Financial Accounting 15th Edition Carl Warren James M Reeve Jonathan Duchac- Test Bank Chapter 1_17 by QuentinAxel

Chapter 1 - Introduction to Accounting and Business True / False 1. A merchandising business buys products from other businesses to sell to customers. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 2. The role of accounting is to provide many different users with financial information to make economic decisions. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 3. Accounting information users need reports about the economic activities and condition of businesses. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 4. Managerial accounting information is used by external and internal users equally. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.25 - Managerial Characteristics/Terminology ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 1 - Introduction to Accounting and Business 5. Senior executives cannot be criminally prosecuted for the wrongdoings they commit on behalf of the companies where they work. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Ethics 6. Financial accounting provides information to all users, while the main focus for managerial accounting is to provide information to the management. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 7. Proper ethical conduct implies that you only consider what's in your best interest. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Ethics

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Chapter 1 - Introduction to Accounting and Business 8. Some of the major fraudulent acts committed by senior executives started as what they considered to be small ethical lapses that grew out of control. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Ethics 9. A business is an organization in which basic resources or inputs, such as materials and labor, are assembled and processed to provide outputs in the form of goods or services to customers. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.BB.01 - Industry ACCT.AICPA.BB.06 - Resource Management BUSPROG: Analytic 10. Two factors that typically lead to ethical violations are relevance and timeliness of accounting information. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 11. Financial accounting reports are relevant only to users within the business. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 1 - Introduction to Accounting and Business 12. The Sarbanes-Oxley Act established standards for corporate responsibility and disclosure. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Ethics 13. The main objective for all business is to maximize unrealized profits. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 14. The primary role of accounting is to determine the amount of taxes a business will be required to pay to taxing entities. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 15. The basic difference between manufacturing and merchandising companies is the completion level of the products they purchase for resale to customers. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 1 - Introduction to Accounting and Business 16. An example of an external user of accounting information is the federal government. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 17. Proprietorships are owned by one owner and provide only services to their customers. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 18. About 90% of the businesses in the United States are organized as corporations. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 19. The Financial Accounting Standards Board (FASB) is the authoritative body that has primary responsibility for developing accounting principles. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 1 - Introduction to Accounting and Business 20. The cost concept is the basis for entering the purchase price into the accounting records. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 21. The unit of measurement concept requires that economic data be recorded in dollars. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 22. If a building is appraised for $85,000, it is offered for sale at $90,000, and the buyer pays $80,000 cash for it, the buyer would record the building at $85,000. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 23. The financial statements of a proprietorship should include the owner's personal assets and liabilities. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 24. No significant differences exist between the accounting standards issued by the FASB and the IASB. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 25. Generally accepted accounting principles regulate how and what financial information is reported by businesses. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 26. The accounting equation can be expressed as Assets – Liabilities = Owner's Equity. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 27. The rights or claims to the assets of a business may be subdivided into rights of creditors and rights of owners. a. True b. False ANSWER: True DIFFICULTY: Challenging Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 28. The owner’s rights to the assets rank ahead of the creditors' rights to the assets. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 29. If the liabilities owed by a business total $300,000 and owner's equity is equal to $300,000, then the assets also total $300,000. a. True b. False ANSWER: False RATIONALE: Assets = Liabilities + Owner's Equity = $300,000 + $300,000 = $600,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 30. If total assets decreased by $30,000 during a specific period and owner's equity decreased by $35,000 during the same period, the period's change in total liabilities was a $65,000 increase. a. True b. False ANSWER: False RATIONALE: Assets = Liabilities + Owner's Equity –$30,000 = Liabilities + (–$35,000) Liabilities = +$5,000 DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 31. If total assets increased by $190,000 during a specific period and liabilities decreased by $10,000 during the same period, the period's change in total owner's equity was a $200,000 increase. a. True b. False ANSWER: True RATIONALE: Assets = Liabilities + Owner’s Equity +$190,000 = –$10,000 + Owner’s Equity Owner’s Equity = +$200,000 DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 32. If net income for a proprietorship was $50,000, the owner withdrew $20,000 in cash, and the owner invested $10,000 in cash, the capital of the owner increased by $40,000. a. True b. False ANSWER: True RATIONALE: Increase in Capital = Net Income for the Year – Withdrawals + Additional Investment by Owner = $50,000 – $20,000 + $10,000 = $40,000 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 33. An account receivable is typically classified as a revenue. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 34. An account receivable is a claim against a customer resulting from a sale on account. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 35. Paying an account payable increases liabilities and decreases assets. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 36. Receiving payments on an account receivable increases both equity and assets. a. True b. False ANSWER: False DIFFICULTY: Challenging Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 37. Cash withdrawals by owners decrease assets and increase equity. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 38. Purchasing supplies on account increases liabilities and decreases equity. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 39. Receiving a bill or otherwise being notified that an amount is owed is not recorded until the amount is paid. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 40. Revenue is earned only when money is received. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 41. Assets that are used up during the process of earning revenue are called expenses. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 1 - Introduction to Accounting and Business 42. The excess of revenue over the expenses incurred in earning the revenue is called capital. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 43. The primary financial statements of a proprietorship are the income statement, statement of owner's equity, and balance sheet. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 44. An income statement is a summary of the revenues and expenses of a business as of a specific date. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 45. A statement of owner's equity reports the changes in the owner's equity for a period of time. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 1 - Introduction to Accounting and Business 46. The statement of cash flows consists of three sections: cash flows from operating activities, cash flows from income activities, and cash flows from equity activities. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 47. The balance sheet represents the accounting equation. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 48. Net income and net profit do not mean the same thing. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business Multiple Choice 49. Profit is the difference between a. assets and liabilities b. the incoming cash and outgoing cash c. the assets purchased with cash contributed by the owner and the cash spent to operate the business d. the amounts received from customers for goods or services and the amounts paid for the inputs used to provide the goods or services ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 50. Two common areas of accounting that respectively provide information to internal and external users are a. forensic accounting and financial accounting b. managerial accounting and financial accounting c. managerial accounting and environmental accounting d. financial accounting and tax accounting systems ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 51. Which of the following best describes accounting? a. records economic data but does not communicate the data to users according to any specific rules b. is an information system that provides reports to users regarding economic activities and condition of a business c. is of no use by individuals outside of the business d. is used only for filling out tax returns and for financial statements for various type of governmental reporting requirements ANSWER: b DIFFICULTY: Moderate Bloom's: Evaluating LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 1 - Introduction to Accounting and Business 52. Which type of accountant typically practices as an individual or as a member of a public accounting firm? a. Certified Public Accountant b. Certified Payroll Professional c. Certified Internal Auditor d. Certified Management Accountant ANSWER: a DIFFICULTY: Easy Bloom's: Evaluating LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 53. Financial reports are used by a. management b. creditors c. investors d. All of these choices ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 54. Which of the following is a manufacturing business? a. General Motors b. Facebook c. American Airlines d. Target ANSWER: a DIFFICULTY: Moderate Bloom's: Evaluating LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 55. Which of the following is a service business? a. Microsoft b. Dell Computers c. Facebook d. Walmart ANSWER: c DIFFICULTY: Easy Bloom's: Evaluating LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 56. Which of the following groups of companies includes examples of merchandising businesses? a. Delta Air Lines, Marriott, Gap Inc. b. Gap Inc., Amazon, Nike Inc. c. GameStop, Sony, Dell d. GameStop, Best Buy, Gap Inc. ANSWER: d DIFFICULTY: Easy Bloom's: Evaluating LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 57. Which of the following groups is considered to be internal users of accounting information? a. employees and customers b. customers and vendors c. employees and managers d. government entities and banks ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 58. The following are examples of external users of accounting information except a. government entities b. customers c. creditors d. managers ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 59. Which of the following is the best description of accounting’s role in business? a. Accounting provides stockholders with information regarding the market value of the company’s stocks. b. Accounting provides information to managers to operate the business and to other users to make decisions regarding the economic condition of the company. c. Accounting helps in decreasing the credit risk of the company. d. Accounting is not responsible for providing any form of information to users. That is the role of the Information Systems Department. ANSWER: b DIFFICULTY: Moderate Bloom's: Evaluating LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 60. Managerial accountants would be responsible for providing information regarding a. tax reports to government agencies b. profit reports to owners and management c. expansion of a product line report to management d. consumer reports to customers ANSWER: c DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.25 - Managerial Characteristics/Terminology ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 61. Which of the following is not a certification for accountants? a. CIA b. CMA c. CISA d. IRS ANSWER: d DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 62. Which of the following is not a role of accounting in business? a. to provide reports to users about the economic activities and conditions of a business b. to personally guarantee loans of the business c. to provide information to external users to determine the economic performance and condition of the business d. to assess the various informational needs of users and design an accounting system to meet those needs ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 63. Which of the following is a guideline for behaving ethically? I. Identify the consequences of a decision and its effect on others. II. Consider your obligations and responsibilities to those affected by the decision. III. Identify your decision based on personal standards of honesty and fairness. a. I and II b. II and III c. I and III d. I, II, and III ANSWER: d DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Ethics

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Chapter 1 - Introduction to Accounting and Business 64. Which of the following would not normally operate as a service business? a. pet groomer b. grocer c. lawn care company d. styling salon ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 65. Most businesses in the United States are a. proprietorships b. partnerships c. corporations d. cooperatives ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 66. Which of the following is not a business entity? a. entrepreneurship b. proprietorship c. partnership d. corporation ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 LOCAL STANDARDS: United States - OH - Default City - ACBSP: APC-03-Business Forms United States - OH - Default City - AICPA: FN-Measurement ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.BB.01 - Industry BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 67. An entity that is organized according to state or federal statutes and in which ownership is divided into shares of stock is a a. proprietorship b. corporation c. partnership d. governmental unit ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 68. Which of the following is true regarding a limited liability company? a. makes up 10% of business organizations in the United States b. combines the attributes of a partnership and a corporation c. provides tax and liability advantages to the owners d. All of these choices ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 69. On May 20, White Repair Service extended an offer of $108,000 for land that had been priced for sale at $140,000. On May 30, White Repair Service accepted the seller’s counteroffer of $115,000. On June 20, the land was assessed at a value of $95,000 for property tax purposes. On July 4, White Repair Service was offered $150,000 for the land by a national retail chain. At what value should the land be recorded in White Repair Service’s records? a. $108,000 b. $95,000 c. $140,000 d. $115,000 ANSWER: d DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 1 - Introduction to Accounting and Business 70. Which of the following is most likely to obtain large amounts of resources by issuing stock? a. partnership b. corporation c. proprietorship d. government entity ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 71. Which of the following is not a characteristic of a corporation? a. Corporations are organized as a separate legal taxable entity. b. Ownership is divided into shares of stock. c. Corporations experience an ease in obtaining large amounts of resources by issuing stock. d. A corporation’s resources are limited to its individual owners’ resources. ANSWER: d DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 72. The initials GAAP stand for a. general accounting procedures b. generally accepted plans c. generally accepted accounting principles d. generally accepted accounting practices ANSWER: c DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.1-02 - 01 - 02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 73. Within the United States, the dominant body in the primary development of accounting principles is the a. American Institute of Certified Public Accountants (AICPA) b. American Accounting Association (AAA) c. Financial Accounting Standards Board (FASB) d. Institute of Management Accountants (IMA) ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 74. The business entity concept means that a. the owner is part of the business entity b. an entity is organized according to state or federal statutes c. an entity is organized according to the rules set by the FASB d. the entity is an individual economic unit for which data are recorded, analyzed, and reported ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 75. For accounting purposes, the business entity should be considered separate from its owners if the entity is a. a corporation b. a proprietorship c. a partnership d. All of these choices ANSWER: d DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 76. The objectivity concept requires that a. business transactions be consistent with the objectives of the entity b. the Financial Accounting Standards Board be fair and unbiased in its deliberations over new accounting standards c. accounting principles meet the objectives of the Securities and Exchange Commission d. amounts recorded in the financial statements be based on independently verifiable evidence ANSWER: d DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 77. Karen Meyer owns and operates Crystal Cleaning Company. Recently, Meyer withdrew $10,000 from Crystal Cleaning, and she contributed $6,000, in her name, to the American Red Cross. The contribution of the $6,000 should be recorded on the accounting records of which of the following entities? a. Crystal Cleaning and the American Red Cross b. Karen Meyer's personal records and the American Red Cross c. Karen Meyer's personal records and Crystal Cleaning d. Karen Meyer's personal records, Crystal Cleaning, and the American Red Cross ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 78. Equipment with an estimated market value of $30,000 is offered for sale at $45,000. The equipment is acquired for $15,000 in cash and a note payable of $20,000 due in 30 days. The amount used in the buyer's accounting records to record this acquisition is a. $30,000 b. $35,000 c. $15,000 d. $45,000 ANSWER: b RATIONALE: Amount in Buyer's Accounting Records = Amount Paid in Cash + Amount Paid through Note Payable = $15,000 + $20,000 = $35,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 79. Which of the following is the authoritative body in the United States that has the primary responsibility for developing accounting principles? a. FASB b. IRS c. SEC d. AICPA ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 80. Which of the following concepts relates to separating the reporting of business and personal economic transactions? a. cost concept b. unit of measure concept c. business entity concept d. objectivity concept ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 81. Donner Company is selling a piece of land adjacent to its business premises. An appraisal reported the market value of the land to be $220,000. Focus Company initially offered to buy the land for $177,000. The companies settled on a purchase price of $212,000. On the same day, another piece of land on the same block sold for $232,000. Under the cost concept, at what amount should the land be recorded in the accounting records of Focus Company? a. $177,000 b. $212,000 c. $220,000 d. $232,000 ANSWER: b DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 82. Many countries outside the United States use financial accounting standards issued by the a. AICPA b. SEC c. IASB d. FASB ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 83. The unit of measure concept a. is only used in the financial statements of manufacturing companies b. is not important when applying the cost concept c. requires that different units be used for assets and liabilities d. requires that economic data be reported in yen in Japan or dollars in the United States ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 84. Which of the following is not true of accounting principles? a. Financial accountants follow generally accepted accounting principles (GAAP). b. Following GAAP allows accounting information users to compare one company to another. c. A new accounting principle can be adopted with stockholders' approval. d. The Financial Accounting Standards Board (FASB) has primary responsibility for developing accounting principles. ANSWER: c DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 85. Assets are a. always lower than liabilities b. equal to liabilities less owner’s equity c. the same as expenses because they are acquired with cash d. financed by the owner and/or creditors ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 86. Debts owed by a business are referred to as a. accounts receivable b. expenses c. owner’s equity d. liabilities ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 87. The accounting equation may be expressed as a. Assets = Equities − Liabilities b. Assets + Liabilities = Owner's Equity c. Assets = Revenues − Liabilities d. Assets − Liabilities = Owner's Equity ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 88. Which of the following is not an asset? a. investments b. cash c. inventory d. owner’s equity ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 89. The assets and liabilities of a company are $128,000 and $84,000, respectively. Owner’s equity should equal a. $212,000 b. $44,000 c. $128,000 d. $84,000 ANSWER: b RATIONALE: Assets = Liabilities + Owner's Equity $128,000 = $84,000 + Owner's Equity Owner's Equity = $44,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 90. If total liabilities decreased by $46,000 during a period of time and owner's equity increased by $60,000 during the same period, the amount and direction (increase or decrease) of the period's change in total assets would be a a. $106,000 increase b. $14,000 increase c. $14,000 decrease d. $106,000 decrease ANSWER: b RATIONALE: Assets = Liabilities + Owner's Equity = –$46,000 + $60,000 = $14,000 Change in Assets = +$14,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 91. Which of the following is not a business transaction? a. make a sales offer b. sell goods for cash c. receive cash for services to be rendered later d. pay for supplies ANSWER: a DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 92. A business paid $7,000 to a creditor in payment of an amount owed. The effect of the transaction on the accounting equation was to a. increase an asset, decrease another asset b. decrease an asset, decrease a liability c. increase an asset, increase a liability d. increase an asset, increase owner's equity ANSWER: b RATIONALE: Assets = Liabilities + Owner's Equity Asset (Cash) decreases by $7,000 Liability (Accounts Payable) decreases by $7,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 93. Earning revenue a. increases assets, increases owner’s equity b. increases assets, decreases owner's equity c. increases one asset, decreases another asset d. decreases assets, increases liabilities ANSWER: a DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 94. The monetary value charged to customers for the performance of services sold is called a(n) a. asset b. net income c. capital d. revenue ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 95. Revenues are reported when a. a contract is signed b. cash is received from the customer c. work is begun on the job d. work is completed on the job ANSWER: d DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 96. Expenses are recorded when a. cash is paid for services rendered b. a bill is received in advance of services rendered c. assets are used in the process of earning revenue d. assets are purchased ANSWER: c DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 97. Goods purchased on account for future use in the business, such as supplies, are called a. prepaid liabilities b. revenues c. prepaid expenses d. liabilities ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 98. The asset created by a business when it makes a sale on account is termed a. accounts payable b. prepaid expense c. unearned revenue d. accounts receivable ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.12 - Receivables Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 99. The debt created by a business when it makes a purchase on account is referred to as an a. account payable b. account receivable c. asset d. expense payable ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 100. If total assets decreased by $88,000 during a period of time and owner's equity increased by $71,000 during the same period, then the amount and direction (increase or decrease) of the period's change in total liabilities would be a(n) a. $17,000 increase b. $88,000 decrease c. $159,000 increase d. $159,000 decrease ANSWER: d RATIONALE: Assets = Liabilities + Owner's Equity –$88,000 = Liabilities + $71,000 Liabilities = –$159,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 101. Owner's withdrawals a. increase expenses b. decrease expenses c. increase cash d. decrease owner's equity ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 102. How does paying a liability in cash affect the accounting equation? a. assets increase; liabilities decrease b. assets increase; liabilities increase c. assets decrease; liabilities decrease d. liabilities decrease; owner's equity increases ANSWER: c DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 103. How does receiving a bill to be paid next month for services received affect the accounting equation? a. assets decrease; owner's equity decreases b. assets increase; liabilities increase c. liabilities increase; owner's equity increases d. liabilities increase; owner's equity decreases ANSWER: d DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 104. How does the purchase of equipment by signing a note affect the accounting equation? a. assets increase; assets decrease b. assets increase; liabilities decrease c. assets increase; liabilities increase d. assets increase; owner's equity increases ANSWER: c DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 STATE STANDARDS: United States - OH - ICPA: FN-Measurement ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 105. Land originally purchased for $30,000 is sold for $62,000 in cash. What is the effect of the sale on the accounting equation? a. assets increase by $62,000; owner's equity increases by $62,000 b. assets increase by $32,000; owner's equity increases by $32,000 c. assets increase by $62,000; liabilities decrease by $30,000; owner's equity increases by $32,000 d. assets increase by $30,000; no change in liabilities; owner's equity increases by $62,000 ANSWER: b RATIONALE: Net Change in Assets = Increase in Cash – Decrease in Land = $62,000 – $30,000 = +$32,000 Change in Owner's Equity = +$32,000 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 106. Which of the following accounts is a liability? a. Accounts Payable b. Accounts Receivable c. Wages Expense d. Service Revenue ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 107. Abbie Marson is the sole owner and operator of Great Plains Company. As of the end of its accounting period, December 31, Year 1, Great Plains Company has assets of $940,000 and liabilities of $300,000. During Year 2, Marson invested an additional $73,000 and withdrew $33,000 from the business. What is the amount of net income during Year 2, assuming that as of December 31, Year 2, assets were $995,000 and liabilities were $270,000? a. $45,000 b. $50,000 c. $106,000 d. $370,000 ANSWER: a RATIONALE: Assets = Liabilities + Owner's Equity Owner's Equity (Year 1) = $940,000 – $300,000 = $640,000 Owner's Equity (Year 2) = $995,000 – $270,000 = $725,000 Increase in Owner's Equity = Owner's Equity (Year 2) – Owner's Equity (Year 1) = $725,000 – $640,000 = $85,000 Net Income during Year 2 = Increase in Owner's Equity – Additional Investment + Withdrawals = $85,000 – $73,000 + $33,000 = $45,000 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 108. Which of the following asset accounts is increased when a receivable is collected? a. Accounts Receivable b. Supplies c. Accounts Payable d. Cash ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 109. Transactions affecting owner's equity include a. owner's investments and payment of liabilities b. owner's investments, owner's withdrawals, earning of revenues, and incurrence of expenses c. owner's investments, earning of revenues, incurrence of expenses, and collection of accounts receivable d. owner's withdrawals, earning of revenues, incurrence of expenses, and purchase of supplies on account ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 110. Michael Anderson is starting a computer programming business and has deposited an initial investment of $15,000 into the business cash account. Identify how the accounting equation will be affected. a. increase in assets (Cash) and increase in liabilities (Accounts Payable) b. increase in assets (Cash) and increase in owner’s equity (Michael Anderson, Capital) c. increase in assets (Accounts Receivable) and decrease in liabilities (Accounts Payable) d. increase in assets (Cash) and increase in assets (Accounts Receivable) ANSWER: b RATIONALE: Assets = Liabilities + Owner's Equity Assets (Cash) increase by $15,000 Owner's equity increases by $15,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 111. Gomez Service Company paid its first installment on a note payable of $2,000. How will this transaction affect the accounting equation? a. increase in liabilities (Notes Payable) and decrease in assets (Cash) b. decrease in assets (Cash) and decrease in owner’s equity (Note Payable Expense) c. decrease in assets (Cash) and decrease in assets (Notes Receivable) d. decrease in assets (Cash) and decrease in liabilities (Notes Payable) ANSWER: d RATIONALE: Assets = Liabilities + Owner's Equity Assets (Cash) decrease by $2,000 Liabilities (Notes Payable) decrease by $2,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 112. Ramon Ramos has withdrawn $750 from Ramos Repair Company’s cash account to deposit in his personal account. How does this transaction affect Ramos Repair Company’s accounting equation? a. increase in assets (Accounts Receivable) and decrease in assets (Cash) b. decrease in assets (Cash) and decrease in owner’s equity (Owner’s Withdrawal) c. decrease in assets (Cash) and decrease in liabilities (Accounts Payable) d. increase in assets (Cash) and decrease in owner’s equity (Owner’s Withdrawal) ANSWER: b RATIONALE: Assets = Liabilities + Owner's Equity Assets (Cash) decrease by $750 Owner's equity decreases by $750 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 113. Which of the following is not a business transaction? a. Erin deposits $15,000 in a bank account in the name of Erin’s Lawn Service. b. Erin provided services to customers earning fees of $600. c. Erin purchased hedge trimmers for her lawn service agreeing to pay the supplier next month. d. Erin pays her monthly personal credit card bill. ANSWER: d DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 1 - Introduction to Accounting and Business 114. Which of the following is a business transaction? a. purchase inventory on account b. plan advertising for upcoming sale c. give employees a raise beginning next month d. submit estimate for construction project ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 115. All of the following are general-purpose financial statements except a(n) a. balance sheet b. income statement c. statement of owner’s equity d. cash budget ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 116. The financial statement that presents a summary of the revenues and expenses of a business for a specific period of time, such as a month or year, is called a(n) a. prior period statement b. statement of owner's equity c. income statement d. balance sheet ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 117. Which of the following financial statements reports information as of a specific date? a. income statement b. statement of owner's equity c. statement of cash flows d. balance sheet ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 118. Four financial statements are usually prepared for a business. The statement of cash flows is usually prepared last. The statement of owner's equity (OE), the balance sheet (B), and the income statement (I) are prepared in a certain order to obtain information needed for the next statement. In what order are these three statements prepared? a. I,OE, B b. B, I, OE c. OE, I, B d. B,OE, I ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 119. Liabilities are reported on the a. income statement b. statement of owner's equity c. statement of cash flows d. balance sheet ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 120. Cash investments made by the owner to the business are reported on the statement of cash flows in the a. financing activities section b. investing activities section c. operating activities section d. supplemental statement ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 121. The year-end balance of the owner's capital account appears in a. both the statement of owner's equity and the income statement b. only the statement of owner's equity c. both the statement of owner's equity and the balance sheet d. both the statement of owner's equity and the statement of cash flows ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 122. A financial statement user would determine if a company was profitable or not during a specific period of time by reviewing the a. income statement b. balance sheet c. statement of cash flows d. statement of retained earnings ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 123. If an owner wanted to know how money flowed into and out of the company, which financial statement would the owner use? a. income statement b. statement of cash flows c. balance sheet d. statement of retained earnings ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 124. The assets section of the balance sheet normally presents assets in a. alphabetical order b. the order of largest to smallest dollar amounts c. the order in which they will be converted into cash or used in operations d. the order of smallest to largest dollar amounts ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 125. All of the following statements regarding the ratio of liabilities to owner’s equity are true except a. a ratio of 1 indicates that liabilities equal owner’s equity b. corporations can use this ratio but substitute total stockholders’ equity for total owner’s equity c. the higher this ratio, the better able a business is to withstand poor business conditions and pay creditors d. the lower this ratio, the better able a business is to withstand poor business conditions and pay creditors ANSWER: c DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-06 - 01-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 126. Given the following data: Dec. 31,Year 2 Total liabilities $128,250 Total owner’s equity 95,000

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

Compute the ratio of liabilities to owner’s equity for each year. Round to two decimal places. a. 1.50 and 1.07, respectively b. 1.35 and 1.50, respectively c. 1.07 and 1.19, respectively d. 1.19 and 1.35, respectively ANSWER: b RATIONALE: Ratio of Liabilities to Owner’s Equity = Total Liabilities/Total Owner's Equity Dec. 31, Year 2 $128,250/$95,000 1.35

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

DIFFICULTY:

Challenging Bloom's Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-06 - 01-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business Matching Match the following business types with each business listed below. Each may be used more than once. a. Service business b. Manufacturing business c. Merchandising business DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 127. A tax preparation firm ANSWER: a 128. A law firm ANSWER: a 129. A health club and spa ANSWER: a 130. An automobile dealer ANSWER: c 131. A book publisher ANSWER: b 132. A hospital ANSWER: a 133. A supermarket ANSWER: c 134. A modular homebuilder ANSWER: b 135. A men’s clothing store ANSWER: c 136. A dressmaking company ANSWER: b

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Chapter 1 - Introduction to Accounting and Business Match the following characteristics with the form of business entity that best describes it. Each may be used more than once. a. Proprietorship b. Partnership c. Corporation d. Limited liability company (LLC) DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 137. Comprises 70% of business entities in the United States ANSWER: a 138. Generates 90% of business revenues ANSWER: c 139. Owned by two or more individuals ANSWER: b 140. Organized as a separate legal taxable entity ANSWER: c 141. Easy and cheap to organize ANSWER: a 142. Often used as an alternative to a partnership ANSWER: d 143. Used by large business ANSWER: c 144. Has the ability to obtain large amounts of resources ANSWER: c 145. Offers tax and legal liability advantages for owners ANSWER: d

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Chapter 1 - Introduction to Accounting and Business Match each transaction with its effect on the accounting equation. Each letter may be used more than once. a. Increase assets, increase liabilities b. Increase liabilities, decrease owner’s equity c. Increase assets, increase owner’s equity d. No effect e. Decrease assets, decrease liabilities f. Decrease assets, decrease owner’s equity DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 146. Received cash for services provided ANSWER: c 147. Received utility bill to be paid next month ANSWER: b 148. Investment of land by owner ANSWER: c 149. Paid part of an amount owed to a creditor ANSWER: e 150. Paid cash for the purchase of a one-year insurance policy ANSWER: d 151. Received payment from a customer on account ANSWER: d 152. Cash withdrawal by owner ANSWER: f 153. Provided a service to a customer on account ANSWER: c 154. Purchased supplies on credit ANSWER: a 155. Paid wages ANSWER: f 156. Cash investment by owner ANSWER: c

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Chapter 1 - Introduction to Accounting and Business 157. Borrowed money from a bank ANSWER: a 158. Purchased equipment for cash ANSWER: d 159. Received cash for providing services to customers ANSWER: c 160. Used up supplies that were already on hand ANSWER: f Match each of the following characteristics with the financial statement that best describes it. Each may be used more than once. a. Income statement b. Balance sheet c. Statement of owner’s equity d. Statement of cash flows DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 161. Reports as of a specific date ANSWER: b 162. The first statement prepared ANSWER: a 163. Has three sections: operating, investing and financing ANSWER: d 164. Reports only revenues and expenses ANSWER: a 165. The second statement prepared ANSWER: c 166. A formal presentation of the accounting equation ANSWER: b 167. The connecting link between the income statement and balance sheet ANSWER: c

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Chapter 1 - Introduction to Accounting and Business Subjective Short Answer 168. Discuss internal and external users of accounting information. What areas of accounting provide them with information? Give an example of the type of report each type of user might use. ANSWER: Internal users of accounting information include managers and employees. The area of accounting that provides internal users with information is called managerial accounting or management accounting. An example of a report that might be used internally is a customer profitability report. External users of accounting information include customers, creditors, banks, and government entities. These users are not directly involved in managing or operating the business. The area of accounting that provides external users with information is called financial accounting. General-purpose financial statements are one type of financial accounting report that is distributed to external users. DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 169. Companies like Enron, WorldCom, and Tyco International, Ltd. have been caught in the midst of ethical lapses that led to fines, firings, and criminal and/or civil prosecution. List and briefly describe three factors that are responsible for what went wrong in these companies. ANSWER: The three factors are: (1) individual character, (2) firm culture, and (3) lack of laws and enforcement. Honesty, integrity, and fairness in the face of pressure to hide the truth are important characteristics of an ethical businessperson. The behavior and attitude of senior management set the firm’s culture. In firms like Enron, senior managers created a culture of greed and indifference to the truth. That culture flowed down to lower-level managers, who took shortcuts and lied to cover financial frauds. The lack of laws and enforcement has been blamed as a contributing factor to financial reporting abuses. As a result, new laws such as the Sarbanes-Oxley Act (SOX) established a new oversight body for the accounting profession, known as the Public Company Accounting Oversight Board (PCAOB), and established standards to enhance corporate accountability, financial disclosures, and independence. DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Ethics

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Chapter 1 - Introduction to Accounting and Business 170. List the five steps in the process by which accounting provides information to users. ANSWER: 1. Identify users. 2. Assess users’ information needs. 3. Design the accounting information system to meet users’ needs. 4. Record economic data about business activities and events. 5. Prepare accounting reports for users. DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 171. For each of the following companies, identify whether they are a service, merchandising, or manufacturing business. A. Dillard's B. Time Warner Cable C. General Motors D. Blockbuster E. Applebee’s F. Sony G. Best Buy H. Banana Republic I. H&R Block ANSWER: A. Merchandising B. Service C. Manufacturing D. Service E. Service/Manufacturing F. Manufacturing G. Merchandising H. Merchandising I. Service DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.1-01 - 01 - 01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 172. Identify each of the following as either internal or external users of accounting information. A. Payroll manager B. Bank C. President’s secretary D. Internal Revenue Service E. Raw material vendors F. Social Security Administration G. Health insurance provider H. Managerial accountant ANSWER: A. Internal B. External C. Internal D. External E. External F. External G. External H. Internal DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 173. What is the major difference between the objective of financial accounting and the objective of managerial accounting? ANSWER: The objective of financial accounting is to provide information for the decision-making needs of external users. The objective of managerial accounting is to provide information for internal users. DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-01 - 01-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 174. Give the major disadvantage of disregarding the cost concept and constantly revaluing assets based on appraisals and opinions. ANSWER: Accounting reports would become unstable and unreliable. DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 175. On May 7, Carpet Barn Company offered to pay $83,000 for land that had a selling price of $105,000. On May 15, Carpet Barn accepted a counteroffer of $95,000. On June 5, the land was assessed at a value of $115,000 for property tax purposes. On December 10, Carpet Barn Company was offered $135,000 for the land by another company. At what value should the land be recorded in Carpet Barn Company’s records? ANSWER: $95,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 176. Donner Company is selling a piece of land adjacent to its business. An appraisal reported the market value of the land to be $120,000. Focus Company initially offered to buy the land for $107,000. The companies settled on a purchase price of $115,000. On the same day, another piece of land on the same block sold for $122,000. Under the cost concept, what amount will be used to record this transaction in the accounting records? ANSWER: $115,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 177. Explain the meaning of the business entity concept. ANSWER: The business entity concept limits the economic data in an accounting system to data related directly to the activities of the business. In other words, the business is viewed as an entity separate from its owners, creditors, or other businesses. DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 178. Darnell Company purchased $88,000 of computer equipment from Joseph Company. Darnell Company paid for the equipment using cash that had been obtained from the initial investment by Donnie Darnell. Which entity or entities (Darnell Company, Joseph Company, and Donnie Darnell) should record the transaction involving the computer equipment on their accounting records? ANSWER: Darnell Company and Joseph Company DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 1 - Introduction to Accounting and Business 179. Bob Johnson is the sole owner of Johnson’s Carpet Cleaning Service. Bob purchased a personal automobile for $10,000 cash plus he took out a loan for $20,000 in his name. Describe how this transaction is related to the business entity concept. ANSWER: Under the business entity concept, economic data are limited to the direct activities of the business. The business is viewed as separate from its owner. Therefore, when Bob buys a personal automobile, it is not listed on the books of Johnson’s Carpet Cleaning Service, unless Bob invests it in the business. In this case, the loan is a personal debt and not a liability of the company, and the cash is from Bob’s personal account and not the company’s account. DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 180. Discuss the characteristics of a limited liability company (LLC). ANSWER: A limited liability company (LLC) combines the attributes of a partnership and a corporation. It is often used as an alternative to a partnership because it has tax and legal liability advantages for owners. DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 181. Explain the meaning of: (a) the objectivity concept (b) the unit of measure concept ANSWER: (a) The objectivity concept requires that the amounts recorded in the accounting records be based on objective evidence. In exchanges between a buyer and a seller, both try to get the best price. Only the final agreed-upon amount is objective enough to be recorded in the accounting records. (b) The unit of measure concept requires that economic data be recorded in dollars. Money is a common unit of measurement for entering financial data and preparing reports. DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-02 - 01-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 182. Dave Ryan is the owner and operator of Ryan's Arcade. At the end of its accounting period, December 31, Ryan’s Arcade has assets of $450,000 and liabilities of $125,000. Using the accounting equation, determine the following amounts: (a) owner’s equity as of December 31 of the current year (b) owner’s equity as of December 31 at the end of the next year, assuming that assets increased by $65,000 and liabilities increased by $35,000 during the year ANSWER: (a) $325,000 ($450,000 − $125,000) (b) $355,000 [($450,000 + $65,000) − ($125,000 + $35,000)] DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCREDITING STANDAR ACCT.ACBSP.APC.06 - Recording Transactions DS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 183. Krammer Company has liabilities equal to one-fourth of the total assets. Krammer’s owner’s equity is $45,000. Using the accounting equation, what is the amount of liabilities for Krammer? ANSWER: Assets = Liabilities + Owner’s Equity 4x = x + $45,000 3x = $45,000 x = $15,000 in liabilities DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 184. Determine the missing amount for each of the following: Assets (a) $30,000 53,000

