost – (own. % × Net loss) – (own. % × div. pd.))

82.

When a company holds stock of several different corporations, the group of securities is identified as a(n) a. affiliated investment. b. consolidated portfolio. c. investment portfolio. d. controlling interest.

Ans: C, LO: 2, Topic: Accounting for Stock Investments, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

Reporting and Analyzing Investments

83.

Corporation A invests in 300 shares of Corporation B's common stock. The stock is purchased for $53 a share. The entry for the purchase is: a. Debt Investments 15,000 Cash 15,000 b. Stock Investments 15,900 Cash 15,900 c. Stock Investments 15,000 Cash 15,000 d. Cash 15,900 Stock Investments 15,900

Ans: B, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Acquisition of Stock, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control Solution: 300  $53/sh. = $15,900 (Sh. pur × Cost/sh.)

84.

Corporation A invests in 200 shares of Corporation B's common stock. The stock is purchased for $52 a share. The entry for the purchase is a. Debt Investments 10,400 Cash 10,400 b. Stock Investments 10,400 Cash 10,400 c. Stock Investments 10,000 Cash 10,000 d. Cash 10,400 Stock Investments 10,400

85.

For accounting purposes, the method used to account for investments in common stock is determined by a. the amount paid for the stock by the investor. b. the extent of an investor's influence over the operating and financial affairs of the investee. c. whether the stock has paid dividends in past years. d. whether the acquisition of the stock by the investor was "friendly" or "hostile."

Ans: B, LO: 2, Topic: Accounting for Stock Investments, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

20 86.

Test Bank

Suppose that Samsung sells 300 shares of common stock being held as an investment. The shares were acquired six months ago for $40 a share. Samsung sold the shares for $43 a share. The entry to record the sale is a. Cash 12,000 Loss on Sale of Stock Investments 900 Stock Investments 8,600 b. Cash 12,900 Gain on Sale of Stock Investments 900 Stock Investments 12,000 c. Cash 12,900 Stock Investments 12,900 d. Stock Investments 12,000 Loss on Sale of Stock Investments 900 Cash 12,900

Ans: B, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Sale of Stock, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control Solution: (300 × $43)  (300 × $40)  $900 (Sh. cold × sell. pr./sh.) – (inv. cost × sh. sold)

87.

Suppose that adidas sells 150 shares of common stock being held as an investment. The shares were acquired six months ago for $30 per share. adidas sold the shares for $38 a share. The entry to record the sale is a. Cash 4,500 Loss on Sale of Stock Investments 1,200 Stock Investments 5,700 b. Stock Investments 5,700 Cash 5,700 c. Cash 5,700 Gain on Sale of Stock Investments 1,200 Stock Investments 4,500 d. Cash 5,700 Stock Investments 5,700

Ans: C, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Sale of Stock, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control Solution: ($38  $30) × 150  $1,200 (sol. pr./sh. – cost/sh.) × sh. sold

Reporting and Analyzing Investments

88.

Suppose that Netflix sells 400 shares of common stock being held as an investment. The shares were acquired six months ago for $50 per share. Netflix sold the shares for $46 a share. The entry to record the sale is: a. Cash 18,400 Loss on Sale of Stock Investments 1,600 Stock Investments 20,000 b. Cash 20,000 Gain on Sale of Stock Investments 1,600 Stock Investments 18,400 c. Cash 18,400 Stock Investments 18,400 d. Stock Investments 18,400 Loss on Sale of Stock Investments 1,600 Cash 20,000

Ans: A, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Sale of Stock, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control Solution: ($46  $50) × 400  $1.600 (sell. pr./sh. – cost/sh.) × sh. sold

89.

A purchase of common stock of Acme Corporation for $29,000 was sold three months later for $30,000. The entry to record the sale would include a a. debit to Cash of $29,000. b. credit to Gain on Sale of Stock Investments of $1,000. c. credit to Stock Investments of $30,000. d. credit to Interest Revenue of $1,000.

Ans: B, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Sale of Stock, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control Solution: $30,000  $29,000  $1,000 (Sell. pr. – inv. cost)

90.

Company A had these transactions pertaining to stock investments Feb. 1 Purchased 5,000 shares of Company B (10%) for $89,000 cash. June 1 Received cash dividends of $1 per share on Company B stock. Oct. 1 Sold 2,000 shares of Company B stock for 39,000. Dec. 1 Received cash dividends of $2 per share on Company B stock. The entry to record the purchase of the Company B stock would include a a. credit to the Stock Investments account for $89,000. b. credit to the Cash account for $90,000 c. debit to the Stock Investments account for $89,000. d. debit to the Investment Expense account for $1,000.

Ans: C, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Acquisition of Stock, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control Solution: $89,000 cost

22 91.

Test Bank

Company A had these transactions pertaining to stock investments Feb. 1 Purchased 5,000 shares of Company B (10%) for $89,000 cash. June 1 Received cash dividends of $1 per share on Company B stock. Oct. 1 Sold 2,000 shares of Company B stock for $39,000. Dec. 1 Received cash dividends of $2 per share on Company B stock. The entry to record the receipt of the dividends June 1 would include a a. debit to Stock Investments of $5,000. b. credit to Dividend Revenue of $5,000. c. debit to Dividend Revenue of $5,000. d. credit to the Stock Investments of $5,000.

Ans: B, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Dividends, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control Solution: 5,000 × $1  $5,000 (sh. purch. × div./sh.)

92.

Company A had these transactions pertaining to stock investments Feb. 1 Purchased 5,000 shares of Company B (10%) for $89,000 cash. June 1 Received cash dividends of $1 per share on Company B stock. Oct. 1 Sold 2,000 shares of Company B stock for $39,000. Dec. 1 Received cash dividends of $2 per share on Company B stock. The entry to record the sale of the stock would include a a. debit to Cash for $35,600. b. credit to Gain on Sale of Stock Investments for $1,360. c. debit to Stock Investment for $35,600. d. credit to Gain on Sale of Stock Investments of $3,400.

Ans: D, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Sale of Stock, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control Solution: $39,000 – ($89,000 ÷ 5,000 × 2,000) (sell pr. − [(inv. cost/sh. pur.) × sh. sold]

93.

Company A had these transactions pertaining to stock investments Feb. 1 Purchased 5,000 shares of Company B (10%) for $89,000 cash. June 1 Received cash dividends of $1 per share on Company B stock. Oct. 1 Sold 2,000 shares of Company B stock for $39,000. Dec. 1 Received cash dividends of $2 per share on Company B stock. The entry to record the receipt of the dividends Dec. 1 would include a a. debit to Stock Investments of $6,000. b. credit to Dividend Revenue of $6,000. c. debit to Dividend Revenue of $6,000. d. credit to the Stock Investments of $6,000.

94.

If an investor owns less than 20% of the common stock of another corporation as an investment a. the equity method of accounting for the investment should be employed. b. no dividends can be expected. c. it is presumed that the investor has relatively little influence on the investee. d. it is presumed that the investor has significant influence on the investee.

Ans: C, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Holdings of Less than 20%, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

Reporting and Analyzing Investments

95.

If the cost method is used to account for an investment in common stock, dividends received should be a. credited to the Stock Investments account. b. credited to the Dividend Revenue account. c. debited to the Stock Investments account. d. recorded only when 20% or more of the stock is owned.

Ans: B, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Dividends, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

96.

Under the cost method of accounting for dividends, a. a revenue account is credited when dividends are received. b. the Investment account is credited when the investee reports a net income. c. the Investment account is credited when dividends are received. d. Investment Revenue is credited when the investee reports a net income.

Ans: A, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Dividends, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

97.

If 10% of the common stock of an investee company is purchased as an investment, the appropriate method of accounting for the investment is a. the cost method. b. the equity method. c. the preparation of consolidated financial statements. d. determined by agreement with whoever owns the remaining 90% of the stock.

Ans: A, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Holdings of Less than 20%, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

98.

When the cost method is used to account for a stock investment the carrying value of the investment is affected by a. the earnings of the investee. b. the dividend distributions of the investee. c. the earnings and dividend distributions of the investee. d. neither the earnings nor the dividends of the investee.

Ans: D, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Holdings of Less than 20%, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

99.

The cost method of accounting for investments in stock should be employed when the a. investor owns more than 50% of the investee's stock. b. investor has a significant influence on the investee and the stock held by the investor are marketable equity securities. c. market value of the shares held is greater than their historical cost. d. investor's influence on the investee is insignificant.

Ans: D, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Holdings of Less than 20%, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

100.

The equity method should generally be used to account for a stock investment when the level of ownership is a. less than 10%. b. between 10% and 20%. c. between 20% and 50%. d. 10% or more.

Ans: C, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Holdings Between 20% and 50%, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

24 101.

Test Bank

When an investor owns between 20% and 50% of the common stock of a corporation, it is generally presumed that the investor a. has insignificant influence on the investee and that the cost method should be used to account for the investment. b. should apply the cost method in accounting for the investment. c. will prepare consolidated financial statements. d. has a significant influence on the investee and that the equity method should be used to account for the investment.

Ans: D, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Holdings Between 20% and 50%, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

102.

The cost method of accounting for stock investments should be used when the investment is a. influential and controlling. b. influential and noncontrolling. c. controlling. d. non-influential and noncontrolling.

Ans: D, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Holdings Less Than 20%, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

103.

The ability of an investing company to affect the operating and financial activities of another company, even though the investor holds less than 50% of the stock, is known as a. significant influence. b. control. c. a combination. d. influence and control.

Ans: A, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Revenue and Dividends, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

104.

Under the equity method of accounting for investments in common stock, when a dividend is received from the investee company a. the Dividend Revenue account is credited. b. the Stock Investments account is increased. c. the Stock Investments account is decreased. d. no entry is necessary.

Ans: C, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Revenue and Dividends, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

105.

The receipt of dividends on an investment affects the Stock Investment account when which of the following methods is used? a. Cost method. b. Equity method. c. Combination method. d. Market method.

Ans: B, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Revenue and Dividends, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

Reporting and Analyzing Investments

106.

Ace Company owns 30% interest in the stock of Acme Wholesale Corporation. During the year, Acme Wholesale pays $75,000 in dividends to Ace and reports $400,000 in net income. Ace Company’s investment in Acme Wholesale will increase Ace’s net income by a. $120,000. b. $97,500. c. $75,000. d. $22,500.

Ans: A, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Revenue and Dividends, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control Solution: 30% × $400,000  $120,000 (Own. % × Net inc.)

107.

Company A owns 15% interest in the stock of Company B. During the year, Company B pays $10,000 in dividends to Company A and reports $400,000 in net income. Company A’s investment in Company B will increase Company A’s net income by a. $10,000. b. $50,000. c. $60,000. d. $1,500.

Ans: A, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Dividends, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

108.

Ace Service Company owns 40% interest in the stock of A1 Supply Corporation. During the year, A1 Supply pays $40,000 in dividends to Ace Service and reports $300,000 in net income. Ace Service Company’s investment in A1 Supply will increase Ace Service’s net income by a. $104,000. b. $120,000. c. $80,000. d. $16,000.

Ans: B, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Revenue and Dividends, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control Solution: 40% × $300,000  $120,000 (Own. % × Net inc.)

109.

Ace Service Company owns 40% interest in the stock of A1 Supply Corporation. During the year, A1 Supply pays $40,000 in dividends to Ace Service and reports $300,000 in net income. Ace Service Company’s investment in A1 Supply will increase by a. $104,000. b. $120,000. c. $16,000. d. $80,000.

Ans: D, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Revenue and Dividends, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control Solution: (40% × $300,000)  $40,000  $80,000 (Own. % × Net inc.) – div. rec.

26 110.

Test Bank

Acme Supply Company owns 10% interest in the stock of A1 Corporation. During the year, A1 pays $12,000 in dividends to Acme Supply and reports $200,000 in net income. Acme Supply Company’s investment in A1 will increase Acme Supply’s net income by a. $20,000. b. $19,200. c. $12,000. d. $8,000.

Ans: C, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Dividends, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

111.

Company A owns 30% interest in the stock of Company B. During the year, Company B pays $10,000 in dividends to Company A and reports a net loss of $200,000. Company A Company’s investment in Company B will affect Company A’s net income by a a. $10,000 increase. b. $60,000 increase. c. $60,000 decrease. d. $10,000 decrease.

Ans: C, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Revenue and Dividends, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control Solution: $200,000 × 30%  $60,000 (Net loss × own. %)

112.

Company A owns 10% interest in the stock of Company B. During the year, Company B pays $5,000 in dividends to Company A and reports a net loss of $100,000. Company A’s investment in Company B will affect its net income by a a. $5,000 increase. b. $10,000 increase. c. $10,000 decrease. d. $5,000 decrease.

Ans: A, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Dividends, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

113.

On January 1, 2025, Ace Corporation purchased 25% of the common stock outstanding of A1 Corporation for $200,000. During 2025, A1 Corporation reported net income of $80,000 and paid cash dividends of $48,000. The balance of the Stock Investments—A1 account on the books of Ace Corporation at December 31, 2025, is a. $200,000. b. $208,000. c. $220,000. d. $192,000.

Ans: B, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Revenue and Dividends, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control Solution: $200,000 + [($80,000  $48,000) × .25]  $208,000 (Inv. Cost + [(Net inc. – div. pd.) × own.%])

Reporting and Analyzing Investments

114.

On January 1, 2025, the A1 Corporation purchased 30% of the common stock outstanding of the Ace Service Corporation for $300,000. In 2025, Ace reported net income of $120,000 and paid cash dividends of $30,000. The balance of the Stock Investments—Ace account on the books of A1 Corporation at December 31, 2025, is a. $300,000. b. $330,000. c. $420,000. d. $327,000.

Ans: D, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Revenue and Dividends, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control Solution: $300,000 + (30% × $120,000)  (30% × $30,000) = $327,000 (Inv. cost + (own. % × Net inc.) – (own. % × div. pd.)

115.

Under the equity method, the Stock Investments account is increased when the a. investee company reports net income. b. investee company pays a dividend. c. investee company reports a loss. d. stock investment is sold at a gain.

Ans: A, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Revenue and Dividends, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

116.

Which of the following is the correct matching concerning an investor's influence on the operations and financial affairs of an investee? % of Investor Ownership Presumed Influence a. Less than 20% Short-term b. Between 20%-50% Significant c. More than 50% Long-term d. Between 20%-50% Controlling

Ans: B, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Holdings Between 20% and 50%, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

117.

Which of the following is the correct matching concerning the appropriate accounting for long-term stock investments? % of Investor Ownership Accounting Guidelines a. Less than 20% Cost method b. Between 20%-50% Cost method c. More than 50% Cost or equity method d. Between 20%-50% Consolidated financial statements

Ans: A, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Holdings Less Than 20%, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

118.

If the cost method is used to account for an investment in common stock a. it is presumed that the investor has significant influence on the investee. b. the earning of net income by the investee is considered a proper basis for recognition of income by the investor. c. net income of the investee is not considered earned by the investor until dividends are declared by the investee. d. the investment account may be at times greater than the acquisition cost.

Ans: C, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Holdings Less Than 20%, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Risk Analysis, AICPA PC: None, IMA: Strategy, Planning & Performance

28 119.

Test Bank

If a company acquires a 40% common stock interest in another company a. the equity method is usually applicable. b. all influence is classified as controlling. c. the cost method is usually applicable. d. the ability to exert significant influence over the activities of the investee does not exist.

Ans: A, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Holdings Between 20% and 50%, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Risk Analysis, AICPA PC: None, IMA: Strategy, Planning & Performance

120.

If a stock investment is sold at a gain, the gain a. is reported as operating revenue. b. is reported under a special section, "Discontinued investments," on the income statement. c. is reported in the Other Revenues and Gains section of the income statement. d. contributes to gross profit on the income statement.

Ans: C, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Sale of Stock, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

121.

If the equity method is being used, cash dividends received a. are credited to the Dividend Revenue account. b. require no entry because investee net income has already been recorded at the proper proportion on the investor's books. c. are credited to the Stock Investments account. d. are credited to the Revenue from Investment in Stock account.

122.

If the equity method is being used, the Revenue from Stock Investments account is a. just another name for a Dividend Revenue account. b. credited when dividends are declared by the investee. c. credited when net income is reported by the investee. d. debited when dividends are declared by the investee.

Ans: C, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Revenue and Dividends, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

123.

Under the equity method, the Stock Investments account is credited when the a. investee reports net income. b. investee reports a net loss. c. investment is originally acquired. d. investee reports net income and when the investment is originally acquired.

Ans: B, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Revenue and Dividends, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

Reporting and Analyzing Investments

124.

Suppose that Nike purchased 2,000 shares of a company’s common stock ($50 par) at $73 per share as a short-term investment. The shares were subsequently sold at $77 per share. The cost of the securities purchased and gain or loss on the sale were Cost Gain or Loss a. $100,000 $54,000 loss b. $100,000 $54,000 gain c. $146,000 $8,000 loss d. $146,000 $8,000 gain

Ans: D, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Sale of Stock, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control Solution: (2,000 × $77)  (2,000 × $73)  $8,000 (Sh. sold. × sell pr./sh.) – (sh. pur. × cost/sh.)

125.

Which of the following is not a method of accounting for stock investments? a. Cost method. b. Stock method. c. Consolidated financial statements. d. Equity method.

Ans: B, LO: 2, Topic: Accounting for Stock Investments, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

126.

To use the cost method of accounting for stock investments, what level of ownership interest must the investor own? a. Less than 20%. b. More than 50%. c. Between 20% and 50%. d. The cost method is always used for stock investments of any size.