Liabilities $38,000 (b) 32,000

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

ANSWER:

(a) $83,000 ($38,000 + $45,000) (b) $8,000 ($30,000 – $22,000) (c) $21,000 ($53,000 – $32,000) DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 185. Determine the missing amount designated with an “X” for each of the following: (a) (b) (c)

Assets $78,500 X 49,500

ANSWER:

Liabilities $37,600 53,280 X

Owner’s Equity X $145,000 34,000

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

(c) $15,500 ($49,500 − $34,000) Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DIFFICULTY:

186. Use the accounting equation to answer each of the independent questions below. (a) At the beginning of the year, Norton Company's assets were $75,000 and its owner’s equity was $38,000. During the year, assets increased by $18,000 and liabilities increased by $4,000. What was the owner’s equity at the end of the year? (b) At the beginning of the year, Turpin Industries had liabilities of $44,000 and owner’s equity of $66,000. If assets increased by $10,000 and liabilities decreased by $5,000, what was the owner’s equity at the end of the year? ANSWER: (a) $75,000 − $38,000 = $37,000 beginning of year liabilities ($75,000 + $18,000) − ($37,000 + $4,000) = $52,000 end of year owner’s equity (b) $44,000 + $66,000 = $110,000 beginning of year assets ($110,000 + $10,000) − ($44,000 − $5,000) = $81,000 end of year owner’s equity DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 187. On July 1 of the current year, the assets and liabilities of John Wong, DVM, are as follows: Cash, $27,000; Accounts Receivable, $12,300; Supplies, $3,100; Land, $35,000; Accounts Payable, $13,900. What is the amount of owner's equity (John Wong’s capital) as of July 1 of the current year? ANSWER: $63,500 ($27,000 Cash + $12,300 Accounts Receivable + $3,100 Supplies + $35,000 Land − $13,900 Accounts Payable = $63,500) DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 188. Ting Hsu is the owner of Hsu’s Financial Services. At the end of its accounting period, December 31, of Year 1, Hsu’s has assets of $575,000 and owner’s equity of $335,000. Using the accounting equation and considering each case independently, determine the following amounts: (a) Hsu’s liabilities as of December 31 of Year 1. (b) Hsu’s liabilities as of December 31 of Year 2, assuming that assets increased by $56,000 and owner’s equity decreased by $32,000. (c) Net income or net loss during Year 2, assuming that as of December 31, Year 2, assets were $592,000, liabilities were $450,000, and there were no additional investments or withdrawals. ANSWER: (a) $575,000 − $335,000 = $240,000 (b) ($575,000 + $56,000) − ($335,000 − $32,000) = $328,000 (c) $592,000 − $450,000 = $142,000 owner’s equity (Year 2) $335,000 − $142,000 = $193,000 net loss DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 189. Indicate whether each of the following accounts represents an asset, liability, or owner’s equity: (a) Accounts Payable (b) Wages Expense (c) Capital (d) Accounts Receivable (e) Withdrawal (f) Land ANSWER:

(a) liability (b) owner’s equity (c) owner’s equity (d) asset (e) owner’s equity (f) asset DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 190. Martin Blair is the owner and operator of Martin Consultants. At December 31 of the current year, Martin Consultants has assets of $430,000 and liabilities of $205,000. Using the accounting equation and considering each case independently, determine the following: (a) Martin Blair, capital, as of December 31. (b) Martin Blair, capital, as of December 31 of the next year, assuming that assets increased by $12,000 and liabilities increased by $15,000. (c) Martin Blair, capital, as of December 31 of the next year, assuming that assets decreased by $8,000 and liabilities increased by $14,000. ANSWER: (a) $430,000 − $205,000 = $225,000 (b) ($430,000 + $12,000) − ($205,000 + $15,000) = $222,000 (c) ($430,000 − $8,000) − ($205,000 + $14,000) = $203,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business The accountant for Scott Industries prepared the following list of accounting equation element balances from the company’s records for the year ended December 31: Fees earned Accounts receivable Equipment Accounts payable Salaries and wages expense Income taxes payable Notes payable

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

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

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

191. Determine the total assets at the end of the current year for Scott Industries. ANSWER: $110,000 ($30,000 Cash + $14,000 Accounts Receivable + $64,000 Equipment + $2,000 Prepaid Rent = $110,000) DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 192. Determine the total liabilities at the end of the current year for Scott Industries. ANSWER: $37,000 ($12,000 Accounts Payable + $5,000 Income Taxes Payable + $20,000 Notes Payable = $37,000) DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-03 - 01-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 193. Based on the information for Scott Industries, is it profitable? Explain your answer. ANSWER: ($165,000 Fees Earned + $3,000 Interest Income) − ($40,000 Salaries and Wages Expense + $44,000 Selling Expenses + $18,000 Income Taxes Expense + $20,000 Rent Expense) = $46,000 Net Income Scott Industries had net income for the period of $46,000. Since revenues exceeded expenses for the period, the company would be considered profitable. DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 194. Daniels Company is owned and operated by Thomas Daniels. The following selected transactions were completed by Daniels Company during May: 1. Received cash from owner as additional investment, $55,000. 2. Paid creditors on account, $7,000. 3. Billed customers for services on account, $2,565. 4. Received cash from customers on account, $8,450. 5. Paid cash to owner for personal use, $2,500. 6. Received the utility bill, $160, to be paid next month. Indicate the effect of each transaction on the accounting equation by: (a) Accounting equation element type: (A) assets, (L) liabilities, (OE) owner’s equity, (R) revenue, and (E) expense b) Name of accounting equation element c) The amount of the transaction d) The direction of change (increase or decrease) in the account affected Note: Each transaction has two entries. Entry Entry Accounting Name of Accounting Name of Equation Accounting Increase or Equation Accounting Element Equation Amount Decrease Element Equation Amount (c) (c) Type Element (d) Type Element (a) (b) (a) (b)

Increase or Decrease (d)

1 2 3 4 5 6 ANSWER:

1 2 3 4 5 6

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

Increase or Decrease (d) Increase Decrease Increase Decrease Increase Increase

DIFFICULTY:

Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 1 - Introduction to Accounting and Business 195. Collins Landscape Company purchased various landscaping supplies on account to be used for landscape designs for its customers. How will this business transaction affect the accounting equation? ANSWER: Increase assets (Supplies) and increase liabilities (Accounts Payable) DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 196. Shiny Kar Company had the following transactions. For each transaction, show the effect on the accounting equation by putting the amount and direction (+, –, or NC for no change) in each box of the table below. Assets Liabilities

Owner’s Equity

(a) Shiny Kar withdrew $500 cash for food (b) Shiny Kar Company sold 2 cars for a total of $55,000 on account (c) The cost of the cars sold in (b) above was $40,000 (d) Shiny Kar received a $35,000 payment for a car previously sold on account (e) Shiny Kar paid $450 for advertising (f) Shiny Kar purchased $150 of cleaning supplies on account Assets Liabilities Owner’s Equity (a) −$500 NC −$500 (b) +$55,000 NC +$55,000 (c) −$40,000 NC −$40,000 (d) NC NC NC (e) −$450 NC −$450 (f) +$150 +$150 NC DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic ANSWER:

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Chapter 1 - Introduction to Accounting and Business 197. Ramierez Company received its first electric bill in the amount of $60 which will be paid next month. How will this transaction affect the accounting equation? ANSWER: Increase liabilities (Accounts Payable) and decrease owner’s equity (Utilities Expense) DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 198. Simpson Auto Body Repair purchased $20,000 of machinery. The company paid $8,000 in cash at the time of the purchase and signed a promissory note for the remainder to be paid in four monthly installments. (a) How will the purchase affect the accounting equation? (b) How will the payment of the first monthly installment affect the accounting equation (ignore interest)? ANSWER: (a) Increase total assets by a net amount of $12,000 (increase Machinery, $20,000 and decrease Cash, $8,000) and increase liabilities by $12,000 (Notes Payable, $12,000) (b) Decrease assets by $3,000 (decrease Cash,$3,000) and decrease liabilities by $3,000 (Notes Payable,$3,000) DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 199. Indicate how the following transactions affect the accounting equation. (a) The purchase of supplies on account (b) The purchase of supplies for cash (c) A withdrawal by the owner to pay personal expenses (d) Revenues received in cash (e) Sale made on account ANSWER: (a) Assets increase; liabilities increase (b) No effect (c) Assets decrease; owner's equity decreases (d) Assets increase; owner’s equity increases (e) Assets increase; owner’s equity increases DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 200. (a) A vacant lot acquired for $83,000 cash is sold for $127,000 in cash. What is the effect of the sale on the total amount of the seller’s (1) assets, (2) liabilities, and (3) owner’s equity? (b) Assume that the seller owes $52,000 for the land. After receiving the $127,000 cash in (a), the seller pays the $52,000 owed. What is the effect of the payment on the total amount of the seller’s (1) assets, (2) liabilities, and (3) owner’s equity? ANSWER: (a) (1) Total assets increased $44,000 (2) No change in liabilities (3) Owner’s equity increased $44,000 (b) (1) Total assets decreased $52,000 (2) Total liabilities decreased $52,000 (3) No change in owner’s equity DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 201. Austin Land Company sold land for $85,000 in cash. The land was originally purchased for $65,000. At the time of the sale, $40,000 was still owed to Regions Bank. After the sale, Austin Land Company paid off the loan. Explain the effect of the sale and the payoff of the loan on the accounting equation. ANSWER: Total assets decrease $20,000 (Cash increases by $45,000; Land decreases by $65,000) Total liabilities decrease $40,000 (Note payoff to Regions) Owner's equity increases $20,000 (Sales price − Cost of the land) DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 202. There are four transactions that affect owner’s equity. (a) What are the two types of transactions that increase owner’s equity? (b) What are the two types of transactions that decrease owner’s equity? ANSWER: (a) Additional investment by the owner and increase in revenues (b) Withdrawal made by the owner and increase in expenses DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 203. Identify each of the following as an (1) increase to owner's equity or a (2) decrease to owner's equity. (a) Fees earned (b) Wages expense (c) Withdrawals (d) Lawn care revenue (e) Investment (f) Supplies expense ANSWER:

(a) 1 (b) 2 (c) 2 (d) 1 (e) 1 (f) 2 DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 204. Given the following: Beginning capital Ending capital Owner withdrawal

$58,000 30,000 25,000

Calculate net income or net loss. ANSWER: Ending capital Beginning capital Decrease in capital Less withdrawals Net loss

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

DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 205. Selected transactions completed by a proprietorship are described below. Indicate the effects of each transaction on assets, liabilities, and owner's equity by inserting "+" for increase and "−" for decrease in the appropriate columns at the right. If appropriate, you may insert more than one symbol in a column. A L (a) Received cash from owner as an additional investment _____ _____ (b) Purchased supplies on account _____ _____ (c) Paid rent for the current month _____ _____ (d) Received cash for services sold to customers _____ _____ (e) Returned some defective supplies purchased in (b) _____ _____ (f) Paid insurance premiums in advance _____ _____ (g) Paid cash to creditor for purchases in (b) _____ _____ (h) Charged customers for services sold on account _____ _____ (i) Paid cash to a customer as a refund for an overcharge _____ _____ (j) Received cash on account from customers _____ _____ (k) Owner withdrew cash for personal use _____ _____ (l) Recorded the cost of supplies used during the year _____ _____ (m) Received invoice for electricity used _____ _____ (n) Paid wages _____ _____ (o) Purchased a truck for cash _____ _____ ANSWER: A L OE (a) + + (b) + + (c) − − (d) + + (e) − − (f) +,− (g) − − (h) + + (i) − − (j) +,− (k) − − (l) − − (m) + − (n) − − (o) +,− DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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

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Chapter 1 - Introduction to Accounting and Business 206. The accountant for Flagger Company prepared the following list of accounting equation element balances from the company’s records for the year ended December 31: Fees earned Accounts receivable Equipment Accounts payable Salaries and wages expense Income taxes payable Notes payable

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

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

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

Prepare an income statement for Flagger Company in good form. ANSWER:

Flagger Company Income Statement For the Year Ended December 31

Revenues: Fees earned $165,000 Interest income 3,000 Expenses: Rent expense $ 51,000 Selling expenses 44,000 Salary and wages expense 40,000 Income taxes expense 18,000 Total expenses Net income DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-04 - 01-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

$168,000

153,000 $ 15,000

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

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

Miscellaneous expense Office expense Supplies Wages expense Drawing

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

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Chapter 1 - Introduction to Accounting and Business 207. Prepare an income statement for the current year ended March 31. ANSWER: Thompson Computer Services Income Statement For the Year Ended March 31 Fees earned Expenses: Wages expense $23,550 Office expense 1,240 Miscellaneous expense 1,030 Total expenses Net income DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

$73,450

25,820 $47,630

208. Prepare a statement of owner’s equity for Thompson Computer Services for the current year ended March 31. ANSWER: Thompson Computer Services Statement of Owner’s Equity For the Year Ended March 31 Thompson, capital, April 1 $180,000 Additional investment by owner during year $ 25,000 Net income for the year 47,630 Withdrawals (16,570) Increase in owner’s equity 56,060 Thompson, capital, March 31 $236,060 DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 209. Prepare a balance sheet for Thompson Computer Services for the current year ended March 31. ANSWER: Thompson Computer Services Balance Sheet March 31 Assets Liabilities Cash $ 21,420 Accounts payable Accounts receivable 10,340 Supplies 1,670 Land 47,000 Owner’s Equity Building 157,630 Thompson capital Total assets

$ 2,000

236,060

$238,060Total liabilities and owner’s equity $238,060

DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 210. A summary of cash flows for Linda's Design Services for the year ended December 31 is shown below. Cash receipts: Cash received from customers Cash received from additional investment by owner

$83,990 25,000

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

$27,000 47,000 410 5,000

Cash balance as of January 1

$40,600

Prepare a statement of cash flows for Linda's Design Services for the year ended December 31. ANSWER:

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

$83,990

Cash payments for expenses and supplies

(27,410) $ 56,580

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

(47,000)

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

$25,000

Cash withdrawal by owner

(5,000)

Net cash flow from financing activities

20,000

Net increase in cash during year

$29,580

Cash as of January 1

40,600

Cash as of December 31

$70,180

DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 211. What information does the income statement give to business users? ANSWER: The income statement reports the revenues and expenses for a period of time. The result is either a net income or a net loss. DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 212. What are the three sections of the statement of cash flows? ANSWER: operating activities, investing activities, and financing activities DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 213. Match the following items to the financial statement where they can be found. (Hint: Some of the items can be found on more than one financial statement.) A. Balance sheet B. Income statement C. Statement of cash flows D. Statement of owner’s equity 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. ANSWER:

Item Withdrawals Revenues Supplies Land Accounts payable Accounts receivable Operating activities Wages expense Net income Cash Answer 1. D (If Cash, also C) 2. B 3. A 4. A 5. A 6. A 7. C 8. B

Item Withdrawals Revenues Supplies Land Accounts payable Accounts receivable Operating activities Wages expense

9. D & B (if using the indirect method, also C) Net income 10. A & C DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Cash

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Chapter 1 - Introduction to Accounting and Business 214. Name and describe the four primary financial statements for a proprietorship. ANSWER: 1. Income statement: A summary of the revenue and expenses for a specific period of time, such as a month or a year. 2. Statement of owner’s equity: A summary of the changes in the owner’s equity that have occurred during a specific period of time such as a month or a year. 3. Balance sheet: A list of the assets, liabilities, and owner’s equity as of a specific date, usually at the close of the last day of a month or a year. 4. Statement of cash flows: A summary of the cash receipts and cash payments for a specific period of time, such as a month or a year. DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 215. A summary of cash flows for Evelyn's Event Planning for the year ended December 31 is shown below. Cash receipts: Cash received from customers Cash received from bank loan

$57,360 15,000

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

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

Cash balance as of January 1

$15,580

Prepare a statement of cash flows for Evelyn's Event Planning for the year ended December 31.

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Chapter 1 - Introduction to Accounting and Business ANSWER:

Evelyn's Event Planning Statement of Cash Flows For the Year Ended December 31 Cash flows from operating activities: Cash received from customers $57,360 (21,600) Cash payments for expenses and supplies Net cash flow from operating activities $35,760 Cash flows from investing activities: Cash paid for equipment

Cash flows from financing activities: Cash received from bank loan Cash withdrawals by owner Net cash flow from financing activities Net increase in cash during year Cash as of January 1 Cash as of December 31 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

(18,070)

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

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

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

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

Prepare an income statement for the current year ended December 31. ANSWER:

Rocky's Day Spa Income Statement For the Year Ended December 31 Fees earned Expenses:

$98,435 Wages expense $26,580 Spa operating expense 23,760 Office expense 2,470 Total expenses

Net income

52,810 $45,625

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Chapter 1 - Introduction to Accounting and Business DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 217. The assets and liabilities of Rocky's Day Spa on December 31 and its revenue and expenses for the year are listed below. The capital of the owner was $68,000 on January 1. The owner invested an additional $10,000 during the year. Accounts payable Accounts receivable Cash Fees earned Spa furniture and equipment Computers

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

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

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

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

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

Owner's capital Total liabilities and owner’s equity

$ 4,375

85,455 $89,830

DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 69

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

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

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

Prepare a statement of owner’s equity for the current year ended December 31. ANSWER:

Rocky's Day Spa Statement of Owner’s Equity For the Year Ended December 31 Owner's capital, January 1 Additional investment by owner during year $ 10,000 Net income for the year 45,625 Withdrawals (38,170) Increase in owner’s equity Owner's capital, December 31

$68,000

17,455 $85,455

DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 219. Explain the interrelationship between the balance sheet and the statement of cash flows. ANSWER: The cash reported on the balance sheet is also reported as the end-of-period cash on the statement of cash flows. DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 70

Chapter 1 - Introduction to Accounting and Business 220. From the following list of items taken from Lamar’s accounting records, identify those that would appear on the income statement. (a) Rent expense (b) Land (c) Capital (d) Fees earned (e) Withdrawal (f) Wages expense (g) Investment ANSWER: DIFFICULTY:

(a), (d), (f) Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 221. Identify which of the following items would appear on a balance sheet. (a) Cash (b) Fees earned (c) Joe Brown, capital (d) Wages payable (e) Rent expense (f) Prepaid advertising (g) Land ANSWER: DIFFICULTY:

(a), (c), (d), (f), (g) Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 71

Chapter 1 - Introduction to Accounting and Business 222. Indicate whether each of the following activities would be reported on the statement of cash flows as an operating activity, an investing activity, or a financing activity, or if it does not appear on the cash flow statement. (a) Cash paid for building (b) Cash paid to suppliers (c) Cash paid for owner's withdrawal (d) Cash received from customers (e) Cash received from the owner's investment (f) Cash received from the sale of a building (g) Borrowed cash from a bank ANSWER: (a) Investing (b) Operating (c) Financing (d) Operating (e) Financing (f) Investing (g) Financing DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 223. For each of the following, determine the amount of net income or net loss for the year. (a)

Revenues for the year totaled $71,300 and expenses totaled $35,500. The owner made an additional investment of $15,000 during the year. (b) Revenues for the year totaled $220,500 and expenses totaled $175,000. The owner withdrew $40,000 during the year. (c) Revenues for the year totaled $149,000 and expenses totaled $172,000. The owner invested an additional $12,000 and withdrew $16,000 during the year. (d) Revenues for the year totaled $198,150 and expenses totaled $174,200. The owner withdrew $35,000 during the year. ANSWER: (a) $35,800 net income ($71,300 − $35,500) (b) $45,500 net income ($220,500 − $175,000) (c) $23,000 net loss ($149,000 − $172,000) (d) $23,950 net income ($198,150 − $174,200) DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 224. The total assets and total liabilities of Paul’s Pools, a proprietorship, at the beginning and at the end of the current fiscal year are as follows: January 1 December 31 $280,000 $475,000 205,000 130,000

Total assets Total liabilities (a) (b)

(c)

(d)

Determine the amount of net income earned during the year. The owner did not invest any additional assets in the business during the year and made no withdrawals. Determine the amount of net income during the year. The assets and liabilities at the beginning and end of the year are unchanged from the amounts presented above. However, the owner withdrew $53,000 in cash during the year (no additional investments). Determine the amount of net income earned during the year. The assets and liabilities at the beginning and end of the year are unchanged from the amounts presented above. However, the owner invested an additional $35,000 in cash in the business in June of the current fiscal year (no withdrawals). Determine the amount of net income earned during the year. The assets and liabilities at the beginning and end of the year are unchanged from the amounts presented above. However, the owner invested an additional $12,000 in cash in August of the current fiscal year and made 12 monthly cash withdrawals of $1,500 each during the year.

ANSWER:

(a) Owner's equity at end of year ($475,000 − $130,000) Owner's equity at beginning of year ($280,000 − $205,000) Net income

$345,000 75,000 $270,000

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

$270,000 53,000 $323,000

$270,000 35,000 $235,000

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

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

Deduct additional investment Net income DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 225. Selected transaction data of a business for September are summarized below. Determine the following amounts for September: (a) total revenue, (b) total expenses, (c) net income. Service sales charged to customers on account during September Cash received from cash customers for services performed in September Cash received from customers on account during September: Services performed and charged to customers prior to September Services performed and charged to customers during September Expenses incurred prior to September and paid during September Expenses incurred and paid in September Expenses incurred in September but not paid in September Expenses for supplies used and insurance (not included above) applicable to September ANSWER: (a) $61,000 ($33,000 + $28,000) (b) $43,250 ($36,250 + $5,000 + $2,000) (c) $17,750 ($61,000 − $43,250) DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

$33,000 28,000 13,000 18,000 6,500 36,250 5,000 2,000

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

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

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

Page 74

Chapter 1 - Introduction to Accounting and Business ANSWER:

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

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

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

$150,000

(1,160) $148,840

(c) Richard’s Catering Company Balance Sheet March 31 Assets Liabilities Cash $ 23,840 Accounts payable Accounts receivable 45,950 Prepaid insurance 3,000 Owner's Equity Supplies 900 Richard Cook, capital Land 85,400 Total liabilities and Total assets $159,090 owner's equity DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

$ 10,250

148,840 $159,090

Page 75

Chapter 1 - Introduction to Accounting and Business 227. Harris Designers began operations on April 1. The financial statements for Harris Designers are shown below for the month ended April 30, (the first month of operations). Determine the missing amounts for letters (a) through (o). Harris Designers Income Statement For the Month Ended April 30 Fees earned Expenses: Wages expense Rent expense Supplies expense Utilities expense Miscellaneous expense Total expenses Net income

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

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

(b) (c)

$35,000 (d) (6,000) (e) $38,100

Harris Designers Balance Sheet April 30 Assets Cash Supplies Land

(f) 8,100 (g)

Total assets

$55,900

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

Harris Designers Statement of Cash Flows For the Month Ended April 30 Cash flows from operating activities: Cash received from customers Cash payments for expenses and payments to creditors Net cash flow from operating activities Cash flows from investing activities: Cash payments for acquisition of land Cash flows from financing activities: Cash received as owner's investment Cash withdrawal by owner Net cash flow from financing activities Net increase in cash and April 30 cash balance

$(h) (i) $(j)

$23,000 (4,200) $18,800 (17,000) $ (k) (l) $

(m) (n)

Page 76

Chapter 1 - Introduction to Accounting and Business Place your answers in the space provided below. Hint: Use the interrelationships among the financial statements to solve this problem. (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) (n)

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

ANSWER:

(a) $6,400 (b) $17,900 (c) $9,100 (d) $9,100 (e) $38,100 (f) $30,800 (g) $17,000 (h) $17,800 (i) $38,100 (j) $55,900 (k) $35,000 (l) $6,000 (m) $29,000 (n) $30,800 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 77

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

$ 1,150 3,000 1,540 800 15,700 1,400 140 1,500 20,000 14,320 4,800 750 2,400 420 Heavenly Futures Company Income Statement For the Month Ended August 31

Fees earned Expenses: Wages expense $4,800 Rent expense 1,400 Telephone expense 1,150 Utilities expense 750 Office expense 420 Total expenses Net income DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

$15,700

8,520 $ 7,180

Page 78

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

$ 1,150 3,000 1,540 800 15,700 1,400 140 1,500 20,000 14,320 4,800 750 2,400 420 Bright Futures Company Statement of Owner’s Equity For the Month Ended August 31 Jason Bright, capital, August 1 $14,320 Net income for August $7,180 Withdrawals 800 Increase in owner’s equity 6,380 Jason Bright, capital, August 31 $20,700

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 79

Chapter 1 - Introduction to Accounting and Business 230. Eric Wood, CPA, was organized on January 1 as a proprietorship. List the errors that you find in the following financial statements and prepare the corrected statements for the three months ended March 31. Eric Wood, CPA Income Statement For the Three Months Ended March 31 Fees earned Expenses: Salary expense Rent expense Advertising expense Utilities expense Miscellaneous expense Answering service expense Supplies expense Total expenses Net income

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

Eric Wood, CPA Statement of Owner's Equity March 31 Eric Wood, capital, January 1 Investment on January 1 $20,000 Net income for the three months 14,000 Withdrawals (5,000) Increase in owner's equity Eric Wood, capital, March 31 Balance Sheet For the Three Months Ended March 31 Assets Owner's Equity Land $13,000 Eric Wood, capital Cash 10,860 Liabilities Accounts payable 2,670 Accounts receivable Supplies 925 Total liabilities and Total assets $33,225 owner's equity ANSWER:

31,000 $31,000

$31,000 2,225 $33,225

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

(2) (3) (4)

(5)

(6)

Miscellaneous expense is incorrectly listed after utilities expense on the income statement. Miscellaneous expense should be listed as the last expense, regardless of the amount. The operating expenses are incorrectly added. Instead of $28,000, the total should be $32,660. Because operating expenses are incorrectly added, the net income is incorrect. It should be listed as $9,340. The statement of owner's equity should be for a period of time instead of a specific date. That is, the statement of owner's equity should be reported "For the Three Months Ended March 31." Because the net income was incorrect, the increase in owners' equity and the balance in Eric Wood, Capital are incorrect. They should both be shown as $24,340. The name of the company is missing from the balance sheet heading.

Page 80

Chapter 1 - Introduction to Accounting and Business (7)

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

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

Eric Wood, CPA Statement of Owner's Equity For the Three Months Ended March 31 Eric Wood, capital, January 1 $ 0 Investment on January 1 $20,000 Net income for three months 9,340 Withdrawals (5,000) Increase in owner's equity 24,340 Eric Wood, capital, March 31 $24,340 Eric Wood, CPA Balance Sheet March 31 Assets Liabilities Cash $10,860 Accounts payable $ 2,670 Accounts receivable 2,225 Owner's Equity Supplies 925 Eric Wood, capital 24,340 Land 13,000 Total liabilities and Total assets $27,010 owner's equity $27,010 DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Page 81

Chapter 1 - Introduction to Accounting and Business 231. Using the following accounting equation elements and their balances, prepare, in good format a balance sheet in report form for Bright Futures Company for the month ended August 31. Telephone expense Cash Accounts payable Jason Bright, drawing Fees earned Rent expense Supplies Accounts receivable Computer equipment Jason Bright, capital (August 1) Wages expense Utilities expense Notes payable Office expense ANSWER:

$ 1,150 3,000 1,540 800 15,700 1,400 140 1,500 20,000 14,320 4,800 750 2,400 420 Bright Futures Company Balance Sheet August 31 Assets Cash Accounts receivable Supplies Computer equipment Total assets Liabilities Accounts payable Notes payable Total liabilities Owner's Equity Jason Bright, capital Total liabilities and owner’s equity

$ 3,000 1,500 140 20,000 $24,640

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

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-05 - 01-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 82

Chapter 1 - Introduction to Accounting and Business 232. The accounting equation elements and their balances of Awesome Travel Services at December 31 are listed below. There were no additional investments or withdrawals by J. Trendsetter during the year. Accounts payable Accounts receivable Cash Computer equipment Fees earned Rent expense

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

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

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

Prepare an income statement, statement of owner’s equity, and a balance sheet as of December 31. ANSWER:

Awesome Travel Services Income Statement For the Year Ended December 31 Fees earned Expenses:

$78,000 Wages expense Rent expense Utilities expense Supplies expense Income taxes expense Total expenses

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

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

Assets Cash Accounts receivable Supplies Computer equipment Total assets

Awesome Travel Services Balance Sheet December 31 Liabilities $18,000 Accounts payable 14,000 1,000 Owner’s Equity 21,000 J. Trendsetter, capital $54,000 Total liabilities and owner’s equity

46,000 $32,000

$10,000 32,000 $42,000

$12,000

42,000 $54,000

DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.1-05 - 01 - 05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 1 - Introduction to Accounting and Business 233. Schultz Tax Services, a tax preparation business, had the following transactions during the month of June: 1. Received cash for providing accounting services, $3,000. 2. Billed customers on account for providing services, $7,000. 3. Paid advertising expense, $800. 4. Received cash from customers on account, $3,800. 5. Owner made a withdrawal, $1,500. 6. Received telephone bill, $220. 7. Paid telephone bill, $220. Based on the information given above, calculate the balance of cash at June 30. Use the following reconciliation. Cash, June 1

$25,000

Plus cash receipts for June

____________

Minus cash payments for June ____________ Cash, June 30 ANSWER:

____________

Cash, June 1 $25,000 Plus cash receipts for June 6,800 Minus cash payments for June 2,520 Cash, June 30 $29,280 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-06 - 01-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 234. Given the following data: Dec. 31,Year 2 Total liabilities $128,250 Total owner’s equity 95,000

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

(a) Compute the ratio of liabilities to owner’s equity for each year. (b) Has the creditors’ risk increased or decreased from December 31, Year 1, to December 31, Year 2? ANSWER: (a) Dec. 31, Year 2 Dec. 31,Year 1 Total liabilities $128,250 $120,000 Total owner’s equity 95,000 80,000 Ratio of liabilities to owner’s equity 1.35 1.50 ($128,250/$95,000) ($120,000/$80,000) (b) Decreased DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.01-06 - 01-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 1 - Introduction to Accounting and Business 235. Company G has a ratio of liabilities to stockholders’ equity of 0.12 and 0.28 for Year 1 and Year 2, respectively. In contrast, Company M has a ratio of liabilities to stockholders’ equity of 1.13 and 1.29 for the same period. REQUIRED: Based on this information, which company's creditors are more at risk and why? Should the creditors of either company fear the risk of nonpayment? ANSWER: Company M’s creditors are more at risk than are Company G’s creditors. The lower the ratio of liabilities to stockholders' equity, the better able the company is to withstand poor business conditions and pay its obligations to creditors. Without additional information, it appears that the creditors of either company are well protected against the risk of nonpayment, because the ratios are relatively low for both. However, the fact that both ratios are increasing over the period should be monitored for downturns in business conditions. DIFFICULTY: Moderate Bloom's: Analyzing LEARNING OBJECTIVES: ACCT.WARD.18.01-06 - 01-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 236. The following data were taken from Miller Company’s balance sheet: Total liabilities Total owner’s equity

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

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

(a) Compute the ratio of liabilities to owner’s equity. Round your answer to one decimal place. (b) Has the creditors’ risk increased or decreased from December 31, Year 1, to December 31, Year 2? ANSWER: (a) 12/31/Year 2: $150,000/$75,000 = 2.0 12/31/Year 1: $105,000/$60,000 = 1.8 (b) Increased DIFFICULTY: Moderate Bloom's: Analyzing LEARNING OBJECTIVES: ACCT.WARD.18.01-06 - 01-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions True / False 1. Accounts are records of increases and decreases in individual financial statement items. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 2. A chart of accounts is a listing of accounts that make up the journal. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 3. The chart of accounts should be the same for each business. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 4. Accounts payable are accounts that you expect will be paid to you. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - OH - FN-Measurement ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 5. Consuming goods and services in the process of generating revenues results in expenses. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 6. Prepaid expenses are an example of an expense. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-04-Cash vs. Accrual ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 7. The unearned revenue account is an example of a liability. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-04-Cash vs. Accrual ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 8. The drawing account is an expense. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 9. Accounts in the ledger are usually maintained in alphabetical order. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 10. Depending on the account title, the right side of the account is referred to as the credit side. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 11. To determine the balance in an account, always subtract credits from debits. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 12. An account in its simplest form has three parts to it: a title, an increase side, and a decrease side. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 13. The T account got its name because it resembles the letter “T.” a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 14. The right-hand side of a T account is known as a debit and the left-hand side is known as a credit. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 15. Debiting the cash account will increase the account. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 16. A credit to the cash account will increase the account. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 17. The cash account will always be debited. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 18. The recording of cash receipts to the cash account will be done by debiting the account. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 19. The recording of cash payments from the cash account is done by entering the amount as a credit. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 20. The balance of an account can be determined by adding all of the debits, adding all of the credits, and adding the amounts together. a. True b. False ANSWER: False DIFFICULTY: Challenging Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 21. Liabilities are debts owed by the business entity. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-03-Business Forms ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 22. The accounts payable account is listed in the chart of accounts as an asset. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-16-Current Liabilities Repor - APC-16-Current Liabilities Reporting ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 23. A drawing account represents the amount of withdrawals made by the owner. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-03-Business Forms ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 24. Revenues are equal to the difference between cash receipts and cash payments. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-04-Cash vs. Accrual ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 25. Expenses result from using up assets or consuming services in the process of generating revenues. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 26. Owner’s equity will be reduced by the amount in the drawing account. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-03-Business Forms ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 27. When an owner invests assets in the business, the capital account increases due to revenue being earned. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 28. When an account receivable is collected in cash, the total assets of the business increase. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-16-Current Assets Reporting ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 29. When an account payable is paid with cash, the owner's equity in the business decreases. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-16-Current Liabilities Repor - APC-16-Current Liabilities Reporting ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 30. For a month's transactions for a typical medium-sized business, the salary expense account is likely to have only credit entries. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 31. A debit is abbreviated as Db and a credit is abbreviated as Cr. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-05-Accounting Cycle ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 32. When a business receives a bill from the utility company, no entry should be made until the invoice is paid. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-16-Current Liabilities Repor - APC-16-Current Liabilities Reporting ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 33. For a month's transactions for a typical medium-sized business, the accounts payable account is likely to have only credit entries. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 34. Withdrawals decrease owner's equity and are listed on the income statement as a deduction from revenue. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-09-Financial Statements ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 35. The normal balance of revenue accounts is a credit. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 36. The normal balance of an expense account is a credit. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 37. The normal balance of the drawing account is a debit. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 38. Expense accounts are increased by credits. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 39. The normal balance of a capital account is a debit. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.2-02 - 02-02 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 40. Revenue accounts are increased by credits. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 41. Liability accounts are increased by debits. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 42. Journalizing transactions using the double-entry bookkeeping system will eliminate fraud. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 43. Transactions are listed in the journal chronologically. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 44. Journalizing is the process of entering amounts in the ledger. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 45. The process of recording a transaction in the journal is called journalizing. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 46. Transactions are initially entered into a record called a journal. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 47. The double-entry accounting system records each transaction twice. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 48. The increase side of an account is also the side of the normal balance. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 49. Journal entries include both debit and credit accounts for each transaction. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 50. A transaction that is recorded in the journal is called a journal entry. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 51. Assets are increased with debits and decreased with credits. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 52. Liabilities are increased with debits and decreased with credits. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 53. Debits will increase unearned revenues and revenues. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-04-Cash vs. Accrual ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 54. All owner’s equity accounts record increases to the accounts with credits. a. True b. False ANSWER: False DIFFICULTY: Challenging Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 18