Ans: A, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Holdings Less Than 20%, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

127.

Assume that Ace Corp. acquires 30% of Acme Service Corp. for $360,000 on January 1, 2025. If Acme Service declares and pays $120,000 in total dividends on February 14th, Ace’s journal entry would include a credit to a. Dividend Revenue for $120,000. b. Dividend Revenue for $36,000. c. Stock Investments for $36,000. d. No entry is necessary.

Ans: C, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Revenue and Dividends, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control Solution: 30% × $120,000  $36,000 (Own. % × div. paid.)

128.

Assume that Ace Corp. acquires 30% of Acme Service Corp. for $360,000 on January 1, 2025. The journal entry on Ace’s books assuming Acme Service’s net income for 2025 was $600,000 would include a debit to a. No entry is necessary. b. Cash for $600,000. c. Cash for $180,000. d. Stock Investments for $180,000.

Ans: D, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Recording Revenue and Dividends, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control Solution: $600,000 × 30%  $180,000 (Net inc. × own. %)

30 129.

Test Bank

Suppose that Starbucks receives net proceeds of $73,000 on the sale of stock investments that cost $79,000. This transaction will result in reporting in the income statement a a. loss of $6,000 under “Other expenses and losses.” b. loss of $6,000 under “Operating expenses.” c. gain of $6,000 under “Other revenues and gains.” d. gain of $6,000 under “Operating revenues.”

130.

Consolidated financial statements are useful to all of the following except a. creditors of subsidiary companies. b. management of the parent company. c. stockholders of the parent company. d. board of directors of the parent company.

Ans: A, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Holdings Greater Than 50%, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

131.

When a company owns more than 50% of the common stock of another company a. consolidated financial statements are usually prepared. b. the cost method of accounting is used. c. they are referred to as the subsidiary. d. they recognize revenue when dividends are received.

132.

The company whose stock is owned by the parent company is called the a. controlled company. b. subsidiary company. c. investee company. d. sibling company.

Ans: B, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Holdings Greater Than 50%, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

133.

A company that owns more than 50% of the common stock of another company is known as the a. charge company. b. subsidiary company. c. parent company. d. management company.

Ans: C, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Holdings Greater Than 50%, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

134.

If one company owns more than 50% of the common stock of another company a. the cost method should be used to account for the investment. b. a partnership exists. c. a parent-subsidiary relationship exists. d. the company whose stock is owned must be liquidated.

Reporting and Analyzing Investments

135.

If a parent company has two wholly-owned subsidiaries, how many legal and economic entities are there from the viewpoint of the shareholders of the parent company? Legal Economic a. 3 3 b. 1 2 c. 3 1 d. 2 1

Ans: C, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Holdings Greater Than 50%, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

136.

When a company owns more than 50% of the common stock of another company a. affiliated financial statements are prepared. b. consolidated financial statements are prepared. c. controlling financial statements are prepared. d. significant financial statements are prepared.

137.

In recognizing a decline in the fair value of short-term stock investments, an Unrealized Loss account is debited because a. management intends to realize this loss in the near future. b. the securities have not been sold. c. the stock market is volatile. d. management cannot determine the exact amount of the loss in value.

Ans: B, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Short-term Investments, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

138.

Which of the following statements is true about investments classified as trading securities? a. The investor’s intent and ability is to hold them to maturity. b. They are valued on the balance sheet at cost. c. They can consist of equity, but not debt, securities. d. Changes in market value are reflected as part of net income.

Ans: D, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Trading Securities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

139.

The Fair Value Adjustment account a. is set up for each security in the company's portfolio. b. relates to an entire portfolio of securities held by the company. c. is closed at the end of each accounting period. d. appears on the income statement as Other Expenses and Losses.

Ans: B, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

32 140.

Test Bank

At the end of the first year of operations, the total cost of the trading securities portfolio is $179,000 and the total fair value is $174,000. What should the financial statements show? a. A reduction of an asset of $5,000 and a realized loss of $5,000. b. A reduction of an asset of $5,000 and an unrealized loss of $5,000 in the stockholders’ equity section. c. A reduction of an asset of $5,000 in the current assets section and an unrealized loss of $5,000 under “Other expenses and losses.” d. A reduction of an asset of $5,000 in the current assets section and a realized loss of $75,000 under “Other expenses and losses.”

Ans: C, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Trading Securities, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control Solution: $179,000  $174,000  $5,000 (Cost – Fair val.)

141.

Trading securities are reported on the balance sheet at a. fair value. b. cost. c. cost, adjusted for the effects of interest. d. lower of cost or market.

Ans: A, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Trading Securities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

142.

The Fair Value Adjustment account is a(n) a. offset account. b. adjustment account. c. valuation allowance account. d. opposite account.

Ans: C, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

143.

Reporting investments at fair value is a. applicable to equity securities only. b. applicable to debt securities only. c. applicable to both debt and equity securities. d. a conservative approach because only losses are recognized.

144.

Ace Corporation's portfolio of stock holdings of less than 20% at the end of the year is as follows: Investment Cost Market Value Common Stock A $16,000 $18,000 Common Stock B 13,000 7,000 $29,000 $25,000 At the end of the year, Ace Corporation should a. set up a Fair Value Adjustment account for Common Stock B. b. set up a Fair Value Adjustment account for the portfolio. c. recognize an Unrealized Gain or Loss—Income for $6,000. d. report a loss on the income statement for $6,000 under "Other Expenses and Losses."

Ans: B, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Illustration of Stock Holdings Less than 50%, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

Reporting and Analyzing Investments

145.

Ace Corporation's portfolio of stock holdings of less than 20% at the end of the year is as follows: Investment Cost Fair Value Common Stock A $16,000 $18,000 Common Stock B 13,000 7,000 $29,000 $25,000 The year-end adjusting entry to reflect a decrease in the value of stock trading securities includes a a. credit to Fair Value Adjustment—Stock. b. debit to Fair Value Adjustment—Stock. c. credit to Unrealized Gain or Loss—Income. d. credit to Stock Investments.

Ans: A, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Illustration of Stock Holdings Less than 50%, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

146.

Ace Corporation's portfolio of stock holdings of less than 20% at the end of the year is as follows: Investment Cost Fair Value Common Stock A $16,000 $18,000 Common Stock B 13,000 7,000 $29,000 $25,000 Ace subsequently sells Common Stock B for $15,000. What entry is made to record the sale? a. Cash 15,000 Stock Investments 15,000 b. Cash 15,000 Fair Value Adjustment—Stock 2,000 Stock Investments 13,000 c. Cash 15,000 Stock Investments 13,000 Gain on Sale of Stock Investments 2,000 d. Cash 15,000 Stock Investments 7,000 Gain on Sale of Stock Investments 8,000

Ans: C, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Illustration of Stock Holdings Less than 50%, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control Solution: $15,000  $13,000  $2,000 (Sell. pr. – inv. B cost)

147.

A stock investment (less than 20% ownership) is purchased for $73,500. At year-end, when the market value of the stock is $65,000, the adjusting entry includes a a. credit to Stock Investments. b. debit to Loss on Sale of Stock Investment. c. credit to Fair Value-Adjustment—Stock. d. credit to Unrealized Gain or Loss—Income.

34 148.

Test Bank

Which of the following would not be reported under "Other Revenues and Gains" on the income statement? a. Unrealized gain on available-for-sale securities. b. Dividend revenue. c. Interest revenue. d. Gain on sale of debt investments.

Ans: A, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Available-for-Sale Securities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

149.

If the cost of an available-for-sale security exceeds its fair value by $29,000, the entry to recognize the loss a. is not required since the share prices will likely rebound in the long run. b. will show a debit to an expense account. c. will show a credit to a valuation allowance account that appears in the stockholders’ equity section of the balance sheet. d. will show a debit to an unrealized gain or loss account that is deducted in the stockholders' equity section of the balance sheet.

Ans: D, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Available-for-Sale Securities, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

150.

The balance in the Unrealized Gain or Loss—Equity account will a. be deducted from the Investments account on the balance sheet as a contra asset. b. appear on the income statement under Other Expenses and Losses. c. be reflected in the Accumulated Other Comprehensive Income section of stockholders' equity. d. not be shown on the financial statements until the securities are sold.

Ans: C, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Presentation of Realized and Unrealized Gain or Loss, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

151.

Assume that A1 Inc.’s trading securities have a total cost of $185,000 and a total fair value of $215,000 at year-end. The related adjusting entry would include a debit to a. Unrealized Gain or Loss – Income for $30,000. b. Fair Value Adjustment – Trading for $30,000. c. No adjustment since only realized gains are recorded. d. Fair Value Adjustment – Trading for $215,000.

Ans: B, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Presentation of Realized and Unrealized Gain or Loss, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control Solution: $215,000  $185,000  $30,000 (Fair val. – Cost)

152.

Which of the following is not a category used for valuing and reporting debt investments? a. Securities held for investing purposes. b. Trading securities. c. Held-to-maturity securities. d. Available-for-sale securities.

Ans: A, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Debt Securities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

Reporting and Analyzing Investments

153.

Unrealized gains or losses on available-for-sale debt securities are reported where in the financial statements? a. Nowhere since only realized gains are reported. b. In the “Other revenues and gains” or “Other expenses and losses” sections of the income statement. c. Below unusual items in the income statement. d. In Comprehensive Income.

Ans: D, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Presentation of Realized and Unrealized Gain or Loss, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

154.

At the end of its first year, the securities portfolio consisted of the following common stocks, all of which represent less than 20% ownership. Cost Fair value Company A $ 46,400 $ 50,000 Company B 60,000 55,800 Company C 80,000 76,000 $186,400 $181,800 The unrealized loss to be recognized under the fair value method is a. $4,200. b. $8,200. c. $4,600. d. $4,000.

Ans: C, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Illustration of Stock Holdings Less than 20%, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control Solution: $186,400  $181,800  $4,600 (Tot. cost – tot. FV)

155.

At the end of its first year, the securities portfolio consisted of the following common stocks, all of which represent less than 20% ownership. Cost Fair Value Company A $ 46,400 $ 50,000 Company B 60,000 55,800 Company C 80,000 76,000 $186,400 $181,800 In the following year, the Company B common stock is sold for cash proceeds of $57,000. The gain or loss to be recognized on the sale is a a. gain of $1,200. b. loss of $3,000. c. gain of $10,600. d. loss of $1,200.

Ans: B, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Illustration of Stock Holdings Less than 20%, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control Solution: $57,000  $60,000  ($3,000) (Cash proc. – inv. cost)

36 156.

Test Bank

At the end of the first year of operations, the total cost of the trading securities portfolio is $245,000. The total fair value is $250,000. The financial statements should show a. an addition to an asset of $5,000 and a realized gain of $5,000. b. an addition to an asset of $5,000 and an unrealized gain of $5,000 in the stockholders’ equity section. c. an addition to an asset of $5,000 in the current assets section and an unrealized gain of $5,000 in “Other revenues and gains.” d. an addition to an asset of $5,000 in the current assets section and a realized gain of $5,000 in “Other revenues and gains.”

Ans: C, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Trading Securities, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control Solution: $250,000  $245,000  $5,000 (Fair. Val. – Cost)

157.

At the end of its first year of operations, a company has common stock of $3,500,000, Retained Earnings of $1,800,000, unrealized gains on trading securities of $60,000, and unrealized losses on available-for-sale securities of $110,000. What is the total amount of the company’s stockholders’ equity? a. $5,190,000. b. $5,300,000. c. $5,240,000. d. $5,130,000.

Ans: A, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Available-for-Sale Securities, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control Solution: $3,500,000 + $1,800,000  $110,000  $5,190,000 (Com. st. + R/E – un. loss.)

158.

Cost and fair value data for the trading securities of A1 Service Company at December 31, 2025, are $100,000 and $88,000, respectively. Which of the following correctly presents the adjusting journal entry to record the securities at fair value? a. Dec. 31 Unrealized Gain or LossIncome 12,000 12,000 Trading Securities Unrealized Gain or LossIncome b. Dec. 31 12,000 12,000 Trading Securities Unrealized Gain or LossIncome c. Dec. 31 12,000 Fair Value AdjustmentTrading 12,000 d. Dec. 31 Fair Value Adjustment—Trading 12,000 Unrealized Gain or Loss—Income 12,000

Ans: C, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Trading Securities, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control Solution: $100,000  $88,000  $12,000 (Cost – fair val.)

Reporting and Analyzing Investments

159.

At December 31, 2025, the trading securities for Acme, Inc. are as follows: Fair Value Security Cost 12/31/25 Company A bonds $ 90,000 $ 92,000 Company B bonds 150,000 144,000 Company C bonds 30,000 28,000 Acme should report the following amount related to the securities transactions in its 2025 income statement a. $2,000 gain. b. $6,000 realized loss. c. $6,000 unrealized loss. d. $8,000 unrealized loss.

Ans: C, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Presentation of Realized and Unrealized Gain or Loss, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control Solution: ($90,000 + $150,000 + $30,000)  ($92,000 + $144,000 + $28,000) = $6,000 (Tot. cost – tot. FV)

160.

At December 31, 2025, A1 Marine Supply Inc. has these data on its security investments Fair Value Security Cost 12/31/25 Trading $140,000 $172,000 Available-for-sale 137,000 127,000 If the available-for-sale securities are held as long-term investments, which of the following will be recorded to adjust the securities to fair value? a. Debt Securities 22,000 Unrealized Gain or LossIncome 22,000 b. Unrealized Gain or LossIncome 10,000 22,000 Debt Securities Unrealized Gain or LossIncome 32,000 c. Fair Value AdjustmentTrading 32,000 Unrealized Gain or LossIncome 32,000 10,000 Unrealized Gain or LossEquity Fair Value AdjustmentAvailable-for-sale 10,000 d. Unrealized Gain or Loss—Income 32,000 Fair Value AdjustmentTrading 32,000 Fair Value Adjustment—Available-for-sale 10,000 Unrealized Gain or LossEquity 10,000

Ans: C, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Available-for-Sale Securities, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control Solution: $172,000  $140,000  $32,000; $137,000  $127,000  $10,000 (Trad. FV – trad. cost); (AFS cost – AFS FV)

161.

All of the following statements about financial statement gains and losses on investments are true except a. the account "Fair Value Adjustment—Available-For-Sale" is reported on the balance sheet. b. unrealized losses on trading securities are reported on the income statement. c. unrealized losses on available-for-sale securities are reported on the income statement. d. the account "Fair Value Adjustment—Trading" is reported on the balance sheet.

38 162.

Test Bank

Company A owns stock in Company B which it intends to hold indefinitely because of some negative tax consequences if sold. Which of the following statements is true regarding Company A’s reporting of the investment? a. The stock would be classified as trading securities. b. The stock would be reported at fair value if the ownership level is less than 20%. c. The stock requires no market adjustments since there are no plans to sell it. d. Any losses on the stock are recorded in stockholders’ equity.

Ans: B, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Equity Securities, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

163.

All of the following statements about short-term investments are true except a. short-term investments are also called marketable securities. b. trading securities are always classified as short-term investments. c. short-term investments are listed below accounts receivable in the current asset section of the balance sheet. d. short-term assets must be readily marketable.

Ans: C, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Short-term Investments, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

164.

Short-term investments are listed on the balance sheet immediately below a. cash. b. inventory. c. accounts receivable. d. prepaid expenses.

Ans: A, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Short-term Investments, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

165.

Short-term investments should be valued on the balance sheet at a. the lower of cost or fair value. b. the higher of cost or fair value. c. cost. d. fair value.

Ans: D, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Short-term Investments, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

166.

Which one of the following would not be classified as a short-term investment? a. Marketable equity securities. b. Marketable merchandise. c. Marketable debt securities. d. Short-term paper.

Ans: B, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Short-term Investments, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

167.

Short-term investments are securities that are readily marketable and intended to be converted into cash within the next a. year. b. two years. c. year or operating cycle, whichever is shorter. d. year or operating cycle, whichever is longer.

Reporting and Analyzing Investments

168.

Which of the following would not be classified as a short-term investment? a. Short-term commercial paper. b. Idle cash in a bank checking account. c. Marketable equity securities. d. Marketable debt securities.

BRIEF EXERCISES Be. 169 Company A had the following transactions pertaining to debt securities held as an investment. Jan. 1

Purchased 80, 6%, $1,000 Company B bonds for $80,000 cash. Interest is payable annually on January 1.

Dec. 31 Accrued $4,800 annual interest on Company B bonds. Instructions Journalize the purchase and the receipt of interest. Assume no interest has been accrued. Ans: N/A, LO: 1, Topic: Accounting for Debt Investments, Subtopic: N/A, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

Solution 169 Jan.

Debt Investments ............................................................... Cash .......................................................................... Interest Receivable ............................................................ Interest Revenue .......................................................... *(Bond face val. × int. rate)

Dec. 31

80,000 80,000 4,800* 4,800

Be. 170 The following transactions were made by Acme Company. Assume all investments are temporary. July

Purchased 400 shares of A1 Corporation common stock for $35 per share.

Received a cash dividend of $1.25 per share from the A1 Corporation.

Sept. 15

Sold 80 shares of A1 Corporation stock for $38 per share.

Instructions Journalize the transactions. Ans: N/A, LO: 2, Topic: Accounting for Stock Investments, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

Test Bank

Solution 170 July

Sept. 15

Stock Investments ............................................................ Cash ....................................................................... (To record purchase of 400 shares of A1 Corporation common stock)

14,000

Cash .................................................................................. Dividend Revenue .................................................. (To record receipts of cash dividend)

500

Cash .................................................................................. Stock Investments .................................................. Gain on Sale of Stock Investments ......................... (To record sale of A1 Corporation stock) *(sell. pr./sh. − cost/sh) × sh. sold

3,040

14,000

500

2,800 240*

Be. 171 Company A had the following transactions pertaining to its temporary stock investments. Jan.