Chapter 2 - Analyzing Transactions 55. Journalizing always eliminates fraudulent activity. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-01-Purpose ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 56. Journal entries can have more than two accounts as long as the debits equal the credits. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 57. Normal account balances are on the increase side of the accounts. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 58. The process of transferring data from the journal to the ledger accounts is called posting. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-03 - 02-03 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 59. The posting reference notation used in the ledger is the account number. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-03 - 02-03 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 60. The posting reference notation used in the journal is the page number. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-03 - 02-03 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 61. A notation in the Post. Ref. column of the general journal indicates that the amount has been posted to the ledger. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-03 - 02-03 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 62. The order of the flow of accounting data is (1) record in the ledger, (2) record in the journal, and (3) prepare the financial statements. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-03 - 02-03 STATE STANDARDS: United States - IN - APC-05-Accounting Cycle ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 63. The process of transferring the debits and credits from the journal entries to the accounts is known as posting. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-03 - 02-03 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 64. Postings made to standard account forms show a new balance after each entry. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-03 - 02-03 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 65. A group of related accounts that make up a complete unit is called a trial balance. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 STATE STANDARDS: United States - IN - APC-09-Financial Statements ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 66. A trial balance determines the accuracy of the numbers. a. True b. False ANSWER: False DIFFICULTY: Challenging Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 STATE STANDARDS: United States - IN - APC-09-Financial Statements ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 67. Even when a trial balance is in balance, there may be errors in the individual accounts. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 STATE STANDARDS: United States - IN - APC-09-Financial Statements ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 68. The totals at the bottom of the trial balance and the totals at the bottom of the balance sheet both show equality and balancing and therefore should be equal. a. True b. False ANSWER: False DIFFICULTY: Challenging Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 STATE STANDARDS: United States - IN - APC-09-Financial Statements ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 69. A proof of the equality of debits and credits in the ledger at the end of an accounting period is called a balance sheet. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 STATE STANDARDS: United States - IN - APC-09-Financial Statements ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 70. If the trial balance is in balance, it can be assumed that all journal entries were posted correctly and no errors were made. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 STATE STANDARDS: United States - IN - APC-09-Financial Statements ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 71. Posting a part of a transaction to the wrong account will cause the trial balance totals to be unequal. a. True b. False ANSWER: False DIFFICULTY: Challenging Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 STATE STANDARDS: United States - IN - APC-09-Financial Statements ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 72. The erroneous arrangement of digits, such as writing $45 as $54, is called a slide. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 73. Journalizing a transaction with both the debit and the credit for $69 instead of $96 will cause the trial balance to be out of balance. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 STATE STANDARDS: United States - IN - APC-09-Financial Statements ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 74. The erroneous moving of an entire number one or more spaces to the right or left, such as writing $85 as $850, is called a transposition. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic Multiple Choice 75. Accounts a. do not reflect money amounts b. are not used by entities that manufacture products c. are records of increases and decreases in individual financial statement items d. are only used by large entities with many transactions ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-01-Purpose ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 76. Accounts are classified in the ledger a. chronologically b. alphabetically c. in accordance with their appearance in the financial statements d. with the accounts used most often listed first ANSWER: c DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 77. Which of the following accounts is an owner's equity account? a. Cash b. Accounts Payable c. Prepaid Insurance d. Ross Morris, Capital ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 78. The gross increases in owner's equity attributable to business activities are called a. assets b. liabilities c. revenues d. expenses ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 79. A chart of accounts is a. the same as a balance sheet b. usually a listing of accounts in alphabetical order c. usually a listing of accounts in financial statement order d. used in place of a ledger ANSWER: c DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-09-Financial Statements ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 80. The debit side of an account a. depends on whether the account is an asset, liability, or owner's equity b. can be either side of the account depending on how the accountant set up the system c. is the right side of the account d. is the left side of the account ANSWER: d DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 81. An account is said to have a debit balance if a. the amount of the debits exceeds the amount of the credits b. there are more entries on the debit side than on the credit side c. there are more entries on the credit side than on the debit side d. the first entry of the accounting period was posted on the debit side ANSWER: a DIFFICULTY: Challenging Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 82. Which side of the account increases the cash account? a. credit b. neither a debit nor a credit c. debit d. either a debit or a credit ANSWER: c DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 83. Which statement(s) concerning cash is (are) true? a. Cash will always have more debits than credits. b. Cash will never have a credit balance. c. Cash is increased by debiting. d. All of these choices. ANSWER: c DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 84. Which of the following is true about T accounts? a. The left side of a T account is called the debit side. b. The left side of a T account is called the credit side. c. The right side of a T account is called the debit side. d. Transactions are first recorded in T accounts and then posted to the journal. ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 85. A cash payment is recorded in the cash account as a. neither a debit nor a credit b. a credit c. a debit d. either a debit or a credit ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 86. A list of the accounts used by a business is called the a. journal b. chart of accounts c. T chart d. debit listing ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 87. In the chart of accounts, the balance sheet accounts are normally listed in which order? a. liabilities, assets, owner’s equity b. assets, liabilities, owner’s equity c. owner’s equity, assets, liabilities d. assets, owner’s equity, liabilities ANSWER: b DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 88. In which order are the accounts listed in the chart of accounts? a. assets, expenses, liabilities, owner’s equity, revenues b. owner's equity, assets, liabilities, revenues, expenses c. assets, liabilities, owner’s equity, revenues, expenses d. assets, liabilities, revenues, expenses, owner's equity ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 89. Which are the parts of the T account? a. title, date, total b. date, debit side, credit side c. title, debit side, credit side d. title, debit side, total ANSWER: c DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 90. The chart of accounts is designed to a. alphabetize the accounts to make reading easier for financial statement users b. organize accounts in order of dollar amount to simplify the accounting information for users c. summarize the transactions and determine ending account balances d. meet the information needs of a company's managers and other users of its financial statements ANSWER: d DIFFICULTY: Challenging Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 91. Which group of accounts is comprised of only assets? a. Cash, Accounts Payable, Buildings b. Accounts Receivable, Revenue, Cash c. Prepaid Expenses, Buildings, Patents d. Unearned Revenue, Prepaid Expenses, Cash ANSWER: c DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 92. Which of the following is true about assets? a. Assets include both physical and intangible items. b. Assets include only physical items. c. Assets are the personal property of the owner of the company. d. Assets are the result of selling products or services to customers. ANSWER: a DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 93. Which of the following is not considered to be a liability? a. Wages Payable b. Accounts Receivable c. Unearned Revenue d. Accounts Payable ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 94. Which of the following statements is not true about liabilities? a. Liabilities are debts owed to outsiders. b. Account titles of liabilities often include the term “payable.” c. Cash received before a service is performed creates a liability. d. Liabilities do not include wages owed to employees of the company. ANSWER: d DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 95. Owner’s equity will be reduced by all of the following except a. revenues b. expenses c. withdrawals d. All of these choices ANSWER: a DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 96. Expenses can result from a. increasing owner’s equity b. consuming services c. using up liabilities d. purchasing assets ANSWER: b DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 97. Assume that you are creating a chart of accounts for a company. Each account number will have two digits. The first digit indicates the major account group to which the account belongs. Which of the following correctly identifies the major account groups typically represented by the numbers 1 through 5? a. 1-Assets, 2-Liabilities, 3-Owner’s Equity, 4-Expenses, 5-Revenues b. 1-Assets, 2-Liabilities, 3-Owner’s Equity, 4-Revenues, 5-Expenses c. 1-Assets, 2-Owner’s Equity, 3-Revenues, 4-Expenses, 5-Drawing d. 1-Owner’s Equity, 2-Drawing, 3-Revenues, 4-Expenses ANSWER: b DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 98. A debit may signify a(n) a. decrease in asset accounts b. decrease in liability accounts c. increase in the capital account d. decrease in the drawing account ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 99. The accounts in the ledger of Monroe Entertainment Co. are listed below. All accounts have normal balances. Accounts Payable Accounts Receivable Prepaid Insurance Cash Drawing

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

Fees Earned Insurance Expense Land Wages Expense Capital

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

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

a Total Assets = Accounts Receivable + Prepaid Insurance + Cash + Land = $1,800 + $2,000 + $3,200 + $3,000 = $10,000 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 100. The balance of an account is determined by a. adding all of the debits to all of the credits b. always subtracting the debits from the credits c. always subtracting the credits from the debits d. adding all of the debits, adding all of the credits, and then subtracting the smaller sum from the larger sum ANSWER: d DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 101. Which of the following types of accounts have a normal credit balance? a. assets and liabilities b. liabilities and expenses c. revenues and capital d. capital and drawing ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 102. Which of the following groups of accounts have a normal debit balance? a. revenues, liabilities, and capital b. capital and assets c. liabilities and capital d. assets and expenses ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 103. Which of the following statements is not a purpose for the journal? a. to show increases and decreases in accounts b. to show a chronological order by date c. to show a complete transaction in one place d. to help locate errors ANSWER: d DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 104. A credit may signify a a. decrease in assets b. decrease in liabilities c. decrease in capital d. decrease in revenue ANSWER: DIFFICULTY:

a Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 105. A debit signifies a decrease in a. assets b. expenses c. drawing d. revenues ANSWER: d DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 106. Which of the following applications of the rules of debit and credit is true? a. decrease Prepaid Insurance with a credit and the normal balance is a credit b. increase Accounts Payable with a credit and the normal balance is a debit c. increase Equipment with a debit and the normal balance is a debit d. decrease Cash with a debit and the normal balance is a credit ANSWER: c DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 107. Which of the following describes the classification and normal balance of the fees earned account? a. asset, credit b. liability, credit c. owner's equity, debit d. revenue, credit ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 108. The classification and normal balance of the accounts payable account are a. asset, credit balance b. liability, credit balance c. owner's equity, credit balance d. revenue, credit balance ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 109. The classification and normal balance of the drawing account are a. expense, credit balance b. expense, debit balance c. liability, credit balance d. owner's equity, debit balance ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 110. Which of the following accounts are debited to record increases? a. assets and liabilities b. drawing and liabilities c. expenses and liabilities d. assets and expenses ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 111. In which of the following types of accounts are increases recorded by credits? a. revenues and liabilities b. drawing and assets c. liabilities and drawing d. expenses and liabilities ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 112. In which of the following types of accounts are decreases recorded by debits? a. assets b. liabilities c. expenses d. drawing ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 113. In which of the following types of accounts are decreases recorded by credits? a. liabilities b. owner's equity c. assets d. revenues ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 114. A credit balance in which of the following accounts would likely indicate an error? a. Fees Earned b. Salary Expense c. Janet James, Capital d. Accounts Payable ANSWER: b DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 115. A debit balance in which of the following accounts would likely indicate an error? a. Salaries Expense b. Notes Payable c. Edgar Martin, Drawing d. Supplies ANSWER: b DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 116. Which of the following entries records the payment of an account payable? a. debit Cash; credit Accounts Payable b. debit Accounts Receivable; credit Cash c. debit Cash; credit Supplies Expense d. debit Accounts Payable; credit Cash ANSWER: d DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 117. Which of the following entries records the investment of cash by Taylor Thomas, owner of a proprietorship? a. debit Taylor Thomas, Capital; credit Accounts Receivable b. debit Cash; credit Taylor Thomas, Capital c. debit Taylor Thomas, Drawing; credit Cash d. debit Cash; credit Taylor Thomas, Drawing ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 118. Which of the following entries records the payment of a bill for your insurance premium? a. debit Prepaid Insurance; credit Cash b. debit Insurance Payable; credit Accounts Receivable c. debit Accounts Payable; credit Cash d. debit Cash; credit Prepaid Insurance ANSWER: a DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 119. Which of the following entries records the withdrawal of cash by Sally Anderson, owner of a proprietorship, for personal use? a. debit Sally Anderson, Capital; credit Cash b. debit Sally Anderson, Drawing; credit Cash c. debit Salaries Expense; credit Cash d. debit Salaries Expense; credit Salaries Payable ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 120. Office supplies were sold by Janer's Cleaning Service at cost to another repair shop, with cash received. Which of the following entries for Janer's Cleaning Service records this transaction? a. Office Supplies, debit; Cash, credit b. Office Supplies, debit; Accounts Payable, credit c. Cash, debit; Office Supplies, credit d. Accounts Payable, debit; Office Supplies, credit ANSWER: c DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 121. Office supplies purchased by Janer's Cleaning Service on account were returned. Which of the following entries for Janer's Cleaning Service records this transaction? a. Cash, debit; Office Supplies, credit b. Office Supplies, debit; Accounts Receivable, credit c. Accounts Payable, debit; Office Supplies, credit d. Office Supplies, debit; Accounts Payable, credit ANSWER: c DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 122. Cash was paid by Janer's Cleaning Service to creditors on account. Which of the following entries for Janer's Cleaning Service records this transaction? a. Cash, debit; Debbi Janer, Capital, credit b. Accounts Payable, debit; Cash, credit c. Accounts Receivable, debit; Cash, credit d. Accounts Payable, debit; Accounts Receivable, credit ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 123. The process of initially recording a business transaction is called a. closing b. posting c. journalizing d. balancing ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 124. Which of the following entries records the acquisition of office supplies on account? a. Office Supplies, debit; Cash, credit b. Cash, debit; Office Supplies, credit c. Office Supplies, debit; Accounts Payable, credit d. Accounts Receivable, debit; Office Supplies, credit ANSWER: c DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 125. Which of the following entries records the payment of insurance for the current month? a. Cash, debit; Insurance Expense, credit b. Insurance Expense, debit; Cash, credit c. Insurance Expense, debit; Accounts Receivable, credit d. Prepaid Insurance, debit; Cash, credit ANSWER: b DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 126. Which of the following entries records the receipt of cash from clients on account? a. Accounts Payable, debit; Fees Earned, credit b. Accounts Receivable, debit; Fees Earned, credit c. Accounts Receivable, debit; Cash, credit d. Cash, debit; Accounts Receivable, credit ANSWER: d DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 127. Which of the following entries records the collection of cash from cash customers? a. Fees Earned, debit; Cash, credit b. Fees Earned, debit; Accounts Receivable, credit c. Cash, debit; Fees Earned, credit d. Accounts Receivable, debit; Fees Earned, credit ANSWER: c DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 128. Which of the following entries records the receipt of cash for two months' rent? The cash was received in advance of providing the service. a. Prepaid Rent, debit; Rent Revenue, credit b. Cash, debit; Unearned Rent, credit c. Cash, debit; Prepaid Rent, credit d. Cash, debit; Rent Expense credit ANSWER: b DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 129. A client has a massage and asks the company bookkeeper to mail her the bill. The bookkeeper should make which entry to record the invoice? a. no entry until the cash is received b. Fees Earned, debit; Accounts Receivable, credit c. Cash, debit; Fees Earned, credit d. Accounts Receivable, debit; Fees Earned, credit ANSWER: d DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 130. Which of the following abbreviations is correct? a. Debit, “Dr”; Credit, “Cd” b. Debit, “Db”; Credit, “Cr” c. Debit, “Db”; Credit, “Cd” d. Debit, “Dr”; Credit, “Cr” ANSWER: d DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 131. Which of the following is not a correct rule of debits and credits? a. Assets, expenses, and withdrawals are increased by debits. b. Assets are decreased by credits and have a normal debit balance. c. Liabilities, revenues, and owner’s equity are increased by credits. d. The normal balance for revenues and expenses is a credit. ANSWER: d DIFFICULTY: Challenging Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 132. Gently Laser Clinic purchased laser equipment for $8,500 and paid $2,250 down, with the remainder to be paid later. The correct entry would be a. Equipment 2,250 Cash 2,250 b. Cash 2,250 Accounts Payable 6,250 Equipment 8,500 c. Equipment Expense 8,500 Accounts Payable 2,250 Cash 6,250 d. Equipment 8,500 Accounts Payable 6,250 Cash 2,250 ANSWER: d RATIONALE: Equipment 8,500 Accounts Payable 6,250 ($8,500 – $2,250) Cash 2,250 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 133. The __________ is where a transaction can first be found in the accounting records. a. chart of accounts b. income statement c. balance sheet d. journal ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 134. The process of recording a transaction in the journal is called a. ledgerizing b. journalizing c. posting d. summarizing ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 135. Joshua Scott invests $40,000 into his new business. How would this transaction be entered in the journal in good form? a. Cash 40,000 Joshua Scott, Capital 40,000 Invested cash in business. b. Cash 40,000 Joshua Scott, Loan 40,000 Invested cash in business. c. Joshua Scott, Capital 40,000 Cash 40,000 Invested cash in business. d. Joshua Scott, Loan 40,000 Cash 40,000 Invested cash in business. ANSWER: a DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 2 - Analyzing Transactions 136. May

Cash Scott Clark, Capital Invested cash in business.

22,000 22,000

This journal entry will a. increase Capital and decrease Cash b. increase Cash and decrease Capital c. increase Cash and increase Capital d. decrease Cash and decrease Capital ANSWER: c DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 137. May

Land 105,000 Cash 105,000 Purchased land for business. What effects does this journal entry have on the accounts? a. increase Cash and increase Land b. increase Land and decrease Cash c. decrease Cash and decrease Land d. increase Cash and decrease Land ANSWER: b DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 138. Mar.

Accounts Payable 800 Cash 800 Paid creditors on account. What effects does this journal entry have on the accounts? a. decrease Accounts Payable, increase Cash b. increase Cash, decrease Accounts Payable c. increase Accounts Payable, increase Cash d. decrease Accounts Payable, decrease Cash ANSWER: d DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 139. Which of the following accounts would be increased with a credit? a. Land; Accounts Payable; Drawing b. Accounts Payable; Unearned Revenue; Collins, Capital c. Collins, Capital; Accounts Receivable; Unearned Revenue d. Cash; Accounts Receivable; Collins, Capital ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 140. In accordance with the debit and credit rules, which of the following is true? a. Debits increase assets. b. Credits increase assets. c. Debits increase both assets and capital. d. Credits increase both assets and liabilities. ANSWER: a DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 141. All of the following accounts are increased with a debit except a. Unearned Revenue b. Land c. Accounts Receivable d. Cash ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 142. Which of the following owner’s equity accounts follows the same debit and credit rules as liabilities? a. expense accounts only b. drawing accounts only c. revenue accounts only d. expense and drawing accounts ANSWER: c DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 143. The payment for the monthly rent will require which of the following entries? a. debit Cash and debit Rent Expense b. credit Cash and credit Rent Expense c. debit Rent Expense and credit Cash d. credit Rent Expense and debit Cash ANSWER: c DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 144. Expenses follow the same debit and credit rules as a. revenues b. the drawing account c. the capital account d. liabilities ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 145. Net income will result when a. revenues (credits) > expenses (debits) b. revenues (debits) > expenses (credits) c. expenses (credits) = revenues (debits) d. revenues (credits) = expenses (debits) ANSWER: a DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 146. Which of the following will increase owner’s equity? a. expenses > revenues b. the owner draws money for personal use c. revenues > expenses d. cash is received from customers on account ANSWER: c DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 147. Which of the following situations increases owner’s equity? a. Supplies are purchased on account. b. Services are provided on account. c. Cash is received from customers on account. d. Utility bill will be paid next month. ANSWER: b DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 148. Which of the following groups of accounts is increased with a debit? a. assets, liabilities, owner’s equity b. assets, drawing, expenses c. assets, revenues, expenses d. assets, liabilities, revenues ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 149. Which of the following groups of accounts increases with a credit? a. capital, revenues, expenses b. assets, capital, revenues c. liabilities, capital, revenues d. None of these choices ANSWER: c DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 150. Which of the following is true regarding normal balances of accounts? a. All accounts have a normal debit balance. b. The normal balance of all accounts will have either a positive or negative balance. c. Accounts that have a normal debit balance will only have debit entries, never credit entries. d. The normal balance is on the increase side of the account. ANSWER: d DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 151. Which of the following is not true with a double-entry accounting system? a. The accounting equation remains in balance. b. The sum of all debits is always equal to the sum of all credits in each journal entry. c. Each business transaction will have two debits. d. Every transaction affects at least two accounts. ANSWER: c DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 152. Mar.

6 Cash 2,500 Unearned Fees 2,500 ???????????? What is the best explanation for this journal entry? a. Received cash for services performed. b. Received cash for services to be performed in the future. c. Paid cash in advance for services to be performed. d. Performed services for which cash is owed. ANSWER: b DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 153. Apr.

Equipment 15,000 Cash 5,000 Notes Payable 10,000 ???????????? Which is the best explanation for this journal entry? a. Purchased equipment; paid cash of $5,000, with the remainder to be paid in the future. b. Purchased equipment; paid cash of $10,000, with the remainder to be received in the future. c. Purchased equipment with cash. d. Purchased equipment on account. ANSWER: a DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 154. The process of transferring the debits and credits from the journal entries to the accounts is called a. sliding b. transposing c. journalizing d. posting ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 155. The posting process will include the transfer of which of the following data from the journal to the ledger? a. date, amount (debit or credit) b. date, amount (debit or credit), journal page number c. amount (debit or credit), account number d. date, amount (debit or credit) account number ANSWER: b DIFFICULTY: Challenging Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 2 - Analyzing Transactions 156. The Posting Reference columns are used to trace transactions from the ledger to the journal. What will be entered in the Posting Reference column of (1) the journal and (2) the ledger? a. (1) the amount of the debit or credit and (2) the journal page number b. (1) the journal page number and (2) the date of the transaction c. (1) the journal page number and (2) the account number d. (1) the account number and (2) the journal page number ANSWER: d DIFFICULTY: Challenging Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic The chart of accounts for Corning Company includes the following: Account Name

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

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

1,530 1,530

157. What is the posting reference that will be found in the cash account? a. 11 b. 15 c. 3 d. 13 ANSWER: c DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 158. What is the posting reference that will be found in the prepaid insurance account? a. 11 b. 15 c. 3 d. 13 ANSWER: c DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 159. What posting references will be found in the journal entry? a. 15, 11 b. 15, 3 c. 11, 3 d. 3, 15 ANSWER: a DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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

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

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

640 640

What posting references will be found in the journal entry? a. 41, 3 b. 3, 11 c. 11, 41 d. 11, 3 ANSWER: c DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 161. The chart of accounts for Miguel Company includes the following: Account Name

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

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

525 525

What is the posting reference that will be found in the salaries expense account? a. 5 b. 11 c. 54 d. 21 ANSWER: a DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 162. Proof that the dollar amount of the debits equals the dollar amount of the credits in the ledger means a. all of the information from the journal was correctly transferred to the ledger b. all accounts have their correct balances in the ledger c. only the journal is accurate; the ledger may be incorrect d. only that the debit dollar amounts equal the credit dollar amounts ANSWER: d DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 163. That the total dollar amount of the debits equals the total dollar amount of the credits in the ledger accounts can be verified through a(n) a. chart of accounts b. trial balance c. income statement d. balance sheet ANSWER: b DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 164. Randomly listed below are the steps for preparing a trial balance: (1) Verify that the total of the Debit column equals the total of the Credit column. List the accounts from the ledger and enter their debit or credit balance in the Debit or (2) Credit column of the trial balance. List the name of the company, the title of the trial balance, and the date the trial balance (3) is prepared. (4) Total the Debit and Credit columns of the trial balance. What is the proper order of these steps? a. (3), (2), (4), (1) b. (2), (3), (4), (1) c. (3), (2), (1), (4) d. (4), (3), (2), (1) ANSWER: a DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 165. A trial balance is prepared to a. prove that there were no errors made in recording transactions into the journal b. prove that no errors were made in posting to the ledger c. prove that each account balance is correct d. discover errors that affect the equality of debits and credits ANSWER: d DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 166. The accounts in the ledger of Monroe Entertainment Co. are listed below. All accounts have normal balances. Accounts Payable Accounts Receivable Prepaid Insurance Cash Drawing

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

Fees Earned Insurance Expense Land Wages Expense Capital

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

Prepare a trial balance. The total of the debits is a. $13,900 b. $11,200 c. $12,700 d. $9,700 ANSWER: a RATIONALE: Monroe Entertainment Co. Trial Balance Debit Balances Accounts Payable Accounts Receivable Prepaid Insurance Cash Drawing Fees Earned Insurance Expense Land Wages Expense Capital

Credit Balances 1,500

1,800 2,000 3,200 1,200 3,600 1,300 3,000 1,400 13,900

8,800 13,900

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Chapter 2 - Analyzing Transactions DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 167. Which of the following is an internal report that will determine if debit balances equal credit balances in the ledger? a. chart of accounts b. income statement c. trial balance d. account reconciliation ANSWER: c DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 168. An overpayment error was discovered in computing and paying the wages of a Jamison Tree Trimming employee. When Jamison receives cash from the employee for the amount of the overpayment, which of the following entries will Jamison make? a. Cash, debit; Wages Expense, credit b. Wages Payable, debit; Wages Expense, credit c. Wages Expense, debit; Cash, credit d. Cash, debit; Wages Payable, credit ANSWER: a DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 169. If the two totals of a trial balance are not equal, it could be due to a. failure to record a transaction b. recording the same erroneous amount for both the debit and the credit parts of a transaction c. an error in determining the account balances, such as a balance being incorrectly computed d. recording the same transaction more than once ANSWER: c DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 170. When a transposition error is made on the trial balance, the difference between the debit and credit totals on the trial balance will be a. zero b. twice the amount of the transposition c. one-half the amount of the transposition d. divisible by 9 ANSWER: d DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 171. Which of the following errors, each considered individually, would cause the trial balance totals to be unequal? a. A transaction was not posted. b. A payment of $67 for insurance was posted as a debit of $76 to Prepaid Insurance and a credit of $76 to Cash. c. A payment of $4,450 to a creditor was posted as a debit of $4,500 to Accounts Payable and a credit of $450 to Cash. d. Cash received from customers on account was posted as a debit of $720 to Cash and a credit of $720 to Accounts Payable. ANSWER: c DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 172. Which of the following errors will cause the trial balance totals to be unequal? a. posting the debit portion of a journal entry incorrectly when the credit portion of the entry is correctly posted b. failure to record a transaction or to post a transaction c. recording the same transaction more than once d. recording the same erroneous amount for both the debit and the credit parts of a transaction ANSWER: a DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 173. The trial balance is out of balance and the accountant suspects that a transposition or slide error has occurred. What will the accountant do to confirm this suspicion? a. Determine the amount of the error and look for that amount on the trial balance. b. Determine the amount of the error and divide by 2, then look for that amount on the trial balance. c. Determine the amount of the error and refer to the journal entries for that amount. d. Determine the amount of the error and divide by 9. If the result is evenly divided, then this type of error is likely. ANSWER: d DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 174. The purchase of supplies on account was recorded and posted as a debit to Supplies for $500 and a credit to Accounts Receivable for $500. The correcting entry would include a a. credit to Accounts Receivable for $500 b. credit to Accounts Receivable for $1,000 c. credit to Accounts Payable for $500 d. credit to Accounts Payable for $1,000 ANSWER: c DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 175. Which of the following is not a useful step in finding errors on the trial balance? a. Determine the difference between debits and credits and look for the amount. b. Determine the difference between debits and credits and change any account to make the trial balance correct. c. Determine the difference between debits and credits, divide the amount by 2, and look for the amount. d. Determine the difference between debits and credits, divide the amount by 9, and if it divides evenly, look for a transposition or slide error. ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 176. Which of the following statements regarding a horizontal analysis is false? a. A horizontal analysis is used to compare an item in a current statement with the same item in prior statements. b. A horizontal analysis can be performed on a balance sheet and income statement, but not on a statement of cash flows. c. If Fees Earned in Year 1 is $125,000 and Fees Earned in Year 2 is $143,750, a horizontal analysis will indicate a 15% increase over this period. d. When two statements are compared in horizontal analysis, the earlier statement is used as the base for computing the amount and the percent of change. ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.02-05 - 02-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 177. McNally Industries has a condensed income statement as shown. Sales Total operating expenses Net income

Year 2 $198,000 163,000 $ 35,000

Year 1 $165,500 147,500 $ 18,000

Using horizontal analysis, calculate the amount and percent change for sales. Round to one decimal place. a. $32,500, 19.6% b. $18,000, 10.9% c. $35,000, 17.7% d. $17,000, 9.4% ANSWER: a RATIONALE: Change in Sales = Sales in Year 2 – Sales in Year 1 = $198,000 – $165,500 = $32,500 Percent Change in Sales = (Sales in Year 2 – Sales in Year 1)/Sales in Year 1 = ($198,000 – $165,500)/$165,500 = 19.6% © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 2 - Analyzing Transactions DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-05 - 02-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 178. Richardson Company has a condensed income statement as shown. Sales Total operating expenses Net income

Year 2 $150,000 133,000 $ 17,000

Year 1 $165,500 147,500 $ 18,000

Using horizontal analysis, calculate the amount and percent change for sales. Round to one decimal place. a. $(17,000), (11.3%) b. $(15,500), (10.3%) c. $(18,000), (10.9%) d. $(15,500), (9.4%) ANSWER: d RATIONALE: Change in Sales = Sales in Year 2 – Sales in Year 1 = $150,000 – $165,500 = –$15,500 Percent Change in Sales = (Sales in Year 2 – Sales in Year 1)/Sales in Year 1 = ($150,000 – $165,500)/$165,500 = –9.4% DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-05 - 02-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic Matching Match each of the following accounts with its proper account group from the groups listed below. a. Assets b. Liabilities c. Owner's Equity d. Revenue e. Expenses DIFFICULTY:

Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 2 - Analyzing Transactions 179. Unearned Rent ANSWER: b 180. Prepaid Insurance ANSWER: a 181. Fees Earned ANSWER: d 182. Patents ANSWER: a 183. Chris Clark, Drawing ANSWER: c For each of the following accounts, indicate whether its normal balance is on the credit side or the debit side of the T account. a. Credit side b. Debit side DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 STATE STANDARDS: United States - OH - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 184. John Smith, Capital ANSWER: a 185. Accounts Receivable ANSWER: b 186. Accounts Payable ANSWER: a 187. Interest Earned ANSWER: a 188. Copyrights ANSWER: b

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Chapter 2 - Analyzing Transactions Several types of errors can be made during the journalizing and posting process. Match the following with their best description. a. Trial balance preparation errors b. Account balance errors c. Posting errors DIFFICULTY: Challenging Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 STATE STANDARDS: United States - IN - APC-06-Recording Transactions ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 189. Balance incorrectly computed ANSWER: b 190. Debit or credit posting omitted ANSWER: c 191. Wrong amount posted to an account ANSWER: c 192. Column incorrectly added ANSWER: a 193. Balance entered on wrong side of account ANSWER: b 194. Amount incorrectly entered on trial balance ANSWER: a 195. Balance entered in wrong column or omitted ANSWER: a 196. Debit posted as credit, or vice versa ANSWER: c

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Chapter 2 - Analyzing Transactions Subjective Short Answer 197. The chart of accounts classifies the accounts to make identification of the accounts easier. Describe the numbering system businesses use in setting up the chart of accounts. ANSWER: A chart of accounts is set up by assigning two-digit numbers to each of the accounts for use as references. The first digit indicates the major account group of the ledger in which the account is located. Accounts beginning with 1 represent assets; 2, liabilities; 3, owner's equity; 4, revenue; 5, expenses. The second digit indicates the location of the account within its group. Large companies may have additional digits to accommodate a large number of accounts. DIFFICULTY:

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

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

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Chapter 2 - Analyzing Transactions ANSWER:

11 Cash 12 Accounts Receivable 13 Supplies 14 Prepaid Insurance 15 Equipment 16 Truck 21 Accounts Payable 22 Notes Payable 31 Cassie Harris, Capital 32 Cassie Harris, Drawing 41 Fees Earned 51 Wages Expense 52 Rent Expense 53 Utilities Expense 54 Truck Expense 55 Insurance Expense 56 Miscellaneous Expense DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 199. On January 31, the cash account balance was $96,750. During January, cash receipts totaled $305,000 and cash payments totaled $375,880. Determine the cash balance on January 1. ANSWER: ??? + $305,000 − $375,880 = $96,750 Cash balance at January 1 is $167,630 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 200. Organize the following accounts into the usual sequence of a chart of accounts. Miscellaneous Expense Accounts Payable Accounts Receivable Cash Alecia Morris, Capital Fees Earned Prepaid Rent Salaries Expense Unearned Revenue Alecia Morris, Drawing

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Chapter 2 - Analyzing Transactions ANSWER:

Cash Accounts Receivable Prepaid Rent Accounts Payable Unearned Revenue Alecia Morris, Capital Alecia Morris, Drawing Fees Earned Salaries Expense Miscellaneous Expense DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 201. Calculate the following: (a)

Determine the cash receipts for April based on the following data: Cash payments during April Cash account balance, April 1 Cash account balance, April 30

(b)

$63,000 25,500 31,750

Determine the cash received from customers on account during April based on the following data:

Accounts receivable account balance, April 1 $22,500 Accounts receivable account balance, April 30 15,250 Fees billed to customers during April 45,000 ANSWER: (a) $69,250 ($31,750 + $63,000 − $25,500) (b) $52,250 ($22,500 + $45,000 − $15,250) DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCREDITING STANDARDS ACCT.ACBSP.APC.02 - GAAP : ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 202. Selected accounts from the ledger of Garrison Company appear below. For each account, indicate the following: (a) In the first column at the right, indicate the nature of each account, using the following abbreviations: Asset - A Liability - L None of the above - N

Revenue - R Expense - E

(b) In the second column, indicate the increase side of each account by inserting Dr. or Cr. Account (1) Supplies (2) Notes Receivable (3) Fees Earned (4) Garrison, Drawing (5) Accounts Payable (6) Salaries Expense (7) Garrison, Capital (8) Accounts Receivable (9) Equipment (10) Notes Payable ANSWER:

Type of Account _______ _______ _______ _______ _______ _______ _______ _______ _______ _______

Increase Side ________ ________ ________ ________ ________ ________ ________ ________ ________ ________

Type of Account (1) A (2) A (3) R (4) N (5) L (6) E (7) N (8) A (9) A (10) L DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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

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Chapter 2 - Analyzing Transactions 203. All nine transactions for Dalton Survey Company for September, the first month of operations, are recorded in the following T accounts: Cash 20,000 (3) 6,900 (5) 4,700 (6) (8)

(1) (7) (9)

(4)

Michael Dalton, Capital (1) 20,000

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

Accounts Receivable 4,900 (9) 4,700

(3)

Supplies 7,500

(2)

Equipment 4,500

Fees Earned (4) (7) (6)

Accounts Payable 2,600(2)

(5)

Michael Dalton, Drawing (8) 2,000 4,900 6,900

Operating Expenses 5,500

4,500

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

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

Present your answers in the following form: Transaction

Account Debited Type Effect

Account Credited Type Effect

ANSWER:

Account Debited Account Credited Transaction Type Effect Type (1) asset + capital (2) asset + liability (3) asset + asset (4) asset + revenue (5) liability − asset (6) expense + asset (7) asset + revenue (8) drawing + asset (9) asset + asset DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Effect + + − + − − + − −

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Chapter 2 - Analyzing Transactions 204. On June 1, the cash account balance was $96,750. During June, cash receipts totaled $305,000 and the June 30 balance was $75,880. Determine the cash payments made during June. ANSWER: $75,880 = $96,750 + $305,000 − ? Cash Payments = $325,870 DIFFICULTY: Bloom's: Applying Easy LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 205. On September 1, Erika Company purchased land for $47,500 cash. Provide the journal entry for this transaction. ANSWER: Sept. 1 Land 47,500 Cash 47,500 Purchased land for the company. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 206. On October 10, Nickle Company purchased supplies for $1,800 on account. On October 25, Nickle Company paid the invoice. (a) Provide the journal entry for the purchase on account. (b) Provide the journal entry for the payment of the invoice. ANSWER: (a) Oct. 10 Supplies 1,800 Accounts Payable 1,800 Purchased supplies on account. (b) Oct. 25 Accounts Payable Cash Paid for supplies on account. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

1,800

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Chapter 2 - Analyzing Transactions 207. On October 17, Nickle Company purchased a building and a plot of land for $750,000. The building was valued at $500,000 while the land carried a value of $250,000. Nickle paid $300,000 down in cash and signed a note payable for the balance. Provide the journal entry for this transaction. ANSWER: Oct. 17 Building 500,000 Land 250,000 Cash 300,000 Notes Payable 450,000 Purchased building and land with cash down payment. DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 208. On November 1, Nickle Company made a cash payment of $200,000 on a note payable that was generated in the purchase of a building and land. Provide the journal entry for this transaction. ANSWER: Nov. 1 Notes Payable 200,000 Cash 200,000 Made payment on note payable. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 209. On January 7, Damien Lawson invests $45,000 to initiate the operation of his business, JumpStart. Provide the journal entry for this transaction. ANSWER: Jan. 7 Cash 45,000 Damien Lawson, Capital 45,000 Invest cash in JumpStart. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 210. On January 8, Damien Lawson transfers ownership of several pieces of office equipment to his new business, JumpStart. When new, these items were worth $72,500. The fair market value of the equipment is $60,000. Journalize this transfer. ANSWER: Jan. 8 Office Equipment 60,000 Damien Lawson, Capital 60,000 Invested equipment in business. While Damien may have paid $72,500 for this equipment sometime in the past, it should be transferred into the company at fair market value (FMV), $60,000. DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 211. On August 30, JumpStart incurred the following expenses: Payment to the landlord for August rent, $2,300 Payment to Gas & Electric Company for August bill, $525 Payment of employee wages for the last half of August, $1,750 Payment of shopping center’s parking lot cleaning fee, $275 Journalize these payments as one compound journal entry. ANSWER: Aug. 30 Rent Expense 2,300 Utilities Expense 525 Wages Expense 1,750 Maintenance Expense 275 Cash Paid expenses. DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

4,850

212. On October 30, Damien Lawson withdraws $3,330 from JumpStart for personal use. Journalize this event. ANSWER: Oct. 30 Damien Lawson, Drawing 3,330 Cash 3,330 Withdrew cash for personal use. DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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

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

D-Decrease

NE-No Effect Assets

Example John Smith invests in his new business by giving it his personal drill press valued at $3,500. I (a) Cash sales are made. (b) Equipment is purchased on credit. __ ___ (c) Payment is made for the equipment purchased on credit in (b). _____ (d) The company sold excess supplies to another company on credit. ________ (e) Cash is collected from customers for accounts receivable balances. ________

Liabilities

___NE__

Owner’s Equity

_ ____

__ ___

_____

________

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Chapter 2 - Analyzing Transactions ANSWER: Assets (a) (b) (c)

(d)

(e)

= Liabilities +

Cash sales are made.

I Equipment is purchased on credit. I Payment is made for the equipment purchased on credit in (b). D The company sold excess supplies to another company on credit. ___NE___ Cash is collected from customers for accounts receivable balances. ___NE___

Owner’s Equity

NE_

___ NE

__ NE ___

___ NE_

___ NE_ __

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 215. Journalize the following five transactions for Nexium & Associates, Inc. Omit explanations. Mar. 1 Bills are sent to clients for services provided in February in the amount of $800. 9

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

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

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

Salaries of $850 are paid to employees.

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Chapter 2 - Analyzing Transactions ANSWER:

Mar. 1

Accounts Receivable Service Revenue

800

9 Office Furniture Office Supplies Accounts Payable

1,060 160

15 Accounts Payable Cash

1,220

800

1,220

23 Electricity Expense Accounts Payable

430

31 Salaries Expense Cash

850

430

850

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 216. Increases and decreases in various types of accounts are listed below. In each case, indicate by "Dr." or "Cr." (a) whether the change in the account would be recorded as a debit or a credit and (b) whether the normal balance of the account is a debit or a credit.

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

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

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

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Chapter 2 - Analyzing Transactions ANSWER:

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

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

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

217. Record the following selected transactions for April in a two-column journal, identifying each entry by letter: (a) (b)

Received $18,000 from Katie Long, owner. Purchased equipment for $27,000, paying $10,000 in cash and giving a note payable for the remainder. (c) Paid $2,300 for rent for April. (d) Purchased $1,500 of supplies on account. (e) Recorded $9,800 of fees earned on account. (f) Received $7,500 in cash for fees earned. (g) Paid $1,200 to creditors on account. (h) Paid wages of $3,425. (i) Received $7,900 from customers on account. (j) Recorded owner's withdrawal of $1,875. ANSWER: (a) Cash 18,000 Katie Long, Capital

18,000

(b) Equipment Cash Notes Payable

27,000 10,000 17,000

2,300

(d) Supplies Accounts Payable

1,500

(e) Accounts Receivable Fees Earned

9,800

(f) Cash Fees Earned

7,500

2,300

1,500

9,800

7,500

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Chapter 2 - Analyzing Transactions (g) Accounts Payable Cash

1,200

(h) Wages Expense Cash

3,425

(i) Cash Accounts Receivable

7,900

1,200

3,425

7,900

(j) Katie Long, Drawing 1,875 Cash DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

1,875

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

870 870

Office Supplies Accounts Payable

870

Accounts Payable Cash

870

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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

Cash Accounts Receivable

600 2,300 2,900 900 900

(c) Original invoice Less cash paid upon completion Original amount on accounts receivable Less November 20 payment Accounts receivable balance DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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

220. Prepare a journal entry for the purchase of a truck on April 4 for $85,700, paying $15,000 cash and the remainder on account. Omit explanation. ANSWER: Apr. 4 Truck 85,700 Cash 15,000 Accounts Payable 70,700 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 221. Journalize the following selected transactions for January. Explanations may be omitted. Jan.

1 2 3 4 5 6 7 8

Date

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

Description

Debit

Credit

ANSWER: Date

Description

Post. Ref.

Debit

Credit

Jan. 1 Cash Owner, Capital

14,000

2 Cash Revenues

9,500

3 Accounts Receivable Revenues

4,200

4 Advertising Expense Cash

700

14,000

9,500

4,200

700 Page 81

Chapter 2 - Analyzing Transactions 5 Cash Accounts Receivable

2,500

6 Owner, Drawing Cash

1,010

7 Telephone Expense Accounts Payable 8 Accounts Payable Cash DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

2,500

1,010 900 900 900 900

222. On December 1, JumpStart provides $2,800 in services to clients. (a) Journalize this event as if the clients had paid cash at the time the services were rendered. (b) Journalize this event as if the clients had placed this on account. (c) Assume that the clients paid $1,200 of the amount on account on December 30. Journalize this transaction. ANSWER: (a) Dec. 1 Cash 2,800 Fees Earned 2,800 (b)

Dec. 1

(c)

Dec. 30

Accounts Receivable Fees Earned Cash Accounts Receivable

2,800 2,800 1,200 1,200

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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

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

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

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

Put the appropriate letter next to each transaction. ANSWER: Transaction Effect on Accounting Equation (a) 5 (b) 4 (c) 8 (d) 6 (e) 7 (f) 1 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 224. Prepare a journal entry on October 12 for the fees earned on account, $14,600. Omit explanation. ANSWER: Oct. 12 Accounts Receivable 14,600 Fees Earned 14,600 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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

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

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

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

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

ANSWER:

Aug. 1

Equipment Accounts Payable

850

Cash

125

850

Unearned Revenue 15

125

Utilities Expense Accounts Payable

180

Accounts Receivable Rental Revenue

1,250

Cash

180

1,250 600

Accounts Receivable

600

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 226. The bookkeeper for Brockton Industries prepared the following journal entries and posted the entries to the general ledger as indicated in the T accounts presented. Assume that the dollar amounts and the descriptions of the entries are correct. July

7/3

Accounts Receivable Service Revenue Customers were billed for services completed.

1,000

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

500

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

600

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

700

Accounts Receivable 1,000

7/11

Cash 500 7/25

Office Supplies 7/12 600

7/3

700

1,000

500

600

Service Revenue 1,000 7/11

700

500

Accounts Payable 7/12 600 Office Furniture 7/25 700

Required If you assume that all journal entries have been recorded correctly, use the above information to: (1) Identify the postings to the general ledger that were made incorrectly. (2) Describe how the each incorrect posting should have been made. ANSWER: (1) The bookkeeper incorrectly posted the July 3, July 11, and 12 journal entries. (2) For the July 3 journal entry, the $1,000 credit to Service Revenue should have been posted to the Service Revenue account as a credit, not as a debit. For the July 11 journal entry, the $500 credit should be posted to Accounts Receivable, not to Service Revenue. For the July 12 journal entry, the $600 credit to Accounts Payable should have been posted as a credit, not as a debit. DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 227. State for each account whether it is likely to have (a) debit entries only, (b) credit entries only, or (c) both debit and credit entries when recording business transactions during the month. Also, indicate the normal balance of each account. 1. Fees Earned 2. Utilities Expense 3. Accounts Payable ANSWER:

4. Supplies 5. Cash 6. Accounts Receivable 1. Credit entries only, normal credit balance 2. Debit entries only, normal debit balance 3. Both debit and credit entries, normal credit balance 4. Both debit and credit entries, normal debit balance 5. Both debit and credit entries, normal debit balance 6. Both debit and credit entries, normal debit balance DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 228. On January 1, Merry Walker established a catering service. Listed below are accounts to use for transactions (a) through (d), each identified by a number. Following this list are the transactions that occurred during the first month of operations. You are to indicate for each transaction the accounts that should be debited and credited by placing the account number(s) in the appropriate box. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.

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

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

Account(s) Debited Account(s) Credited

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Chapter 2 - Analyzing Transactions ANSWER:

Transactions Account(s) Debited Account(s) Credited a. 1 9 b. 13 1 c. 6 1,7 d. 5 8 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 229. On January 1, Merry Walker established a catering service. Listed below are accounts to use for transactions (a) through (e), each identified by a number. Following this list are the transactions that occurred in Walker’s first month of operation. You are to indicate for each transaction the accounts that should be debited and credited by placing the account number(s) in the appropriate box. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17.

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

Account(s) Debited Account(s) Credited

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Chapter 2 - Analyzing Transactions ANSWER:

Transactions Account(s) Debited Account(s) Credited a. 3 1 b. 4 1 c. 1 2 d. 8 1 e. 1 11 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 230. On January 1, Merry Walker established a catering service. Listed below are accounts to use for transactions (a) through (f), each identified by a number. Following this list are the transactions that occurred in Walker’s first month of operations. You are to indicate for each transaction the accounts that should be debited and credited by placing the account number(s) in the appropriate box. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17.

Transactions Account(s) Debited a. Recorded jobs completed on account and sent invoices to customers. b. Received an invoice for truck expenses to be paid in February. c. Paid utilities expense d. Received cash from customers on account. e. Paid employee wages. f. Withdrew cash for personal use.

Account(s) Credited

Page 88

Chapter 2 - Analyzing Transactions ANSWER:

Transactions Account(s) Debited Account(s) Credited a. 2 11 b. 15 8 c. 14 1 d. 1 2 e. 12 1 f. 10 1 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 231. Listed below are accounts to use for transactions (a) through (d), each identified by a number. Following this list are the transactions. You are to indicate for each transaction the accounts that should be debited and credited by placing the account number(s) in the appropriate box. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21.

Cash Accounts Receivable Office Supplies Land Interest Receivable Building Accumulated Depreciation—Building Depreciation Expense—Building Accounts Payable Interest Payable Insurance Payable Utilities Expense Notes Payable Prepaid Insurance Service Revenue Owner, Capital Insurance Expense Interest Expense Office Supplies Expense Unearned Service Revenue Owner, Drawing

Transactions Account(s) Debited Account(s) Credited a. Utility bill is received; payment will be made in 10 days. b. Paid the utility bill previously recorded in transaction (a). c. Bought a three-year insurance policy and paid in full. d. Received $7,000 from a contract to perform accounting services over the next two years. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Page 89

Chapter 2 - Analyzing Transactions ANSWER:

Transactions Account(s) Debited Account(s) Credited a. 12 9 b. 9 1 c. 14 1 d. 1 20 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 232. The following two situations are independent of each other. 1. On June 1, the cash account balance was $45,750. During June, cash payments totaled $243,910, and the June 30 balance was $53,200. Determine the cash receipts during June and show your calculation. 2. On March 1, the supplies account balance was $1,800. During March, supplies of $2,450 were purchased, and supplies of $630 were on hand as of March 31. Determine the supplies expense for March and show your calculation. ANSWER: 1. $53,200 = $45,750 + Cash Receipts − $243,910 Cash Receipts = $251,360 2. $630 = $1,800 + $2,450 − Supplies Expense Supplies Expense = $3,620 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-02 - 02-02 ACCT.WARD.18.02-03 - 02-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 233. Journalize the entries to correct the following errors: (a)

A purchase of supplies for $500 on account was recorded and posted as a debit to Supplies for $200 and as a credit to Accounts Receivable for $200. (b) A receipt of $2,500 from Fees Earned was recorded and posted as a debit to Fees Earned for $2,500 and a credit to Cash for $2,500. ANSWER: (a) Accounts Receivable 200 Supplies Supplies Accounts Payable (b) Cash Fees Earned

200

500 500 5,000 5,000

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Chapter 2 - Analyzing Transactions DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 234. On November 30, Damien Lawson is informed by his accountant that $550 of a transaction recording the purchase of office supplies was really office equipment. Prepare the journal entry to correct this situation. ANSWER: Nov. 30 Office Equipment 550 Office Supplies 550 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 235. The following errors took place in journalizing and posting transactions: a. b.

A withdrawal of $5,000 by Stan Norton, owner of the business, was recorded as a debit to Office Expense and a credit to Cash. An accounts receivable payment for $7,800 was recorded as a debit to Cash and a credit to Fees Earned.

Journalize the entries to correct the errors. Omit the explanations. ANSWER:

Stan Norton, Drawing Office Expense

5,000 5,000

Fees Earned 7,800 Accounts Receivable 7,800 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 236. For each of the following errors, considered individually, indicate whether the error would cause the trial balance totals to be unequal. If the error would cause the trial balance totals to be unequal, indicate whether the debit or credit total is higher and by how much. a. b. c.

Payment of a cash withdrawal of $6,800 was journalized and posted as a debit of $8,600 to Salaries Expense and a credit of $8,600 to Cash. A fee of $9,780 earned was debited to Accounts Receivable for $7,980 and credited to Fees Earned for $9,780. A payment of $3,000 to a creditor was posted as a credit of $3,000 to Accounts Payable and a credit of $3,000 to Cash.

ANSWER:

a. b. c.

The totals are equal. The totals are unequal. The credit total is higher by $1,800. The totals are unequal. The credit total is higher by $6,000.

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Chapter 2 - Analyzing Transactions DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 237. Below is the unadjusted trial balance for Dawson Designs Co. Required (1) Identify the errors in the trial balance. All accounts have normal balances. (2) Prepare a corrected trial balance.

Cash Accounts Receivable Prepaid Insurance Equipment Accounts Payable Salaries Payable Tim Dawson, Capital Tim Dawson, Drawing Service Revenue Salary Expense Miscellaneous Expense

Dawson Designs Co. Unadjusted Trial Balance For the Month of January Debit Balances 23,000

49,700 11,300 150,500 6,050 4,250 110,000 18,500 236,600 98,930 424,020

ANSWER:

Credit Balances

4,970 424,020

(1) a. The Debit column is added incorrectly; the sum is actually $289,780. b. The trial balance should be dated January 31, rather than “For the Month of January” c. The Accounts Receivable balance should be in the Debit column. d. The Accounts Payable balance should be in the Credit column. e. The Tim Dawson, Drawing balance should be in the Debit column. f. The Miscellaneous Expense balance should be in the Debit column.

Page 92

Chapter 2 - Analyzing Transactions (2) Dawson Designs Co. Unadjusted Trial Balance January 31 Debit Balances Credit Balances Cash 23,000 Accounts Receivable 49,700 Prepaid Insurance 11,300 Equipment 150,500 Accounts Payable 6,050 Salaries Payable 4,250 Tim Dawson, Capital 110,000 Tim Dawson, Drawing 18,500 Service Revenue 236,600 Salary Expense 98,930 Miscellaneous Expense 4,970 356,900 356,900 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 238. Prepare a trial balance, listing the following accounts in proper sequence. The accounts (all normal balances) were taken from the ledger of Sophie Designs Co. on April 30. Accounts Payable Accounts Receivable Cash Sophie Dawson, Capital Sophie Dawson, Drawing Equipment Miscellaneous Expense

$ 4,100 3,450 6,700 17,800 7,500 14,500 850

Rent Expense Salary Expense Fees Earned Supplies Supplies Expense Utilities Expense

$11,500 14,000 45,425 3,125 1,700 4,000

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Chapter 2 - Analyzing Transactions ANSWER:

Sophie Designs Co. Trial Balance April 30 Debit Credit Balances Balances 6,700 3,450 3,125 14,500 4,100 17,800 7,500 45,425 14,000 11,500 4,000 1,700 850 67,325 67,325

Cash Accounts Receivable Supplies Equipment Accounts Payable Sophie Dawson, Capital Sophie Dawson, Drawing Fees Earned Salary Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 239. (a) List the errors in the following trial balance. All accounts have normal balances. (b) What would be the new totals in the Debit and Credit columns after errors are corrected? What would be the balance of Accounts Receivable? Winslow’s Auto Body Trial Balance For Month Ending April 30 Debit Balances Cash Accounts Receivable Supplies Equipment Prepaid Insurance Accounts Payable Thad Winslow, Capital Thad Winslow, Drawing Fees Earned Salary Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense

Credit Balances 19,475 ? 1,000

15,000 500 2,500 17,000 1,000 49,600 14,500 9,000 1,400 3,900 250 55,000

81,575

Page 94

Chapter 2 - Analyzing Transactions ANSWER:

(a) (1) (2) (3) (4) (5) (6) (7) (8) (9)

In the heading, the date should be April 30; not for a period of time. The Cash balance should be a debit. The Accounts Receivable balance is missing. The Supplies balance should be a debit. The Prepaid Insurance balance should be a debit and this account should follow Accounts Receivable. The Thad Winslow, Capital balance should be a credit. The Thad Winslow, Drawing balance should be a debit. Rent Expense should be a debit. The trial balance does not balance.

(b)

The new total for credits would be $69,100 ($2,500 accounts payable + $49,600 fees earned + $17,000 capital). The debits would also total $69,100. Accounts receivable would be $3,075 ($69,100 total credits − $66,025 corrected debits). DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 240. Answer the following questions for each of the errors listed below, considered individually: (a) (b) (c)

Did the error cause the trial balance totals to be unequal? What is the amount of the difference between the trial balance totals (where applicable)? Which of the trial balance totals, debit or credit, is the larger (where applicable)?

Present your answers in columnar form, using the following headings: Error Totals Difference in Totals Larger of Totals (identifying number) (equal or unequal) (amount) (debit or credit) Errors: (1) A withdrawal of $3,000 cash by the owner was recorded by a debit of $3,000 to Salary Expense and a credit of $3,000 to Cash. (2) A $650 purchase of supplies on account was recorded as a debit of $1,650 to Equipment and a credit of $1,650 to Accounts Payable. (3) A purchase of equipment for $3,450 on account was not recorded. (4) An $870 receipt on account was recorded as an $870 debit to Cash and a $780 credit to Accounts Receivable. (5) A payment of $1,530 cash on account was recorded only as a credit to Cash. (6) Cash sales of $8,500 were recorded as a credit of $8,500 to Cash and a credit of $8,500 to Fees Earned. (7) The debit to record a $4,000 cash receipt on account was posted twice; the credit was posted once. (8) The credit to record a $300 cash payment on account was posted twice; the debit was posted once. (9) The debit balance of $7,400 in Accounts Receivable was recorded in the trial balance as a debit of $7,200.

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Chapter 2 - Analyzing Transactions ANSWER:

Error

Totals equal equal equal unequal unequal unequal unequal unequal unequal

Difference in Totals — — — $ 90 1,530 17,000 4,000 300 200

(1) (2) (3) (4) (5) (6) (7) (8) (9) DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Larger of Totals — — — debit credit credit debit credit credit

241. Set up T accounts for Cash; Accounts Receivable; Supplies; Accounts Payable; Clay Potter, Capital; Clay Potter, Drawing; Professional Fees; and Operating Expenses. (a)

In the T accounts, record the following transactions of Potter Pool Services for June, identifying each entry by number: (1) Potter invested $12,500 cash in the business. (2) Purchased supplies on account, $6,250. (3) Paid operating expenses, $5,500. (4) Billed clients for fees, $7,440. (5) Received cash from cash clients, $4,700. (6) Paid creditors on account, $1,400. (7) Received $3,100 from clients on account. (8) Withdrew $1,500 cash for personal use.

(b)

Prepare a trial balance as of June 30 for Potter Pool Services.

(c)

Assuming that supplies expense (which has not been recorded) amounts to $1,500 for June, determine the following: (1) Net income for the month. (2) Owner's equity as of June 30.

Page 96

Chapter 2 - Analyzing Transactions ANSWER:

(a) Cash 12,500 (3) 4,700 (6) 3,100 (8) 11,900

5,500 1,400 1,500

Accounts Receivable (4) 7,440 (7) Bal. 4,340

3,100

(1) (5) (7) Bal.

(2)

(6)

Clay Potter, Capital (1) 12,500

(8)

Supplies 6,250

Clay Potter, Drawing 1,500 Professional Fees (4) 7,440 (5) 4,700 Bal. 12,140

Accounts Payable 1,400 (2) 6,250 Bal. 4,850

(3)

Operating Expenses 5,500

(b) Potter Pool Services Trial Balance June 30

Cash Accounts Receivable Supplies Accounts Payable Clay Potter, Capital Clay Potter, Drawing Professional Fees Operating Expenses

Debit Credit Balances Balances 11,900 4,340 6,250 4,850 12,500 1,500 12,140 5,500 29,490 29,490

(c) (1) $5,140 ($12,140 − $5,500 − $1,500) (2) $16,140 ($12,500 + $5,140 − $1,500) DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-01 - 02-01 ACCT.WARD.18.02-02 - 02-02 ACCT.WARD.18.02-03 - 02-03 ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 97

Chapter 2 - Analyzing Transactions Exhibit 2-1 All nine transactions for Ralston Sports Co. for September, the first month of operations, are recorded in the following T accounts: Cash 25,000 (3) 11,900 (5) 9,700 (6) (8)

(1) (7) (9)

(4)

9,900

James Ralston, Capital (1)

12,500 7,600 10,500 7,000

Accounts Receivable (9)

9,700

Supplies (3)

Equipment 9,500

(5)

Accounts Payable 7,600 (2)

James Ralston, Drawing 7,000 Fees Earned (4) (7)

12,500

(2)

(8)

(6)

25,000

9,900 11,900

Operating Expenses 10,500

9,500

242. Refer to Exhibit 2-1. Prepare a trial balance, listing the accounts in their proper order. ANSWER: Ralston Sports Company Trial Balance September 30 Debit Credit Balances Balances Cash 9,000 Accounts Receivable 200 Supplies 12,500 Equipment 9,500 Accounts Payable 1,900 James Ralston, Capital 25,000 James Ralston, Drawing 7,000 Fees Earned 21,800 Operating Expenses 10,500 48,700 48,700 DIFFICULTY: Moderate Bloom's Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-04 - 02-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 2 - Analyzing Transactions 243. Lewis Company has a condensed income statement as shown below. Sales Wages expense Rent expense Utilities expense Total operating expenses Net income

Year 2 $178,400 $100,000 33,000 30,000 $163,000 $ 15,400

Year 1 $162,500 $ 92,500 30,000 25,000 $147,500 $ 15,000

Required Prepare a horizontal analysis of Lewis Company’s income statements. Comment on the trends, both favorable and unfavorable. ANSWER: Increase/ Percent Decrease Year 2 Year 1 Change Amount Sales $178,400 $162,500 $15,900 9.8% Wages expense $100,000 $ 92,500 $ 7,500 8.1 Rent expenses 33,000 30,000 3,000 10.0 Utilities expense 30,000 25,000 5,000 20.0 Total operating $163,000 $147,500 $15,500 10.5 expenses Net income $ 15,400 $ 15,000 $ 400 2.7 While the trend in sales revenue is favorable, it is not sufficient enough to offset the rising expenses, resulting in a positive but small and slowing increase in net income. DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.02-05 - 02-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 99

Chapter 2 - Analyzing Transactions 244. Nebraska Technologies has a condensed income statement as shown below. Year 2 Sales Wages expense Rent expense Utilities expense Total operating expenses Net income

Year 1 $158,400 $ 80,000 28,000 30,000 $138,000 $ 20,400

$162,500 $ 92,500 30,000 25,000 $147,500 $ 15,000

Required Prepare a horizontal analysis of Nebraska Technologies' income statements. Comment on the trends, both favorable and unfavorable. ANSWER: Increase/Decrease Percent Year 2 Year 1 Amount Change Sales $158,400 $162,500 $ (4,100) (2.5)% Wages expense $ 80,000 $ 92,500 $(12,500) (13.5) Rent expense 28,000 30,000 (2,000) (6.7) Utilities expense 30,000 25,000 5,000 20.0 Total operating expenses $138,000 $147,500 $ (9,500) (6.4) $ 20,400 $ 15,000 $ 5,400 36.0 Net income The trend in sales revenue is unfavorable, but that is more than offset by the declines in operating expenses, with the exception of utilities, which increased over the period. Despite the 2.5% drop in sales, the net effect was a favorable increase in net income of 36.0%, which was in large part spurred by the drop in wages expense. DIFFICULTY:

Page 100

Chapter 3 - The Adjusting Process True / False 1. Even though GAAP requires the accrual basis of accounting, some businesses prefer using the cash basis of accounting. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 2. Generally accepted accounting principles require the accrual basis of accounting. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 3. The revenue recognition principle states that revenue should be recorded in the same period as the cash is received. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 4. The system of accounting where revenues are recorded when they are earned and expenses are recorded when they are incurred is called the cash basis of accounting. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 3 - The Adjusting Process 5. The matching principle requires expenses be recorded in the same period that the related revenue is recorded. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 6. For most large businesses, the cash basis of accounting will provide accurate financial statements for user needs. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 7. An example of deferred revenue is Unearned Rent. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 8. Accruals are needed when an unrecorded expense has been incurred or an unrecorded revenue has been earned. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 9. If the debit portion of an adjusting entry is to an asset account, then the credit portion must be to a liability account. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 10. The revenue recognition principle requires that the reporting of revenue be included in the period when cash for the service is received. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 11. Revenues and expenses should be recorded in the same period to which they relate. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 12. The matching principle supports matching expenses with the related revenues. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 3 - The Adjusting Process 13. The updating of accounts when financial statements are prepared is called the adjusting process. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 14. Adjusting entries affect balance sheet accounts to the exclusion of income statement accounts. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 15. Adjusting entries affect only expense and asset accounts. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 16. An adjusting entry would adjust revenue so it is reported when earned and not when cash is received. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 17. An adjusting entry would adjust an expense account so the expense is reported when incurred. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 18. An adjusting entry to accrue an incurred expense will affect total liabilities. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 19. The difference between deferred revenue and accrued revenue is that accrued revenue has been recorded and needs adjusting and deferred revenue has never been recorded. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 20. Deferrals are recorded transactions that delay the recognition of an expense or revenue. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 21. Adjustments for accruals are needed to record a revenue that has been earned or an expense that has been incurred but not recorded. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 22. Unearned revenue is a liability. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 23. A company pays an employee $3,000 for a five-day workweek, Monday–Friday. The adjusting entry on December 31, which is a Wednesday, is a debit to Wages Expense of $1,800, and a credit to Wages Payable of $1,800. a. True b. False ANSWER: True RATIONALE: Wages Expense per Day = $3,000/5 = $600 Wages Expense for 3 days = $600 × 3 = $1,800 Debit Credit Dec. 31 Wages Expense 1,800 Wages Payable 1,800 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 24. A company realizes that the last two days' revenue for the month was billed but not recorded. The adjusting entry on December 31 is a debit to Accounts Receivable and a credit to Fees Earned. a. True b. False ANSWER: True DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 25. If the adjustment for accrued salaries at the end of the period is inadvertently omitted, both liabilities and stockholders' equity will be understated for the period. a. True b. False ANSWER: False DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 26. A company pays $36,000 for 12 months' rent on October 1, recording the prepayment as an asset. The adjusting entry on December 31 is a debit to Rent Expense of $9,000, and a credit to Prepaid Rent of $9,000. a. True b. False ANSWER: True RATIONALE: Rent Expense per Month = $36,000/12 = $3,000 Rent Expense from October 1 to December 31 = $3,000 × 3 = $9,000 Debit Credit Dec. 31 Rent Expense 9,000 Prepaid Rent 9,000 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 27. A company receives $360 for a 12-month trade magazine subscription on August 1. The adjusting entry on December 31 is a debit to Unearned Subscription Revenue of $150 and a credit to Subscription Revenue of $150. a. True b. False ANSWER: True RATIONALE: Unearned Subscription Revenue per Month = $360/12 = $30 Subscription Revenue from August 1 to December 31 = $30 × 5 = $150 Debit Credit Dec. 31 Unearned Subscription Revenue 150 Subscription Revenue 150 DIFFICULTY: Challenging Bloom’s: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 28. A company receives $6,500 for two season tickets sold on September 1. If $2,500 is earned by December 31, the adjusting entry made at that time is a debit to Cash of $2,500, and a credit to Ticket Revenue of $2,500. a. True b. False ANSWER: False DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 29. At year-end, the balance in the prepaid insurance account, prior to any adjustments, is $6,000. The amount of the journal entry required to record insurance expense will be $4,000 if the amount of unexpired insurance applicable to future periods is $2,000. a. True b. False ANSWER: True RATIONALE: Insurance Expense = Balance in Prepaid Insurance Account (prior to any adjustments) – Amount of Unexpired Insurance (applicable to future periods) = $6,000 – $2,000 = $4,000 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 30. If the adjustment to recognize expired insurance at the end of the period is inadvertently omitted, the assets at the end of the period will be understated. a. True b. False ANSWER: False DIFFICULTY: Challenging Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 31. If the adjustment of the unearned rent account at the end of the period to recognize the amount of rent earned is inadvertently omitted, the net income for the period will be understated. a. True b. False ANSWER: True DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 32. The systematic allocation of land's cost to expense is called depreciation. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 33. The difference between the balance of a fixed asset account and the balance of its related accumulated depreciation account is termed the book value of the asset. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 3 - The Adjusting Process 34. The balance in the accumulated depreciation account is the sum of the depreciation expense recorded in past periods. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 35. Accumulated depreciation accounts are liability accounts. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 36. Accumulated depreciation is reported on the income statement. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 37. A contra asset account for Land will normally appear on the balance sheet. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 38. Depreciation Expense is reported on the balance sheet as an addition to the related asset. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 39. A company depreciates its equipment $500 a year. The adjusting entry on December 31 is a debit to Depreciation Expense of $500 and a credit to Equipment of $500. a. True b. False ANSWER: False DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 40. A fixed asset’s market value is reflected on the balance sheet. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 41. If the adjustment for depreciation for the year is inadvertently omitted, the assets on the balance sheet at the end of the period will be understated. a. True b. False ANSWER: False DIFFICULTY: Challenging Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 3 - The Adjusting Process 42. Adjusting journal entries are dated on the last day of the period. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-05 - 03-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 43. By ignoring and not posting the adjusting journal entries to the appropriate accounts, net income will always be overstated. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-05 - 03-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 44. The financial statements are prepared from the unadjusted trial balance. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-06 - 03-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 45. The adjustment for accrued fees was debited to Accounts Payable instead of Accounts Receivable. This error will be detected when the adjusted trial balance is prepared. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-06 - 03-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 46. The adjusted trial balance verifies that total debits equal total credits before the adjusting entries are prepared. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-06 - 03-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 47. Vertical analysis compares each item in a financial statement with a total amount from the same statement. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-07 - 03-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 48. When preparing an income statement vertical analysis, each revenue and expense is expressed as a percent of net income. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-07 - 03-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 49. Vertical analysis is useful for analyzing financial statement changes over time. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-07 - 03-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 3 - The Adjusting Process Multiple Choice 50. The revenue recognition principle a. is not in conflict with the cash method of accounting b. determines when revenue is credited to a revenue account c. states that revenue is not recorded until the cash is received d. controls all revenue reporting for the cash basis of accounting ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 51. The matching principle a. addresses the relationship between the journal and the balance sheet b. determines whether the normal balance of an account is a debit or credit c. requires that the dollar amount of debits equal the dollar amount of credits on a trial balance d. states that the revenues and related expenses should be reported in the same period ANSWER: d DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 52. Using accrual accounting, revenue is recorded and reported only a. when cash is received without regard to when the services are rendered b. when the services are rendered without regard to when cash is received c. when cash is received at the time services are rendered d. if cash is received after the services are rendered ANSWER: b DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 53. Using accrual accounting, expenses are recorded and reported only a. when they are incurred, whether or not cash is paid b. when they are incurred and paid at the same time c. if they are paid before they are incurred d. if they are paid after they are incurred ANSWER: a DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 54. The accounting principle upon which deferrals and accruals are based is a. matching b. cost c. price-level adjustment d. conservatism ANSWER: a DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 55. If the effect of the debit portion of an adjusting entry is to increase the balance of an expense account, which of the following describes the effect of the credit portion of the entry? a. decreases the balance of an owner's equity account b. increases the balance of a liability account c. increases the balance of an asset account d. decreases the balance of an expense account ANSWER: b DIFFICULTY: Challenging Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 56. If the effect of the credit portion of an adjusting entry is to increase the balance of a liability account, which of the following describes the effect of the debit portion of the entry? a. increases the balance of a contra asset account b. increases the balance of an asset account c. decreases the balance of an owner's equity account d. increases the balance of an expense account ANSWER: d DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 57. Prior to the adjusting process, accrued expenses have a. not yet been incurred, paid, or recorded b. been incurred, have not been paid, but have been recorded c. been incurred but not paid and not recorded d. been paid but have not yet been incurred ANSWER: c DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 58. Prior to the adjusting process, accrued revenue has a. been earned and cash received b. been earned and not recorded as revenue c. not been earned but recorded as revenue d. not been recorded as revenue but cash has been received ANSWER: b DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 59. Prepaid expenses have a. not yet been recorded as expenses but have been paid b. been recorded as expenses and paid c. been incurred and paid d. not yet been recorded as expenses ANSWER: d DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 60. Deferred revenue is revenue that is a. earned and the cash has been received b. earned but the cash has not been received c. not earned and the cash has not been received d. not earned but the cash has been received ANSWER: d DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 61. Adjusting entries are a. the same as correcting entries b. needed to bring accounts up to date and match revenue and expense c. optional under generally accepted accounting principles d. rarely needed in large companies ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 62. Adjusting entries affect at least one a. income statement account and one balance sheet account b. revenue and the dividends account c. asset and one owner’s equity account d. revenue and one owner’s equity account ANSWER: a DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 63. The term used to describe an expense that has not been paid and has not yet been recognized in the accounts by a routine entry is a. prepaid b. deferred c. accrued d. matched ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 64. Which of the following is not a characteristic of the accrual basis of accounting? a. Revenues and expenses are reported in the period in which cash is received or paid. b. Revenues are reported on the income statement in the period in which they are earned. c. The accrual basis of accounting supports the matching concept. d. Expenses are reported in the same period as the revenues to which they relate. ANSWER: a DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 65. Generally accepted accounting principles require that companies use the ____ of accounting. a. cash basis b. deferral basis c. accrual basis d. account basis ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 66. The cash basis of accounting records revenues and expenses when the cash is exchanged, while the accrual basis of accounting a. records revenues when they are earned and expenses when they are paid b. records revenues and expenses when they are incurred c. records revenues when cash is received and expenses when they are incurred d. records revenues and expenses when the company needs to apply for a loan ANSWER: b DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 67. By matching revenue earned during the accounting period to related incurred expenses, a. net income or loss will always be underestimated b. net income or loss will always be overestimated c. net income or loss will be properly reported on the income statement d. net income or loss will not be determined ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 68. Adjusting entries always include a. only income statement accounts b. only balance sheet accounts c. the cash account d. at least one income statement account and one balance sheet account ANSWER: d DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 69. Prepaid expenses are eventually expected to become a. expenses when their future economic value expires or is used up b. revenues when services are performed c. expenses in the period when they are paid d. revenues when the liability is no longer owed ANSWER: a DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 70. Which of the following is considered to be unearned revenue? a. theater tickets sold last month for yesterday’s performance b. theater tickets sold yesterday on credit for yesterday’s performance c. theater tickets that were not sold for the current performance d. theater tickets sold for next month’s performance ANSWER: d DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 71. Which of the following is an example of accrued revenue? a. snow removal services that have been paid for three months in advance b. snow removal services that have been provided but have not been billed or paid c. an agreement that has been signed for snow removal services for the next three months d. snow removal services that have been provided and paid on the same day ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 72. Which of the following is considered to be an accrued expense? a. A computer technician installed the latest software updates and was paid on the same day. b. A computer technician has been paid in advance to install software updates as they become available. c. A computer technician has just signed an agreement with you regarding pricing for future work. d. A computer technician has installed the latest software updates, but you have not received an invoice or made payment. ANSWER: d DIFFICULTY: Challenging Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 73. Which of the following accounts would likely be included in an accrual adjusting entry? a. Insurance Expense b. Prepaid Rent c. Interest Expense d. Unearned Rent ANSWER: c DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 74. Which of the following accounts would likely be included in a deferral adjusting entry? a. Interest Revenue b. Unearned Revenue c. Salaries Payable d. Accounts Receivable ANSWER: b DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 75. If there is a balance in the prepaid rent account after adjusting entries are made, it represents a(n) a. deferral b. accrual c. revenue d. liability ANSWER: a DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 76. If there is a balance in the unearned subscriptions account after adjusting entries are made, it represents a(n) a. deferral b. accrual c. dividend d. revenue ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 77. The unexpired insurance at the end of the fiscal period represents a(n) a. accrued asset b. accrued liability c. accrued expense d. deferred expense ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 78. The general term used to indicate delaying the recognition of an expense already paid or of a revenue already received is a. depreciation b. deferral c. accrual d. inventory ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 79. Which account would normally not require an adjusting entry? a. Wages Expense b. Accounts Receivable c. Accumulated Depreciation d. Cash ANSWER: d DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 80. The account type and normal balance of Prepaid Expense would be a. revenue, credit b. expense, debit c. liability, credit d. asset, debit ANSWER: d DIFFICULTY: Bloom's: Understanding Easy LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 81. The account type and normal balance of Unearned Revenue would be a. revenue, credit b. expense, debit c. liability, credit d. asset, debit ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 82. Buster Industries pays weekly salaries of $30,000 on Friday for a five-day week ending on that day. The adjusting entry necessary at the end of the fiscal period ending on Tuesday is a. debit Salaries Payable, $12,000; credit Cash, $12,000 b. debit Salary Expense, $12,000; credit Dividends, $12,000 c. debit Salary Expense, $12,000; credit Salaries Payable, $12,000 d. debit Dividends, $12,000; credit Cash, $12,000 ANSWER: c RATIONALE: Salary Expense per Day = $30,000/5 = $6,000 Salary Expense for 2 Days = $6,000 × 2 = $12,000 Debit Credit Salary Expense 12,000 Salaries Payable 12,000 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 83. The entry to adjust the accounts for salaries accrued at the end of the accounting period is a. debit Salaries Payable; credit Cash b. debit Cash; credit Salaries Payable c. debit Salaries Payable; credit Salaries Expense d. debit Salaries Expense; credit Salaries Payable ANSWER: d DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 84. Data for an adjusting entry described as "accrued wages, $2,020" requires a a. debit to Wages Expense and a credit to Wages Payable b. debit to Wages Payable and a credit to Wages Expense c. debit to Accounts Receivable and a credit to Wages Expense d. debit to Dividends and a credit to Wages Payable ANSWER: a DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 85. Accrued revenues would affect _______ on the balance sheet. a. assets b. liabilities c. owner’s capital d. prepaid expenses ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 86. Accrued expenses affect ________ on the balance sheet. a. assets b. liabilities c. fixed assets d. prepaid expenses ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 87. Fees payable would appear on the balance sheet as a(n) a. asset b. liability c. fixed asset d. unearned revenue ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 88. The following adjusting journal entry found in the journal is missing an explanation. Select the best explanation for the entry. Wages Expense 4,500 Wages Payable 4,500 ???????????????? a. Record payment of wages. b. Record wages paid last month. c. Record wages paid in advance. d. Record wages expense incurred and to be paid next month. ANSWER: d DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 89. Which of the following is an example of an accrued expense? a. salary owed but not yet paid b. fees received but not yet earned c. supplies on hand d. a two-year premium paid on a fire insurance policy ANSWER: a DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 90. A business pays biweekly salaries of $20,000 every other Friday for a 10-day period ending on that day. The adjusting entry necessary at the end of the fiscal period ending on the second Wednesday of the pay period includes a a. debit to Salary Expense of $8,000 b. debit to Salaries Payable of $8,000 c. credit to Salary Expense of $16,000 d. credit to Salaries Payable of $16,000 ANSWER: d RATIONALE: Salary Expense per Day = $20,000/10 = $2,000 Salary Expense Accrued (on the second Wednesday of the pay period) = $2,000 × 8 days = $16,000 Debit Credit Salary Expense 16,000 Salaries Payable 16,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 91. A business pays biweekly salaries of $20,000 every other Friday for a 10-day period ending on that day. The last payday of December is Friday, December 27. Assume the next pay period begins on Monday, December 30, and the proper adjusting entry is journalized at the end of the fiscal period (December 31). The entry for the payment of the payroll on Friday, January 10, includes a a. debit to Salary Expense of $16,000 b. debit to Salary Expense of $4,000 c. credit to Salaries Payable of $16,000 d. credit to Salaries Payable of $4,000 ANSWER: a RATIONALE: Salary Expense per Day = $20,000/10 = $2,000 Number of Working Days (till January 10 from the previous pay day, December 27) = 2 days in December + 8 days in January = 10 days Salary Expense on January 10 = $2,000 × 8 days = $16,000 Salaries Payable = $2,000 × 2 days = $4,000 Debit Credit Jan. 10 Salary Expense 16,000 Salaries Payable 4,000 Cash 20,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 92. The balance in the prepaid rent account before adjustment at the end of the year is $32,000, which represents four months' rent paid on December 1. The adjusting entry required on December 31 is a. debit Rent Expense, $8,000; credit Prepaid Rent, $8,000 b. debit Prepaid Rent, $24,000; credit Rent Expense, $8,000 c. debit Rent Expense, $24,000; credit Prepaid Rent, $8,000 d. debit Prepaid Rent, $8,000; credit Rent Expense, $8,000 ANSWER: a RATIONALE: Rent Expense per Month = $32,000/4 = $8,000 Debit Credit Dec. 31 Rent Expense 8,000 Prepaid Rent 8,000 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 93. The balance in the office supplies account on January 1 was $7,000, supplies purchased during January were $3,000, and the supplies on hand on January 31 were $2,000. The amount to be used for the appropriate adjusting entry is a. $4,300 b. $12,000 c. $5,000 d. $8,000 ANSWER: d RATIONALE: Amount to Be Used for Appropriate Adjusting Entry = Balance in Office Supplies Account on January 1 + Supplies Purchased During January – Supplies on Hand at January 31 = $7,000 + $3,000 – $2,000 = $8,000 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 94. Which of the following is the proper adjusting entry, based on a prepaid insurance account balance before adjustment of $14,000 and unexpired insurance of $3,000, for the fiscal year ending on April 30? a. debit Insurance Expense, $3,000; credit Prepaid Insurance, $3,000 b. debit Insurance Expense, $14,000; credit Prepaid Insurance, $14,000 c. debit Prepaid Insurance, $11,000; credit Insurance Expense, $11,000 d. debit Insurance Expense, $11,000; credit Prepaid Insurance, $11,000 ANSWER: d RATIONALE: Insurance Expense = Prepaid Insurance Account Balance Before Adjustment – Unexpired Insurance = $14,000 – $3,000 = $11,000 Debit Credit Apr. 30 Insurance Expense 11,000 Prepaid Insurance 11,000 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 95. The entry to adjust for the cost of supplies used during the accounting period is a. debit Supplies Expense; credit Supplies b. debit Owner’s Equity; credit Supplies c. debit Accounts Payable; credit Supplies d. debit Supplies; credit Owner’s Equity ANSWER: a DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 3 - The Adjusting Process 96. The supplies account had a balance of $4,400 at the beginning of the year and was debited during the year for $2,400, representing the total of supplies purchased during the year. If $400 of supplies are on hand at the end of the year, the supplies expense to be reported on the income statement for the year is a. $400 b. $2,000 c. $6,800 d. $6,400 ANSWER: d RATIONALE: Supplies Expense (to be reported on the income statement for the year) = Balance of Supplies Account (at the beginning of the year) + Supplies Purchased (during the year) + Supplies on Hand (at the end of the year) = $4,400 + $2,400 – $400 = $6,400 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 97. Smokey Company purchases a one-year insurance policy on July 1 for $3,600. The adjusting entry on December 31 is a. debit Insurance Expense, $1,800; credit Prepaid Insurance, $1,800 b. debit Insurance Expense, $1,500; credit Prepaid Insurance, $1,500 c. debit Insurance Expense, $2,100; credit Prepaid Insurance, $2,100 d. debit Prepaid Insurance, $1,800; credit Cash, $1,800 ANSWER: a RATIONALE: Insurance Expense (per month) = $3,600/12 = $300 Insurance Expense (from July 1 to December 31) = $300 × 6 = $1,800 Debit Credit Dec.31 Insurance Expense 1,800 Prepaid Insurance 1,800 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 98. Gracie Company made a prepaid rent payment of $2,800 on January 1. The company’s monthly rent is $700. The amount of prepaid rent that would appear on the January 31 balance sheet after adjustment is a. $2,100 b. $700 c. $2,800 d. $1,400 ANSWER: a RATIONALE: Amount of Prepaid Rent (that would appear on the January 31 balance sheet after adjustment) = Prepaid Rent Payment (on January 1) – Rent for January = $2,800 – $700 = $2,100 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 99. The type of account and normal balance of Prepaid Insurance would be a. asset, credit b. asset, debit c. contra asset, credit d. contra asset, debit ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 100. The type of account and normal balance of Unearned Consulting Fees would be a. revenue, credit b. expense, debit c. liability, credit d. liability, debit ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 101. Supplies are recorded as assets when purchased. Therefore, the credit to Supplies in the adjusting entry is for the amount of supplies a. still on hand b. purchased c. used d. required for the next accounting period ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 102. The cost of office supplies to be used in future periods is ordinarily shown on the balance sheet as a. stockholders' equity b. an asset c. a contra asset d. a liability ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 103. Which of the following is an example of a prepaid expense? a. Supplies b. Accounts Receivable c. Unearned Subscription Revenue d. Unearned Fees ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 104. Prepaid advertising, representing payment for the next quarter, would be reported on the balance sheet as a. an asset b. a liability c. a contra asset d. owner's equity ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 105. Prepaid rent, representing rent for the next six months' occupancy, would be reported on the tenant's balance sheet as a(n) a. asset b. liability c. owner's equity account d. contra liability ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 106. The adjusting entry for gym memberships earned that were previously recorded in the unearned gym memberships account is a. debit Unearned Gym Memberships; credit Gym Memberships Revenue b. debit Gym Memberships Revenue; credit Unearned Gym Memberships c. debit Unearned Gym Memberships; credit Prepaid Gym Memberships d. debit Gym Memberships Expense; credit Unearned Gym Memberships ANSWER: a DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 107. Which of the following pairs of accounts could not appear in the same adjusting entry? a. Fees Earned and Unearned Fees b. Interest Income and Interest Expense c. Rent Expense and Prepaid Rent d. Salaries Payable and Salaries Expense ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 108. The unearned rent account has a balance of $72,000. If $18,000 of the $72,000 is unearned at the end of the accounting period, the amount of the adjusting entry is a. $18,000 b. $90,000 c. $54,000 d. $36,000 ANSWER: c RATIONALE: Amount of Adjusting Entry = Beginning Balance – Ending Balance = $72,000 – $18,000 = $54,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 109. The following adjusting journal entry does not include an explanation. Select the best explanation for the entry. Unearned Revenue 7,500 Fees Earned 7,500 ???????????????? a. Record payment of fees earned. b. Record fees earned at the end of the month. c. Record fees that have not been earned at the end of the month. d. Record payment of fees to be earned. ANSWER: b DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 110. The following adjusting journal entry does not include an explanation. Select the best explanation for the entry. Supplies Expense 730 Supplies 730 ???????????????? a. Adjust supplies inventory to actual. b. Record purchase of supplies. c. Reduce supplies expense. d. Record sale of supplies. ANSWER: a DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 111. What effect will this adjustment have on the accounting records? Unearned Fees 6,375 Fees Earned 6,375 a. increase net income b. increase revenues reported for the period c. decrease liabilities d. All of these choices ANSWER: d DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 112. What effect will this adjusting journal entry have on the accounting records? Supplies Expense 760 Supplies 760 a. increase income b. decrease net income c. decrease expenses d. increase assets ANSWER: b DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 3 - The Adjusting Process 113. How will the following adjusting journal entry affect the accounting equation? Unearned Subscription Revenue 11,500 Subscription Revenue 11,500 a. increase assets, increase revenues b. increase liabilities, increase revenues c. decrease liabilities, increase revenues d. decrease liabilities, decrease revenues ANSWER: c DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 114. The balance in the supplies account before adjustment at the end of the year is $6,250. The proper adjusting entry if the amount of supplies on hand at the end of the year is $1,500 would be a. debit Supplies, $1,500; credit Supplies Expense, $1,500 b. debit Supplies Expense, $4,750; credit Supplies, $4,750 c. debit Supplies Expense, $1,500; credit Supplies, $1,500 d. debit Supplies, $4,750; credit Supplies Expense, $4,750 ANSWER: b RATIONALE: Supplies Expense (for the given year) = Balance in Supplies Account (before adjustment at the end of the year) – Amount of Supplies on Hand (at the end of the year) = $6,250 – $1,500 = $4,750 Debit Credit Supplies Expense 4,750 Supplies 4,750 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 115. For the year ending December 31, Orion, Inc. mistakenly omitted adjusting entries for $1,500 of supplies that were used, (2) unearned revenue of $4,200 that was earned, and (3) insurance of $5,000 that expired. For the year ending December 31, what is the effect of these errors on revenues, expenses, and net income? a. Revenues are overstated by $4,200. b. Net income is overstated by $2,300. c. Expenses are overstated by $6,500. d. Expenses are understated by $3,500. ANSWER: b RATIONALE: Revenues are understated by $4,200. Expenses are understated by $6,500 (insurance of $5,000 and supplies of $1,500). Effect on Net Income = $4,200 – $6,500 = –$2,300 Net income is overstated by $2,300. DIFFICULTY: Moderate Bloom’s: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 116. The net income reported on the income statement is $58,000. However, adjusting entries have not been made at the end of the period for supplies expense of $2,200 and accrued salaries of $1,300. Net income, as corrected, is a. $56,700 b. $58,000 c. $55,800 d. $54,500 ANSWER: d RATIONALE: Net Income = Reported Net Income – Supplies Expense – Accrued Salaries Expense = $58,000 – $2,200 – $1,300 = $54,500 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 117. At the end of the fiscal year, the usual adjusting entry to prepaid insurance to record expired insurance was omitted. Which of the following statements is true? a. Total assets at the end of the year will be understated. b. Owner's equity at the end of the year will be understated. c. Net income for the year will be overstated. d. Insurance expense will be overstated. ANSWER: c DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 118. The adjusting entry to adjust supplies was omitted at the end of the year. This would affect the income statement by having a. expenses understated and therefore net income overstated b. revenues understated and therefore net income understated c. expenses understated and therefore net income understated d. expenses overstated and therefore net income understated ANSWER: a DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 119. The difference between the balance of a fixed asset account and the related accumulated depreciation account is termed a. historical cost b. contra asset c. book value d. market value ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 120. The adjusting entry to record the depreciation of a building for the fiscal period is a. debit Depreciation Expense; credit Building b. debit Depreciation Expense; credit Accumulated Depreciation c. debit Accumulated Depreciation; credit Depreciation Expense d. debit Building; credit Depreciation Expense ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 121. As time passes, fixed assets other than land lose their capacity to provide useful services. To account for this decrease in usefulness, the cost of fixed assets is systematically allocated to expense through a process called a. equipment allocation b. depreciation c. accumulation d. matching ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 122. Accumulated Depreciation and Depreciation Expense are classified, respectively, as a. expense, contra asset b. asset, contra liability c. revenue, asset d. contra asset, expense ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 123. What effect will the following adjusting journal entry have on the accounting records? Depreciation Expense 2,150 Accumulated Depreciation 2,150 a. increase net income b. increase revenues c. decrease expenses d. decrease net book value ANSWER: d DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 124. Which of the following is not true regarding depreciation? a. Depreciation allocates the cost of a fixed asset over its estimated life. b. Depreciation expense reflects the decrease in market value each year. c. Depreciation is an allocation not a valuation method. d. Depreciation expense does not measure changes in market value. ANSWER: b DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 125. The net book value of a fixed asset is determined by the original cost a. less accumulated depreciation b. less market value c. less accumulated depreciation plus depreciation expense d. plus accumulated depreciation ANSWER: a DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 126. At the end of the fiscal year, the usual adjusting entry for depreciation on equipment was omitted. Which of the following is true? a. Total assets will be understated at the end of the current year. b. The balance sheet and income statement will be misstated, but the statement of owner’s equity will be correct for the current year. c. Net income will be overstated for the current year. d. Total liabilities and total assets will be understated. ANSWER: c DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 127. Which of the accounts below would most likely appear on an adjusted trial balance but probably would not appear on the unadjusted trial balance? a. Fees Earned b. Accounts Receivable c. Unearned Fees d. Depreciation Expense ANSWER: d DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-06 - 03-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 128. Which of the following accounting steps in the accounting process would be completed last? a. preparing the adjusted trial balance b. posting c. preparing the financial statements d. journalizing ANSWER: c DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-06 - 03-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 129. When is the adjusted trial balance prepared? a. before adjusting journal entries are posted b. after adjusting journal entries are posted c. after the adjusting journal entries are journalized d. before the adjusting journal entries are journalized ANSWER: b DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-06 - 03-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 130. What is the purpose of the adjusted trial balance? a. to verify that all of the adjusting entries have been posted b. to verify that the net income (loss) is correctly reported c. to verify that no adjusting journal entry has been omitted d. to verify that the debits and credits balance ANSWER: d DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-06 - 03-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 131. All of the following statements regarding vertical analysis are true except a. vertical analysis may be prepared for several periods to analyze changes in relationships over time b. in a vertical analysis of a balance sheet, each asset item is stated as a percent of total assets c. in a vertical analysis of an income statement, each item is stated as a percent of total expenses d. major differences between a company’s vertical analysis and industry averages should be investigated ANSWER: c DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-07 - 03-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 132. Two income statements for Toby Sam Enterprises are shown below. Toby Sam Enterprises Income Statement For the Years 2 and 1 Ending December 31

Fees earned Operating expenses Operating income

Year 2 $674,350 472,045 $202,305

Year 1 $520,600 338,390 $182,210

Prepare a vertical analysis of Toby Sam Enterprises' income statements. Has operating income increased or decreased as a percentage of revenue? a. increased by 5% b. increased by 111% c. decreased by 5% d. decreased by 111% ANSWER: c RATIONALE: Operating Income (as a percentage of revenue for Year 1) = $182,210/$520,600 = 35% Operating Income (as a percentage of revenue for Year 2) = $202,305/$674,350 = 30% Change in Operating Income (as a percentage of revenue from Year 1 to Year 2) = 30% – 35% = –5% DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-07 - 03-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic Matching Match the type of account (a through e) with the business transactions that follow. a. Prepaid expense b. Accrued expense c. Unearned revenue d. Accrued revenue e. None of these choices DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-05 - 03-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 133. Services provided that have not been recorded. ANSWER: d © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 3 - The Adjusting Process 134. Paid for one year’s insurance policy. ANSWER: a 135. Retainer fee received from a client for future legal representation. ANSWER: c 136. Annual property taxes that are paid at the end of the year. ANSWER: b 137. Electric bill to be paid next month. ANSWER: b 138. Paid for a six-month magazine subscription. ANSWER: a 139. Received payment covering a six-month magazine subscription. ANSWER: c 140. Provided tutoring for a student that will be invoiced next month. ANSWER: d 141. Received six months of rental payments from a tenant. ANSWER: c 142. Paid six months of rental payments to the landlord. ANSWER: a 143. Annual depreciation on equipment, recorded on a monthly basis. ANSWER: a 144. A contract to provide tutoring services beginning next month was signed. ANSWER: e Identify the effect (a through h) that omitting each of the following items would have on the balance sheet. a. Assets and owner's equity overstated b. Assets and owner's equity understated c. Assets overstated and owner's equity understated d. Assets understated and owner's equity overstated e. Liabilities and owner's equity overstated f. Liabilities and owner's equity understated g. Liabilities overstated and owner's equity understated h. Liabilities understated and owner's equity overstated DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-05 - 03-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 3 - The Adjusting Process 145. No adjustment was made for supplies used up during the month. ANSWER: a 146. Wages are paid every Friday for the five-day workweek. The month ended on Monday and no adjustment was recorded. ANSWER: h 147. Interest earned on a note receivable was not recorded. ANSWER: b 148. Services provided to customers on the last day of the month were not billed. ANSWER: b 149. An attorney has earned half of a retainer fee that was received and recorded last month. No adjustment was recorded for the amount earned. ANSWER: g 150. Property taxes are paid annually. The estimated monthly amount for the taxes was not recorded. ANSWER: h 151. Depreciation on equipment was not recorded. ANSWER: a 152. A tenant paid six months' rent in advance when he moved in on the first day of the month. No entry was made on the last day of the month. ANSWER: g Subjective Short Answer 153. Explain the difference between the accrual basis of accounting and the cash basis of accounting. ANSWER: The accrual basis of accounting reports revenues and expenses in the period in which a service has been performed or a product has been delivered, regardless of when cash was received. The cash basis of accounting reports revenues and expenses when cash is received or paid. DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 154. Indicate with a Yes or No whether or not each of the following accounts would, under normal circumstances, require an adjusting entry. 1. Cash 2. Prepaid Expenses 3. Depreciation Expense 4. Accounts Payable 5. Accumulated Depreciation 6. Equipment ANSWER:

1. No 2. Yes 3. Yes 4. Yes 5. Yes 6. No DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 155. Classify the following items as: (1) prepaid expense, (2) unearned revenue, (3) accrued expense, or (4) accrued revenue. a) Fees received but not yet earned b) Fees earned but not yet received c) Paid premium on a one-year insurance policy d) Property tax owed to be paid beginning of next year ANSWER: a. (2) unearned revenue b. (4) accrued revenue c. (1) prepaid expense d. (3) accrued expense DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 156. List the four basic types of accounts that require adjusting entries and give an example of each. ANSWER: 1. Prepaid expenses; example: prepaid insurance 2. Unearned revenues; example: an attorney’s retainer fee 3. Accrued revenues; example: unpaid interest earned on a note receivable 4. Accrued expenses; example: unpaid wages owed to employees DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 157. Under the accrual basis, some accounts in the ledger require updating at the end of the period. Discuss the three main reasons for this updating and give an example of each. ANSWER: 1. Some expenses are not recorded daily. For example, the daily use of supplies would require many entries with small amounts. Also, the amount of supplies on hand on a day-to-day basis is normally not needed. 2. Some revenues and expenses are incurred as time passes rather than as separate transactions. For example, rent received in advance (unearned rent) expires and becomes revenue with the passage of time. Likewise, prepaid insurance expires and becomes an expense with the passage of time. 3. Some revenues and expenses may be unrecorded at the end of the accounting period. For example, a company may have provided services to customers that it has not billed or recorded at the end of the accounting period. Likewise, a company may not pay its employees until the next accounting period even though the employees have earned their wages in the current period. DIFFICULTY:

Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-01 - 03-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 158. (a) Explain the differences between accrued revenues and unearned revenues. (b) Explain the differences between accrued expenses and prepaid expenses. (c) Give an example of each. ANSWER: (a) Accrued revenues are revenues that have been earned but not recorded in the accounts. Unearned revenues are payments that have been received for services or goods to be provided in the future. (b) Accrued expenses are expenses that have been incurred but not recorded in the accounts. Prepaid expenses are expenses for which payment has been made and for which economic benefits will be enjoyed in future accounting periods. (c) Accrued revenues: unbilled services on account Unearned revenues: rental payments received by a landlord in advance Accrued expenses: unpaid wages due to employees Prepaid expenses: insurance policy purchased to cover future periods

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Chapter 3 - The Adjusting Process DIFFICULTY:

(b)

(c)

(d)

A business pays weekly salaries of $22,000 on Friday for a five-day week ending on that day. Journalize the necessary adjusting entry at the end of the fiscal period, assuming that the fiscal period ends (1) on Tuesday or (2) on Wednesday. The balance in the prepaid insurance account before adjustment at the end of the year is $18,000. Journalize the adjusting entry required under each of the following alternatives: (1) the amount of insurance expired during the year is $5,300 or (2) the amount of unexpired insurance applicable to a future period is $2,700. On July 1 of the current year, a business pays $54,000 to the city for license taxes for the coming fiscal year. The same business is also required to pay an annual property tax at the end of the year. The estimated amount of the current year's property tax allocated to July is $4,800. (1) Journalize the two adjusting entries required to bring the accounts affected by the taxes up to date as of July 31. (2) What is the amount of tax expense for July? The estimated depreciation on equipment for the year is $32,000.

ANSWER:

(a) (1) Salary Expense ($22,000/5 × 2) Salaries Payable

8,800

(2) Salary Expense ($22,000/5 × 3) Salaries Payable

13,200

(b) (1) Insurance Expense Prepaid Insurance (2) Insurance Expense ($18,000 – $2,700) Prepaid Insurance

8,800

13,200 5,300 5,300 15,300 15,300

4,500

Taxes Expense Property Taxes Payable

4,800

4,500

4,800

(2) $9,300 ($4,500 + $4,800) (d) Depreciation Expense Accumulated Depreciation— Equipment DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

32,000

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Chapter 3 - The Adjusting Process 160. Listed below are accounts to use for transactions (a) through (j), each identified by a number. Following this list are the transactions. You are to indicate for each transaction the accounts that should be debited and credited by placing the account number(s) in the appropriate box. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22.

Accounts Payable Accounts Receivable Accumulated Depreciation—Office Equipment Building Owner’s Capital Cash Depreciation Expense—Office Equipment Owner’s Drawing Fees Earned Insurance Expense Insurance Payable Interest Expense Interest Payable Interest Receivable Land Notes Payable Office Supplies Office Supplies Expense Prepaid Insurance Unearned Fees Utilities Expense Utilities Payable

Transactions Account(s) Debited a. Utility bill is received; payment will be made in 10 days. b. Paid the utility bill previously recorded in transaction (a). c. Bought a three-year insurance policy and paid in full. d. Made an entry to adjust for the expired portion of the insurance premium. e. Received $7,000 from a contract to perform accounting services over the next two years. f. Made an entry to adjust for half of the services performed in (e). g. Purchased office supplies, paying part cash and charging the balance on account. h. Borrowed money from a bank and signed a note payable due in six months. i. Recorded one month’s accrued interest on the note payable. j. Depreciation is recorded on office equipment.

Account(s) Credited

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Chapter 3 - The Adjusting Process ANSWER:

Transactions Account(s) Debited Account(s) Credited a. 21 22 b. 22 6 c. 19 6 d. 10 19 e. 6 20 f. 20 9 g. 17 6, 1 h. 6 16 i. 12 13 j. 7 3 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCT.WARD.18.03-03 - 03-03 ACCT.WARD.18.03-04 - 03-04 ACCT.WARD.18.03-05 - 03-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 161. REM Consulting is completing the accounting information processing at the end of the fiscal year, December 31. The following trial balances are available. Accounts Cash Accounts Receivable Prepaid Insurance Supplies Machines Accumulated Depreciation Wages Payable Unearned Fees Owner’s Capital Owner’s Drawing Fees Earned Wages Expense Depreciation Expense Supplies Expense Insurance Expense

Unadjusted Trial Balance Debit Credit 13,000 1,500 600 3,800 30,000 12,000 6,700 24,000 4,800 25,000 14,000

67,700

Adjusted Trial Balance Debit Credit 13,000 1,800 200 3,000 30,000 17,500 900 6,500 24,000 4,800 25,500 14,900 5,500 800 400 74,400 74,400

(a) Reconstruct the adjusting entries and give a brief explanation of each. (b) What is the amount of net income?

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Chapter 3 - The Adjusting Process ANSWER:

(a)

Accounts Receivable Fees Earned

300 300 Accrued fees.

Insurance Expense Prepaid Insurance

400 400 Expired insurance.

Supplies Expense Supplies

800 800 Supplies used ($3,800 – $3,000).

Depreciation Expense Accumulated Depreciation Depreciation expense.

5,500 5,500

Wages Expense Wages Payable

900 900 Accrued wages.

Unearned Fees Fees Earned

200 200 Fees earned ($6,700 – $6,500).

(b) $25,500 – $14,900 – $400 – $800 – $5,500 = $3,900 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCT.WARD.18.03-03 - 03-03 ACCT.WARD.18.03-04 - 03-04 ACCT.WARD.18.03-05 - 03-05 ACCT.WARD.18.03-06 - 03-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 162. Zoey Bella Company has a payroll of $10,000 for a five-day workweek. Its employees are paid each Friday for the five-day workweek. Prepare the adjusting entry on December 31 assuming the year ends on Thursday. Date

ANSWER:

Description

Post. Ref.

Debit

Credit

$10,000/5 = $2,000 per day × 4 days = $8,000 Date Dec. 31

Description Wages Expense Wages Payable

Post. Ref.

Debit

Credit 8,000

8,000

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Chapter 3 - The Adjusting Process DIFFICULTY:

ANSWER:

Description

Post. Ref.

Debit

Credit

$2,400/12 = $200 per month × 7 months = $1,400 Date Dec. 31

Description Insurance Expense Prepaid Insurance

Post. Ref.

Debit

Credit 1,400 1,400

DIFFICULTY:

Description

Post. Ref.

Debit

Credit

ANSWER: Date Dec. 31

Description Depreciation Expense Accum. Depr.—Office Building

Post. Debit Credit Ref. 2,800 2,800

DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 165. Gizmo Company purchased a one-year insurance policy on October 1 for $1,800. The adjusting entry on December 31 would be: Date

ANSWER:

Description

Post. Ref.

Debit

Credit

$1,800/12 = $150 per month × 3 months = $450 Date Dec. 31

Description Insurance Expense Prepaid Insurance

Post. Ref.