Purchased 600 shares of Company B stock for $7,050 cash.

June

Received cash dividends of $0.40 per share on the Company B stock.

Sept. 15

Sold 300 shares of the Company B stock for $3,400 cash.

Reporting and Analyzing Investments

Solution 171 Jan.

June

Sept. 15

Stock Investments ...................................................... Cash ..................................................................

7,050

Cash (600 × $0.40) .................................................... Dividend Revenue .............................................

240

Cash ............................................................................. Loss on Sale of Stock Investments ............................. Stock Investments .............................................

3,400 125*

7,050

240

3,525**

*[$3,400 − ($7,050 × (300 ÷ 600))] **[300 × ($7,050 ÷ 600)] Be. 172 On January 1, 2025, A1 Company purchased 5,000 shares of Acme Service Company stock for $300,000. A1’s investment represents 30 percent of the total outstanding shares of Acme Service. During 2025, Acme Service paid total dividends of $100,000 and reported net income of $290,000. What revenue does Redwood report related to this investment, and what is the amount to be reported as an investment in Acme Service stock at December 31? Ans: N/A, LO: 2, Topic: Accounting for Stock Investments, Subtopic: N/A, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

Solution 172 Revenue for 2025 ($290,000 × 0.30)

$87,000

Balance in Investment account Purchase price Less dividend receipt ($100,000 × 0.30) Plus Investment Revenue ($290,000 × 0.30) Ending balance Investment in Acme Service

$300,000  30,000 + 87,000 $357,000

Be. 173 On January 1, Company A purchased a 25% equity investment in Company B for $300,000. At December 31, Company B declared and paid a $20,000 dividend and reported net income of $120,000. Instructions (a) Journalize the transactions on the books of Company A (b) Determine the amount to be reported on Company A’s balance sheet as an investment in Company B stock at December 31. Ans: N/A, LO: 2, Topic: Accounting for Stock Investments, Subtopic: N/A, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

Test Bank

Solution 173 (a)

(b)

Stock Investments……………………………………….. Cash………………………………………………...

300,000

Dec. 31 Cash ($20,000 × .25)…………………………………….. Stock Investments…………………………………

5,000

Dec. 31 Stock Investments ($120,000 × .25)……………………. Revenue from Stock Investments………………..

30,000

Jan. 1

300,000

5,000

Investment in Company B, January 1 Less: Dividend received Plus: Share of reported income Investment in Company B, December 31

30,000 $300,000 (5,000) 30,000 $325,000

Be. 174 At January 1, 2025, the stock (less than 20% ownership) portfolio held by Company A consisted of the following investments: 1. 2,500 shares of Company B common stock purchased for $43 per share. 2. 1,500 shares of Company C common stock purchased for $50 per share. At December 31, 2025, the fair values per share were Company B, $36, and Company C, $54. Instructions (a) Prepare a schedule showing the cost and fair value of the portfolio at December 31, 2025. (b) Prepare the adjusting entry to report the portfolio at fair value at December 31, 2025. Ans: N/A, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Illustration of Stock Holdings Less than 50%, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

Solution 174 (a)

(b)

Security Company B Company C Totals Dec. 31

Cost $ 107,500 75,000 $182,500

Fair Value $ 90,000 81,000 $171,000

(2,500 × $36) (1,500 × $54)

Unrealized Gain or Loss—Income.................................... 11,500* Fair Value Adjustment—Stock ......................... *($182,500 – $171,000 = $11,500) (Tot. cost − tot. fair val.)

11,500

Reporting and Analyzing Investments

EXERCISES Ex. 175 Company A had the following transactions pertaining to debt investments. Jan. 1 Purchased 80, 6%, $1,000 Company B bonds for $80,000 cash. July 1 Sold 40 Company B bonds for $42,400. Instructions Journalize the entries for the purchase and sale of the Company B bonds. Ans: N/A, LO: 1, Topic: Accounting for Debt Investments, Subtopic: N/A, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

Solution 175 Jan. July

1 1

Debt Investments ......................................................... Cash .................................................................... Cash

.......................................................................... Debt Investments ................................................ Gain on Sale of Debt Investments .......................

80,000 80,000 42,400 40,000 2,400*

*($42,400 – $40,000 = $2,400) (Sell. pr. − (bonds sold × $1,000)) Ex. 176 Company A had the following transactions pertaining to debt investments. 2025 Jan. 1 Purchased 60, 6%, $1,000 Company B bonds for $60,000 cash. Interest is payable annually on January 1. Dec. 31 Accrued interest on Company B bonds. 2026 Jan. 1

Received interest from Company B bonds.

Jan. 1 Sold 30 Company B bonds for $32,000. Instructions Journalize the transactions for 2025 and 2026. Ans: N/A, LO: 1, Topic: Accounting for Debt Investments, Subtopic: N/A, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

Test Bank

Solution 176 2025 Jan.

Debt Investments ......................................................... Cash ....................................................................

60,000

Dec. 31 Interest Receivable ($60,000 × 6%) ............................. Interest Revenue .................................................

3,600

2026 Jan. 1

Cash .......................................................................... Interest Receivable ............................................... Cash .......................................................................... Debt Investments ................................................. Gain on Sale of Debt Investments .......................

60,000

3,600 3,600 3,600 32,000 30,000 2,000*

*(sell. pr. − (bonds sold × $1,000))

Ex. 177 The following transactions were made by Company A. Assume all investments are short-term. June

Purchased 600 shares of Company B common stock for $45 per share.

July

Purchased 210 Company C bonds for $210,000.

Received a cash dividend of $2.25 per share from Company B.

Sept. 15

Sold 120 shares of Company B stock for $50 per share.

Dec. 31

Received semiannual interest check for $9,240 from Company C.

Received a cash dividend of $2.25 per share from Company B.

Instructions Journalize the transactions on the books of Company A. Ans: N/A, LO: 1, 2, Accounting for Stock Investments, Subtopic: N/A, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

Reporting and Analyzing Investments

Solution 177 June

July

Sept. 15

Dec. 31

Stock Investments ............................................................ Cash ...................................................................... (To record purchase of 600 shares of Company B common stock)

27,000 27,000

Debt Investments.................................................................... 210,000 Cash ...................................................................... (To record purchase of 210 Company C bonds) Cash

............................................................................. Dividend Revenue .................................................. (To record receipts of cash dividend)

1,350

Cash ................................................................................ Stock Investments .................................................. Gain on Sale of Stock Investments ......................... (To record sale of Company B stock)

6,000

Cash ................................................................................ Interest Revenue .................................................... (To record receipt of interest on Company C bonds)

9,240

Cash ................................................................................ Dividend Revenue .................................................. (To record receipt of cash dividend on remaining Company B common stock ((600 – 120) × $2.25)

1,080

210,000

1,350

5,400 600*

9,240

1,080**

*(Sell. pr./sh. − cost/sh.) × sh. sold **(sh. pur. − sh. sold) × div./sh.

Ex. 178 Company A had the following transactions pertaining to its short-term stock investments. Jan.

Purchased 900 shares of Company B stock for $11,880 cash.

June

Received cash dividends of $0.60 per share on the Company B stock.

Sept. 15

Sold 450 shares of the Company B stock for $5,200.

Dec.

Received cash dividends of $0.60 per share on the Company B stock.

Instructions (a) Journalize the transactions. (b) Indicate the income statement effects of the transactions. Ans: N/A, LO: 2, Topic: Accounting for Stock Investments, Subtopic: N/A, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

Test Bank

Solution 178 (a) Jan.

June

Sept. 15

Dec.

Stock Investments ....................................................... Cash ...................................................................

11,880

Cash (900 × $0.60) ..................................................... Dividend Revenue ..............................................

540

Cash ......................................................................... Loss on Sale of Stock Investments ............................. Stock Investments .............................................. [450 × ($11,880 ÷ 900)] *(sell. pr. − (cost × 450 ÷ 900))

5,200 740*

Cash (450 × $0.60) ..................................................... Dividend Revenue .............................................. **(sh. pur. − sh. sold) × div./sh.

270*

11,880

540

5,940

270

(b) Dividend Revenue is reported under Other Revenues and Gains on the income statement. Loss on Sale of Stock Investments is reported under Other Expenses and Losses on the income statement. Ex. 179 Company A had the following transactions pertaining to its short-term stock investments. Jan.

Purchased 2,000 shares of Company B stock for $101,100 cash.

June

Received cash dividends of $2.70 per share on the Company B stock.

Sept. 15

Sold 1,000 shares of the Company B stock for $49,600.

Dec. 31

The fair values of the securities totaled $50,800. Prepare the adjusting entry to report the portfolio at fair value.

Instructions (a) Journalize the transactions. (b) Indicate the income statement effects of the transactions. Ans: N/A, LO: 2, 3, Topic: Reporting Investments in Financial Statements, Subtopic: Illustration of Stock Holdings Less than 50%, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

Reporting and Analyzing Investments

Solution 179 (a) Jan. June

1 1

Sept. 15

Dec. 31

Stock Investments ...................................................... Cash ..................................................................

101,100

Cash (2,000 × $2.70) .................................................. Dividend Revenue .............................................

5,400

Cash ........................................................................ Loss on Sale of Stock Investments ............................. Stock Investments ............................................. [1,000 × ($101,100 ÷ 1,000)] *[sell. pr. – (inv. cost × (1,000 ÷ 2,000))]

49,600 950*

Fair Value Adjustment—Stock ..................................... Unrealized Gain or Loss—Income ...................... [($101,100 – $50,550) – $50,800] [[inv. cost × (1,000 ÷ 2,000)] − fair val.

250

101,100 5,400

50,550

250

(b) Dividend Revenue and Unrealized Gain are reported under Other Revenues and Gains on the income statement. Loss on Sale of Stock Investments is reported under Other Expenses and Losses on the income statement.

Ex. 180 Acme Company purchased 42,000 shares of common stock of the A1 Corporation as an investment for $1,000,000. During the year, A1 Corporation reported net income of $400,000 and paid dividends of $100,000. Instructions (a)

Assuming that the 42,000 shares represent a 15% interest in A1 Corporation: 1. Prepare the journal entry to record the investment in A1 stock. 2. Prepare any entries that Acme Company should make in accounting for its investment in A1 stock during the year. 3. What is the balance of the Stock Investments account on Acme Company's books at the end of the year?

(b)

Repeat requirement (a) above except assume that the 42,000 shares represent a 25% interest in A1 Corporation.

Ans: N/A, LO: 2, Topic: Accounting for Stock Investments, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 16, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

Test Bank

Solution 180 (a)

Cost Method 1. Stock Investments ................................................................... 1,000,000 Cash ............................................................................. (To record purchase of 42,000 shares of A1 Corporation stock) 2. Cash ..................................................................................... 15,000 Dividend Revenue ........................................................ [(To record dividends received); $100,000 × 15% = $15,000]

1,000,000

15,000

3. The Stock Investments account balance at the end of the year is $1,000,000. (b)

Equity Method 1. Stock Investments ................................................................... 1,000,000 Cash ............................................................................. (To record purchase of 42,000 shares of A1 Corporation stock) 2. Stock Investments ...................................................................... 100,000 Revenue from Stock Investments .................................. (To record 25% equity in A1 net income; $400,000 × 25% = $100,000) Cash ..................................................................................... 25,000 Stock Investments ........................................................ [(To record dividends received); $100,000 × 25% = $25,000]

1,000,000

100,000

25,000

3. The Stock Investments account balance at the end of the year is $1,075,000* ($1,000,000 + $100,000 – $25,000). *(Purch. pr. + (Net × inc. × own.%) − (div. paid × own. %))

Ex. 181 Information pertaining to stock investments in 2025 by Company A follows: Acquired 15% of the 200,000 shares of common stock of Company B at a total cost of $9 per share on January 1, 2025. On July 1, Company B declared and paid a cash dividend of $1.90 per share. On December 31, Company B reported net income was $675,000 for the year. Obtained significant influence over Company C by buying 30% of Company C's 120,000 outstanding shares of common stock at a total cost of $25 per share on January 1, 2025. On June 15, Company C declared and paid a cash dividend of $2.50 per share. On December 31, Company C's reported net income was $330,000. Instructions Prepare all necessary journal entries for 2025 for Company A. Ans: N/A, LO: 2, Topic: Accounting for Stock Investments, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

Reporting and Analyzing Investments

Solution 181 Jan.

June 15

July

Dec. 31

Stock Investments ............................................................. Cash ......................................................................... (200,000 × 15% × $9 = $270,000)

270,000

Stock Investments ............................................................. Cash ......................................................................... (30% × 120,000 × $25 = $900,000)

900,000

Cash (36,000 × $2.50) ....................................................... Stock Investments .....................................................

90,000

Cash (30,000 × $1.90) ....................................................... Dividend Revenue .....................................................

57,000

Stock Investments ............................................................. Revenue from Stock Investments .............................. ($330,000 × 30% = $99,000)

99,000

270,000

900,000

90,000

57,000

99,000

Ex. 182 Acme Company had these transactions pertaining to stock investments: Feb

Purchased 2,400 shares of A1 Company’s common stock (2% of outstanding shares) for $16,500 cash.

July

Received cash dividends of $0.80 per share on A1 common stock.

Sept.

Sold 800 shares of A1 common stock for $7,900

Dec.

Received cash dividends of $.80 per share on A1 common stock.

Instructions Journalize the transactions. Ans: N/A, LO: 2, Topic: Accounting for Stock Investments, Subtopic: N/A, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

Test Bank

Solution 182 Feb.

July

Sept. 1

Dec.

Stock Investments ....................................................... Cash ...................................................................

16,500

Cash (2,400 × $.80) .................................................... Dividend Revenue ..............................................

1,920

Cash ............................................................................ Stock Investments ($16,500 × 800 ÷ 2,400) ..................................... Gain on Sale of Stock Investments ($7,900 – $5,500) ................................................ *(sell. pr. − (inv. cost × 800 ÷ 2,400))

7,900

Cash (1,600 × $.80) ..................................................... Dividend Revenue ............................................... *(sh. pur. − sh. sold) × div./sh.

1,280*

16,500

1,920

5,500 2,400*

1,280

Ex. 183 A1 Inc. had these transactions pertaining to investments in common stock: Jan

Purchased 2,000 shares of Acme Marine Supply Corporation common stock (5% of outstanding shares) for $96,500 cash.

July

Received a cash dividend of $1.70 per share on the investment in Acme Marine Supply common stock.

Dec.

Sold 800 shares of Acme Marine Supply Corporation common stock for $40,200.

Received a cash dividend of $1.70 per share on the investment in Acme Marine Supply common stock.

Reporting and Analyzing Investments

Solution 183 Jan.

Dec.

96,500

Cash (2,000 × $1.70) .................................................. Dividend Revenue .............................................

3,400

Cash ....................................................................... Gain on Sale of Stock Investments ......................... Stock Investments ($96,500 × 800 ÷ 2,000) ..................................... *(Sell. price − (inv. cost × 800 ÷ 2,000))

40,200

Cash (1,200 × $1.70) .................................................. Dividend Revenue ................................................... *(Sh. pur. − sh. sold) × div./sh.

2,040*

July

Dec.

Stock Investments ...................................................... Cash ..................................................................

96,500 3,400

1,600* 38,600

2,040

Ex. 184 Acme Marine Supply Inc. acquired 10% of the 200,000 shares of common stock of Ace Company at a total cost of $14 per share on March 18, 2025. On June 30 Ace declared and paid a $96,000 dividend. On December 31, Ace reported net income of $244,000 for the year. At December 31 the market price of Ace Company was $16 per share. Instructions Prepare all the necessary entries for 2025 for Acme Marine Supply Inc. Ans: N/A, LO: 2, 3, Topic: Accounting for Stock Investments, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

Solution 184 Mar. 18 June 30

Dec. 31

Stock Investments ...................................................... Cash (200,000 × 10% × $14)..............................

280,000

Cash............................................................................ Dividend Revenue (96,000× 10%) ................................................

9,600

280,000

Fair Value Adjustment— Stock ............................................................................ 40,000* Unrealized Gain or Loss—Income ($320,000 – $280,000).................................... *(sh. purch. × mar. pr./sh.) − inv. cost

9,600

40,000

Test Bank

52 Ex. 185

Company A obtained significant influence over Company B by buying 40% of Company B’s 30,000 outstanding shares common stock at a total cost of $11 per share on January 1, 2025. On June 15, Company B declared and paid a cash dividend of $32,000. On December 31 Company B reported net income of $120,000 for the year. Instructions Prepare all the necessary journal entries for 2025 for Company A. Ans: N/A, LO: 2, Topic: Accounting for Stock Investments, Subtopic: N/A, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

Solution 185 Jan.

June 15

Dec. 31

Stock Investments ....................................................... Cash (30,000 × 40% × $11) ................................

132,000

Cash ............................................................................ Stock Investments ($32,000 × 40%)..............................................

12,800

Stock Investments........................................................ Revenue from Stock Investments ($120,000 × 40%). ................................................. *(Net inc. × own.%)

132,000

12,800* 48,000 48,000

Reporting and Analyzing Investments

Ex. 186 Company A's balance sheet at December 31, 2024, showed the following: Short-term investments, at fair value $46,500 Company A's portfolio of stock investments (less than 20% ownership) consisted of the following at December 31, 2024: Investment Number of Shares Cost Company B Common Stock 200 $30,000 Company C Preferred Stock 400 6,000 Company D Common Stock 300 9,000 $45,000 During 2025, the following transactions took place: Feb. 5 Mar. 30 Sept. 9

Sold 50 shares of Company B common stock for $7,900. Purchased 25 shares of Company D common stock for $850. Purchased 50 shares of Company D common stock for $2,000.