Debit

Credit 450 450

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 166. The supplies account had a beginning balance of $1,750. Supplies purchased during the period totaled $3,500. At the end of the period before adjustment, $350 of supplies was on hand. Prepare the adjusting entry for supplies. ANSWER: $1,750 + $3,500 − $350 = $4,900 Supplies Expense Supplies DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

4,900 4,900

167. On January 1, DogMart Company purchased a two-year liability insurance policy for $22,800 cash. The purchase was recorded to Prepaid Insurance. Prepare the January 31 adjusting entry. ANSWER: $22,800/24 = $950 per month Jan. 31 Insurance Expense Prepaid Insurance DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

950

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Chapter 3 - The Adjusting Process 168. DogMart Company records depreciation for equipment. Depreciation for the period ending December 31 is $1,400 for office equipment and $2,650 for production equipment. Prepare the two entries to record the depreciation. ANSWER: Dec. 31 Depreciation Expense—Office Equipment 1,400 Accumulated Depreciation—Office 1,400 Equipment Dec. 31 Depreciation Expense—Production Equipment Accumulated Depreciation—Production Equipment DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

2,650 2,650

169. On March 1, a business paid $3,600 for a 12-month liability insurance policy. On April 1, the business entered into a two-year rental contract for equipment at a total cost of $18,000. Determine the following amounts: (a) Insurance expense for the month of March (b) Balance in prepaid insurance as of March 31 (c) Equipment rent expense for the month of April (d) Balance in prepaid equipment rental as of April 30 ANSWER: (a) $300 ($3,600/12 = $300) (b) $3,300 ($3,600 – $300 = $3,300) (c) $750 ($18,000/24 = $750) (d) $17,250 ($18,000 – $750 = $17,250) DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 170. On January 1, Newman Company estimated its property tax to be $5,100 for the year. (a) How much should the company accrue each month for property taxes? (b) Calculate the balance in Property Tax Payable as of August 31. (c) Prepare the adjusting journal entry for September. ANSWER: (a) $425 ($5,100/12) (b) $3,400 ($425 × 8) (c) Property Tax Expense 425 Property Tax Payable Record property tax accrual for September.

425

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Chapter 3 - The Adjusting Process DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDAR ACCT.ACBSP.APC.07 - Adjusting Entries DS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 171. On January 1, Power House Co. prepaid the annual rent of $10,140. Prepare the journal entry to record this transaction. ANSWER: Jan. 1 Prepaid Rent 10,140 Cash 10,140 Prepaid annual rent. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 172. Record journal entries for the following transactions. (a) On December 1, $18,000 was received for a service contract to be performed from December 1 through April 30. (b) Assuming the work is performed evenly throughout the contract period, prepare the adjusting journal entry on December 31. ANSWER: Dec. 1 Cash 18,000 Unearned Fees 18,000 Dec. 31

Unearned Fees Fees Earned ($18,000/5 months = $3,600)

3,600 3,600

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 55

Chapter 3 - The Adjusting Process 173. On December 31, the balance in the office supplies account is $1,385. A physical count shows $435 worth of supplies on hand. Prepare the adjusting entry for supplies. ANSWER: $1,385 − $435 = $950 Dec. 31

Office Supplies Expense Office Supplies

950 950

DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 174. Depreciation on equipment for the year is $6,300. (a) Record the journal entry if the company prepares adjustments once a year. (b) Record the journal entry if the company prepares adjustments on a monthly basis. ANSWER: (a) Depreciation Expense 6,300 Accumulated Depr.—Equipment (b) Depreciation Expense ($6,300/12) 525 Accumulated Depr.—Equipment DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

6,300

525

175. The company determines that the interest expense on a note payable for the period ending December 31 is $775. This amount is payable on January 1. Prepare the journal entries required on December 31 and January 1. ANSWER: Dec. 31 Interest Expense 775 Interest Payable Jan.

Interest Payable Cash

775 775 775

DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 56

Chapter 3 - The Adjusting Process 176. On January 2, Dog Mart prepaid $30,000 rent for the year and recorded the prepayment in an asset account. Prepare the January 31 adjusting entry for rent expense. ANSWER: Jan. 31 Rent Expense 2,500 ($30,000/12) Prepaid Rent 2,500 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 177. The prepaid insurance account had a beginning balance of $6,600 and was debited for $2,300 for premiums paid during the year. Journalize the adjusting entry required at the end of the year, assuming the amount of unexpired insurance related to future periods is $4,100. ANSWER: Dec. 31 Insurance Expense 4,800 Prepaid Insurance $6,600 + $2,300 − $4,100 = $4,800 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

4,800

178. The balance in the unearned fees account, before adjustment at the end of the year, is $10,250. Journalize the adjusting entry required if the amount of unearned fees at the end of the year is $3,125. ANSWER: Unearned Fees ($10,250 – $3,125) 7,125 Fees Earned 7,125 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 179. At the end of the current year, fees of $3,700 have been earned but have not been billed to clients. Journalize the adjusting entry to record the accrued fees. ANSWER: Accounts Receivable 3,700 Fees Earned 3,700 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Page 57

Chapter 3 - The Adjusting Process 180. Ski Master Company pays weekly salaries of $18,000 on Friday for a five-day week ending on that day. Journalize the necessary adjusting entry at the end of the accounting period, assuming that the period ends on Wednesday. ANSWER: Salaries Expense [($18,000/5) × 3] 10,800 Salaries Payable 10,800 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 181. The estimated amount of depreciation on equipment for the current year is $5,300. Journalize the adjusting entry to record the depreciation. ANSWER: Depreciation Expense 5,300 Accumulated Depreciation 5,300 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 182. On November 1, clients of Great Designs Company prepaid $4,250 for services to be provided in the future at a rate of $85 per hour. (a) Journalize the receipt of cash. (b) As of November 30, Great Designs shows that 15 hours of services have been provided on this agreement. the necessary journal entry. (c) Determine the total unearned fees in hours and dollars at November 30. ANSWER: (a) Nov. 1 Cash 4,250 Unearned Service Fees 4,250 (b) Nov. 30 Unearned Service Fees ($85 × 15) Service Fees

Prepare

1,275

(c) Original prepaid fees $4,250/$85 per hour = November service fees 1,275 earned Balance of unearned service $2,975 fees DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

1,275 50 hours 15 hours 35 hours

Page 58

Chapter 3 - The Adjusting Process 183. Prepare the required entries for the following transactions: (a)

Austin Company pays daily wages of $645 (Monday–Friday). Paydays are every other Friday. Prepare the Monday, January 31 adjusting entry, assuming that the previous payday was Friday, January 21.

(b)

Prepare the journal entry to record Austin Company’s payroll on Friday, February 4.

(c)

Annual depreciation expense on the company’s fixed assets is $39,600. Prepare the adjusting entry to recognize depreciation for the month of January.

(d)

The company’s office supplies account shows a debit balance of $3,755. A count of office supplies on hand on January 31 shows $635 worth of supplies on hand. Prepare the January 31 adjusting entry for Office Supplies.

ANSWER:

(a) Jan. 31 Wages Expense 3,870 Wages Payable ($645 × 6 days) Monday, January 24 through Friday January 28 5 days × $645 = $3,225 Monday, January 31 1 day × $645 = $645 Wages Payable for January 24 through January 31 $3,225 + $645 = $3,870 (b) Feb. 4 Wages Expense (4 × $645) Wages Payable Cash Payment of Feb. 4 payroll.

2,580 3,870

3,300

Depreciation Expense ($39,600/12) Accumulated Depreciation January depreciation.

(d) Jan. 31 Office Supplies Expense Office Supplies Office supplies used. Account balance Less supplies on hand January expense

3,870

6,450

3,300 3,120 3,120

$3,755 635 $3,120

DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCT.WARD.18.03-03 - 03-03 ACCT.WARD.18.03-04 - 03-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 59

Chapter 3 - The Adjusting Process 184. On December 15, Great Designs Company hired an independent contractor for a project. The contractor completed the project on December 29 and submitted an invoice for $2,425 which was due on January 15. The amount was duly paid on January 15. (a) Prepare the journal entry or entries necessary to record these transactions. (b) Explain why you prepared this/these journal entries. ANSWER: (a) Dec. 29 Professional Services Expense Accounts Payable Jan. 15

Accounts Payable Cash

2,425 2,425 2,425 2,425

(b) The first journal entry is required to record the expense of the independent contractor in the period in which the services were received. This journal entry created an expense in December’s income statement and a liability on December’s balance sheet. The second entry was to pay the contractor when the payment was due. This removed the liability by resolving it with a cash payment. This journal entry did not affect January’s income statement. DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 185. On November 15, Great Designs Company purchased an advertising campaign for the month of December. Great Designs paid cash of $2,700 in advance. The advertising campaign ran in December and was completed on December 31. (a) Prepare all necessary journal entries for the advertising campaign for November and December. (b) Explain why you prepared this/these journal entries. ANSWER: (a) Nov. 15 Prepaid Advertising 2,700 Cash 2,700 Dec. 31

Advertising Expense Prepaid Advertising

2,700 2,700

(b)

Under the matching concept, the expense should be recorded in the month of December when the advertising campaign ran, even though the cash was paid in November. Thus, the November journal entry creates an asset, prepaid advertising. The December 31 entry recognizes the advertising expense in December and eliminates the prepaid asset. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Page 60

Chapter 3 - The Adjusting Process 186. On January 2, Safe Motorcycling Monthly received a check for $72 from a subscriber for a 12-month subscription. The January issue was mailed on January 15. Prepare the necessary entries for the month of January. ANSWER: Jan. 2 Cash 72 Unearned Subscription 72 Revenue Jan. 15 or 31

Unearned Subscription Revenue Subscription Revenue

6 6

The second entry can be made either on January 15 when the issue is mailed or on January 31with other adjusting entries. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 187. Prepare the December 31 adjusting entries for the following transactions. Omit explanations. 1. Fees accrued but not billed, $6,300. 2. The supplies account balance on December 31, $4,750; supplies on hand, $960. 3. Wages accrued but not paid, $2,700. 4. Depreciation of office equipment, $1,650. 5. Rent expired during year, $10,800. Date

Description

Post. Ref.

Debit

Credit

Page 61

Chapter 3 - The Adjusting Process ANSWER: Date Dec. 31

Description Accounts Receivable Revenues

Post. Debit Credit Ref. 6,300 6,300

Supplies Expense ($4,750 – $960) Supplies

3,790

Wages Expense Wages Payable

2,700

Depreciation Expense Accumulated Depreciation

1,650

Rent Expense Prepaid Rent

10,800

3,790

2,700

1,650

10,800

DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-05 - 03-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 188. Prepare adjusting entries for the following transactions: (a) (b) (c)

(d) (e)

The beginning balance of the supplies account was $245. During the month the company bought additional supplies in the amount of $735. At the end of the month a physical inventory showed $343 of unused supplies. The company has a 12% note payable in the amount of $17,000 due in six months. The interest expense of $170 for the month has not been recorded. The company has two employees. The manager is paid on the fifteenth of every month for work performed during the first half of the month and on the first of the following month for the work performed during the second half of the month. His monthly salary is $5,500. The other employee is paid $650 for each five-day work week (Monday–Friday). The last day of the month fell on Thursday. The unearned fees account shows a balance of $46,000. According to the manager 60% of that amount has been earned. At the end of the month $5,700 of services had been performed but not yet billed.

ANSWER:

(a)

(b)

(c)

(d)

Supplies Expense ($245 + $735 – $343) Supplies

637

Interest Expense [($17,000 × 12%)/12] Interest Payable

170

Wages and Salary Expense Wages and Salary Payable {($5,500/2) + [($650/5) × 4]}

3,270

Unearned Fees Fees Earned ($46,000 × 60%)

27,600

637

170

3,270

27,600 Page 62

Chapter 3 - The Adjusting Process (e)

Accounts Receivable Fees Earned DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

5,700 5,700

189. Journalize the six entries to adjust the accounts at December 31. (Hint: One of the accounts was affected by two different adjusting entries).

Cash Accounts Receivable Supplies Prepaid Insurance Equipment Accumulated Depreciation Wages Payable Unearned Fees Owner's Capital Fees Earned Wages Expense Supplies Expense Insurance Expense Depreciation Expense Totals ANSWER:

Unadjusted Trial Balance Debit Credit Balances Balances 5,000 32,000 3,600 4,000 11,000

8,900 22,000 69,000 44,300

99,900

Adjusted Trial Balance Debit Credit Balances Balances 5,000 32,600 100 1,400 11,000 1,700 2,000 3,500 22,000 75,000 46,300 3,500 2,600 1,700

99,900

104,200

Accounts Receivable Fees Earned

600

Supplies Expense Supplies

3,500

Insurance Expense Prepaid Insurance

2,600

Depreciation Expense Accumulated Depreciation

1,700

600

3,500

2,600

1,700

Page 63

Chapter 3 - The Adjusting Process Unearned Fees Fees Earned

5,400 5,400

Wages Expense Wages Payable DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCT.WARD.18.03-03 - 03-03 ACCT.WARD.18.03-04 - 03-04 ACCT.WARD.18.03-05 - 03-05 ACCT.WARD.18.03-06 - 03-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

2,000 2,000

190. Bloom's Company pays biweekly salaries of $40,000 every other Friday for a 10-day period ending on that day. The last payday of December is Friday, December 27. Assuming the next pay period begins on Monday, December 30, journalize the adjusting entry necessary at the end of the fiscal period (December 31). Date

ANSWER:

Description

Post. Ref.

Debit

Credit

$40,000/10 days = $4,000 per day $4,000 per day × 2 days = $8,000 Date

Description

Dec. 31

Salary Expense Salary Payable

Post. Ref.

Debit

Credit

8,000 8,000

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 64

Chapter 3 - The Adjusting Process 191. A business pays biweekly salaries of $20,000 every other Friday for a 10-day period ending on that day. The last payday of December is Friday, December 27. Assume the next pay period begins on Monday, December 30 and the proper adjusting entry is journalized at the end of the fiscal period (December 31). Journalize the entry for the payment of the payroll on Friday, January 10. Date

ANSWER:

Post. Ref.

Description

Debit

Credit

Accrued Salaries for December = $20,000/10 days = $2,000 per day; $2,000 per day × 2 days = $4,000 Salary Expense through January 10 = $20,000 – $4,000 = $16,000 Date Jan. 10

Description Salary Expense Salary Payable Cash

Post. Ref.

Debit

Credit

16,000 4,000 20,000

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 192. At January 31, the end of the first month of the year, the usual adjusting entry transferring expired insurance to an expense account is omitted. Which items will be incorrectly stated, because of the error, on (a) the income statement for January and (b) the balance sheet as of January 31? Also indicate whether the items in error will be overstated or understated. ANSWER: (a) Insurance expense (or expenses) will be understated. Net income will be overstated. (b) Prepaid insurance (or assets) will be overstated. Owner's equity will be overstated. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-05 - 03-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 65

Chapter 3 - The Adjusting Process 193. At the end of April, the first month of the company's year, the usual adjusting entry transferring rent earned to a revenue account from the unearned rent account was omitted. Indicate which items will be incorrectly stated, because of the error, on (a) the income statement for April and (b) the balance sheet as of April 30. Also indicate whether the items in error will be overstated or understated. ANSWER: (a) Rent revenue (or revenues) will be understated. Net income will be understated. (b) Owner’s equity at the end of the period will be understated. Unearned rent (or liabilities) will be overstated. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-05 - 03-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 194. Salaries of $6,400 are paid for a five-day week on Friday. Prepare the adjusting journal entry that is required if the month ends on Thursday. ANSWER: Salaries Expense [($6,400/5) × 4] 5,120 Salaries Payable 5,120 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-02 - 03-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 195. Accrued salaries of $600 owed to employees for December 29, 30, and 31 are not taken into consideration in preparing the financial statements for the year ended December 31. Indicate which items will be erroneously stated, because of the error, on (a) the income statement for the year and (b) the balance sheet as of December 31. Also indicate whether the items in error will be overstated or understated. ANSWER: (a) Salary expense (or expenses) will be understated. Net income will be overstated. (b) Salaries payable (or liabilities) will be understated. Owner’s equity will be overstated. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-05 - 03-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 66

Chapter 3 - The Adjusting Process 196. For the year ending December 31, Beard Clinical Supplies Co. mistakenly omitted adjusting entries for (1) $9,800 of unearned revenue that was earned, (2) earned revenue that was not billed of $10,200, and (3) accrued wages of $7,000. Indicate the combined effect of the errors on (a) revenues, (b) expenses, and (c) net income. ANSWER: (a) Revenues were understated by $20,000 ($9,800 + $10,200). (b) Expenses were understated by $7,000. (c) Net income was understated by $13,000 ($20,000 − $7,000). DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-05 - 03-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 197. On January 1, Great Designs Company had a debit balance of $1,450 in the office supplies account. During the month, Great Designs purchased $115 and $160 of office supplies and journalized them to the asset account upon purchasing. On January 31, an inspection of the office supplies cabinet shows that only $350 of office supplies remains. Prepare the January 31 adjusting entry for office supplies. ANSWER: Jan. 31 Office Supplies Expense 1,375 Office Supplies 1,375 Beginning balance Plus purchases Available Less ending balance Period expense DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-03 - 03-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

$1,450 $115 160

275 $1,725 350 $1,375

198. For the year ending June 30, Island Clinical Services mistakenly omitted adjusting entries for (1) $1,500 of supplies that were used, (2) unearned revenue of $4,200 that was earned, and (3) insurance of $5,000 that expired. What is the combined effect of these errors on (a) revenues, (b) expenses, and (c) net income for the year ending June 30? ANSWER: (a) Revenues were understated by $4,200. (b) Expenses were understated by $6,500 ($1,500 + $5,000). (c) Net income was overstated by $2,300 ($6,500 − $4,200). DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-05 - 03-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 67

Chapter 3 - The Adjusting Process 199. On December 31, a business estimates depreciation on equipment used during the first year of operations to be $2,900. (a) Journalize the adjusting entry required on December 31. (b) If the adjusting entry in (a) were omitted, which items would be erroneously stated on (1) the income statement for the year and (2) the balance sheet as of December 31? ANSWER: (a) Depreciation Expense 2,900 Accumulated Depreciation—Equipment 2,900 (b) (1) Depreciation expense would be understated. Net income would be overstated. (2) Accumulated depreciation would be understated, and total assets would be overstated. Owner's equity would be overstated. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-04 - 03-04 ACCT.WARD.18.03-05 - 03-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 200. At the end of the fiscal year, the following adjusting entries were omitted: (a)

No adjusting entry was made to transfer the $1,750 of prepaid insurance from the asset account to the expense account. (b) No adjusting entry was made to record accrued fees of $525 for services provided to customers. Assuming that financial statements are prepared before the errors are discovered, indicate the effect of each error, considered individually, by inserting the dollar amount in the appropriate spaces. Insert "0" if the error does not affect the item. Error (a) Error (b) Over- Under- Over- Understated stated stated stated (1) Assets at Dec. 31 would be

(2) Liabilities at Dec. 31 would be

(3) Net income for the year would be

(4) Owner's equity at Dec. 31 would be

ANSWER:

(1) Assets at Dec. 31 would be (2) Liabilities at Dec. 31 would be

Error (a) Error (b) Over- Under- Over- Understated stated stated stated $1,750 $0 $0 $525 0

(3) Net income for the year would be

1,750

525

(4) Owner’s equity at Dec. 31 would be

1,750

525

Page 68

Chapter 3 - The Adjusting Process DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-05 - 03-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 201. Jordon James started JJJ Consulting on January 1. The following are the account balances at the end of the first month of business, before adjusting entries were recorded: Accounts Payable Accounts Receivable Cash Consulting Revenue Equipment Owner's Capital Owner's Drawing Prepaid Rent Supplies

300 750 6,300 4,925 7,000 15,000 1,375 4,000 800

Adjustment data: Supplies on hand at the end of the month, $200 Unbilled consulting revenue, $700 Rent expense for the month, $1,000 Depreciation on equipment, $90 (a) Prepare the required adjusting entries, adding accounts as needed. (b) Prepare an adjusted trial balance for JJJ Consulting as of January 31. ANSWER:

(a) Supplies Expense Supplies Accounts Receivable Consulting Revenue Rent Expense Prepaid Rent Depreciation Expense Accum. Depr.— Equipment

600 600 700 700 1,000 1,000 90

Page 69

Chapter 3 - The Adjusting Process (b) JJJ Consulting Adjusted Trial Balance January 31 Accounts

Debit Balances

Cash Accounts Receivable Supplies Prepaid Rent Equipment Accumulated Depreciation—Equipment Accounts Payable Owner's Capital Owner's Drawing Consulting Revenue Depreciation Expense Rent Expense Supplies Expense Totals

Credit Balances 6,300 1,450 200 3,000 7,000 90 300 15,000 1,375 5,625 90 1,000 600 21,015

21,015

DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-05 - 03-05 ACCT.WARD.18.03-06 - 03-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 70

Chapter 3 - The Adjusting Process 202. Complete the missing items in this summary of adjustments chart: PREPAID EXPENSES Financial Statement Impact Examples Adjusting Entry if Adjusting Entry Is Omitted Supplies, Dr. Expense Income Statement: Cr. Asset Revenues: No effect (a) Expenses: Understated Net income: (b) Balance Sheet: Assets: (c) Liabilities: (d) Owner's equity: Overstated UNEARNED REVENUES Financial Statement Impact if Examples Adjusting Entry Adjusting Entry is Omitted Unearned rent, (f) Income Statement: Revenues: (g) (e) Expenses: No effect Net income: (h) Balance Sheet: Assets: (i) Liabilities: Overstated Owner's equity: (j) ACCRUED REVENUES Financial Statement Impact if Examples Adjusting Entry Adjusting Entry Is Omitted Interest income Dr. Asset Income Statement: due on a note, Cr. Revenue Revenues: (l) Expenses: (m) (k) Net income: Understated Balance Sheet: Assets: (n) Liabilities: (o) Owner's equity: Understated ACCRUED EXPENSES Examples Financial Statement Impact if Adjusting Entry Adjusting Entry Is Omitted Interest due on a (q) Income Statement: note payable, Revenues: No effect Expenses: (r) (p) Net income: (s) Balance Sheet: Assets: (t) Liabilities: Understated Owner's equity: (u)

Page 71

Chapter 3 - The Adjusting Process ANSWER:

(a) (b) (c) (d)

Prepaid rent or Prepaid insurance Overstated Overstated No effect Fee or magazine subscription received in (e) advance (f) Dr. Liability, Cr. Revenue (g) Understated (h) Understated (i) No effect (j) Understated (k) Services performed but not yet billed (l) Understated (m) No effect (n) Understated (o) No effect (p) Unpaid wages (q) Dr. Expense, Cr. Liability (r) Understated (s) Overstated (t) No effect (u) Overstated DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-05 - 03-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 203. For each of the following errors, considered individually, indicate whether the error would cause the adjusted trial balance totals to be unequal. If the error would cause the adjusted trial balance total to be unequal, indicate whether the debit or credit total is higher and by how much. a) The adjustment for unearned fees of $3,260 was journalized as a debit to Accounts Payable for $3,260 and a credit to Fees Earned of $3,260. b) The adjustment for supplies expense of $425 was journalized as a debit to Supplies Expense for $542 and a credit to Supplies for $425. ANSWER: a) The trial balance totals will still be equal, but the balances of Unearned Fees and Accounts Payable will be incorrect as the debit should have been made to Unearned Fees instead of Accounts Payable. b) The debit total exceeds the credit total by $117. DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-06 - 03-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 204. Using the following account balances for Garry’s Tree Service, prepare a trial balance. Cash Supplies Accounts Payable Owner's Capital Wages Expense Machinery Wages Payable Service Revenue Rent Expense Unearned Revenue Accumulated Depreciation—Machinery Prepaid Rent Owner's Drawing

$25,000 1,000 7,000 32,910 2,000 18,350 3,600 21,000 11,500 1,500 7,340 12,200 3,300

ANSWER: Cash Supplies Prepaid Rent Machinery Accumulated Depreciation—Machinery Accounts Payable Wages Payable Unearned Revenue Owner's Capital Owner's Drawing Service Revenue Wage Expense Rent Expense

Debit Credit Balances Balances 25,000 1,000 12,200 18,350 7,340 7,000 3,600 1,500 32,910 3,300 21,000 2,000 11,500 73,350 73,350

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-06 - 03-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 205. Indicate whether the following error would cause the adjusted trial balance totals to be unequal. If the error would cause the adjusted trial balance totals to be unequal, indicate whether the debit or credit total is higher and by how much. The entry for $975 of supplies used during the period was journalized as a debit to Supplies Expense for $795 and credit to Supplies for $975. ANSWER: The total will be unequal with a credit total higher by $180 ($975 − $795). DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-06 - 03-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 206. Indicate whether the following error would cause the adjusted trial balance totals to be unequal. If the error would cause the adjusted trial balance totals to be unequal, indicate whether the debit or credit total is higher and by how much. The adjustment for accrued fees of $1,170 was journalized as a debit to Accounts Receivable for $1,170 and a credit to Fees Earned for $1,107. ANSWER: The total will be unequal with a debit total higher by $63 ($1,170 − $1,107). DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-06 - 03-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 207. What is the purpose of an adjusted trial balance? What type(s) of error does it detect? What type(s) of error does it not detect? ANSWER: The purpose of an adjusted trial balance is to make sure that debits equal credits before financial statements are prepared. If a debit is incorrectly posted as a credit or vice versa, the error will be detected. Likewise, if the debit(s) and credit(s) for a posted transaction do not equal, that error will be detected. Errors that will not be detected include omitting a required adjusting entry or posting a debit or credit for the correct amount to the wrong account. DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.03-06 - 03-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 208. Two income statements for Midnight Enterprises are shown below. Midnight Enterprises Income Statements For the Years Ended December 31

Fees earned Operating expenses Operating income

Year 2 $674,350 472,045 $202,305

Year 1 $520,600 338,390 $182,210

(a) Prepare a vertical analysis of Midnight Enterprises’ income statements. (b) Does the vertical analysis indicate a favorable or unfavorable trend? ANSWER: (a) Midnight Enterprises Income Statements For the Years Ended December 31

Fees earned Operating expenses Operating income

Year 2 Year 1 Amount Percent Amount Percent $674,350 100% $520,600 100% 472,045 70% 338,390 65% 30% $202,305 $182,210 35%

(b) The vertical analysis is indicating an unfavorable trend from Year 1 to Year 2 as the operating expenses of the company as a percent of revenues have increased and operating income has decreased. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-07 - 03-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 3 - The Adjusting Process 209. Two income statements for Danielle’s Design Services are shown below. Danielle’s Design Services Income Statements For the Years Ending December 31 Year 2 $765,340

Fees earned Expenses: Wages expense Rent expense Supplies expense Miscellaneous expense Total expenses Operating income

$254,000 120,000 76,500 11,680 $462,180 $303,160

Year 1 $696,520 $214,600 108,000 98,715 16,420 $437,735 $258,785

(a) Prepare a vertical analysis of Danielle’s Design Services income statements. (b) What types of trends are indicated: favorable or unfavorable? (c) What other information would enhance the analysis? ANSWER: (a) Danielle’s Design Services Income Statements For the Years Ending December 31 Year 2 Year 1 Amount Percent Amount Percent Fees earned $765,340 100.0% $696,520 100.0% Expenses: Wages expense $254,000 33.2% $214,600 30.8% Rent expense 120,000 15.7% 108,000 15.5% Supplies expense 76,500 10.0% 98,715 14.2% Miscellaneous expense 11,680 1.5% 16,420 2.4% Total expenses $462,180 60.4% $437,735 62.9%* Operating income $303,160 39.6% $258,785 37.1%* *Differences due to rounding (b) The vertical analysis shows both favorable and unfavorable trends. The increase in wages expense of 2.4% (33.2% − 30.8%) is unfavorable. The decreases in supplies expense of 4.2% (14.2% − 10.0%) and miscellaneous expense of 0.9% (2.4% − 1.5%) are both favorable. Rent as a percentage of fees earned stayed relatively constant. The net result is favorable—an increase in operating income as a percentage of fees earned from 37.1% to 39.6%. (c) The analysis could be enhanced by comparisons with industry averages. DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.03-07 - 03-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle True / False 1. Cross-referencing is useful in assuring that the debits and credits are in balance. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-01 - 04-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 2. When accounts do not appear on the unadjusted trial balance but are needed to post adjustments, they are simply added to the Account Title column. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-01 - 04-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 3. Once the adjusted trial balance is in balance, the flow of accounts will now go into the financial statements. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-01 - 04-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 4. There is really no benefit in preparing financial statements in any particular order. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 4 - Completing the Accounting Cycle 5. On the income statement, miscellaneous expenses are usually presented as the last item without regard to the dollar amount. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 6. The usual presentation of the statement of owner's equity is (1) Beginning capital, (2) Net income or loss, (3) Drawing, (4) Owner's contributions, and (5) Ending capital. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 7. The difference between a classified balance sheet and one that is not classified is that the classified one has subheadings. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 8. Cash and other assets that may reasonably be expected to be realized in cash, sold, or consumed through the normal operations of a business, usually longer than one year, are called current assets. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 4 - Completing the Accounting Cycle 9. Prepaid Insurance is an example of a current asset. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 10. Land is an example of a plant asset. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 11. Liabilities that will be due within one year or less and that are to be paid out of current assets are called current liabilities. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 12. The amount of the net income for a period appears on both the income statement and the balance sheet for that period. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 13. Accrued taxes payable are generally reported on the balance sheet as a current liability. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 14. Office Equipment is an example of a current asset account. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 15. Capital and drawing are reported in the owner's equity section of the balance sheet. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 16. Deferred expenses that benefit a relatively short period of time are listed on the balance sheet as current assets. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 4 - Completing the Accounting Cycle 17. Unearned revenues that will be earned in a relatively short period of time are listed on the balance sheet as current assets. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 18. Accrued expenses are ordinarily listed on the balance sheet as current assets. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 19. Accrued revenues are ordinarily listed on the balance sheet as current liabilities. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 20. Examples of temporary accounts are supplies and prepaid expenses which are in the ledger for just a short time before they expire. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 21. Accumulated Depreciation is a permanent account. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 22. The drawing account is a temporary account. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 23. The balance sheet accounts are referred to as real or permanent accounts. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 4 - Completing the Accounting Cycle 24. Journalizing and posting the adjustments and closing entries updates the ledger for the new accounting period. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 25. Net income is closed to the owner's capital account. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 26. The accumulated depreciation account is closed to the drawing account. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 27. The drawing account is debited in the closing entry. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 28. The trial balance prepared after all the closing entries have been posted is called a pre-closing trial balance. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 29. Entries required to close the balances of the temporary accounts at the end of the period are called final entries. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 30. Journalizing and posting closing entries must be completed before financial statements can be prepared. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 31. During the closing process, some balance sheet accounts are closed and end the period with a zero balance. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 32. Closing entries are entered directly on to the work sheet. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 33. The post-closing trial balance will generally have fewer accounts than the trial balance. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 34. A post-closing trial balance contains only asset and liability accounts. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 35. A post-closing trial balance should be prepared before the financial statements are prepared. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 4 - Completing the Accounting Cycle 36. Assets, liabilities, and owner’s capital are real accounts and do not get closed at the end of the period. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 37. All income statement accounts will be closed at the end of the period. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 38. Accounts reported on the balance sheet that are carried forward from year to year are known as permanent accounts. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 39. Balance sheet accounts are not considered real accounts. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 40. Real accounts are not permanent accounts. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 41. It is not necessary to post the closing entries to the general ledger. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 42. The closing process is sometimes referred to as closing the books. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 43. Once an account has been closed for the period, inserting a line in the balance columns zeros out the account, making it ready for the following period. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 44. After analyzing transactions, the next step would be to post the transactions in the ledger. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-04 - 04-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 45. The last step of the accounting cycle is to prepare a post-closing trial balance. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-04 - 04-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 46. The most important output of the accounting cycle is the financial statements. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-04 - 04-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 47. The accounting cycle begins with preparing an unadjusted trial balance. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-04 - 04-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 48. Financial statements should be prepared before the closing entries are journalized and posted. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-04 - 04-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 49. The unadjusted, adjusted, and final trial balances are prepared during the accounting cycle of a period. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-04 - 04-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 50. Any 12-month accounting period adopted by a company is known as its fiscal year. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-06 - 04-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 51. A fiscal year that ends when business activities have reached their lowest point is called the natural business year. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-06 - 04-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 52. All companies must use a calendar year as their fiscal year. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-06 - 04-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 53. The majority of businesses end their fiscal year on December 31. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-06 - 04-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 54. The ability to convert assets into cash is called liquidity. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-07 - 04-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 55. The ability of a business to pay its debts is called solvency. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-07 - 04-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 56. Working capital is the excess of the current liabilities of a business over its current assets. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-07 - 04-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 57. The current ratio is computed by dividing current liabilities by current assets. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-07 - 04-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 58. The current ratio is more useful than working capital in making comparisons across companies. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-07 - 04-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 59. Current assets and current liabilities for Brayden Company are as follows:

Current Assets Current Liabilities

20Y9 $498,600 269,300

20Y8 $532,400 301,500

The change in the current ratio from 20Y8 to 20Y9 was favorable. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-07 - 04-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 60. Current assets and current liabilities for Brayden Company are as follows:

Current assets Current liabilities

20Y9 $498,600 269,300

20Y8 $532,400 301,500

The change in working capital from 20Y8 to 20Y9 indicates that Brayden will no longer be solvent. a. True b. False ANSWER: DIFFICULTY:

False Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-07 - 04-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 61. The income statement is prepared from the adjusted trial balance or the Income Statement columns on the work sheet. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT. WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 62. The balances of the capital accounts from the Adjusted Trial Balance columns of the work sheet are extended to the Statement of Owner’s Equity columns. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 63. The work sheet is not considered a part of the formal accounting records. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 64. The work sheet is a working paper that accountants can use to summarize adjusting entries and the account balances for the financial statements. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 65. The trial balance may be listed on the work sheet instead of being prepared separately. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 4 - Completing the Accounting Cycle 66. The totals of the Adjusted Trial Balance columns on a work sheet will always be the sum of the Trial Balance column totals and the Adjustments column totals. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 67. A work sheet heading is dated for a period of time. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 68. On the work sheet, the capital and drawing account balances are extended to the Balance Sheet columns. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 69. After the account balances have been extended from the Adjusted Trial Balance columns on the work sheet, the difference between the initial totals of the Balance Sheet Debit and Credit columns is net income or net loss. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 70. After net income or loss is entered on the work sheet, the Debit column total must equal the Credit column total for the Balance Sheet pair of columns. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 71. A net loss is shown on the work sheet in the Credit columns of both the Income Statement columns and the Balance Sheet columns. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 72. Net income is shown on the work sheet in the Income Statement Debit column and the Balance Sheet Credit column. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 73. If the totals of the Income Statement Debit and Credit columns of a work sheet are $27,000 and $29,000, respectively, after all account balances have been extended, the amount of the net loss is $2,000. a. True b. False ANSWER: False RATIONALE: As the Income Statement Credit column total (total revenue) is greater than the Income Statement Debit column total (total expenses), the difference is the net income. Net Income (excess of revenues over expenses) = Total of Income Statement Credit Column (revenues) – Total of Income Statement Debit Column (expenses) = $29,000 – $27,000 = $2,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 74. The balance in the capital account on the worksheet will equal the amount presented in the balance sheet. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 75. Since the adjustments are entered on the work sheet, it is not necessary to record them in the journal or post them to the ledger. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 76. The chart of accounts, the journal, and the ledger are essential parts of the accounting system. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 77. A reversing entry reverses the effects of an adjusting entry from the previous period. a. True b. False ANSWER: DIFFICULTY:

True Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-APP2 - 04-APP2 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 78. Reversing entries are recorded after adjusting entries have been recorded and before closing entries are recorded for the same period. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-APP2 - 04-APP2 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 79. Accrued fees earned are recorded during the adjusting process. The reversing entry will leave a debit balance in Fees Earned as of the first day of the next period. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-APP2 - 04-APP2 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic Multiple Choice 80. What is the major difference between the unadjusted trial balance and the adjusted trial balance? a. The adjusted trial balance will show the net income (loss) as an additional account. b. Unlike the adjusted trial balance, the unadjusted trial balance will continue with the end-of-period processing even if it is not in balance. c. The adjusted trial balance includes the postings of the adjustments for the period in the balance of the accounts. d. The adjusted trial balance will be used to record the adjustments for the period. ANSWER: c DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.04-01 - 04-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 81. When preparing the statement of owner's equity, the beginning capital balance can always be found a. in the Income Statement columns of the work sheet b. in the statement of cash flows c. in the general ledger d. in the Balance Sheet columns of the work sheet ANSWER: c DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 82. Accumulated Depreciation appears on the a. balance sheet in the current assets section b. balance sheet in the property, plant, and equipment section c. balance sheet in the long-term liabilities section d. income statement as an operating expense ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 83. Notes receivable due in 390 days appear on the a. balance sheet in the current assets section b. balance sheet in the noncurrent assets section c. balance sheet in the current liabilities section d. income statement as an expense ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 84. Unearned fees appear on the a. balance sheet in the current assets section b. balance sheet as a current liability c. balance sheet in the owner's equity section d. income statement as revenue ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 85. Which one of the fixed asset accounts listed below will not have a related contra asset account? a. Office Equipment b. Land c. Delivery Equipment d. Building ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 86. Prepaid insurance is reported on the balance sheet as a a. current asset b. fixed asset c. current liability d. long-term liability ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 87. The first item appearing on the statement of owner's equity is a. net income b. the ending balance of owner's equity c. owner withdrawals d. the beginning balance of owner's equity ANSWER: d DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.10 - Internal Control ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 88. The statement of owner’s equity should be prepared a. before the income statement and after the balance sheet b. before the income statement and balance sheet c. after the income statement and balance sheet d. after the income statement and before the balance sheet ANSWER: d DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 89. The income statement should be prepared a. before the statement of owner’s equity and balance sheet b. after the statement of owner’s equity and before the balance sheet c. after the statement of owner’s equity and balance sheet d. after the balance sheet and before the statement of owner’s equity ANSWER: a DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle Use the adjusted trial balance for Stockton Company to answer the questions that follow.

Cash Accounts Receivable Prepaid Expenses Equipment Accumulated Depreciation Accounts Payable Notes Payable Bob Steely, Capital Bob Steely, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Depreciation Expense Miscellaneous Expense Totals

Stockton Company Adjusted Trial Balance December 31 Account No. 11 12 13 18 19 21 22 31 32 41 51 52 53 54 59

Debit Balances 6,530 2,100 700 13,700

Credit Balances

1,100 1,900 4,300 12,940 790 9,250 2,500 1,960 775 250 185 29,490

29,490

90. Use the adjusted trial balance for Stockton Company. Determine the net income (loss) for the period. a. Net income is $9,250. b. Net loss is $790. c. Net loss is $5,670. d. Net income is $3,580. ANSWER: d RATIONALE: Net Income = Fees Earned – (Wages Expense + Rent Expense + Utilities Expense + Depreciation Expense + Miscellaneous Expense) = $9,250 – ($2,500 + $1,960 + $775 + $250 + $185) = $3,580 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 91. Use the adjusted trial balance for Stockton Company. Determine the owner’s equity ending balance. a. $12,150 b. $15,730 c. $6,480 d. $21,400 ANSWER: b RATIONALE: Ending Balance of Owner's Equity = Beginning Balance of Owner's Equity + Net Income – Withdrawals = $12,940 + $3,580 – $790 = $15,730 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 92. Use the adjusted trial balance for Stockton Company. Determine the total assets. a. $8,630 b. $23,030 c. $21,930 d. $9,330 ANSWER: c RATIONALE: Total Assets = Cash + Accounts Receivable + Prepaid Expenses + (Equipment – Accumulated Depreciation) = $6,530 + $2,100 + $700 + ($13,700 – $1,100) = $21,930 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 93. Use the adjusted trial balance for Stockton Company. Determine the current assets. a. $23,030 b. $9,330 c. $21,930 d. $8,630 ANSWER: b RATIONALE: Current Assets = Cash + Accounts Receivable + Prepaid Expenses = $6,530 + $2,100 + $700 = $9,330 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 94. Use the adjusted trial balance for Stockton Company. Determine the total liabilities for the period. a. $1,900 b. $6,200 c. $4,300 d. $20,240 ANSWER: b RATIONALE: Total Liabilities = Accounts Payable + Notes Payable = $1,900 + $4,300 = $6,200 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 95. The balance sheet should be prepared a. before the income statement and the statement of owner’s equity b. before the income statement and after the statement of owner’s equity c. after the income statement and the statement of owner’s equity d. after the income statement and before the statement of owner’s equity ANSWER: c DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 96. The statement of owner’s equity begins with the beginning balance followed by a. adding net income less withdrawals b. adding net income plus investments c. adding investments less withdrawals d. adding investments plus net income less withdrawals ANSWER: d DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 97. The income statement will present a. revenues less expenses (ordered largest to smallest amounts) with miscellaneous expense listed last b. revenues less expenses (ordered smallest to largest amounts) with miscellaneous expense listed last c. revenues less expenses (ordered in alphabetical order) d. revenues less expenses (order is not important) ANSWER: a DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 98. The classified balance sheet will show which asset subsections? a. current assets and other equity b. current assets and property, plant, and equipment c. current liabilities and short-term assets d. other revenues and property, plant and equipment ANSWER: b DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 99. The classified balance sheet will show which liability subsections? a. current liabilities and long-term liabilities b. current liabilities and other liabilities c. other liabilities and long-term liabilities d. present liabilities and tomorrow’s liabilities ANSWER: a DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 100. Debts listed as current liabilities are those that a. will be paid in less than one year b. are due to be paid in 5 to 10 years c. are due to be paid in more than one year d. are owed to the owner and will never be paid ANSWER: a DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 101. On the balance sheet, owner’s equity is a. added to assets and the two are equal to liabilities b. added to liabilities and the two are equal to assets c. subtracted from liabilities and the net amount is equal to assets d. equal to the total of assets and liabilities ANSWER: b DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 102. Balance sheet accounts a. represent amounts accumulated during a specific period of time b. are called real accounts c. have zero balances after the closing entries have been posted d. are not affected by adjustments ANSWER: b DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 103. Which of the following is not true about closing entries? a. There are two closing entries that update the owner’s equity account. b. After the first closing entry, the owner's capital account has been increased (decreased) by the amount of net income (or loss) for the period. c. All real accounts are closed at the end of the period. d. By closing nominal accounts at the end of the period to zero, it is possible to isolate next period’s information correctly. ANSWER: c DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 104. After posting the first closing entry to the owner's capital account, the balance will be increased (decreased) by a. zero b. owner’s equity c. revenues for the period d. the net income (net loss) for the period ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 105. What is the first account that should be listed in the post-closing trial balance? a. Net Income b. Owner, Capital c. Cash d. Fees Earned ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 106. Which of the following account groups includes nominal accounts? a. Cash, Dividends, Wages Payable b. Prepaid Insurance, Equipment, Fees Earned c. Common Stock, Dividends, Net Income d. Rent Revenue, Fees Earned, Miscellaneous Expense ANSWER: d DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 107. There are two closing entries. The first one is to close _____; the second one is to close _____. a. revenues and expenses, the drawing account b. revenues, expenses and the drawing account c. revenues, expenses d. the drawing account, revenues ANSWER: a DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 108. Closing entries a. need not be journalized if adjusting entries are prepared b. need not be posted if the financial statements are prepared from the work sheet c. are not needed if adjusting entries are prepared d. must be journalized and posted ANSWER: d DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 109. Closing entries are dated in the journal as of a. the date they are actually journalized, although they are generally prepared after the end of the accounting period b. the last day of the accounting period, although they are actually journalized after the end of the accounting period c. the first day of the accounting period, although they are actually journalized well after the beginning of the accounting period d. the first day of the subsequent accounting period ANSWER: b DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 110. Which of the accounts below would be closed by posting a debit to the account? a. Unearned Revenue b. Fees Earned c. Josh Morton, Drawing d. Miscellaneous Expense ANSWER: b DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 111. Which of the following accounts should be closed to the capital account at the end of the year? a. Service Revenue b. Equipment c. Prepaid Insurance d. Unearned Rent ANSWER: a DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 112. Which of the following accounts will not be closed to the capital account at the end of the year? a. Utilities Expense b. Fees Earned c. Prepaid Insurance d. Insurance Expense ANSWER: c DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 113. Which of the following accounts will be debited in the closing entry at the end of the year? a. Rent Expense b. Fees Earned c. Unearned Fees d. Depreciation Expense ANSWER: b DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 114. The entry to close the appropriate insurance account at the end of the accounting period is a. debit Owner’s Capital; credit Prepaid Insurance b. debit Prepaid Insurance; credit Owner’s Capital c. debit Insurance Expense; credit Owner’s Capital d. debit Owner’s Capital; credit Insurance Expense ANSWER: d DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 115. Which of the following accounts ordinarily appears in the post-closing trial balance? a. Fees Earned b. Supplies Expense c. Zane White, Drawing d. Unearned Rent ANSWER: d DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 116. The post-closing trial balance differs from the adjusted trial balance in that it does not a. take into account closing entries b. take into account adjusting entries c. include balance sheet accounts d. include income statement accounts ANSWER: d DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 117. The following accounts were taken from the Adjusted Trial Balance columns of the work sheet: Accumulated Depreciation Fees Earned Depreciation Expense Insurance Expense Prepaid Insurance Supplies Supplies Expense

$ 3,200 17,400 1,300 400 4,800 900 3,800

Net income for the period is a. $5,500 b. $11,900 c. $17,400 d. $8,700 ANSWER: RATIONALE:

b Net Income = Fees Earned – (Depreciation Expense + Insurance Expense + Supplies Expense) = $17,400 – ($1,300 + $400 + $3,800) = $11,900 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 118. A summary of selected ledger accounts appears below for Alberto’s Plumbing Services for the current calendar yearend. 12/31

6/30 11/30

Alberto, Capital 8,500 1/1 12/31 Alberto, Drawing 3,500 12/31 5,000

6,500 15,000

8,500

Net income for the period is a. $13,000 b. $33,500 c. $15,000 d. $18,500

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Chapter 4 - Completing the Accounting Cycle ANSWER: RATIONALE:

c There are two entries on December 31 to the owner’s capital account. One is a debit and the other is a credit. The debit represents the closing of drawing: therefore, the credit must be for net income. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 119. Diane's Designs purchased a one-year liability insurance policy on March 1 of a year for $8,400 and recorded it as a prepaid expense. Which of the following amounts would be recorded as insurance expense during the adjusting process at the end of Diane’s first month of operations on March 31? a. $8,400 b. $840 c. $700 d. $7,700 ANSWER: c RATIONALE: Insurance Expense for One Month = $8,400/12 = $700 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 120. The journal entry to close Fees Earned, $750, and Rent Revenue, $175, during the year-end closing process would be a. Dec. 31 Fees Earned 750 Rent Revenue 175 Owner’s Capital 925 b. Dec. 31 Owner’s Capital 925 Fees Earned 750 Rent Revenue 175 c. Dec. 31 Revenues 925 Owner’s Capital 925 d. Dec. 31 Owner’s Capital 925 Revenues 925 ANSWER: a DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 4 - Completing the Accounting Cycle 121. Evan Roberts owns a business, Shores Sports, that rents canoes and kayaks. Below is the adjusted trial balance at December 31.

Cash Accounts Receivable Interest Receivable Prepaid Insurance Notes Receivable (long-term) Equipment Accumulated Depreciation Accounts Payable Accrued Expenses Payable Income Taxes Payable Unearned Rent Fees Evan Roberts, Capital Evan Roberts, Drawing Rent Fees Earned Furniture Rental Revenue Interest Revenue Wages Expense Depreciation Expense Utilities Expense Insurance Expense Maintenance Expense Income Tax Expense

Account No. 11 12 13 14 16 18

Debit Balances 1,500 2,000 100 1,600 2,800 15,000

3,000

19 21

2,400 3,920

22 23 25 31 32 41

2,700 500 7,700 2,000 37,000 1,200

42 43 51 52 53 54 55 56

Credit Balances

100 19,000 1,800 320 700 9,000 2,700 58,520

58,520

The entry required to close the revenue and expense accounts at the end of the period includes a a. debit for $37,000 b. credit for $38,300 c. debit for $38,200 d. credit for $37,000 ANSWER: b RATIONALE: Total Revenue = Rent Fees Earned + Furniture Rental Revenue + Interest Revenue = $37,000 + $1,200 + $100 = $38,300 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 122. Evan Roberts owns a business, Shore Sports, that rents canoes and kayaks. Below is the adjusted trial balance at December 31.

Account No. 11 12 13 14 16 18

Debit Credit Balances Balances 1,500 2,000 100 1,600 2,800 15,000 3,000

19 21

2,400 3,920

22 23 25 31 32 41

2,700 500 7,700 2,000 37,000 1,200

42 43 51 52 53 54 55 56

100 19,000 1,800 320 700 9,000 2,700 58,520

58,520

The entry required to close the expense accounts at the end of the period will a. increase Owner’s Capital by $35,520 b. decrease Owner’s Capital by $35,520 c. increase Owner’s Capital by $33,520 d. decrease Owner’s Capital by $33,520 ANSWER: c RATIONALE: Total Expenses = Wages Expense + Depreciation Expense + Utilities Expense + Insurance Expense + Maintenance Expense + Income Tax Expense = $19,000 + $1,800 + $320 + $700 + $9,000 + $2,700 = $33,520 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle Use the following end-of-period spreadsheet to answer the questions that follow. Finley Company End-of-Period Spreadsheet For the Year Ended December 31

Account Title Cash Accounts Receivable Supplies Equipment Accumulated Depreciation Accounts Payable Wages Payable C. Finley, Capital C. Finley, Drawing Fees Earned Wages Expense Rent Expense Depreciation Expense Net income

Adjusted Trial Balance Dr. Cr. 48,000

Income Statement

Balance Sheet

Dr.

Dr. 48,000

Cr.

18,000 6,000 57,000

18,000 6,000 57,000 18,000

18,000

25,000

6,000

33,000

3,000

3,000 155,000

63,000 27,000 15,000 237,000

Cr.

155,000 63,000 27,000

237,000

15,000 105,000 50,000 155,000

155,000

132,000

155,000

132,000

82,000 50,000 132,000

123. Use the end-of-period spreadsheet for Finley Company. The first closing entry would include a a. debit to C. Finley, Capital for $155,000 b. debit to C. Finley, Capital for $50,000 c. credit to C. Finley, Capital for $50,000 d. credit to C. Finley, Capital for $155,000 ANSWER: c DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 124. Use the end-of-period spreadsheet for Finley Company. The expenses would be closed by a. debiting Wages Expense for $63,000, Rent Expense for $27,000, and Depreciation Expense for $15,000 b. debiting Expenses for $105,000 c. crediting Expenses for $105,000 d. crediting Wages Expense for $63,000, Rent Expense for $27,000, and Depreciation Expense for $15,000 ANSWER: d DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 125. Use the end-of-period spreadsheet for Finley Company. The entry to close C. Finley, Drawing would be a. debit C. Finley, Capital, $3,000; credit C. Finley, Drawing, $3,000 b. debit C. Finley, Capital, $12,000; credit C. Finley, Drawing, $12,000 c. debit C. Finley, Drawing, $3,000; credit C. Finley, Capital, $3,000 d. debit C. Finley, Drawing, $12,000; credit C. Finley, Capital, $12,000 ANSWER: a DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 126. Use the end-of-period spreadsheet for Finley Company. The first closing entry would be a. Fees Earned 155,000 Wages Expense 63,000 Rent Expense 27,000 Depreciation Expense 15,000 C. Finley, Capital 260,000 b. Wages Expense 63,000 Rent Expense 27,000 Depreciation Expense 15,000 C. Finley, Capital 50,000 Fees Earned 155,000 c. Fees Earned 155,000 Wages Expense 63,000 Rent Expense 27,000 Depreciation Expense 15,000 C. Finley, Capital 50,000 d. C. Finley, Capital 260,000 Fees Earned 155,000 Wages Expense 63,000 Rent Expense 27,000 Depreciation Expense 15,000 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 4 - Completing the Accounting Cycle ANSWER: DIFFICULTY:

c Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 127. Use the end-of-period spreadsheet for Finley Company. The ending balance in C. Finley, Capital is a. $33,000 b. $80,000 c. $30,000 d. $83,000 ANSWER: b RATIONALE: Ending Balance of C. Finley, Capital = Beginning Balance of C. Finley, Capital + Net Income – C. Finley, Drawing = $33,000 + ($155000 – $105,000) – $3,000 = $33,000 + $50,000 – $3,000 = $80,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 128. Which of the following has steps of the accounting cycle in proper sequence (some steps may be missing)? a. analyze and record transactions, post transaction to the ledger, prepare a trial balance, prepare financial statements, journalize closing entries, analyze adjustment data and prepare adjusting entries b. prepare a trial balance, analyze adjustment data, prepare adjusting entries, prepare financial statements, journalize closing entries and post to the ledger, analyze and record transactions, post transactions to the ledger c. analyze and record transactions, post transactions to the ledger, prepare a trial balance, analyze adjustment data, prepare adjusting entries, prepare financial statements, journalize closing entries and post to the ledger, and prepare a post-closing trial balance d. prepare financial statements, journalize closing entries and post to the ledger, analyze and record transactions, post transactions to the ledger, prepare a trial balance, analyze adjustment data, prepare adjusting entries ANSWER: c DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-04 - 04-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 129. In the accounting cycle, the last step is a. preparing the financial statements b. journalizing and posting the adjusting entries c. preparing a post-closing trial balance d. journalizing and posting the closing entries ANSWER: c DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-04 - 04-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 130. Of the following steps of the accounting cycle, which step should be completed first? a. Closing entries are journalized and posted to the ledger. b. Transactions are posted to the ledger. c. Adjusting entries are journalized and posted to the ledger. d. Financial statements are prepared. ANSWER: b DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-04 - 04-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 131. Of the following steps of the accounting cycle, which step should be completed last? a. An adjusted trial balance is prepared. b. Transactions are posted to the ledger. c. An unadjusted trial balance is prepared. d. Adjusting entries are journalized and posted to the ledger. ANSWER: a DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-04 - 04-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 132. The accounting cycle requires three trial balances be done. In what order should they be prepared? a. post-closing, unadjusted, adjusted b. unadjusted, post-closing, adjusted c. unadjusted, adjusted, post-closing d. post-closing, adjusted, unadjusted ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-04 - 04-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 133. During the end-of-period processing, which of the following best describes the logical order of steps? a. preparation of adjustments, adjusted trial balance, financial statements b. preparation of income statement, adjusted trial balance, balance sheet c. preparation of adjusted trial balance, cross-referencing, journalizing d. preparation of adjustments, adjusted trial balance, posting ANSWER: a DIFFICULTY: Bloom's: Remembering Challenging LEARNING OBJECTIVES: ACCT.WARD.18.04-04 - 04-04 ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 134. Once the adjusting entries are posted, the adjusted trial balance is prepared to a. verify that the debits and credits are in balance b. verify that the net income correctly flows into the statement of owner’s equity from the income statement c. verify that the net income (loss) is correct for the period d. verify the correct flow of accounts into the financial statements ANSWER: a DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-05 - 04-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 135. A fiscal year for a business a. ordinarily begins on the first day of a month and ends on the last day of the following twelfth month b. is determined by the federal government c. always begins on January 1 and ends on December 31 of the same year d. should end at the height of the business's annual operating cycle ANSWER: a DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-06 - 04-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 136. The natural business year is a a. fiscal year that ends when business activities are at their lowest point b. calendar year that ends when business activities are at their lowest point c. fiscal year that ends when business activities are at their highest point d. calendar year that ends when business activities are at their highest point ANSWER: a DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-06 - 04-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 137. Current assets and current liabilities for Brayden Company are as follows:

Current assets Current liabilities

20Y9 $498,600 269,300

20Y8 $532,400 301,500

What is the current ratio for 20Y9 and 20Y8? a. 0.94 and 0.89 b. 1.07 and 1.12 c. 0.54 and 0.57 d. 1.85 and 1.77 ANSWER: DIFFICULTY:

d Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-07 - 04-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 4 - Completing the Accounting Cycle 138. Current assets and current liabilities for Brayden Company are as follows:

Current assets Current liabilities

20Y9 $498,600 269,300

20Y8 $532,400 301,500

What is the working capital for 20Y9 and 20Y8? a. $498,600 and $532,400 b. $229,300 and $230,900 c. $269,300 and $301,500 d. $(230,900) and $(229,300) ANSWER: b DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-07 - 04-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 139. Current assets and current liabilities for Brayden Company are as follows:

Current assets Current liabilities

20Y9 $498,600 269,300

20Y8 $532,400 301,500

What conclusions can be drawn regarding Brayden’s ability to meet its financial obligations? a. The current ratio has worsened, and the working capital has decreased. b. The current ratio has improved, and the working capital has increased. c. The current ratio has improved, while the working capital has decreased. d. The current ratio has worsened, but the working capital has increased. ANSWER: c DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-07 - 04-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 140. The income statement is prepared from a. the adjusted trial balance b. the Income Statement columns of the end-of-period spreadsheet c. either the Adjusted Trial Balance or the Income Statement columns of the end-of-period spreadsheet d. both the Adjusted Trial Balance and the Income Statement columns of the end-of-period spreadsheet ANSWER: c DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 141. The end-of-period spreadsheet a. is an integral part of the accounting cycle b. eliminates the need to rewrite the financial statements c. is a working paper that is required d. is used to summarize account balances and adjustments for the financial statements ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 142. Which one of the steps below is not aided by the preparation of the end-of-period spreadsheet? a. preparing the adjusted trial balance b. posting to the general ledger c. preparing the financial statements d. preparing the closing entries ANSWER: b DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 143. An end-of-period spreadsheet includes columns for a. adjusting entries b. closing entries c. reversing entries d. adjusting and closing entries ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 144. When the end-of-period spreadsheet is complete, the Adjustments columns should have a. total credits greater than total debits if a net income was earned b. total debits greater than total credits if a net loss was incurred c. total debits greater than total credits if a net income was earned d. total debits equal to total credits ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 145. The difference between the totals of the Debit and Credit columns of the Adjusted Trial Balance columns on the endof-period spreadsheet a. is the amount of net income or loss b. indicates there is an error on the work sheet c. is the amount of owner's equity d. is the difference between revenue and expenses ANSWER: b DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 146. Net income appears on the end-of-period spreadsheet in the a. Debit column of the Balance Sheet columns b. Debit column of the Adjustments columns c. Debit column of the Income Statement columns d. Credit column of the Income Statement columns ANSWER: c DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 147. A net loss appears on the end-of-period spreadsheet in the a. Debit column of the Balance Sheet columns b. Credit column of the Balance Sheet columns c. Debit column of the Income Statement columns d. Credit column of the Adjustments columns ANSWER: a DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 148. After net income is entered on the end-of-period spreadsheet, the Balance Sheet Debit and Credit columns must a. be the same amount as the total amount of the Income Statement Debit and Credit columns b. equal each other c. be the same amount as the total amount in the Adjusted Trial Balance Debit and Credit columns d. not be equal to each other and need not be the same total amounts as any other pair of columns on the work sheet ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 149. Which of the following statements indicates that a company earned a net income for the period? a. The sum of the credits exceeds the sum of the debits in the Balance Sheet columns on the end-of-period spreadsheet. b. The sum of the credits exceeds the sum of the debits in the Income Statement columns on the end-of-period spreadsheet. c. The sum of the debits exceeds the sum of the credits in the Income Statement columns on the end-of-period spreadsheet. d. Cash inflows exceed cash outflows. ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 150. Which of the following accounts would appear in the Income Statement columns of the end-of-period spreadsheet? a. Cash b. Prepaid Insurance c. Unearned Revenue d. Net Loss ANSWER: d DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 151. Which of the following accounts would not appear in the Balance Sheet columns of the end-of-period spreadsheet? a. Terry James, Drawing b. Service Revenue c. Unearned Revenue d. Terry James, Drawing and Unearned Revenue ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 152. Which of the following accounts would appear in the Balance Sheet columns of the end-of-period spreadsheet? a. Consulting Revenue b. Prepaid Insurance c. Rent Expense d. Fees Earned ANSWER: b DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 153. Daniel's end-of-period spreadsheet at the end of July has $4,950 in the Balance Sheet Credit column for Accumulated Depreciation. The end-of-period spreadsheet at the end of August has $7,600 in the Balance Sheet Credit column for Accumulated Depreciation. What is the amount of the depreciation expense adjustment for the month of August? a. $12,550 b. $7,600 c. $4,950 d. $2,650 ANSWER: d RATIONALE: Amount of Depreciation Expense Adjustment for August = Accumulated Depreciation (at end of August) – Accumulated Depreciation (at end of July) = $7,600 – $4,950 = $2,650 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 154. Which of the following does not appear on the end-of-period spreadsheet? a. adjusting entries b. the unadjusted trial balance c. closing entries d. the drawing account ANSWER: c DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 155. An indication that the end-of-period spreadsheet columns are in balance and the spreadsheet is complete is a. the word "Total" written at the bottom of each pair of columns b. the double rule under each pair of columns c. the circles around each total d. the final figures written in ink ANSWER: b DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 156. After all of the account balances have been extended to the Balance Sheet columns of the work sheet, the totals of the Debit and Credit columns are $36,755 and $32,735, respectively. What is the amount of net income or net loss for the period? a. $4,020 of net income b. $36,755 of net loss c. $4,020 of net loss d. $32,735 of net income ANSWER: a RATIONALE: Net Income (excess of revenues over expenses) = Total of Balance Sheet Debit Column – Total of Balance Sheet Credit Column = $36,755 – $32,735 = $4020 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 157. After all of the account balances have been extended to the Income Statement columns of the work sheet, the totals of the Debit and Credit columns are $77,500 and $83,900, respectively. What is the amount of the net income or net loss for the period? a. $6,400 of net income b. $6,400 of net loss c. $83,900 of net income d. $77,500 of net loss ANSWER: a RATIONALE: Net Income (excess of revenues over expenses) = Total of Income Statement Credit Column (revenues) – Total of Income Statement Debit Column (expenses) = $83,900 – $77,500 = $6,400 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 158. On September 1, the company pays rent for 12 months in advance and debits an asset account. At year-end, the adjusting entry on the work sheet would a. increase an expense account b. decrease a liability account c. increase an asset account d. decrease an expense account ANSWER: a DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 159. On March 1, a company collects revenue in advance for the next 12 months and credits a liability account. The adjusting entry at year-end on the work sheet would a. increase a liability account b. decrease an asset account c. decrease a revenue account d. decrease a liability account ANSWER: d DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 160. Which of the following is not an essential part of the accounting records? a. journal b. ledger c. chart of accounts d. end-of-period spreadsheet ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 161. After all of the account balances have been extended to the Balance Sheet columns of the work sheet, the totals of the Debit and Credit columns show debits of $37,686 and credits of $41,101. This indicates that a. neither net income nor loss can be calculated because it is found on the income statement b. the company has a net loss of $3,415 for the period c. the company has a net income of $3,415 for the period d. the amounts are out of balance and need to be corrected ANSWER: b RATIONALE: Net Income (excess of revenues over expenses) = Total of Balance Sheet Debit Column – Total of Balance Sheet Credit Column = $37,686 – $41,101 = $(3,415) Net Loss = $3,415 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 4 - Completing the Accounting Cycle 162. The Income Statement columns in the end-of-period spreadsheet show that debits are equal to $55,800 and credits are $77,520. What does this information mean to the accountant? a. There is a net income of $21,720. b. There is a net loss of $21,720. c. The accounts are out of balance, indicating that an error has been made. d. The accounts have not been updated. ANSWER: a RATIONALE: Net Income (excess of revenues over expenses) = Total of Income Statement Credit Column (revenues) – Total of Income Statement Debit Column (expenses) = $77,520 – $55,800 = $21,720 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 163. Accrued fees earned but not recorded at August 31 are $25,750. Which of the following is correct for the reversing entry on September 1? a. credit Unearned Fees for $25,750 b. debit Accounts Receivable for $25,750 c. debit Fees Earned for $25,750 d. credit Fees Earned for $25,750 ANSWER: c DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-APP2 - 04-APP2 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 164. Wages are $37,500 per week for a five-day workweek, ending on Friday. The last payday of the year was Friday, June 26. Which of the following is correct for the reversing entry on July 1? a. credit Salaries Payable for $15,000 b. debit Salaries Payable for $37,500 c. debit Salaries Expense for $15,000 d. credit Salaries Expense for $15,000 ANSWER: a DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-APP2 - 04-APP2 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 4 - Completing the Accounting Cycle 165. Wages are $37,500 per week for a five-day workweek, ending on Friday. The last payday of the year was Friday, June 26. Determine the balance in Salaries Expense on July 1 after reversing entries have been journalized and posted to the ledger. a. credit balance of $15,000 b. debit balance of $37,500 c. debit balance of $15,000 d. credit balance of $7,500 ANSWER: a RATIONALE: There are two days remaining in June for which salaries expense will be accrued on June 30 during the adjusting process. ($37,500/5 days) × 2 days = $15,000. Salaries Expense is closed (to a $0 balance) at the end of the period. The reversing entry is a debit to Salaries Payable and a credit to Salaries Expense for $15,000, leaving a credit balance in Salaries Expense on July 1. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-APP2 - 04-APP2 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic Matching Match each journal entry that follows as one of the types of journal entries (a–c) below. a. Journal entries b. Adjusting journal entries c. Closing journal entries DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.04-05 - 04-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 166. Cash Fees Earned ANSWER: a

450

167. Fees Earned ABC, Capital ANSWER: c

650

168. Utilities Expense Cash ANSWER: a

430

450

650

430

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Chapter 4 - Completing the Accounting Cycle 169. Wages Expense Wages Payable ANSWER: b

870

170. Unearned Revenue Fees Earned ANSWER: b

985

870

985

171. Owner's Capital 597 Rent Expense 200 Supplies Expense 180 Utilities Expense 110 Miscellaneous Exp. 107 ANSWER: c 172. RS, Drawing Cash ANSWER: a

215 215

173. Accounts Receivable 325 Fees Earned 325 Customer billed for services performed. ANSWER: a Subjective Short Answer 174. You evaluate loan requests as part of your job at Eastwood National Bank. One loan request you received is from Surfer Dude Supplies, a small proprietorship. Richard Tracy, the owner, is requesting $105,000 and brings you a trial balance (or statement of accounts) for his first year of operations ended December 31. Required While you are willing to work with Richard, how would you explain to him that a complete set of financial statements from his accountant would be more useful for evaluating the loan request? ANSWER: A set of financial statements provides useful information concerning the economic condition of a company. For example, the balance sheet describes the financial condition of the company as of a given date and is useful in assessing the company’s financial soundness and liquidity. The income statement describes the results of operations for a period and indicates the profitability of the company. The statement of owner’s equity describes the changes in the owner’s interest in the company for a period. Each of these statements is useful in evaluating whether to extend credit to the company. DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.04-01 - 04-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 175. You have just accepted your first job out of college, which requires you to evaluate loan requests at Eastwood National Bank. The first loan request you receive is from Richard Enterprises, a small proprietorship. Richard Tracy, the owner, is requesting $105,000 and brings you the following trial balance (or statement of accounts) for his first year of operations ended December 31. What three accounts do you think should be relabeled for greater clarity?

Cash Billings Due from Others Office Supplies Trucks Equipment Amounts Owed to Others Investment in Business Service Revenue Wages Expense Rent Expense Insurance Expense Utilities Expense Miscellaneous Expense

Richard Enterprises Statement of Accounts December 31 2,050 15,070 7,470 36,370 8,090 2,850 33,500 73,650 30,050 7,330 2,400 700 470 110,000

110,000

ANSWER:

The following items should be relabeled for greater clarity: Billings Due from Others—Accounts Receivable Amounts Owed to Others—Accounts Payable Investment in Business—Richard Tracy, Capital DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-01 - 04-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 176. You have just accepted your first job out of college, which requires you to evaluate loan requests at Eastwood National Bank. The first loan request you receive is from Richard Enterprises, a small proprietorship. Richard Tracy, the owner, is requesting $105,000 and brings you the following trial balance (or statement of accounts) for his first year of operations ended December 31. Which of the following accounts do you think might need to be adjusted before an accurate set of financial statements could be prepared?