At year end on December 31, 2025, the fair values per share were: Company B Common Stock Company C Preferred Stock Company D Common Stock

Fair Value Per Share $151.00 $ 13.00 $ 33.00

Instructions (a)

Prepare the journal entries to record the 2025 stock transactions.

(b)

On December 31, 2025, prepare any adjusting entry that might be necessary relative to the portfolio.

(c)

Show how the stock investments will appear on Company A's balance sheet at December 31, 2025.

Ans: N/A, LO: 2, 3, Topic: Accounting for Stock Investments, Reporting Investments in Financial Statements, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

Test Bank

Solution 186 (a)

Feb.

Mar. 30

Sept. 9

(b)

Cash

....................................................................... 7,900 Stock Investments ............................................. Gain on Sale of Stock Investments ................... (To record sale of 50 shares of Company B common stock) *(sell. pr. – (Tot. cost × 50 ÷ 200)) Stock Investments ..................................................... Cash ................................................................. (To record purchase of 25 shares of Company D common stock)

850

Stock Investments ..................................................... Cash ................................................................. (To record purchase of 50 shares of Company D common stock)

2,000

Investment Number of Shares Company B Common Stock 150 Company C Preferred Stock 400 Company D Common Stock 375

Cost $22,500 6,000 11,850 $40,350

7,500 400*

850

2,000

Fair Value $22,650 5,200 12,375 $40,225

Unrealized Loss—Income [($40,350 – $40,225) + $1,500*] ................1,625** Fair Value Adjustment—Stock ............................................

1,625

*($46,500 fair value – $45,000 cost) = $1,500 FVA—Stock bal. (debit) at 12/31/2024 **(Adjustment from $1,500 debit balance to $125 credit balance) (c)

Short-term investments, at fair value

$40,225

Reporting and Analyzing Investments

Ex. 187 On January 5, 2025, Company A purchased the following long-term stock investments: 300 shares Company B common stock for $4,800. 500 shares Company C common stock for $10,000. 600 shares Company D common stock for $18,000. Assume that Company A cannot exercise significant influence over the activities of the investee companies and that the cost method is used to account for the investments. On June 30, 2025, Company A received the following cash dividends: Company B ................................................. Company C ................................................. Company D .................................................

$2.00 per share $3.00 per share $1.50 per share

On November 15, 2025, Company A sold 100 shares of Company D common stock for $3,600. On December 31, 2025, the fair value of the securities held by Company A is as follows: Per Share Company B common stock $12 Company C common stock 16 Company D common stock 33 Instructions Prepare the appropriate journal entries that Company A should make on the following dates: January 5, 2025 June 30, 2025 November 15, 2025 December 31, 2025 Ans: N/A, LO: 2, 3, Topic: Accounting for Stock Investments, Reporting Investments in Financial Statements, Subtopic: NA, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

Solution 187 January 5, 2025 Stock Investments ............................................................................ 32,800* Cash .................................................................................. (To record purchase of equity securities as a long-term investment)

32,800

*$4,800 + $10,000 + $18,000 June 30, 2025 Cash ........................................................................................... Dividend Revenue ............................................................. (To record cash dividends received) *300 × $2 = $600; 500 × $3 = $1,500; 600 × $1.50 = $900.

3,000* 3,000

Test Bank

Solution 187 (Cont.) November 15, 2025 Cash ........................................................................................... Stock Investments .............................................................. Gain on Sale of Stock Investments ..................................... (To record sale of 100 shares of Company D common stock) *(sell. pr. – (cost × 100 ÷ 600)) December 31, 2025 Unrealized Gain or Loss—Income .............................................. Fair Value Adjustment—Stock ............................................ (To value long-term investments at fair value) *(Tot. cost – tot. fair val.)

3,600 3,000 600

1,700* 1,700

Investment Portfolio Investment Company A Company B Company C Total

Shares 300 500 500

Cost $ 4,800 10,000 15,000 $29,800

Fair Value $ 3,600 8,000 16,500 $28,100

Ex. 188 Acme Corporation has the following portfolio of short-term stock investments (holdings less than 20% as of December 31, 2025. Security Cost Fair Value A $17,000 $16,000 B 23,000 25,000 C 32,000 28,000 $72,000 $69,000 On January 22, 2026, Acme Corporation sold Security C for $30,000. Instructions (a)

Prepare the adjusting entry for Acme Corporation on December 31, 2025, to report the portfolio at fair value.

(b)

Indicate the balance sheet and income statement presentation of the fair value data for Acme Corporation at December 31, 2025.

(c)

Prepare the journal entry for the 2026 sale.

Ans: N/A, LO: 2, 3, Topic: Accounting for Stock Investments, Reporting Investments in Financial Statements, Subtopic: NA, Bloom: AP, Difficulty: Hard, Min: 12, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

Reporting and Analyzing Investments

Solution 188 (a)

Dec. 31

(b)

2025 Unrealized Gain or Loss—Income .............................. Fair Value Adjustment—Stock ........................... *(Tot. cost – tot. fair val.)

3,000* 3,000

On the balance sheet, the short-term investments are reported in the current assets section as follows: Current Assets Short-term Investments, at fair value

$69,000

The unrealized loss account is reported under Other Expenses and Losses in the income statement. (c)

Jan. 22

2026 Cash ........................................................................... Loss on Sale of Stock Investments ............................. Stock Investments ............................................. *(Sell. pr. – sec. C cost)

30,000 2,000* 32,000

Ex. 189 Acme Beauty Supply Company has these data at December 31, 2025: Securities Cost Fair Value Trading $110,000 $119,000 Available-for-sale 100,000 95,000 The available-for-sale securities are held as a long-term investment. Instructions (a)

Prepare the adjusting entries to report each class of securities at fair value.

(b)

Indicate the statement presentation of each class of securities and the related unrealized gain (loss) accounts.

Ans: N/A, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Presentation of Realized and Unrealized Gain or Loss, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

Solution 189 (a)

Fair Value Adjustment—Trading ($199,000 – $110,000) ....................................................... Unrealized Gain or Loss—Income .............................. Unrealized Gain or Loss—Equity.............................................. Fair Value Adjustment—Available-for-Sale ......................... *($100,000 – $95,000)

9,000 9,000 5,000* 5,000

Test Bank

Solution 189 (Cont.) (b)

Balance Sheet Current Assets Short-term Investments, at fair value...................................... $119,000 Investments Long-term Investments, at fair value ................................... $ 95,000 Stockholders' equity Less: Unrealized loss on available-for-sale securities ............. $ (5,000) Income Statement Other revenues and gains Unrealized gain—income ....................................................

$ 9,000

COMPLETION STATEMENTS 190. Excess cash due to seasonal fluctuations is invested in

investments.

Ans: N/A, LO: 1, Topic: Accounting for Debt Investments, Subtopic: Why Corporations Invest, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

191. Debt investments are investments in government and

bonds.

Ans: N/A, LO: 1, Topic: Accounting for Debt Investments, Subtopic: Accounting for Debt Investments, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

192. When an investor owns between 20% and 50% of the common stock of a corporation, it is generally presumed that the investor has influence over the investee and therefore, the appropriate method of accounting for this type of investment is the method. Ans: N/A, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Holdings Between 20% and 50%, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

193. Under the cost method, dividends received from an investee company are credited to the account, whereas under the equity method, dividends received from an investee company are credited to the account. Ans: N/A, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Holdings Less than 20%, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

194. At the beginning of the year, Ace Service Corporation acquired 15% of A1 Company common stock for $600,000. A1 Company reported net income for the year of $60,000 and paid $20,000 cash dividends during the year. The balance of the Stock Investments account on the books of the Ace Service Corporation at the end of the year should be $ . Ans: N/A, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Holdings Less than 20%, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

195. A company that owns more than 50% of the common stock of another company is known as the company and financial statements are usually prepared. Ans: N/A, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Holdings of More than 50%, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

Reporting and Analyzing Investments

196.

securities are bought and held primarily for sale in the near future.

Ans: N/A, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Trading Securities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

197. Fair Value Adjustment is a valuation (from) the cost of the investments.

account, which is

Ans: N/A, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Presentation of Realized and Unrealized Gain or Loss, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

198. At the end of an accounting period, if the fair value of the trading portfolio is less than its cost, then the company should recognize an that is reported on the . Ans: N/A, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Presentation of Realized and Unrealized Gain or Loss, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control

199. An unrealized loss on trading securities is reported under Other the income statement.

Ans: N/A, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Presentation of Realized and Unrealized Gain or Loss, LO Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

200. An

unrealized

gain .

loss

available-for-sale

securities

reported

201. Short-term investments are securities that are and converted into cash within the next year or operating cycle, whichever is longer.

to be

Ans: N/A, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Short-term Investments, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Strategy, Planning & Performance

Answers to Completion Statements 190. temporary or short-term 191. corporation 192. significant, equity 193. Dividend Revenue, Stock Investments 194. 600,000 195. parent, consolidated

196. 197. 198. 199. 200. 201.

Trading allowance, added (subtracted) unrealized loss, income statement Expenses and Losses Other Comprehensive Income readily marketable, intended

Test Bank

MATCHING 202.

Match the items below by entering the appropriate code letter in the space provided. A. Available-for-sale securities B. Subsidiary company C. Equity method D. Unrealized Gain or Loss—Equity E. Fair value

F. Consolidated financial statements G. Controlling interest H. Fair Value Adjustment I. Debt investments J. Long-term investments

Valuation allowance account.

Amount for which a security could be sold.

Ownership of more than 50% of another company's common stock.

Securities that may be sold in the future, but not necessarily in the near term.

Investments that are not readily marketable.

Financial statements that present the assets and liabilities controlled by the parent and the aggregate profitability of the affiliated companies.

The Stock Investments account is adjusted for net income and dividends received.

Investments in government and corporation bonds.

Entity whose stock is owned by the parent company.

10. An account that is reported in the stockholders' equity section. Ans: N/A, LO: 1-3, Topic: NA, Subtopic: NA, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

Answers to Matching 1. 2. 3. 4. 5.

H E G A J

6. 7. 8. 9. 10.

F C I B D

Reporting and Analyzing Investments

SHORT-ANSWER ESSAY QUESTIONS S-A E 203 1.

What are the reasons that corporations invest in securities?

Ans: N/A, LO: 1, Topic: Accounting for Debt Investments, Subtopic: Why Corporations Invest, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BC: None, AICPA AC: Risk Analysis, AICPA PC: None, IMA: Strategy, Planning & Performance

Solution 203 Companies invest because (1) they have excess cash not immediately needed, or (2) they want to generate investment income, or (3) they have strategic reasons such as controlling a competitor or supplier or entering a new industry. S-A E 204 (a)

When should a long-term investment in common stock be accounted for by the equity method?

(b)

When is revenue recognized under the equity method?

Ans: N/A, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Holdings Between 20% and 50%, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

Solution 204 (a)

Whenever the investor's influence on the operating and financial affairs of the investee is significant, the equity method should be used. The major factor in determining significant influence is the percentage of ownership interest held by the investor in the investee. The general guideline for use of the equity method is between 20% and 50% ownership interest. Companies are required to use judgment, however, rather than blindly follow the between thee 20% and 50% guidelines. For example, 25% ownership in a company that is 75% controlled by another organization would not indicate significant influence.

(b)

Revenue is recognized as net income is earned by the investee.

S-A E 205 If a company has a stock investment that is properly accounted for by the equity method, what will be the effect on the financial statements when they receive a dividend from its investee? Ans: N/A, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Holdings Between 20% and 50%, Bloom: C, Difficulty: Easy, Min: 3, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

Solution 205 There will be no effect on the income statement. However, on the balance sheet Cash will be increased by the same amount that the Investment account is decreased.

Test Bank

S-A E 206 Distinguish between the cost and equity methods of accounting for investments in stocks. Ans: N/A, LO: 2, Topic: Accounting for Stock Investments, Subtopic: N/A, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communications, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

Solution 206 Under the cost method, an investment is originally recorded at cost. Dividends are reported as revenue. At the end of each subsequent accounting period, cost is adjusted to fair value and an unrealized holding gain or loss is recognized. These unrealized gains and losses are generally recognized in income. The exception is that unrealized holding gains and losses on debt securities classified as available for sale are included in other comprehensive income. Under the equity method, the investment is originally recorded at cost; subsequently, the investment account is adjusted each period for the investor's share of the earnings or losses of the investee. The investor's share of the investee's earnings is recognized in the earnings of the investor as investment income. Dividends received from the investee are reductions in the carrying amount of the investment. Under the equity method, the investment is not adjusted to fair value.

S-A E 207 A consolidated balance sheet reports the financial position of two or more legal entities just as if they were one reporting unit. Explain why this is useful. Ans: N/A, LO: 2, Topic: Accounting for Stock Investments, Subtopic: Holdings of More than 50%, Bloom: C, Difficulty: Easy, Min: 3, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

Solution 207 Consolidated statements are useful to the stockholders, board of directors, and management of the parent company. Consolidated statements indicate to creditors, prospective investors, and regulatory agencies the magnitude and scope of operations of the companies under common control. S-A E 208 The Fair Value Adjustment account is a balance sheet account. Identify the asset account it is related to. Explain how this account is increased and describe the procedure followed when its related asset account is disposed of. Ans: N/A, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Presentation of Realized and Unrealized Gain or Loss, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

Solution 208 The Fair Value Adjustment account is a valuation allowance account for certain investments. The Fair Value Adjustment account is increased when the investments’ fair value is greater than its cost. When specific securities are sold, the Fair Value Adjustment account is ignored because the account relates to the entire portfolio and not the specific securities.

Reporting and Analyzing Investments

S-A E 209 When a year-end adjustment is made to reduce the trading securities portfolio to market, what effect if any, will the adjustment have on the balance sheet and the income statement? Ans: N/A, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Presentation of Realized and Unrealized Gain or Loss, Bloom: C, Difficulty: Easy, Min: 3, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

Solution 209 The unrealized loss would be reported in the Other Expenses and Losses section of the Income Statement and the assets would be decreased by a credit balance in the Fair Value Adjustment— Trading valuation account. S-A E 210 When a year-end adjustment is made to reduce the available-for-sale securities portfolio to market, what effect if any, will the adjustment have on the balance sheet and the income statement? Ans: N/A, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Presentation of Realized and Unrealized Gain or Loss, Bloom: C, Difficulty: Easy, Min: 3, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control

Solution 210 There would be no effect on the income statement related to this adjustment. The unrealized loss would be reported as a reduction in the stockholders’ equity section of the balance sheet and the assets would be decreased by a credit balance in the Fair Value Adjustment—Available-For-Sale valuation account.

S-A E 211

(Ethics)

High Country Stables, Inc., operates several dog-racing tracks throughout the United States. Since most facilities are outdoor tracks only, most of the cash receipts for High Country are received from April through October. These funds are usually invested in temporary, very liquid investments, such as stocks and bonds. Among the stocks purchased last year, was Vendable, Inc. a company specializing in automatic vending equipment. The company decided not to sell its Vendable stock at the end of last year and has purchased more of the stock this year. The company intends to continue to purchase stock until it holds enough to make a takeover bid for the company. The accountants have been instructed to continue to classify the investment as temporary until the takeover is accomplished so that less attention will be directed to it. (Presently, High Country has no long-term investments in stock.) Required: 1. Is it ethical for High Country to attempt to take over another company? Explain. 2. Is it ethical for High Country to leave its investment in the temporary investment category? Explain. Ans: N/A, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: NA, Bloom: E, Difficulty: Easy, Min: 3, AACSB: Ethics, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Ethical Conduct, IMA: Professional Ethics & Values

Test Bank

Solution 211 1. Yes, High Country may attempt to "take over" or purchase another company. The means that it uses to accomplish its goal must be ethical, and certainly building up a portfolio of the stock in question is ethical. Unethical takeovers are those in which a company is purchased for its assets and "harvested," leaving employees without jobs, and possibly irreparably damaging a community. 2. It is not ethical for the company to leave the stock in the temporary category if it no longer meets the criterion for a temporary investment. It would depend upon whether the company was serious in its intention to purchase a controlling interest in Vendable. Since there is no evidence to the contrary, it appears that High Country's investment should be classified as long-term.

S-A E 212

(Communication)

North West is the daughter of Kim Kardashian, the founder, and president of Kardashian Enterprises. She has been working in various departments during school vacations throughout high school. She burst into the accounting department excitedly one morning. She said that the stock price of several of the firm's temporary investments is up and that her mother said that the company had made over $10,000 because of this jump in stock prices. She asks to see how the increase is recorded. It is a very busy time in the accounting department, and so her question is deferred. Required: Prepare a brief note to answer North’s question. Ans: N/A, LO: 3, Topic: Reporting Investments in Financial Statements, Subtopic: Presentation of Realized and Unrealized Gain or Loss, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communication, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Communication, IMA: Reporting & Control

Solution 212 This communication can be informal, but it should contain the key elements of the answer.

Dear North, Yesterday, you asked to see how we recorded the $10,000 that the company had "earned" because of the jump in the price of some of the stock we hold. Since we were finishing month-end closing, we couldn't answer your question right away. An increase in the value of temporary investments is an unrealized gain. An unrealized gain is reported in the income statement because of the likelihood that the securities will be sold at fair value since they are a temporary investment. The gain is recorded by increasing the amount reported as temporary investments and recording an unrealized gain. Again, I'm sorry we couldn't ask you to stay yesterday. Stop by again sometime (any time except month’s end!) (signed)

APPENDIX H PAYROLL ACCOUNTING SUMMARY OF QUESTIONS BY OBJECTIVES AND BLOOM’S TAXONOMY Item

1. 2. 11. 12. 13. 14. 28. 29. 36.

1 1 1 1 1 1 1 1,2 1

K K K AP AP K AP AN K

Item

3. 4. 15. 16. 17. 18. 30. 31. 37.

Item

1 2

True-False Statements K 5. 2 K 7. K 6. 2 K 8.

3 3

C C

9. 10.

3 3

C K

1 1 1 1

Multiple Choice Questions 19. 2 23. AP C 20. 2 24. K C K 21. 2 K 25. C K 22. 2 26.

3 3 3 3

K K K K

27.

1,2 1,2

AP AP

Exercises 32. 1,2 AP 33. 2 AP

2 3

AP K

Completion Statements K 38. 2 K

Item

Type

34. 35.

Matching Statements 39.

K Short-Answer Essay

40.

1,2

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Item

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

Type

TF TF TF TF TF TF TF TF

Item

11. 12. 13. 19. 20. 21. 9. 10.

Type

Item

Type

Item

Type

Item

Type

14. 15. 16.

Learning Objective 1 MC 17. MC 29. MC 18. MC 30. MC 28. Ex 31.

Ex Ex Ex

32. 36. 40.

Ex C SA

22. 29. 30.

Learning Objective 2 MC 31. Ex 34. Ex 32. Ex 37. Ex 33. Ex 38.

Ex C C

40.

23. 24.

Learning Objective 3 MC 25. MC 27. MC 26. MC 35.

MC Ex

39.

MC MC MC MC MC MC TF TF

Note: TF = True-False MC = Multiple Choice

Item

Type

Ex = Exercise C = Completion

Ma = Matching SA = Short-Answer

I-2

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

CHAPTER LEARNING OBJECTIVES 1. Record the payroll for a pay period. The computation of the payroll involves gross earnings, payroll deductions, and net pay. In recording the payroll, Salaries and Wages Expense is debited for gross earnings, individual tax and other liability accounts are credited for payroll deductions, and Salaries and Wages Payable is credited for net pay. When the payroll is paid, Salaries and Wages Payable is debited, and Cash is credited. 2. Record employer payroll taxes. Employer payroll taxes consist of FICA, federal unemployment taxes, and state unemployment taxes. The taxes are usually accrued at the time the payroll is recorded by debiting Payroll Tax Expense and crediting separate liability accounts for each type of tax. 3. Discuss the objectives of internal control for payroll. The objectives of internal control for payroll are (1) to safeguard company assets against unauthorized payments of payrolls, and (2) to ensure the accuracy and reliability of the accounting records pertaining to payrolls.

TRUE-FALSE STATEMENTS 1.

FICA taxes and federal income taxes are levied on employees' earnings without limit.

Answer: F, LO 1, SECTION 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Reporting, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

FICA taxes withheld and federal income taxes withheld are mandatory payroll deductions.

Answer: T, LO 1, SECTION 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Reporting, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

An employee earnings record is a cumulative record of each employee's gross earnings, deductions, and net pay during the year.

Answer: T, LO 1, SECTION 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Reporting, AICPA-PC: Problem Solving/Decision Making, IMA: Internal Controls, Sector: General, IFRS: No

The employer incurs a payroll tax expense equal to the amount withheld from the employees' wages for federal income taxes.

Answer: F, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Reporting, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

The state unemployment tax rate is usually 5.4% on the first $7,000 of wages paid to an employee during the year.

Answer: T, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

A Wage and Tax Statement shows gross earnings, FICA taxes withheld, and income taxes withheld for the year.

Answer: T, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Reporting, AICPA-PC: Problem Solving/Decision Making, IMA: Reporting, Sector: General, IFRS: No

7. Internal control over payroll is not necessary because employees will complain if they do not receive the correct amount on their payroll checks. Answer: F, LO 3, SECTION 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Risk Analysis, AICPA-PC: Professional Demeanor, IMA: Internal Controls, Sector: General, IFRS: No

Payroll Accounting 8.

I-3

A good internal control feature is to have a written hiring authorization form completed before a new employee is added to the payroll.

Answer: T, LO 3, SECTION 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Strategic/Critical Thinking, AICPA-FN: Risk Analysis, AICPA-PC: Professional Demeanor, IMA: Internal Controls, Sector: General, IFRS: No

A good internal control feature is to have several employees choose one person to punch all of their time cards.

Answer: F, LO 3, SECTION 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA-BB: Strategic/Critical Thinking, AICPA-FN: Risk Analysis, AICPAPC: Professional Demeanor, IMA: Internal Controls, Sector: General, IFRS: No

10.

An employee's time card is used to record the number of exemptions claimed by the employee for income tax withholding purposes.

Answer: F, LO 3, SECTION 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Decision Modeling, AICPA-PC: Problem Solving/Decision Making, IMA: Internal Controls, Sector: General, IFRS: No

Answers to True-False Statements Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

1. 2.

F T

3. 4.

T F

5. 6.

T T

7. 8.

F T

9. 10.

F F

MULTIPLE CHOICE QUESTIONS 11.

Which one of the following payroll taxes does not result in a payroll tax expense for the employer? a. FICA tax b. Federal income tax c. Federal unemployment tax d. State unemployment tax

Answer: b, LO 1, SECTION 1, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Reporting, AICPA-PC: Problem Solving/Decision Making, IMA: Reporting, Sector: General, IFRS: No

12.

Lucie Ball's regular rate of pay is $15 per hour with one and one-half times her regular rate for any hours which exceed 40 hours per week. She worked 48 hours last week. Therefore, her gross wages were a. $720. b. $600. c. $780. d. $1,080.

Answer: c, LO 1, SECTION 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No Solution: (40  $15)  (8  $15  1.5)  $780 (40 hours x Wage rate) +(48 - 40) x $15 x 1.5

I-4 13.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e Assuming a FICA tax rate of 7.65% on the first $132,900 in wages and 1.45% on wages in excess of $132,900 and a federal income tax rate of 20% on all wages, what would be an employee's net pay for the year if he earned $180,000? Round all calculations to the nearest dollar. a. $134,867 b. $133,953 c. $144,000 d. $133,150

Answer: d, LO 1, SECTION 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No Solution: ($132,900  .0765)  ($47,100  .0145)  ($180,000  .20)  $46,850; $180,000 - $46,850  $133,150

14.

Most companies are required to compute overtime at a. the worker's regular hourly wage. b. 1.25 times the worker's regular hourly wage. c. 1.5 times the worker's regular hourly wage. d. 2.5 times the worker's regular hourly wage.

Answer: c, LO 1, SECTION 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Business Economics, Sector: General, IFRS: No

15.

Jerri Rice has worked 44 hours this week. She worked at least 8 hours each day. Her regular hourly wage is $12 per hour with one and one-half times her regular rate for any hours which exceed 40 hours per week. What are Jerri's gross wages for the week? a. $528 b. $552 c. $792 d. $576

Answer: b, LO 1, SECTION 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No Solution: (40  $12)  (4  $12  1.5)  $552 (Reg.hrs. x wage rate) + (overtime hrs. x wage rate x 1.5)

16.

FICA taxes do not provide workers with a. life insurance. b. supplemental retirement. c. employment disability. d. medical benefits.

Answer: a, LO 1, SECTION 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Risk Analysis, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

17.

The form showing gross earnings, FICA taxes withheld, and income taxes withheld for the year is a. Form W-4. b. Form W-2. c. Form 1040. d. Schedule A.

Answer: b, LO 1, SECTION 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Decision Modeling, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

Payroll Accounting 18.

I-5

The journal entry to record the payroll for a period will include a credit to Salaries and Wages Payable for the gross a. amount less all payroll deductions. b. amount of all paychecks issued. c. pay less taxes payable. d. pay less voluntary deductions.

Answer: a, LO 1, SECTION 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

19.

Which one of the following payroll taxes is not withheld from the employee's wages because it is not levied on the employee? a. Federal income tax b. Federal unemployment tax c. State income tax d. FICA tax

Answer: b, LO 2, SECTION 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

20.

By January 31, following the end of a calendar year, an employer is required to provide each employee with a(n) a. state unemployment tax form. b. federal unemployment tax form 940. c. wage and tax statement form W-2. d. employee's withholding allowance certificate form W-4.

Answer: c, LO 2, SECTION 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Reporting, AICPA-PC: Problem Solving/Decision Making, IMA: Reporting, Sector: General, IFRS: No

21.

The tax that is paid equally by the employer and employee is the a. federal income tax. b. federal unemployment tax. c. state unemployment tax. d. FICA tax.

Answer: d, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Reporting, AICPA-PC: Problem Solving/Decision Making, IMA: Reporting, Sector: General, IFRS: No

22.

The effective federal unemployment tax rate is usually a. 6.2%. b. 0.8%. c. 5.4%. d. 8.0%.

Answer: b, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

23.

Changes in pay rates during employment should be authorized by the a. human resources department. b. payroll department. c. treasurer's department. d. timekeeping department.

Answer: a, LO 3, SECTION 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Decision Modeling, AICPA-PC: Problem Solving/Decision Making, IMA: Internal Controls, Sector: General, IFRS: No

I-6

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

24.

Which of the following employees would likely receive a salary instead of wages? a. Store clerk b. Factory employee c. Sales manager d. Manual laborer

Answer: c, LO 3, SECTION 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Decision Modeling, AICPA-PC: Problem Solving/Decision Making, IMA: Business Economics, Sector: General, IFRS: No

25.

Control over timekeeping does not include a. having one employee punch the time cards for several employees in the same work area. b. time clock procedure monitoring by a supervisor. c. pay period time reports kept by a supervisor for salaried personnel. d. overtime approval by a supervisor.

Answer: a, LO 3, SECTION 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Risk Analysis, AICPA-PC: Problem Solving/Decision Making, IMA: Internal Controls, Sector: General, IFRS: N

26.

Which of the following is not performed by the payroll department? a. Preparation of payroll checks b. Maintaining payroll records c. Signing of payroll checks d. Preparation of payroll tax returns

Answer: c, LO 3, SECTION 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Risk Analysis, AICPA-PC: Problem Solving/Decision Making, IMA: Internal Controls, Sector: General, IFRS: No

27.

An employee’s payroll check is distributed by the a. personnel department. b. payroll department. c. cashier. d. treasurer's department.

Answer: d, LO 3, SECTION 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Risk Analysis, AICPA-PC: Problem Solving/Decision Making, IMA: Internal Controls, Sector: General, IFRS: No

Answers to Multiple Choice Questions Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

11. 12. 13.

b c d

14. 15. 16.

c b a

17. 18. 19.

b a b

20. 21. 22.

c d b

23. 24. 25.

a c a

26. 27.

c d

Payroll Accounting

I-7

EXERCISES Ex. 28 Ann Hech's regular hourly wage is $18 an hour. She receives overtime pay at the rate of time and a half. The FICA tax rate is 7.65%. Ann is paid every two weeks. For the first pay period in January, Ann worked 86 hours of which 6 were overtime hours. Ann's federal income tax withholding is $400 and her state income tax withholding is $170. Ann has authorized that $50 be withheld from her check each pay period for savings bonds. Instructions Compute Ann Hech's gross earnings and net pay for the pay period showing each payroll deduction in arriving at net pay. Answer: N/A, LO 1, SECTION 1, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

Solution 28

(10 min.)

Gross Earnings: Regular Pay: 80 hours × $18/hr. Overtime Pay: $18 × 1.5 = $27/hr for overtime 6 overtime hours × $27 Total Gross Earnings: Net Pay: Gross Earnings Less: Federal Income Taxes Payable State Income Taxes Payable FICA Taxes Payable Savings Bonds Payable Net Pay:

$1,440 162 $1,602 $1,602.00 $400.00 170.00 122.55 50.00

742.55 $ 859.45

Ex. 29 Warren Company's payroll for the week ending January 15 amounted to $200,000 for salaries and wages. None of the employees has reached the earnings limits specified for federal or state employer payroll taxes. The following deductions were withheld from employees' salaries and wages: Federal Income Tax State Income Tax FICA Taxes Union Dues United Fund

$45,000 9,000 15,300 2,700 1,800

Federal unemployment tax (FUTA) rate is 6.2% less a credit equal to the rate paid for state unemployment taxes. The state unemployment tax (SUTA) rate is 5.4%. Instructions Prepare the journal entries to record the weekly payroll ending January 15 and also the employer’s payroll tax expense on the payroll. Answer: N/A, LO 1, 2, SECTION 1, 2, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

I-8 Solution 29 Jan. 15

(10 min.)

Salaries and Wages Expense......................................... Federal Income Taxes Payable ............................... State Income Taxes Payable................................... FICA Taxes Payable ............................................... Union Dues Payable................................................ United Fund Contributions Payable ......................... Salaries and Wages Payable .................................. (To record payroll for the week ending January 15)

200,000

15 Payroll Tax Expense....................................................... FICA Taxes Payable ............................................... Federal Unemployment Taxes Payable................... State Unemployment Taxes Payable ...................... (To record employer's payroll taxes on January 15 payroll)

27,700

45,000 9,000 15,300 2,700 1,800 126,200

15,300 1,600 10,800

Ex. 30 Sam Geller had earned (accumulated) salary of $120,200 through November 30. His December salary amounted to $9,800. Lara Lane began employment on December 1 and will be paid her first month's salary of $7,000 on December 31. Income tax withholding for December for each employee is as follows: Federal Income Tax State Income Tax

Sam Geller $2,680 490

Lara Lane $1,200 240

The following payroll tax rates are applicable: FICA tax on first $132,900 FUTA tax on first $7,000 SUTA tax on first $7,000

7.65 (1.45% over $132,900) 6.2%* 5.4%

*Less a credit equal to the state unemployment contribution Instructions Record the payroll for the two employees at December 31 and record the employer's share of payroll tax expense for the December 31 payroll. Round all calculations to the nearest dollar. Answer: N/A, LO 1, 2, SECTION 1, 2, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

Payroll Accounting Solution 30 Dec. 31

I-9

(15 min.)

Salaries and Wages Expense ....................................... Federal Income Taxes Payable............................ State Income Taxes Payable ............................... FICA Taxes Payable ............................................ Salaries and Wages Payable ............................... (To record December 31 payroll) *Rounded FICA Taxes Sam Geller ($9,800  7.65%) Lara Lane ($7,000 × 7.65%) =

16,800 3,880 730 1,286* 10,904

$750 536 $1,286

Payroll Tax Expense..................................................... FICA Taxes Payable ............................................ Federal Unemployment Taxes Payable................ State Unemployment Taxes Payable ................... (To record employer's share of payroll taxes for Dec. 31 payroll)

1,720 1,286 56 378

(FUTA and SUTA are based only on Lara Lane's salary of $7,000.) Ex. 31 Assume that the payroll records of Erroll Oil Company provided the following information for the weekly payroll ended November 30, 2021. Year-to-Date Earnings Through Hourly Federal Previous Week Employee Hours Worked Pay Rate Income Tax Union Dues C. Young 40 $55 $432 — $128,200 J. Ward 46 10 65 $5 23,200 K. Hurt 44 18 126 7 5,100 M. King 42 22 169 9 49,500 Additional information: All employees are paid overtime at time and a half for hours worked in excess of 40 hours per week. The FICA tax rate is 7.65% for the first $132,900 of each employee's annual earnings and 1.45% in excess of $132,900. The employer pays unemployment taxes of 6.2% (5.4% for state and .8% for federal) on the first $7,000 of each employee's annual earnings. Instructions (a) Prepare the payroll register for the pay period. (b)

Prepare general journal entries to record the payroll and payroll taxes.

Answer: N/A, LO 1, 2, SECTION 1, 2, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

I - 10 Solution 31

(20 min.)

(a)

ERROLL OIL COMPANY Payroll Register For the Week Ending November 30, 2021 ——————————————————————————————————————————— Earnings Deductions Total Gross Employee Hours Reg. Overtime Pay FICA FIT Union Net Pay C. Young 40 2,200 — 2,200 168.30 432 — 1,599.70 J. Ward 46 400 90 490 37.49 65 5 382.51 K. Hurt 44 720 108 828 63.34 126 7 631.66 M. King 42 880 66 946 72.37 169 9 695.63 4,200 264 4,464 341.50 792 21 3,309.50 (b) Nov. 26

Salaries and Wages Expense ...................................... FICA Taxes Payable ............................................ Federal Income Taxes Payable ........................... Union Dues Payable ............................................ Salaries and Wages Payable ............................... (To record weekly payroll)

4,464.00

Payroll Tax Expense .................................................... 392.83 State Unemployment Taxes Payable ($828 × .054) Federal Unemployment Taxes Payable ($828 ×.008) FICA Taxes Payable ............................................ (To record employer's payroll taxes)

341.50 792.00 21.00 3,309.50

44.71 6.62 341.50

Ex. 32 Diane Lane earns a salary of $11,200 per month during the year. FICA taxes are 7.65% on the first $132,900 of gross earnings and 1.45% in excess of $132,900. Federal unemployment insurance taxes are 6.2% of the first $7,000; however, a credit is allowed equal to the state unemployment insurance taxes of 5.4% on the $7,000. During the year, $32,300 was withheld for federal income taxes and $6,700 was withheld for state income taxes. Instructions (a) Prepare a journal entry summarizing the payment of Lane’s total salary during the year. (b) Prepare a journal entry summarizing the employer payroll tax expense on Lane's salary for the year. (c) Determine the cost of employing Lane for the year. Answer: N/A, LO 1, 2, SECTION 1, 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

Payroll Accounting Solution 32 (a)

(b)

(c)

I - 11

(5 min.)

Salaries and Wages Expense ($11,200 x 12) .............................. 134,400.00 Federal Income Taxes Payable ......................................... State Income Taxes Payable ............................................. FICA Taxes Payable ($132,900 x .0765) +($1,500 x .0145) Salaries and Wages Payable .............................................

32,300.00 6,700.00 10,188.60 85,211.40

Payroll Tax Expense ...................................................................... 10,622.60 FICA Taxes Payable .......................................................... Federal Unemployment Taxes Payable ($7,000 x .008)...... State Unemployment Taxes Payable ($7,000 x .054) .........

10,188.60 56.00 378.00

The total cost of employment is: $134,400 + $10,622.60 = $145,022.60

Ex. 33 Banner Company had the following payroll data for the year: Gross earnings of employees Employee earnings not subject to Social Security tax Employee earnings not subject to FUTA or SUTA tax Assume the following: FICA tax rate on first $132,900 State Unemployment tax rate Federal Unemployment tax rate

$900,000 100,000 610,000 7.65% (1.45% over $132,900) 5.4% (SUTA) .8% (FUTA)

Instructions Compute Banner's payroll tax expense for the year. Make a summary journal entry to record the payroll tax expense. Answer: N/A, LO 2, SECTION 2, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

Solution 33

(25 min.)

Compute FICA tax: Less: Exempted wages Wages subject to FICA tax Applicable tax rate Medicare tax ($900,000  .0145) FICA tax expense

$900,000 100,000 800,000  .062 $49,600 13,050 $62,650

Compute FUTA tax: Less: Exempted wages Wages subject to FUTA tax Applicable tax rate FUTA tax expense

$900,000 610,000 290,000  .008 $2,320

Wages subject to SUTA tax Applicable tax rate SUTA tax expense

$290,000  .054 $15,660

I - 12

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 33

(Cont.)

Journal entry to record payroll tax expense: Payroll Tax Expense ...................................................................... FICA Taxes Payable ............................................................. FUTA Taxes Payable ............................................................ SUTA Taxes Payable ............................................................

80,630 62,650 2,320 15,660

Ex. 34 The following payroll liability accounts are included in the ledger of Clementine Company on January 1, 2021: FICA Taxes Payable Federal Income Taxes Payable State Income Taxes Payable Federal Unemployment Taxes Payable State Unemployment Taxes Payable Union Dues Payable Health Insurance Payable U. S. Savings Bonds Payable

$1,600 4,000 665 175 1,190 400 5,000 1,000

In January, the following transactions occurred: Jan. 9 11 14 18 21 22

Sent a check for $5,000 to Blue Cross and Blue Shield. Deposited a check for $5,600 in Federal Reserve Bank for FICA taxes and federal income taxes withheld. Sent a check for $400 to the union treasurer for union dues. Paid state income taxes withheld from employees. Paid state and federal unemployment taxes. Purchased U. S. Savings Bonds for employees by writing a check for $1,000.

Instructions Journalize the January transactions Answer: N/A, LO 2, SECTION 2, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

Solution 34 Jan. 9 11

(15 min.)

Health Insurance Payable .................................................. Cash ..........................................................................

5,000

FICA Taxes Payable .......................................................... Federal Income Taxes Payable .......................................... Cash ..........................................................................

1,600 4,000

Union Dues Payable .......................................................... Cash ..........................................................................

400

State Income Taxes Payable ............................................. Cash ..........................................................................

665

5,000

5,600

400 665

I - 13

Payroll Accounting Solution 34 21

(Cont.)

State Unemployment Taxes Payable .................................. Cash ..........................................................................

1,190

Federal Unemployment Taxes Payable .............................. Cash ..........................................................................

175

U. S. Savings Bonds Payable ............................................. Cash ..........................................................................

1,000

1,190

175 1,000

Ex. 35 Match the codes assigned to the following payroll functions to the procedures listed (1–12): H = Hiring Employees T = Timekeeping

PRE = Preparing the Payroll PAY = Paying the Payroll

Distribution of checks by the treasurer.

Supervisor approves hours worked.

Posting job openings.

Maintenance of payroll records.

Verification of payroll calculations.

Screening and interviewing of job applicants.

Employment authorization.

Signing prenumbered payroll checks.

Use of a timeclock.

10.

Payroll tax return preparation.

11.

Employee signs receipt acknowledging cash received.

12.

Documentation of employee hiring.

Answer: N/A, LO 3, SECTION 3, Bloom: K, Difficulty: Easy, Min: 6, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Risk Analysis, AICPA-PC: Problem Solving/Decision Making, IMA: Internal Controls, Sector: General, IFRS: No

Solution 35 1. 2. 3. 4. 5. 6. 7.

PAY T H PRE PRE H H

(6 min.) Distribution of checks by the treasurer. Supervisor approves hours worked. Posting job openings. Maintenance of payroll records. Verification of payroll calculations. Screening and interviewing of job applicants. Employment authorization.

I - 14

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 35

(Cont.)

8. 9. 10. 11. 12.

Signing prenumbered payroll checks. Use of a timeclock. Payroll tax return preparation. Employee signs receipt acknowledging cash received. Documentation of employee hiring.

PAY T PRE PAY H

COMPLETION STATEMENTS 36.

Two federal taxes which are levied against employees' wages that must be deducted in arriving at net pay are (1) taxes and (2) taxes.

Answer: N/A, LO 1, SECTION 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Decision Modeling, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

37.

The employer incurs a payroll tax expense equal to the amount contributed by each employee for taxes.

Answer: N/A, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

38.

A payroll tax expense which is borne entirely by the employer is the federal tax.

Answer: N/A, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 3, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Reporting, AICPA-PC: Problem Solving/Decision Making, IMA: Reporting, Sector: General, IFRS: No

Answers to Completion Statements 36. 37. 38.

FICA, federal income FICA unemployment

MATCHING 39. Match the items (1–5) by entering the appropriate code letter in the space provided. A. B. C.

Wage and Tax Statement Net pay Federal income taxes

D. E.

FICA taxes Federal unemployment taxes

1. Levied against employees' wages without limit. 2. A payroll tax expense levied only against the employer based on employees' wages. 3. Gross earnings less payroll deductions. 4. A form showing gross earnings and income taxes withheld. 5. Levied against employees' wages with a maximum limit. Answer: N/A, LO 3, SECTION 3, Bloom: K, Difficulty: Easy, Min: 3, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPA-FN: Reporting, AICPA-PC: Problem Solving/Decision Making, IMA: Reporting, Sector: General, IFRS: No

Payroll Accounting

I - 15

Answers to Matching 1. 2. 3. 4. 5.

C E B A D

SHORT-ANSWER ESSAY S-A E 40 An employee's net pay consists of gross pay less mandatory and voluntary payroll deductions. Identify the mandatory payroll deductions and give two or three examples of common voluntary deductions. Are these deductions recognized as payroll expenses by the employer? What type of payroll expenses does the employer incur related to having a payroll? Answer: N/A, LO 1, 2, SECTION 1, 2 Bloom: K, Difficulty: Easy, Min: 3-5, AACSB: Reflective Thinking, AICPA-BB: Legal/Regulatory Perspective, AICPAFN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: FSA, Sector: General, IFRS: No

Solution 40 Mandatory payroll deductions include both federal and state income taxes and also FICA taxes. Among the deductions that are voluntary payroll deductions are United Way contributions, savings account deposits, insurance payments, and pension plan contributions. These mandatory payroll deductions do not represent payroll expenses for the employer because the employer is only acting as an agent in collecting these deductions. The expenses that do constitute payroll expenses for the employer include the federal and state unemployment taxes and the employer share of FICA taxes.

APPENDIX I SUBSIDIARY LEDGERS AND SPECIAL JOURNALS SUMMARY OF QUESTIONS BY OBJECTIVES AND BLOOM’S TAXONOMY Item

1. 2. 3. 4. 21. 22. 23. 24. 25. 26. 27. 28. 29. 66. 67. 68.

1 1 1 1 1 1 1 1 1 2 2 2 2 1 1 2

K K K C K K K C K K K C K AN AP C

79. 80.

1 2

K K

85.

1, 2

86.

Item

5. 6. 7. 8. 30. 31. 32. 33. 34. 35. 36. 37. 38. 69. 70. 71. 81. 82.

Item

1 1 1 1

True-False Statements 9. 2 13. K K 10. 2 14. C K K 11. 2 K 15. C 12. 2 K 16.

2 2 2 2

C K K K

17. 18. 19. 20.

2 2 2 2

K C K K

2 2 2 2 2 2 2 2 2

Multiple Choice Questions 39. 2 48. K K 40. 2 49. K K 41. 2 50. C C K 42. 2 C 51. K 43. 2 C 52. K 44. 2 C 53. K K 45. 2 54. C K 46. 2 55. K K 47. 2 56.

2 2 2 2 2 2 2 2 2

K K K K K K K C K

57. 58. 59. 60. 61. 62. 63. 64. 65.

2 2 2 2 2 2 2 2 2

K K K K K C K K K

2 2 2

AP AP AN

Exercises 72. 2 C 73. 2 C C 74. 2

2 2 2

AN AP C

78.

2 2

Completion Statements 83. 2 K K 84. 2 K K Matching Statements Short-Answer Essay

75. 76. 77.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

J-2

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Item

1. 2. 3. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18.

Type

TF TF TF TF TF TF TF TF TF TF TF TF TF

Item

4. 5. 6. 19. 20. 26. 27. 28. 29. 30. 31. 32. 33.

Type

Item

Type

Item

Type

Item

Type

7. 8. 21.

Learning Objective 1 TF 22. MC 25. TF 23. MC 66. MC 24. MC 67.

MC Ex Ex

79. 85. 86.

C Ma SA

34. 35. 36. 37. 38. 39. 40. 41. 42. 43.

Learning Objective 2 MC 44. MC 54. MC 45. MC 55. MC 46. MC 56. MC 47. MC 57. MC 48. MC 58. MC 49. MC 59. MC 50. MC 60. MC 51. MC 61. MC 52. MC 62. MC 53. MC 63.

MC MC MC MC MC MC MC MC MC MC

64. 65. 68. 69. 70. 71. 72. 73. 74. 75.

MC MC Ex Ex Ex Ex Ex Ex Ex Ex

TF TF TF TF TF MC MC MC MC MC MC MC MC

Note: TF = True-False MC = Multiple Choice

Item

Type

Ex = Exercise C = Completion

Item

Type

76. 77. 78. 80. 81. 82. 83. 84. 85.

Ex Ex Ex C C C C C Ma

Ma = Matching SA = Short-Answer

CHAPTER LEARNING OBJECTIVES 1. Describe the nature and purpose of a subsidiary ledger. A subsidiary ledger is a group of accounts with a common characteristic. It facilitates the recording process by freeing the general ledger from details of individual balances. 2. Record transactions in special journals. Companies use special journals to group similar types of transactions. In a special journal, generally only one line is used to record a complete transaction. In posting a multi-column journal: (a) Companies post all column totals except for the Other Accounts column once at the end of the month to the account title specified in the column heading. (b) Companies do not post the total of the Other Accounts column. Instead, the individual amounts comprising the total are posted separately to the general ledger accounts specified in the Account Credited (Debited) column. (c) The individual amounts in a column posted in total to a control account are posted daily to the subsidiary ledger accounts specified in the Account Credited (Debited) column.

Subsidiary Ledgers and Special Journals

J-3

TRUE-FALSE STATEMENTS 1.

A subsidiary ledger is a group of control accounts that provides information to the managers for controlling the operation of the company.

Ans: F, LO 1, SECTION 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Business Applications

An accounts receivable subsidiary ledger has all the detailed information about the cash sales to individual customers.

Ans: F, LO 1, SECTION 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Business Applications

The accounts payable subsidiary ledger provides detailed information about amounts owed to creditors.

Ans: T, LO 1, SECTION 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Business Applications

The total of the individual account balances in the accounts receivable subsidiary ledger should agree with the total of the individual account balances in the accounts payable subsidiary ledger.

Ans: F, LO 1, SECTION 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Control accounts are always located in the general ledger.

Ans: T, LO 1, SECTION 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A control account and subsidiary ledger can be established for inventory.

Ans: T, LO 1, SECTION 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A subsidiary ledger provides up-to-date information on specific account balances.

Ans: T, LO 1, SECTION 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

An advantage of using a subsidiary ledger is that one employee must post to both the subsidiary ledger and the general ledger.

Ans: F, LO 1, SECTION 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Applications

Special journals are used to record unique transactions that do not occur very often.

Ans: F, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

10.

A cash receipts journal can be used to record all transactions involving cash coming into the business, regardless of the source.

Ans: T, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

J-4

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

11.

The cash payments journal only has one column because all entries recorded in this journal require a credit to the Cash account.

Ans: F, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

12.

A cash payments journal should not be used to record transactions that require payment by check.

Ans: F, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

13.

If a transaction cannot be recorded in a special journal, it indicates that the company should adopt an electronic accounting system.

Ans: F, LO 2, SECTION 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

14.

A debit column for Sales Discounts may be found in the cash receipts journal.

Ans: T, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

15.

A single-column purchases journal is used to record purchases of merchandise on account.

Ans: T, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

16.

Using special journals can save time in posting because column totals are often posted rather than individual entries.

Ans: T, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

17.

The Reference column in a sales journal is used to indicate the general ledger account number when the entry is posted.

Ans: F, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

18.

Postings are generally made more frequently to the general ledger control accounts than to the individual accounts in the subsidiary ledgers.

Ans: F, LO 2, SECTION 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

19.

The amounts appearing in the Inventory column of the cash payments journal are posted individually to the accounts in the accounts payable subsidiary ledger.

Ans: F, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

20.

Transaction amounts recorded in the general journal are never posted to accounts in the subsidiary ledger.

Ans: F, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Subsidiary Ledgers and Special Journals

J-5

Answers to True-False Statements Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

1. 2. 3.

F F T

4. 5. 6.

F T T

7. 8. 9.

T F F

10. 11. 12.

T F F

13. 14. 15.

F T T

16. 17. 18.

T F F

19. 20.

F F

MULTIPLE CHOICE QUESTIONS 21.

The balance of a control account in the general ledger a. must always be zero. b. must equal the amount of total assets. c. is always greater than the composite balance of individual accounts in a related subsidiary ledger. d. must equal the composite balance of individual accounts in a related subsidiary ledger.

Ans: D, LO 1, SECTION 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

22.

A subsidiary ledger is a. used in place of the general ledger if the general ledger is destroyed or stolen. b. a group of accounts used by branches and subsidiaries of a corporate business. c. a group of accounts with a common characteristic that provides detailed information about a control account in the general ledger. d. used to post excess transactions if a general ledger account becomes full during an accounting period.

Ans: C, LO 1, SECTION 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: Project Management, IMA: Business Applications

23.

A subsidiary ledger frees the general ledger from details of a. individual balances. b. external transactions. c. internal transactions. d. the control account.

Ans: A, LO 1, SECTION 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: Project Management, IMA: Business Applications

24.

A company would not likely use subsidiary ledgers for a. inventory. b. retained earnings. c. equipment. d. accounts receivable.

Ans: B, LO 1, SECTION 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: Project Management, IMA: Business Applications

J-6 25.

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e Postings are made daily to subsidiary ledgers so that a. employees are kept busy. b. debits equal credits. c. individual account information is kept current. d. the control account will balance to the subsidiary ledger.

26.

A sales journal is used to record a. only cash sales of merchandise. b. sales of all assets on credit and for cash. c. only credit sales of merchandise. d. credit sales of merchandise, sales returns and allowances, and sales discounts.

Ans: C, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

27.

If a transaction cannot be recorded in a special journal a. the company must refuse to enter into the transaction. b. it is recorded in the general journal. c. it is recorded directly in the accounts in the general ledger. d. it is recorded as an adjustment on the worksheet.

Ans: B, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

28.

The one characteristic that all entries recorded in a cash receipts journal have in common is a. a credit to the Cash account. b. that they all represent collections from customers. c. that they originate from the sales of merchandise. d. a debit to the Cash account.

Ans: D, LO 2, SECTION 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

29.

A single-column purchases journal indicates that a. only purchases of merchandise on account can be recorded. b. all purchases of merchandise can be recorded. c. all acquisitions on account can be recorded. d. another column must be added so that debits and credits can be recorded.

Ans: A, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

30.

The one characteristic that all entries recorded in a multiple-column purchases journal have in common is a a. credit to the Cash account. b. debit to the Cash account. c. debit to the Accounts Payable account. d. credit to the Accounts Payable account.

Ans: D, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Subsidiary Ledgers and Special Journals 31.

J-7

A company which uses special journals should record a transaction involving the purchase of merchandise for cash in a a. single-column purchases journal. b. multiple-column purchases journal. c. cash payments journal. d. general journal.

Ans: C, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

32.

If merchandise from a cash sale is returned by a customer for a refund, the sales return is recorded in the a. general journal. b. cash receipts journal. c. cash payments journal. d. sales journal.

Ans: C, LO 2, SECTION 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

33.

Which of the following is not a special journal? a. Sales journal b. Purchases journal c. General journal d. Cash receipts journal

Ans: C, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

34.

Correcting entries are journalized in a. a special journal. b. the general journal. c. the general ledger. d. a correcting journal.

Ans: B, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

35.

Adjusting entries are recorded a. only on the work sheet. b. only in the general ledger. c. in the general journal. d. in the special journals.

Ans: C, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

36.

If a transaction cannot be recorded in a special journal, it is a. not recorded. b. a correcting entry. c. recorded in the general journal. d. an error.

Ans: C, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

37.

A company uses a sales journal, cash receipts journal, purchases journal, cash payments journal, and a general journal. A cash sales return would be recorded in the a. sales journal. b. cash receipts journal. c. cash payments journal. d. general journal.

Ans: C, LO 2, SECTION 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

38.

The entries in a sales journal will show a. all sales of merchandise. b. the cash sales of the company. c. the credit sales of merchandise. d. all sales of the company.

Ans: C, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

39.

Entries in a sales journal a. are made from sales invoices. b. will indicate the invoice number in the Reference column of the sales journal. c. will occupy two lines of the sales journal. d. indicate either a Cash debit or Accounts Receivable debit.

Ans: A, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

40.

Journalizing in a sales journal will not a. require a debit to Accounts Receivable. b. show a sales invoice number. c. affect the Reference column of the journal. d. include a credit to the Sales Revenue account.

Ans: C, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

41.

If a company purchases merchandise for cash, the transaction should be recorded in the a. purchases journal. b. general journal. c. cash payments journal. d. sales journal.

Ans: C, LO 2, SECTION 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

42.

Cash from sales of merchandise will be recorded in the a. purchases journal. b. sales journal. c. cash receipts journal. d. general journal.

Ans: C, LO 2, SECTION 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Subsidiary Ledgers and Special Journals 43.

J-9

Debit postings to the individual accounts in an accounts receivable subsidiary ledger generally come from the a. sales journal. b. cash receipts journal. c. purchases journal. d. cash payments journal.

Ans: A, LO 2, SECTION 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

44.

Entries in a sales journal are a. posted only to accounts in an accounts receivable subsidiary ledger. b. posted only to accounts in the general ledger. c. posted to accounts in an accounts receivable subsidiary ledger and to accounts in the general ledger. d. never posted.

Ans: C, LO 2, SECTION 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

45.

Which one of the following columns in a cash receipts journal is not posted in total to an account in the general ledger? a. Cash column b. Sales Discounts column c. Accounts Receivable column d. Other Accounts column

Ans: D, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

46.

The use of special journals to record transactions a. eliminates the need for a general ledger. b. can save time in the posting process. c. eliminates the need for a general journal. d. should only be used if the volume of transactions is small.

Ans: B, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

47.

Posting a sales journal to the accounts in the general ledger requires a a. debit to Cash and a credit to Sales Revenue. b. debit to Sales Revenue and a credit to Inventory. c. debit to Accounts Receivable and a credit to Inventory. d. debit to Accounts Receivable and a credit to Sales Revenue.

Ans: D, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Business Applications

48.

The entries recorded in the Other Accounts column of a cash payments journal a. are posted to the accounts payable subsidiary ledger daily. b. are posted individually to accounts in the general ledger. c. are not posted individually but are posted as a column total to the general ledger. d. do not require posting.

Ans: B, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

J - 10

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

49.

Proving the equality of the totals in the columns of multiple-column special journals is called a. posting to the subsidiary. b. debiting and crediting. c. footing and crossfooting. d. updating the master file.

Ans: C, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

50.

If a company records merchandise it returns to suppliers in the general journal, then a. a posting must be made only to the accounts payable control account. b. a posting must be made only to the accounts payable subsidiary ledger account. c. a dual posting must be made. d. there will be a debit to Inventory.

Ans: C, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

51.

Gable's Wholesale uses a sales journal. An entry in this journal represents a a. debit to Cash; credit to Sales Revenue. b. debit to Accounts Receivable; credit to Sales Revenue. c. debit to Sales Discounts; credit to Cash. d. debit to Accounts Payable; credit to Sales Returns and Allowances.

Ans: B, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

52.

Which accounts in the general ledger are affected when the monthly posting is made from the sales journal? a. Accounts Receivable; accounts receivable subsidiary accounts b. Accounts receivable subsidiary accounts; Sales Revenue c. Accounts Receivable; Sales Revenue d. Accounts Receivable; Accounts Payable

Ans: C, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

53.

Which of the following is not a true statement about the daily posting of the sales journal? a. There is a debit posting to accounts in the accounts receivable subsidiary ledger. b. There is no credit posting. c. The reference column in the sales journal is checked when the posting is completed for each entry in the journal. d. The invoice number supporting the sales transaction is posted to the Reference column in the subsidiary ledger.

Ans: D, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

54.

Evidence that the monthly posting of the sales journal total has been accomplished is indicated by a. a signature of the accountant doing the posting. b. a date under the double-line total. c. the general ledger account numbers under the double-lined total. d. inspecting the postings in the accounts payable subsidiary ledger.

Ans: C, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Internal Controls

Subsidiary Ledgers and Special Journals 55.

J - 11

Which of the following economic events would not be recorded in the cash receipts journal? a. Cash sales of merchandise b. Collections of accounts receivable c. Cash from sale of land d. Cash purchases of merchandise

Ans: D, LO 2, SECTION 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

56.

The "Other Accounts" column in a cash receipts journal is also referred to as the a. miscellaneous column. b. excess column. c. sundry accounts column. d. compound-entry column.

Ans: C, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

57.

The process of totaling the columns of a journal is termed a. ruling. b. columnizing. c. sizing. d. footing.

Ans: D, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

58.

An (x) below the "Other Accounts" column in a cash receipts journal indicates the a. total has been posted to the general ledger. b. total is not posted to the general ledger. c. column has been footed. d. column has been crossfooted.

Ans: B, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

59.

Crossfooting a cash receipts journal means a. the equality of debits and credits in the journal has been proved. b. each line of the journal has a horizontal total. c. the columns of the journal have been cross-referenced. d. all necessary postings have been completed.

Ans: A, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

60.

Which of the following would not be an appropriate heading for a column in the cash receipts journal? a. Cash b. Accounts Payable c. Sales Discounts d. Sales Revenue

Ans: B, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

J - 12

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

61.

Proving the postings of a single-column purchases journal would involve comparing the a. general ledger posting to Accounts Payable to the debit postings of the accounts receivable subsidiary ledger. b. general ledger debit posting to Accounts Payable to the general ledger credit posting to Inventory. c. general ledger credit posting to Accounts Payable to the general ledger debit posting to Inventory. d. debit postings to the accounts receivable subsidiary ledger to the credit postings to the accounts payable subsidiary ledger.

Ans: C, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

62.

If a company uses a multiple-column purchases journal, which of the following possible headings for debit columns of the journal would not be appropriate? a. Accounts Payable b. Inventory c. Supplies d. Other Accounts

Ans: A, LO 2, SECTION 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

63.

Entries in the cash payments journal are made from a. sales invoices. b. purchase invoices. c. prenumbered checks. d. canceled checks.

Ans: C, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

64.

The Reference column of a multiple-column cash payments journal after posting a. will only contain check marks. b. will be blank. c. will only contain account numbers. d. may contain either account numbers or check marks.

Ans: D, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

65.

The Reference column of the accounts in the accounts payable subsidiary ledger after posting may show a. only P references. b. CP, P, or G references. c. G, P, or S references. d. only CP references.

Ans: B, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Subsidiary Ledgers and Special Journals

J - 13

Answers to Multiple Choice Questions Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

21. 22. 23. 24. 25. 26. 27.

d c a b c c b

28. 29. 30. 31. 32. 33. 34.

d a d c c c b

35. 36. 37. 38. 39. 40. 41.

c c c c a c c

42. 43. 44. 45. 46. 47. 48.

c a c d b d b

49. 50. 51. 52. 53. 54. 55.

c c b c d c d

56. 57. 58. 59. 60. 61. 62.

c d b a b c a

63. 64. 65.

c d b

EXERCISES Ex. 66 After Artie Company had completed all posting for the month of December, the sum of the balances in the following accounts payable subsidiary ledger did not agree with the balance of the control account in the general ledger. Name Aston's Address 286 Buck Avenue —————————————————————————————————————————— Date Item Post. Ref. Debit Credit Balance —————————————————————————————————————————— Dec. 2 P25 2,400 2,400

Name Carson Company Address 818 Western Avenue —————————————————————————————————————————— Date Item Post. Ref. Debit Credit Balance —————————————————————————————————————————— Dec. 1 Balance 7,600 10 CP23 7,600 — 20 P32 3,300 3,300 29 J15 300 3,600

Name Diana Fenn Company Address 90210 Baker Boulevard —————————————————————————————————————————— Date Item Post. Ref. Debit Credit Balance —————————————————————————————————————————— Dec. 1 Balance 9,900 18 CP28 9,900 — 29 P34 12,600 2,700

J - 14 Ex. 66

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e (cont.)

Name Maria Lopez Address 2720 Sommers Avenue —————————————————————————————————————————— Date Item Post. Ref. Debit Credit Balance —————————————————————————————————————————— Dec. 8 P27 6,000 6,000 27 P33 8,000 14,000 Name Oster Supplies Address 1560 Puckett Street —————————————————————————————————————————— Date Item Post. Ref. Debit Credit Balance —————————————————————————————————————————— Dec. 1 Balance 8,200 7 P26 5,600 13,800 12 J11 420 12,380 20 CP29 8,000 20,380 The balance in the Accounts Payable control account of $37,380 has been verified as correct. Also, assume that the journal’s references in the Post Ref. columns of the accounts payable subsidiary ledger have been verified as correct. Instructions Determine the errors in the preceding accounts payable subsidiary accounts and prepare a corrected schedule of accounts payable. Ans: N/A, LO 1, SECTION 1, Bloom: AN, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Research, AICPA PC: Problem Solving, IMA: Internal Controls

Solution 66

(20 min.)

IDENTIFICATION OF ERRORS: Carson Company The $300 represents merchandise returned and should be subtracted from the balance owed. The correct balance is $3,000. Diana Fenn Company The $12,600 represents new purchases on account and should be added to the previous balance of zero. The correct balance is $12,600. Oster Supplies There is an addition error. Adding $5,600 to the beginning balance of $8,200 yields a balance of $13,800. Subtracting merchandise returned of $420 leaves a balance of $13,380. The $8,000 is a payment on account, not an increase. The correct balance is $5,380.

Subsidiary Ledgers and Special Journals Solution 66

J - 15

(cont.)

ACCOUNTS PAYABLE SUBSIDIARY LEDGER ACCOUNT BALANCES Aston's Carson Company Diana Fenn Company Maria Lopez Oster Supplies Total

$ 2,400 3,000 12,600 14,000 5,380 $37,380

Ex. 67 On December 1, the accounts receivable control account balance in the general ledger of Mitus Company was $9,000. The accounts receivable subsidiary ledger contained the following detailed customer balances: Acme $1,500, Baker $2,100, Fare $2,600, and Grote $2,800. The following information is available from the company's special journals for the month of December: Cash Receipts Journal: Cash received from Fare $1,900, from Acme $1,600, from Santos $1,700, and from Baker $1,800. Sales Journal: Sales to Santos $2,300, to Fare $1,700, to Acme $2,300, and to Grote $2,400. Additionally, Fare returned defective merchandise for credit for $900. Acme returned defective merchandise for $600, which he had purchased for cash. Instructions (a) Using T-accounts for Accounts Receivable Control and the detail customer accounts, post the activity for the month of December. (b)

Reconcile the accounts receivable control account with the subsidiary ledger by preparing a detail list of customer balances at December 31.

Ans: N/A, LO 1, SECTION 1, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Research, AICPA PC: Problem Solving, IMA: Internal Controls

Solution 67 (a)

(15 min.)

Control Account:

Accounts Receivable 9,000 8,700 9,800

(S) Bal.

(CR) (G)

7,000 900

Subsidiary Accounts: Acme (S) Bal.

1,500 2,300 2,200

(CR)

Baker 1,600 Bal.

2,100 300

(CR)

1,800

J - 16

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 67

(cont.) Fare

(S) Bal.

2,600 1,700 1,500

(CR) (G)

Grote 1,900 900

(S) Bal.

2,800 2,400 5,200

Santos (S) Bal. (b)

2,300 600

(CR)

1,700

Listing of accounts receivable at end of the month: Acme Baker Fare Grote Santos Total

$2,200 300 1,500 5,200 600 $9,800

Accounts receivable balance

Ex. 68 Gates Company maintains four special journals and a general journal to record its transactions. Using the codes, indicate in the space provided the appropriate journal for recording the transactions listed. Code S CR CP P G

Journals Sales journal Cash receipts journal Cash payments journal Single-column purchases journal General journal

1. Stockholders invested cash in the business. 2. Purchased store supplies on account. 3. Sold merchandise to customer on account. 4. Purchased a 2-year fire insurance policy for cash. 5. Received a check from a customer as payment on account. 6. Paid for store supplies purchased in transaction 2. 7. Purchased merchandise on account. 8. Issued a credit memorandum to a customer who returned defective merchandise previously sold on account. 9. Purchased office equipment for cash. 10. Made an adjusting entry for store supplies used during the period. Ans: N/A, LO 2, SECTION 2, Bloom: C, Difficulty: Easy, Min: 10, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Leverage Technology, AICPA PC: None, IMA: Business Applications

Subsidiary Ledgers and Special Journals Solution 68 1. 2. 3. 4. 5.

CR G S CP CR

J - 17

(10 min.) 6. 7. 8. 9. 10.

CP P G CP G

Ex. 69 Sasser Company uses a sales journal, a cash receipts journal, and a general journal to record transactions with its customers. Record the following transactions in the appropriate journals. The cost of all merchandise sold was 70% of the sales price. July

Sold merchandise for $21,000 to B. Stine on account. Credit terms 2/10, n/30. Sales invoice No. 100.

July

Received a check for $800 from R. Hyatt in payment of his account.

July

Sold merchandise to F. Wendel for $900 cash.

July 10

Received a check in payment of Sales invoice No. 100 from B. Stine minus the 2% discount.

July 15

Sold merchandise for $9,000 to J. Nott on account. Credit terms 2/10, n/30. Sales invoice No. 101.

July 18

Borrowed $25,000 cash from United Bank signing a 6-month, 10% note.

July 20

Sold merchandise for $18,000 to C. Karn on account. Credit terms 2/10, n/30. Sales invoice No. 102.

July 25 Issued a credit memorandum for $600 to C. Karn as an allowance for damaged merchandise previously sold on account. The fair value of the damaged merchandise is $350. July 31

Received a check from J. Nott for $5,000 as payment on account. SASSER COMPANY Sales Journal

S1 —————————————————————————————————————————— Invoice Acct. Rec. Dr. COGS Dr. Date Account Debited No. Ref. Sales Rev. Cr. Inventory Cr. —————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— ——————————————————————————————————————————

J - 18 Ex. 69

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e (cont.) SASSER COMPANY General Journal

G1 —————————————————————————————————————————— Date Explanations Ref. Debit Credit —————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— SASSER COMPANY Cash Receipts Journal CR1 ——————————————————————————————————————————— Sales Accounts Sales Other COGS Dr. Accounts Cash Discounts Rec. Rev. Accounts Inven. Cr. Date Credited Ref. Dr. Dr. Cr. Cr. Cr. ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— Ans: N/A, LO 2, SECTION 2, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 69

(20 min.) SASSER COMPANY Sales Journal

S1 ——————————————————————————————————————————— Invoice Acct. Rec. Dr. COGS Dr. Date Account Debited No. Ref. Sales Rev Cr. Inven. Cr. ——————————————————————————————————————————— July 2 B. Stine 100 21,000 14,700 ——————————————————————————————————————————— July 15 J. Nott 101 9,000 6,300 ——————————————————————————————————————————— July 20 C. Karn 102 18,000 12,600 ———————————————————————————————————————————

Subsidiary Ledgers and Special Journals Solution 69

J - 19

(cont.) SASSER COMPANY General Journal

G1 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit ——————————————————————————————————————————— July 25 Sales Returns and Allowances 600 ——————————————————————————————————————————— Accounts Receivable—C. Karn 600 ——————————————————————————————————————————— July 25 Inventory 350 ——————————————————————————————————————————— Cost of Goods Sold 350 ——————————————————————————————————————————— SASSER COMPANY Cash Receipts Journal CR1 ——————————————————————————————————————————— Sales Accounts Sales Other Accounts Cash Discounts Rec. Rev. Accounts COGS Dr. Date Credited Ref. Dr. Dr. Cr. Cr. Cr. Inven. Cr. ——————————————————————————————————————————— July 5 R. Hyatt 800 800 ——————————————————————————————————————————— July 8 900 900 630 ——————————————————————————————————————————— July 10 B. Stine 20,580 420 21,000 ——————————————————————————————————————————— July 18 Notes Pay. 25,000 25,000 ——————————————————————————————————————————— July 31 J. Nott 5,000 5,000 ——————————————————————————————————————————— Ex. 70 Ward Company uses a single-column purchases journal, a cash payments journal, and a general journal to record transactions with its suppliers and others. Record the following transactions in the appropriate journals. Transactions Oct.

Purchased merchandise on account for $10,000 from Groton Company. Terms: 2/10, n/30; FOB shipping point.

Oct.

Paid $7,200 to Federated Insurance Company for a 2-year fire insurance policy.

Oct.

Purchased store supplies on account for $700 from Flynn Supply Company. Terms: 2/10, n/30.

Oct. 11

Purchased merchandise on account for $14,000 from Buehler Corporation. Terms: 2/10, n/30; FOB shipping point.

Oct. 13

Issued a debit memorandum for $5,000 to Buehler Corporation for merchandise purchased on October 11 and returned because of damage.

J - 20

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ex. 70

(cont.)

Oct. 15

Paid Groton Company for merchandise purchased on October 5, less discount.

Oct. 16

Purchased merchandise for $8,000 cash from Clifford Company.

Oct. 21

Paid Buehler Corporation for merchandise purchased on October 11, less merchandise returned on October 13, less discount.

Oct. 25

Purchased merchandise on account for $22,000 from Dooley Company. Terms: 2/10, n/30; FOB shipping point.

Oct. 31

Purchased office equipment for $30,000 cash from Paten Office Supply Company. WARD COMPANY Purchases Journal

P1 ——————————————————————————————————————————— Inventory. Dr. Date Account Credited Ref. Accounts Payable Cr. ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— WARD COMPANY General Journal G1 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ———————————————————————————————————————————

Subsidiary Ledgers and Special Journals Ex. 70

J - 21

(cont.) WARD COMPANY Cash Payments Journal

CP1 ——————————————————————————————————————————— Other Accounts Account Accounts Payable Inventory Cash Date Debited Ref. Dr. Dr. Cr. Cr. ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— Ans: N/A, LO 2, SECTION 2, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 70

(20 min.) WARD COMPANY Purchases Journal

P1 ——————————————————————————————————————————— Inventory Dr. Date Account Credited Ref. Accounts Payable Cr. ——————————————————————————————————————————— Oct. 5 Groton Company 10,000 ——————————————————————————————————————————— Oct. 11 Buehler Corporation 14,000 ——————————————————————————————————————————— Oct. 25 Dooley Company 22,000 ——————————————————————————————————————————— WARD COMPANY General Journal G1 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit ——————————————————————————————————————————— Oct. 8 Supplies 700 ——————————————————————————————————————————— Accounts Payable—Flynn Supply Company 700 ——————————————————————————————————————————— Oct. 13 Accounts Payable—Buehler Corp. 5,000 ——————————————————————————————————————————— Inventory 5,000 ———————————————————————————————————————————

J - 22

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Solution 70

(cont.) WARD COMPANY Cash Payments Journal

CP1 ——————————————————————————————————————————— Other Accounts Accounts Accounts Payable Inventory Cash Date Debited Ref. Dr. Dr. Cr. Cr. ——————————————————————————————————————————— Oct. 6 Prepaid Insurance 7,200 7,200 ——————————————————————————————————————————— Oct. 15 Groton Company 10,000 200 9,800 ——————————————————————————————————————————— Oct. 16 Inventory 8,000 8,000 ——————————————————————————————————————————— Oct. 21 Buehler Corp. 9,000 180 8,820 ——————————————————————————————————————————— Oct. 31 Equipment 30,000 30,000 ——————————————————————————————————————————— Ex. 71 Sandy Company uses both special journals and a general journal. The company accountant made the following errors during July. 1. Incorrectly added the credit entries in a customer's account in the accounts receivable subsidiary ledger. The total was listed as $2,690; it should have been $2,790. 2. A remittance of $400 from Tom Short was correctly recorded in the cash receipts journal, but the amount was posted incorrectly to the account of customer Will Short in the subsidiary ledger. 3. A purchase of merchandise on account from Easton Company for $1,000 was incorrectly entered in the purchases journal at $10,000. 4. In the sales journal, the entries were incorrectly added for the month. The monthly total was listed as $24,620; it should have been $24,260. Instructions Indicate how each of these errors might be discovered. Ans: N/A, LO 2, SECTION 2, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Internal Controls

Solution 71

(10 min.)

1. The subsidiary ledger will not agree with the general ledger control account. Refooting the subsidiary ledger should locate the error. 2. The error will be discovered when the customer receives his statement. Mr. Tom Short's statement will indicate a balance of $400 more than he owes. 3. The error may not be discovered until the payment is sent to the supplier. Then, hopefully, Easton will send back the excess payment. Additionally, analysis of gross profit may indicate it is inordinately out of line with prior periods. .

Subsidiary Ledgers and Special Journals Solution 71

J - 23

(cont.)

4. When the accounts receivable control account is reconciled with the accounts receivable subsidiary ledger, it will be $360 higher than the subsidiary ledger. Refooting the sales journal should then locate the error. Ex. 72 Here are some typical transactions incurred by Harley Company. 1. Purchase of merchandise on account. 2. Collection on account from customers. 3. Payment of employee's wages. 4. Sales of merchandise for cash. 5. Close Income Summary to Retained Earnings. 6. Adjusting entry for depreciation on machinery. 7. Payment of creditors on account. 8. Purchase of office equipment on credit. 9. Sales discount taken on goods sold on credit. 10. Sales of merchandise on account. 11. Purchase of a delivery truck for cash. 12. Return of merchandise purchased on credit. 13. Payment of rent in advance. 14. Adjusting entry for accrued interest expense. 15. Purchase of office supplies for cash. For each transaction, indicate by the code letter the appropriate journal where the transaction would be journalized. CR — Cash Receipts Journal CP — Cash Payments Journal S — Sales Journal P — Single-Column Purchases Journal G — General Journal Ans: N/A, LO 2, SECTION 2, Bloom: C, Difficulty: Easy, Min: 10, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Solution 72

(10 min.)

1. 2. 3. 4. 5.

6. 7. 8. 9. 10.

P CR CP CR G

G CP G CR S

11. 12. 13. 14. 15.

CP G CP G CP

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

J - 24 Ex. 73

Circle the correct answer to each situation. (a)

(b)

A sales journal will be used for: Credit Sales

Cash Sales

Sales Discounts

Yes

Purchases on Account

Yes

(e)

Purchase Returns and Allowances Yes

A multiple-column purchases journal will be used for: Supplies Purchased on Account

Cash Purchases

(d)

A single-column purchases journal will be used for: Cash Purchases

(c)

Yes

Equipment Purchases on Account Yes

A cash payments journal will be used for: Payments to Creditors

Purchases Discounts

Payment of Dividends

Yes

A cash receipts journal will be used for: Sale of Stock Yes

Purchases Discounts

Yes

Cash Sales Yes

Ans: N/A, LO 2, SECTION 2, Bloom: C, Difficulty: Easy, Min: 10, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Solution 73

(10 min.)

(a) Yes, No, No (b) No, Yes, No (c) No, Yes, Yes

(d) Yes, Yes, Yes (e) Yes, No, Yes

Subsidiary Ledgers and Special Journals

J - 25

Ex. 74 Listed here are various column headings that may appear in special journals. Using the following code letters, identify for each column heading (1) the special journal where the column heading would appear, and (2) whether the amounts entered under the column heading would be posted in total, individually, or both in total and individually. (Note: column headings may appear in more than one special journal) Code: Special Journals S = Sales journal P = Single-column purchases journal CR = Cash receipts journal CP = Cash payments journal Heading

Code: Posting I = Individual posting T = Total posting B = Both individual and total posting

Special Journal

Posting

1. Accounts Payable—Cr. 2. Sales—Cr. 3. Sales Discounts—Dr. 4. Merchandise Inventory—Dr. 5. Cash—Cr. 6. Accounts Receivable—Dr. 7. Other Accounts—Cr. 8. Merchandise Inventory—Cr. 9. Accounts Receivable—Cr. 10. Accounts Payable—Dr. Ans: N/A, LO 2, SECTION 2, Bloom: C, Difficulty: Easy, Min: 15, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Solution 74

(15 min.)

Heading 1. Accounts Payable—Cr. 2. Sales—Cr. 3. Sales Discounts—Dr. 4. Merchandise Inventory—Dr. 5. Cash—Cr. 6. Accounts Receivable—Dr. 7. Other Accounts—Cr. 8. Merchandise Inventory—Cr. 9. Accounts Receivable—Cr. 10. Accounts Payable—Dr.

Special Journal P S, CR CR P, CP CP S CR CP, CR, S CR CP

Posting B T T T T B I T B B

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Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

Ex. 75 Horton Company uses four special journals, (cash receipts, cash payments, sales, and purchases journal) in addition to a general journal. On November 1, 2021, the control accounts in the general ledger had the following balances: Cash $12,000, Accounts Receivable $200,000 and Accounts Payable $42,000. Selected information on the final line of the special journals for the month of November is presented here: Cash Receipts Journal: Cash Dr. ?

Sales Discounts Dr. $600

Accounts Receivable Cr. $3,400

Sales Rev. Cr. $29,000

Other Accounts Cr. Acct. Ref. Amount (X) $1,000

C. of G. S. Dr. Inven. Cr. $17,400

Cash Payments Journal: Other Accounts Dr. Acct. Ref. Amount (X) $1,600

Accounts Payable Dr. ?

Purchases Journal: Accounts Payable Inventory Cr. Dr. ? $37,000

Supplies Dr. $1,450

Supplies Dr. $2,400

Inventory Cr. $700

Cash Cr. $14,600

Other Accounts Dr. Acct. Ref. Amount (X) $3,300

Additional Data: The Sales Journal total was $41,000. A customer returned merchandise for credit for $360, and Horton Company returned store supplies to a supplier for credit for $400. Instructions (a) Determine the missing amounts in the special journals. (b)

Determine the balances in the general ledger accounts (Cash, Accounts Receivable, and Accounts Payable) at the end of November.

Ans: N/A, LO 2, SECTION 2, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Subsidiary Ledgers and Special Journals Solution 75 (a)

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(20 min.)

The missing amounts can be determined by crossfooting the journals. Cash Receipts Credits ($3,400 + $29,000 + $1,000) Debits Cash debit

$33,400 600 $32,800

Cash Payments Credits ($700 + $14,600) Debits ($1,600 + $1,300 + $1,100) Accounts payable debit

$15,300 4,000 $11,300

Purchases Debits ($37,000 + $1,450 + $3,300) Credits Accounts payable credit

$41,750 -0$41,750

(b) (CR) Bal. (CP) (G)

Cash 12,000 (CP) 32,800 30,200 Accounts Payable 11,300 400 (P) Bal.

14,600 (S) Bal.

Accounts Receivable 200,000 (CR) 41,000 (G) 237,240

3,400 360

42,000 41,750 72,050

Ex. 76 Easton Company began business on October 1. The sales journal, as it appeared at the end of the month, follows: SALES JOURNAL Page 1 ——————————————————————————————————————————— Invoice Post. Date Account Debited Number Ref. Amount ———— —————————————————————————————————————— — Oct. 5 Donna Miner 10001 275 11 Mike Barr 10002 335 16 Donna Miner 10003 818 19 Laura Cher 10004 147 26 Myron Silas 10005 1,184 2,759 1. Open general ledger T-accounts for Accounts Receivable (No. 112) and Sales (No. 401) and an accounts receivable subsidiary T-account ledger with an account for each customer. Make the appropriate postings from the sales journal. Fill in the appropriate posting references in the sales journal provided. 2. Prove the accounts receivable subsidiary ledger by preparing a schedule of accounts receivable. Ans: N/A, LO 2, SECTION 2, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

J - 28 Solution 76

(20 min.)

1. SALES JOURNAL Page 1 ——————————————————————————————————————————— Invoice Post Date Account Debited Number Ref. Amount ———————————————————————————————————————————  Oct. 5 Donna Miner 10001 275  11 Mike Barr 10002 335  16 Donna Miner 10003 818  19 Laura Cher 10004 147  26 Myron Silas 10005 1,184 2,759 (112)/(401) GENERAL LEDGER Accounts Receivable 10/31 (S1) 2,759 Sales Revenue 10/31 (S1)

SUBSIDIARY LEDGER 112

401 2,759

10/11 (S1)

Barr, Mike 335

10/19 (S1)

Cher, Laura 147

10/5 (S1) 10/16 (S1)

10/26 (S1) 2.

SCHEDULE OF ACCOUNTS RECEIVABLE Mike Barr Laura Cher Donna Miner Myron Silas Total Accounts Receivable

$ 335 147 1,093 1,184 $2,759

Miner, Donna 275 818 1,093 Silas, Myron 1,184

Subsidiary Ledgers and Special Journals

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Ex. 77 CASH PAYMENTS JOURNAL Page 45 ——————————————————————————————————————————— Other Accounts Ck. Account Accounts Payable Inventory Cash Date No. Debited Ref. Dr. Dr. Cr. Cr. ——————————————————————————————————————————— 2021 Jan. 4 659 M. Tate (a) 4,000 40 3,960 11 660 Prepaid Rent (b) 1,000 1,000 13 661 Inventory (c) 565 565 14 662 Dividends (d) 2,000 2,000 18 663 Welch (e) 1,300 1,300 20 664 Inventory (f) 450 450 29 665 Equipment (g) 3,400 3,400 7,415 5,300 12,675 40 (h) (i) (k) (j) Using the cash payments journal, identify each of the posting references indicated by a letter, as representing: (1)

a posting to a general ledger account.

(2)

a posting to a subsidiary ledger account.

(3)

that no posting is required.

Ans: N/A, LO 2, SECTION 2, Bloom: C, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 77 a. b. c. d. e. f.

2 1 1 1 2 1

(10 min.) g. h. i. j. k.

1 3 1 1 1

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

J - 30 Ex. 78

Shown here is a page from a special journal. 1. What is the name of this journal? 2. Give an explanation for each of the transactions in this journal. 3. Explain the following: (a) the numbers under the bottom lines. (b) the checks entered into the Ref. column. (c) the numbers 113 and 416 in the Ref. column. (d) the (x) below the Other Accounts column. ——————————————————————————————————————————— Account Credited

Date

Ref.

Cash Dr.

Sales Discounts Dr.

Accounts Sales Receivable Rev. Cr. Cr.

Other COGS Dr. Accounts Inventory Cr. Cr.

——————————————— —————————————————— ———— —————— May 27 28 29 31

Ted Roth  Notes Receivable 113 Interest Revenue 416 

Don Calb

980 4,480 370 400 6,230 (111)

1,000 4,000 480 370

20 (412)

400 1,400 (114)

370 (411)

260 4,480 (x)

260 (505)(120)

Ans: N/A, LO 2, SECTION 2, Bloom: C, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 78

(15 min.)

1. Cash receipts journal. 2. May 27— Ted Roth has paid for merchandise previously purchased on account. He is paying within the discount period and taking the discount. May 28— A note receivable has matured. Payment is received for the $4,000 face value and $480 of interest revenue. May 29— A cash sale of merchandise is made for $370. The cost of the merchandise sold was $260. May 31— Don Calb has paid $400 on account. 3. (a) The numbers in parentheses under the bottom line of the journal indicate that these column totals have been posted to the general ledger accounts with these account numbers. (b) The checks in the posting reference column of the journal indicate that the accounts receivable subsidiary account for that customer has been credited for the amount shown in the accounts receivable column of this journal. (c) The 113 indicates that account No. 113 in the general ledger, Notes Receivable, has been credited for the $4,000. The 416 indicates that account No. 416 in the general ledger, Interest Revenue, has been credited for $480. (d) The (x) below the Other Accounts column indicates that this column total is not posted. All the amounts in this column have already been posted individually to the appropriate general ledger account.

Subsidiary Ledgers and Special Journals

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COMPLETION STATEMENTS 79.

The accounts receivable accounts which is summarized in one

provides detailed information about customer account in the general ledger.

Ans: N/A, LO 1, SECTION 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

80.

If a certain type of transaction occurs with great frequency, it is more efficient to create a to record that type of transaction.

Ans: N/A, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

81.

If a company maintains special journals, sales of merchandise on credit should be recorded in a whereas sales of merchandise for cash should be recorded in the .

Ans: N/A, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

82.

The use of special journals often saves time in the

process.

Ans: N/A, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

83.

The entries in the Accounts Receivable Credit column of the cash receipts journal must be posted to the accounts in the accounts receivable subsidiary ledger and in to the control account in the general ledger.

Ans: N/A, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

84.

Transactions that cannot be entered in a special journal are recorded in the , and if control and subsidiary accounts are involved, there must be a posting.

Ans: N/A, LO 2, SECTION 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Answers to Completion Statements 79. subsidiary ledger, control 80. special journal 81. sales journal, cash receipts journal 82. posting 83. individually, total 84. general journal, dual

Test Bank for Kimmel, Accounting: Tools for Business Decision Making, 8e

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MATCHING 85. Match the items (1–5) by entering the appropriate code letter in the space provided. A. B. C.

Accounts payable ledger Cybercrime Special journals

D. E.

Subsidiary ledger Control account

1. A general ledger account that summarizes detailed information in a subsidiary ledger. 2. A subsidiary ledger that contains accounts with individual creditors. 3. Involves the Internet or computer technology. 4. Detailed information about a group of accounts with a common characteristic. 5. Used to record high volume, similar type transactions. Ans: N/A, LO 1, 2, SECTION 1, 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Technology, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Applications

Answers to Matching 1. 2. 3. 4. 5.

E A B D C

SHORT-ANSWER ESSAY S-A E 86 At the end of the month, the accountant for Slater Company prepared a schedule of accounts receivable from the accounts receivable subsidiary ledger. Its total did not agree with the balance in the Accounts Receivable control account in the general ledger. Briefly describe the procedure that should be followed in reconciling the two balances. Ans: N/A, LO 1, SECTION 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Research, AICPA PC: Problem Solving, IMA: Internal Controls

Solution 86 The first step would be to go back and double-check the total of the accounts receivable subsidiary ledger. There may have been a math error that caused the total to be incorrect. If the math is accurate, then the next step would be to review the postings in the accounts receivable control account. This review includes checking both the accuracy of the math and the accuracy of the posting from the journals. If the control account is correct, then the next step is to repeat the procedure with each individual subsidiary account. If the error still has not been found, then the final step is to look at the journals to see if there were any entries that failed to get recorded.