Richard Enterprises Statement of Accounts December 31 2,050 15,070 7,470 36,370 8,090 2,850 33,500 73,650 30,050 7,330 2,400 700 470 110,000

110,000

ANSWER:

The following adjustments might be necessary before an accurate set of financial statements can be prepared: ∙ No office supplies expense is shown. The office supplies account should be adjusted for the supplies used during the year. ∙ No depreciation expense is shown for the trucks or equipment. An adjusting entry should be prepared for depreciation expense on each of these assets. ∙ An inquiry should be made as to whether any accrued expenses, such as wages or utilities, exist at the end of the year. ∙ An inquiry should be made as to whether any prepaid expenses, such as rent or insurance, exist at the end of the year. ∙ An inquiry should be made as to whether any unearned revenue exists at the end of the year. ∙ An inquiry should be made as to whether the owner withdrew any funds from the company during the year. No drawing account is shown in the “statement of accounts.” DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-01 - 04-01 ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 177. The balances for the accounts listed below appear in the Adjusted Trial Balance columns of the end-of-period spreadsheet (work sheet). Indicate whether each balance would flow to (a) the income statement, (b) the statement of owner’s equity, or (c) the balance sheet. 1. Accounts Payable 2. Dobson, Drawing 3. Depreciation Expense 4. Accumulated Depreciation 5. Fees Earned 6. Unearned Fees 7. Supplies 8. Supplies Expense ANSWER:

1. Balance sheet 2. Statement of owner's equity 3. Income statement 4. Balance sheet 5. Income statement 6. Balance sheet 7. Balance sheet 8. Income statement DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-01 - 04-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 178. Hannah Roberts owns and operates Hannah's Pool Service Company. On January 1, Hannah Roberts, Capital had a balance of $252,000. During the year, Hannah invested an additional $32,000 and withdrew $52,400. For the year ended December 31, Hannah's Pool Service Company reported a net income of $73,200. Prepare a statement of owner’s equity for the year ended December 31. ANSWER: Hannah's Pool Service Company Statement of Owner’s Equity For the Year Ended December 31 Hannah Roberts, capital, January 1 Investment during year Net income Withdrawals during year Increase in owner’s equity Hannah Roberts, capital, December 31

$252,000 $32,000 73,200 (52,400) 52,800 $304,800

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 179. The following accounts appear in an adjusted trial balance of Blaine Auto Service Company. Indicate whether each account would be reported in the (a) current assets, (b) property, plant, and equipment, (c) current liabilities, (d) long-term liabilities, or (e) owner’s equity section of the December 31 balance sheet of Blaine Auto Service Company. 1. Blaine Brock, Capital 2. Accumulated Depreciation 3. Unearned Revenues 4. Mortgage Payable 5. Equipment 6. Notes Payable (due in two years) 7. Cash 8. Accounts Receivable ANSWER: 1. (e) Owner’s equity 2. (b) Property, plant, and equipment 3. (c) Current liabilities 4. (d) Long-term liabilities 5. (b) Property, plant, and equipment 6. (d) Long-term liabilities 7. (a) Current assets 8. (a) Current assets DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 180. Describe a classified balance sheet. ANSWER: A classified balance sheet subsections assets as current assets and property, plant, and equipment. It also subsections liabilities as current liabilities and long-term liabilities. It also includes the owner's equity section. DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 181. The balances for the accounts listed below appeared in the Adjusted Trial Balance columns of the work sheet. Indicate whether each balance should flow to (a) the income statement, (b) the statement of owner’s equity, or (c) the balance sheet. (1) (2) (3) (4) (5) (6)

Salaries Payable Fees Earned Accounts Payable Supplies Supplies Expense Unearned Rent

(7) (8) (9) (10) (11) (12)

Felipe Ramos, Drawing Equipment Accounts Receivable Accumulated Depreciation Salary Expense Depreciation Expense

ANSWER:

(a) Income statement: 2, 5, 11, 12 (b) Statement of owner's equity: 7 (c) Balance sheet: 1, 3, 4, 6, 8, 9, 10 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 4 - Completing the Accounting Cycle 182. The following balance sheet contains errors. Mark Brock Services Co. Balance Sheet For the Year Ended December 31 Assets Current assets: Cash

Liabilities Current liabilities: Accounts receivable Accum. depr.— building Accum. depr.— equipment Net income

$ 7,170

Accounts payable

7,500

Supplies Prepaid insurance Land Total current assets

2,590 800 24,000 $ 42,060 Total liabilities

$ 10,000 12,525 7,340 11,500 $ 41,365

Owner’s Equity Property, plant, and equipment: Building Equipment Total property, plant, and equipment

Wages payable Mark Brock, capital Total owner’s equity

$43,700 29,250

1,500 88,645 $ 90,145

72,950

Total assets

$131,510

Total liabilities and owner’s equity

$131,510

(a) List the errors in the balance sheet above and (b) prepare a corrected balance sheet. ANSWER:

(a) Date of statement should be "December 31" not "For the Year Ended December 31." (2) Accounts payable should be a current liability. (3) Land is a fixed asset and should be listed as property, plant, and equipment. (4) Accumulated depreciation should be deducted from the related fixed asset in the property, plant, and equipment section. (5) An adding error was made in determining the amount of total assets. (6) Accounts receivable should be a current asset. (7) Net income would be reported on the income statement. (8) Wages payable should be a current liability. (1)

Page 63

Chapter 4 - Completing the Accounting Cycle A corrected balance sheet would be as follows: Mark Brock Services Co. Balance Sheet December 31 Assets Current assets: Cash

$ 7,17 0 10,000 2,590 800

Accounts receivable Supplies Prepaid insurance Total current assets $ 20,560 Property, plant, and equipment: Land $24,000 Building $43,700 Less accum. depr. 12,525 31,175 Equipment $29,250 Less accum. depr. 7,340 21,910 Total property, plant, and equipment 77,085 Total assets $97,645 Liabilities Current liabilities: Accounts payable $7,500 Wages payable 1,500 Total liabilities $ 9,000 Owner's Equity Mark Brock, capital 88,645 Total liabilities and owner's equity $97,645 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 64

Chapter 4 - Completing the Accounting Cycle 183. Indicate whether each of the following would be reported in the financial statements as a(n) (a) current asset, (b) current liability, (c) revenue, or (d) expense: (1) Supplies (2) Unearned Fees (3) Prepaid Advertising (4) Advertising Expense ANSWER:

(5) Supplies Expense (6) Prepaid Insurance (7) Accounts Payable (8) Fees Earned current asset current liability current asset expense expense current asset current liability revenue

(1) (2) (3) (4) (5) (6) (7) (8) DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 184. The following accounts were taken from the Adjusted Trial Balance columns of the end-of-period spreadsheet for April 30, for Finnegan Co.: Accumulated Depreciation Fees Earned Depreciation Expense Rent Expense Prepaid Insurance Supplies Supplies Expense Prepare an income statement. ANSWER:

$32,000 78,000 7,250 34,000 6,000 400 1,800

Finnegan Co. Income Statement For the Period Ended April 30

Fees earned Expenses: Rent expense $34,000 Depreciation expense 7,250 Supplies expense 1,800 Total expenses Net income DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

$78,000

43,050 $34,950

Page 65

Chapter 4 - Completing the Accounting Cycle 185. The following revenue and expense account balances were taken from the Income Statement columns of the work sheet for Fraser Services Co. for December 31: Depreciation Expense Insurance Expense Miscellaneous Expense Rent Expense Service Revenue Supplies Expense Utilities Expense Wages Expense Prepare an income statement. ANSWER:

$ 4,950 2,900 1,200 24,000 92,500 3,150 5,000 63,750

Fraser Services Co. Income Statement For the Year Ended December 31

Service revenue Expenses: Wages expense $63,750 Rent expense 24,000 Utilities expense 5,000 Depreciation expense 4,950 Supplies expense 3,150 Insurance expense 2,900 Miscellaneous expense 1,200 Total expenses Net loss DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

$ 92,500

104,950 $(12,450)

Page 66

Chapter 4 - Completing the Accounting Cycle 186. The following data were taken from the Adjusted Trial Balance columns of the end-of-period spreadsheet for April 30, for Abigail Company: Accumulated Depreciation Prepaid Rent Supplies Unearned Fees Trucks Cash Abigail, Capital

$42,400 6,800 850 7,310 49,300 3,400 ?

Prepare a classified balance sheet. ANSWER:

Abigail Company Balance Sheet April 30

Assets Liabilities Current assets: Cash $ 3,400 Current liabilities: Supplies 850 Unearned fees $ 7,310 Prepaid rent 6,800 Total Owner's Equity $11,050 current assets Property, plant, and Abigail, capital 10,640 equipment: Total liabilities and owner's $17,950 Trucks $49,300 equity Less accum. depr.

42,400 Total property, plant, and 6,900 equipment Total assets $17,950 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 67

Chapter 4 - Completing the Accounting Cycle 187. Indicate whether each of the following would be reported in the section of financial statements identified as (a) current asset, (b) property, plant, and equipment, (c) current liability, (d) revenue, or (e) expense: (1) (2) (3) (4) (5) (6) (7) (8) (9)

Truck Accumulated Depreciation Telephone Expense Fees Earned Wages Payable Prepaid Insurance Office Supplies Dining Expense Unearned Rent

ANSWER:

(1) Property, plant, and equipment (2) Property, plant, and equipment (3) Expense (4) Revenue (5) Current liability (6) Current asset (7) Current asset (8) Expense (9) Current liability DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 68

Chapter 4 - Completing the Accounting Cycle 188. The following is the adjusted trial balance for Nadia Company. Nadia Company Adjusted Trial Balance December 31 Account Debit Credit No. Balances Balances Cash 11 5,130 Accounts Receivable 12 3,300 Prepaid Expenses 13 420 Equipment 18 12,400 Accumulated Depreciation 19 2,200 Accounts Payable 21 700 Notes Payable (due on June 30) 22 3,070 Nadia Porter, Capital 31 13,000 Nadia Porter, Drawing 32 700 Fees Earned 41 10,930 Wages Expense 51 2,450 Rent Expense 52 1,900 Utilities Expense 53 1,475 Depreciation Expense 54 1,150 Miscellaneous Expense 59 975 Totals 29,900 29,900 Prepare an income statement, statement of owner’s equity, and balance sheet. Assume that the capital account started with a beginning balance of $10,000 and that the owner made an additional investment of $3,000 during the period. ANSWER: Nadia Company Income Statement For the Year Ended December 31 Fees earned $10,930 Expenses: Wages expense $2,450 Rent expense 1,900 Utilities expense 1,475 Depreciation expense 1,150 Miscellaneous expense 975 7,950 Total expenses $ 2,980 Net income Nadia Company Statement of Owner’s Equity For the Year Ended December 31 Nadia Porter, capital, January 1 Investments during the year $3,000 Net income for the year 2,980 Withdrawals during the year (700) Increase in owner's equity Nadia Porter, capital, December 31

$10,000

5,280 $15,280

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Chapter 4 - Completing the Accounting Cycle

Assets Current assets: Cash Accounts receivable Prepaid expenses Total current assets Property, plant, and equipment: Equipment Less accum. depr. Total property, plant, and equipment Total assets

Nadia Company Balance Sheet December 31 Liabilities Current liabilities: Accounts $ 5,130 payable 3,300 420

$ 700 3,070

Notes payable Total liabilities

$3,770

Owner’s Equity Nadia Porter, capital

15,280

$ 8,850

$12,400 2,200 10,200 $19,050

Total liabilities and owner’s equity

$19,050

DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 70

Chapter 4 - Completing the Accounting Cycle 189. Selected T accounts appear below for the current year for Linda's Surveying Services. Linda Capital 12/3125,0001/1 12/31

Winter, Winter, 20,000 3/31 12,00012/31 48,000 12/2213,000

Linda Drawing 25,000

Prepare a statement of owner's equity. ANSWER:

Linda's Surveying Services Statement of Owner's Equity For the Year Ended December 31 Linda Winter, capital, January 1 Net income for the year $ 48,000 Withdrawals for the year (25,000) Increase in owner’s equity Linda Winter, capital, December 31 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-02 - 04-02 ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

$20,000

23,000 $43,000

190. List and describe the purpose of the four closing entries. ANSWER: 1. Close revenues and expenses to capital account. 2. Close drawing account to capital account. At the beginning of the next period, temporary accounts should have zero balances. To achieve a zero balance, temporary account balances are transferred to permanent accounts at the end of the accounting period. The entries that transfer these balances are called closing entries and the transfer process is called the closing process. DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 71

Chapter 4 - Completing the Accounting Cycle 191. Robert Evans owns a business, Beachside Realty, that rents condominiums and furnishings. Below is the adjusted trial balance at December 31.

Cash Accounts Receivable Interest Receivable Prepaid Insurance Notes Receivable (long-term) Equipment Accumulated Depreciation Accounts Payable Accrued Expenses Payable Income Taxes Payable Unearned Rent Fees Robert Evans, Capital Robert Evans, Drawing Rent Fees Earned Furniture Rental Revenue Interest Revenue Wages Expense Depreciation Expense Utilities Expense Insurance Expense Maintenance Expense Income Tax Expense

Account No. 11 12 13 14 16 18 19 21 22 23 24 31 32 41 42 43 51 52 53 54 55 56

Debit Balances 1,500 2,000 100 1,600 2,800 15,000

Credit Balances

3,000 2,400 3,920 2,700 500 7,700 2,000 37,000 1,200 100 19,000 1,800 320 700 9,000 2,700 58,520

58,520

Prepare the entry required to close the revenue and expense accounts at the end of the period. ANSWER: Dec. 31 Rent Fees Earned 37,000 Furniture Rental Revenue 1,200 Interest Revenue 100 Wages Expense Depreciation Expense Utilities Expense Insurance Expense Maintenance Expense Income Tax Expense Robert Evans, Capital DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

19,000 1,800 320 700 9,000 2,700 4,780

Page 72

Chapter 4 - Completing the Accounting Cycle 192. Prior to adjustment at August 31, Salary Expense has a debit balance of $298,500. Salaries owed but not paid as of the same date total $4,200. Present the entries to record the following: (1) Accrued salaries as of August 31. (2) Closing of Salary Expense as of August 31. ANSWER:

(1) Salary Expense Salaries Payable

4,200

(2) Owner's Capital Salary Expense

302,700

4,200

302,700

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 193. Robert Evans owns a business, Beachside Realty, that rents condominiums and furnishings. Below is the adjusted trial balance at December 31.

Cash Accounts Receivable Interest Receivable Prepaid Insurance Notes Receivable (long-term) Equipment Accumulated Depreciation Accounts Payable Accrued Expenses Payable Income Taxes Payable Unearned Rent Fees Robert Evans, Capital Robert Evans, Drawing Rent Fees Earned Furniture Rental Revenue Interest Revenue Wages Expense Depreciation Expense Utilities Expense Insurance Expense Maintenance Expense Income Tax Expense

Account No. 11 12 13 14 16 18 19 21 22 23 24 31 32 41 42 43 51 52 53 54 55 56

Debit Balances 1,500 2,000 100 1,600 2,800 15,000

Credit Balances

3,000 2,400 3,920 2,700 500 7,700 2,000 37,000 1,200 100 19,000 1,800 320 700 9,000 2,700 58,520

58,520

Prepare the entry required to close the drawing account at the end of the period. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Page 73

Chapter 4 - Completing the Accounting Cycle ANSWER:

Dec. 31

Robert Evans, Capital Robert Evans, Drawing

2,000 2,000

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 194. Identify which of the following accounts should be closed with a debit or a credit at the end of the fiscal year. If it is not closed, mark as n/a. 1. Utilities Payable 2. Utilities Expense 3. Supplies 4. Supplies Expense 5. Fees Earned 6. Unearned Fees 7. Accounts Receivable 8. Jason Hill, Drawing 9. Jason Hill, Capital 10. Accumulated Depreciation—Equipment 11. Depreciation Expense—Equipment 12. Equipment 13. Prepaid Insurance 14. Insurance Expense ANSWER: 1. Utilities Payable 2. Utilities Expense 3. Supplies 4. Supplies Expense 5. Fees Earned 6. Unearned Fees 7. Accounts Receivable 8. Jason Hill, Drawing 9. Jason Hill, Capital 10. Accumulated Depreciation—Equipment 11. Depreciation Expense—Equipment 12. Equipment 13. Prepaid Insurance 14. Insurance Expense DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

n/a credit n/a credit debit n/a n/a n/a n/a n/a credit n/a n/a credit

Page 74

Chapter 4 - Completing the Accounting Cycle 195. After the accounts have been adjusted at January 31, the end of the year, the following balances are taken from the ledger of Harrison's Dog Walking Service Company: Harrison Taylor, Capital Harrison Taylor, Drawing Fees Earned Wages Expense Rent Expense Supplies Expense Miscellaneous Expense Journalize the four entries required to close the accounts ANSWER: Jan. 31 Fees Earned Wages Expense Rent Expense Supplies Expense Miscellaneous Expense Harrison Taylor, Capital 31 Harrison Taylor, Capital Harrison Taylor, Drawing DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

$349,000 6,000 124,600 29,000 43,000 7,300 5,700

124,600 29,000 43,000 7,300 5,700 39,600 6,000

6,000

Page 75

Chapter 4 - Completing the Accounting Cycle 196. Robert Evans owns a business, Beachside Realty, that rents condominiums and furnishings. Below is the adjusted trial balance at December 31.

Cash Accounts Receivable Interest Receivable Prepaid Insurance Notes Receivable (long-term) Equipment Accumulated Depreciation Accounts Payable Accrued Expenses Payable Income Taxes Payable Unearned Rent Fees Robert Evans, Capital Robert Evans, Drawing Rent Fees Earned Furniture Rental Revenue Interest Revenue Wages Expense Depreciation Expense Utilities Expense Insurance Expense Maintenance Expense Income Tax Expense

Account No. 11 12 13 14 16 18 19 21 22 23 24 31 32 41 42 43 51 52 53 54 55 56

Debit Balances 1,500 2,000 100 1,600 2,800 15,000

Credit Balances

3,000 2,400 3,920 2,700 500 13,700 2,000 31,000 1,200 100 19,000 1,800 320 700 9,000 2,700 58,520

58,520

Prepare the closing entry required to transfer the income or loss at the end of the period. ANSWER: Dec. 31 Rent Rees Earned 31,000 Furniture Rental Revenue 1,200 Interest Revenue 100 Robert Evans, Capital 1,220 Wages Expense Depreciation Expense Utilities Expense Insurance Expense Maintenance Expense Income Tax Expense

19,000 1,800 320 700 9,000 2,700

DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 76

Chapter 4 - Completing the Accounting Cycle 197. On the basis of the following data taken from the Adjusted Trial Balance columns of the work sheet for the year ended March 31 for Banes Domino's Company, journalize the closing entries. Cash Accounts Receivable Supplies Equipment Accumulated Depreciation Accounts Payable Jack Banes, Capital Jack Banes, Drawing Fees Earned Salary Expense Rent Expense Depreciation Expense Supplies Expense Miscellaneous Expense ANSWER:

30,000 45,200 5,000 169,900 32,000 12,500 71,600 47,000 510,000 244,500 48,000 25,000 9,500 2,000 626,100 Mar. 31 Fees Earned Salary Expense Rent Expense Depreciation Expense Supplies Expense Miscellaneous Expense Jack Banes, Capital

31 Jack Banes, Capital Jack Banes, Drawing DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

626,100

510,000 244,500 48,000 25,000 9,500 2,000 181,000 47,000 47,000

Page 77

Chapter 4 - Completing the Accounting Cycle 198. After all adjustments have been made, but before the accounts have been closed, the following balances were taken from the ledger of Ramona’s Designs: Accounts Payable Accounts Receivable Accumulated Depreciation Cash Depreciation Expense Equipment Insurance Expense Prepaid Insurance

$ 27,600 64,500 73,325 17,150 13,500 165,000 2,510 6,275

Rent Expense Salary Expense Salaries Payable Service Revenue Supplies Supplies Expense Ramona Cross, Capital Ramona Cross, Drawing

Journalize the entries to close the appropriate accounts. ANSWER: Service Revenue Depreciation Expense Insurance Expense Rent Expense Salary Expense Supplies Expense Ramona Cross, Capital Ramona Cross, Capital Ramona Cross, Drawing DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

$ 32,700 41,390 8,150 186,000 1,500 2,500 99,950 48,000

186,000 13,500 2,510 32,700 41,390 2,500 93,400 48,000 48,000

Page 78

Chapter 4 - Completing the Accounting Cycle 199. On the basis of the following information taken from the Adjusted Trial Balance columns of the work sheet for the month ended September 30, journalize the closing entries for Perez Roofing Company. Cash Accounts Receivable Office Supplies Repair Parts Machinery Accumulated Depreciation Accounts Payable Notes Payable Sam Perez, Capital Sam Perez, Drawing Service Revenue Wages Expense Office Supplies Expense Repair Parts Expense Depreciation Expense ANSWER:

22,500 3,575 2,850 3,785 17,750 3,250 1,150 6,500 2,500 1,750 47,200 4,840 1,275 925 1,350 60,600 Sept. 30 Service Revenue Wages Expense Office Supplies Expense Repair Parts Expense Depreciation Expense Sam Perez, Capital 30

Sam Perez, Capital Sam Perez, Drawing

60,600 47,200 4,840 1,275 925 1,350 38,810 1,750 1,750

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 79

Chapter 4 - Completing the Accounting Cycle 200. The following adjusted trial balance is the result of the adjustments made at the end of the month of March for Erik Martin Company. Use these adjusted values to journalize the closing entries for Erik Martin Company. Cash Accounts Receivable Office Supplies Store Supplies Machinery Accumulated Depreciation Accounts Payable Notes Payable Erik Martin, Capital Erik Martin, Drawing Service Revenue Wages Expense Office Supplies Expense Store Supplies Expense Depreciation Expense ANSWER:

24,750 5,750 3,525 4,785 9,750 2,150 3,550 7,500 19,725 6,250 36,500 6,425 1,465 5,150 1,575 69,425 Mar. 31

Service Revenue Wages Expense Office Supplies Expense Store Supplies Expense Depreciation Expense Erik Martin, Capital Erik Martin, Capital Erik Martin, Drawing

69,425 36,500 6,425 1,465 5,150 1,575 21,885 6,250 6,250

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 80

Chapter 4 - Completing the Accounting Cycle 201. The following adjusted trial balance is the result of the adjustments made at the end of the month of July for Ladonna Douglas Company. Utilize these adjusted values to perform the closing entries for Ladonna Douglas Company. Cash Accounts Receivable Office Supplies Store Supplies Machinery Accumulated Depreciation Accounts Payable Notes Payable Ladonna Douglas, Capital Ladonna Douglas, Drawing Service Revenue Wages Expense Rent Expense Advertising Expense Office Supplies Expense Store Supplies Expense Depreciation Expense ANSWER:

34,750 9,750 2,525 4,785 10,750 2,150 14,300 11,500 53,725 13,250 41,500 37,425 3,000 2,750 1,465 2,150 575 123,175

123,175

July 31 Service Revenue Ladonna Douglas, Capital Wages Expense Rent Expense Advertising Expense Office Supplies Expense Store Supplies Expense Depreciation Expense 31

Ladonna Douglas, Capital Ladonna Douglas, Drawing

41,500 5,865 37,425 3,000 2,750 1,465 2,150 575 13,250 13,250

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 81

Chapter 4 - Completing the Accounting Cycle 202. Prepare closing entries from the following end-of-period spreadsheet. Austin Enterprises End-of-Period Spreadsheet For the Year Ended December 31 Unadjusted Trial Balance Account Dr. Title Cash 26,500 Accounts Receivable 5,000 Supplies 8,000 Equipment 18,500 Accumulated Depreciation Accounts Payable Wages Payable Don Austin, Capital Don Austin, 2,000 Drawing Fees Earned Wages Expense 18,000 Supplies Expense Depreciation _____ Expense 78,000 ANSWER:

Cr.

Adjusted Trial Balance

Adjustments Dr. 2,000

1,500

Cr.

Dr. 26,500 7,000 7,000 1,000 18,500 3,500

11,000

Cr.

5,000 11,000 1,000 8,000

1,000 8,000 2,000 57,500

2,000

59,500

1,000 7,000 3,500

19,000 7,000 3,500

78,000 13,500

13,500 84,500 Journal Post. Ref.

84,500

Date Description Dec. 31 Fees Earned Wages Expense Supplies Expense Depreciation Expense Don Austin, Capital

Debit 59,500

Dec. 31 Don Austin, Capital Don Austin, Drawing

2,000

Credit 19,000 7,000 3,500 30,000

2,000

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 82

Chapter 4 - Completing the Accounting Cycle 203. The following is the adjusted trial balance for Miller Company. Miller Company Adjusted Trial Balance December 31 Account Debit No. Balances Cash 11 8,130 Accounts Receivable 12 3,300 Prepaid Expenses 13 2,750 Equipment 18 10,400 Accumulated Depreciation 19 Accounts Payable 21 Notes Payable 22 Diane Miller, Capital 31 Diane Miller, Drawing 32 4,870 Fees Earned 41 Wages Expense 51 12,450 Rent Expense 52 4,900 Utilities Expense 53 3,475 Depreciation Expense 54 2,150 Miscellaneous Expense 59 1,275 53,700 Prepare closing entries and the post-closing trial balance. ANSWER: Fees Earned Wages Expense Rent Expense Utilities Expense Depreciation Expense Miscellaneous Expense Diane Miller, Capital Diane Miller, Capital Diane Miller, Drawing

Credit Balances

2,200 2,700 1,000 11,200 36,600

53,700

36,600 12,450 4,900 3,475 2,150 1,275 12,350 4,870 4,870

Miller Company Post-Closing Trial Balance December 31 Account Debit Credit No. Balances Balances Cash 11 8,130 Accounts Receivable 12 3,300 Prepaid Expenses 13 2,750 Equipment 18 10,400 Accumulated Depreciation 19 2,200 Accounts Payable 21 2,700 Notes Payable 22 1,000 Diane Miller, Capital 31 18,680 24,580 24,580 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Page 83

Chapter 4 - Completing the Accounting Cycle DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 204. Reconstruct the adjusting and closing entries from the following.

Prepaid Insurance 1,200 200 1,000

Accounts Receivable 6,000 1,500 7,500

Madison Cox, Capital 7,000 5,280 2,100 10,180

Madison Cox, Drawing 2,100 2,100 0

Wages Payable 530 530

Fees Earned

9,935

Wages Expense

Rent Expense

2,600 530

1,145 1,145 3,130

Unearned Revenue 1,350 435 915

Insurance Expense 200 200 0

8,000 1,500 435 0

Utilities Expense 180 180 0

ANSWER:

Adjusting Entries: 1) Insurance Expense Prepaid Insurance 2)

200 200

Accounts Receivable Fees Earned

1,500

Unearned Revenue Fees Earned

435

Wages Expense Wages Payable

530

1,500

435

530

Page 84

Chapter 4 - Completing the Accounting Cycle Closing Entries: 1) Fees Earned Wages Expense Rent Expense Insurance Expense Utilities Expense Madison Cox, Capital

9,935 3,130 1,145 200 180 5,280

Madison Cox, Capital Madison Cox, Drawing DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

2,100 2,100

205. Reconstruct adjusting and closing entries for the month ended September 30 from the T accounts below.

Prepaid Insurance 1,350 130 1,220

Accounts Receivable 1,250 275 1,525

Unearned Revenue 1,050 235 815

Diane Lin, Drawing 2,400 2,400 0

Diane Lin, Capital 7,000 580 2,400

Fees Earned 5,000 275 235 0

5,510

4,020

Wages Expense

Rent Expense

3,600 385

1,880 1,880 3,985

Wages Payable 385 385

Insurance Expense 130 130 0

Utilities Expense 95 95 0

Page 85

Chapter 4 - Completing the Accounting Cycle ANSWER:

Adjusting Entries: 1) Insurance Expense Prepaid Insurance

130 130

2) Accounts Receivable Fees Earned

275

3) Unearned Revenue Fees Earned

235

4) Wages Expense Wages Payable

385

Closing Entries: 1) Fees Earned Diane Lin, Capital Wages Expense Rent Expense Insurance Expense Utilities Expense 2) Diane Lin, Capital Diane Lin, Drawing DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-03 - 04-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

275

235

385 5,510 580 3,985 1,880 130 95 2,400 2,400

206. The following are all the steps in the accounting cycle. List them in the order in which they should be done. - Closing entries are journalized and posted to the ledger. - An unadjusted trial balance is prepared. - An optional end-of-period spreadsheet (work sheet) is prepared. - A post-closing trial balance is prepared. - Adjusting entries are journalized and posted to the ledger. - Transactions are analyzed and recorded in the journal. - Adjustment data are assembled and analyzed. - Financial statements are prepared. - An adjusted trial balance is prepared. - Transactions are posted to the ledger.

Page 86

Chapter 4 - Completing the Accounting Cycle ANSWER:

1. Transactions are analyzed and recorded in the journal. 2. Transactions are posted to the ledger. 3. An unadjusted trial balance is prepared. 4. Adjustment data are assembled and analyzed. 5. An optional end-of-period spreadsheet (work sheet) is prepared. 6. Adjusting entries are journalized and posted to the ledger. 7. An adjusted trial balance is prepared. 8. Financial statements are prepared. 9. Closing entries are journalized and posted to the ledger. 10. A post-closing trial balance is prepared. DIFFICULTY: Challenging Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-04 - 04-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 207. 1) Dana Bowen Company is completing its first year of operations on April 30. Reconstruct the entries for the year ended April 30 from the T accounts below. Record them, assigning letters to each transaction, as follows: a–l Transaction m–r Adjusting journal entries 2)

Balance and prepare the income statement, the statement of owner’s equity, and the balance sheet from the T accounts.

Prepare the closing entries (s–t).

Prepare the post-closing trial balance. Accounts Receivable 1,250 385

Cash 6,500 900

Prepaid Insurance 1,940

Supplies 870 540

725

400 420 1,940 2,500 50 350 930

Equipment 2,500

Accumulated Depreciation 130

Accounts Payable

Wages Payable 870

225

Page 87

Chapter 4 - Completing the Accounting Cycle Unearned Revenue

Dana Bowen, Capital

Dana Bowen, Drawing

930

6,500 2,500

Fees Earned 900 1,250 2,500 385 590

Wages Expense 420 225

Rent Expense 400

Insurance Expense

Depreciation Expense

Miscellaneous Expense

590

725

ANSWER:

350

130

Supplies Expense 540

1) Journal Entries: a) Cash b) c) d) e) f) g) h) i) j) k) l)

Dana Bowen, Capital Equipment Dana Bowen, Capital Cash Fees Earned Rent Expense Cash Accounts Receivable Fees Earned Supplies Accounts Payable Wages Expense Cash Prepaid Insurance Cash Cash Fees Earned Miscellaneous Expense Cash Dana Bowen, Drawing Cash Cash Unearned Revenue

6,500 6,500 2,500 2,500 900 900 400 400 1,250 1,250 870 870 420 420 1,940 1,940 2,500 2,500 50 50 350 350 930 930

Page 88

Chapter 4 - Completing the Accounting Cycle Adjusting Entries: m) Supplies Expense Supplies n) Accounts Receivable Fees Earned o) Insurance Expense Prepaid Insurance p) Depreciation Expense Accumulated Depreciation q) Wages Expense Wages Payable r) Unearned Revenue Fees Earned 2)

540 540 385 385 725 725 130 130 225 225 590 590

Dana Bowen Company Income Statement For the Year Ended April 30 Fees earned Expenses: Insurance expense Wages expense Supplies expense Rent expense Depreciation expense Miscellaneous expense Total expenses Net income

$5,625 $725 645 540 400 130 50

Dana Bowen Company Statement of Owner’s Equity For the Year Ended April 30 Dana Bowen capital, May 1 Investment during the year $9,000 Net income for the year 3,135 Withdrawals (350) Increase in owner’s equity Dana Bowen, capital, April 30

2,490 $3,135

11,785 $11,785

Page 89

Chapter 4 - Completing the Accounting Cycle Dana Bowen Company Balance Sheet April 30

Assets $7,670

Liabilities Current liabilities: Accounts payable

Supplies

1,635 330

Wages payable Unearned revenues

Prepaid insurance

1,215

Total liabilities

Current assets: Cash Accounts receivable

Total current assets Property, plant, and equipment: Equipment

$ 870 225 340 $1,435

$10,850 Owner’s Equity

$2,500

Less accum. depr.

130 Total property, plant, and equipment Total assets

2,370 $13,200

Dana Bowen, capital

11,785

Total liabilities and owner’s equity

$13,220

3) Closing Entries: s) Fees Earned Wages Expense Rent Expense Supplies Expense Insurance Expense Depreciation Expense Miscellaneous Expense Dana Bowen, Capital t) Dana Bowen, Capital Dana Bowen, Drawing

5,625 645 400 540 725 130 50 3,135 350 350

Page 90

Chapter 4 - Completing the Accounting Cycle 4) Dana Bowen Company Post-Closing Trial Balance For the Year Ended April 30

Cash Accounts Receivable Supplies Prepaid Insurance Equipment Accumulated Depreciation Accounts Payable Wages Payable Unearned Revenue Dana Bowen, Capital

Account Debit Credit No. Balances Balances 11 7,670 12 1,635 13 330 14 1,215 18 2,500 19 130 21 870 22 225 24 340 31 11,785 13,350 13,350

DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-05 - 04-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 91

Chapter 4 - Completing the Accounting Cycle 208. Kirk Enterprises offers rug cleaning services to business clients. Below is the trial balance for Kirk Enterprises, which was prepared on the end-of-period spreadsheet (work sheet) for the year ended July 31.

Kirk Enterprises End-of-Period Spreadsheet For the Year Ended July 31

Cash Prepaid Insurance Fees Receivable Supplies Equipment Accumulated Depreciation Unearned Revenue Accounts Payable Wages Payable Ruben Ramon, Capital Ruben Ramon, Drawing Service Revenue Advertising Expense Wages Expense Insurance Expense Supplies Expense Depreciation Expense

Unadjusted Trial Balance Dr. Cr. 36 12 56 12 60 12

Adjustments Dr.

Cr.

Adjusted Trial Balance Dr. Cr.

20 32 84 4 80 28 20

228

Required Enter the adjustment data in the work sheet for the transactions shown below and place the balances in the Adjusted Trial Balance columns. Adjustments: a) The equipment is estimated to last for five years with no salvage value. The asset will be depreciated evenly over its useful life. Record one month’s depreciation. b) Accrued wages, $2. c) Unused supplies on hand, $8. d) Of the unearned revenue, 75% has been earned. e) Unexpired insurance remaining at the end of the month, $9.

Page 92

Chapter 4 - Completing the Accounting Cycle ANSWER:

Kirk Enterprises End-of-Period Spreadsheet For the Year Ended July 31 Unadjusted Adjusted Adjustments Trial Balance Trial Balance Dr. Cr. Dr. Cr. Dr. Cr. 36 36 12

(e) 3

56 12 60

56 8 60

(a) 1

20 (d) 15

32 (b) 2

4 80

(d) 15

228

(b) 2

(e) 3

(a) 1

228

231

DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-05 - 04-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 93

Chapter 4 - Completing the Accounting Cycle 209. Kirk Enterprises offers rug cleaning services to business clients. Below are the adjustments data for the year ended July 31. Using this information along with the spreadsheet below, record the adjusting entries in proper general journal form. Adjustments: (a) The equipment is estimated to last for five years with no salvage value. The asset will be depreciated evenly over its useful life. Record one month’s depreciation. (b) Accrued wages, $2. (c) Unused supplies on hand, $8. (d) Of the unearned revenue, 75% has been earned. (e) Unexpired insurance remaining at the end of the month, $9. Kirk Enterprises End-of-Period Spreadsheet For the Year Ended July 31 Unadjusted Adjustments Trial Balance

Cr.

Dr. Cash Prepaid Insurance Fees Receivable Supplies Equipment Accumulated Depreciation Unearned Revenue Accounts Payable Wages Payable Ruben Ramon, Capital Ruben Ramon, Drawing Service Revenue Advertising Expense Wages Expense Insurance Expense Supplies Expense Depreciation Expense

Dr.

Cr.

Adjusted Trial Balance

Dr.

Cr.

36 12 56 12 60 12 20 32 84 4 80 28 20

228

Page 94

Chapter 4 - Completing the Accounting Cycle ANSWER: Date (a)

(b)

(c)

(d)

(e)

Description

Journal Post. Ref.

Page 1 Debit

Adjusting Entries Depreciation Expense Accumulated Depreciation

Credit 1 1

Wages Expense Wages Payable

Supplies Expense Supplies

Unearned Revenue Service Revenue

Insurance Expense Prepaid Insurance DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-05 - 04-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

15 3 3

210. The end-of-period spreadsheet (work sheet) for the current year for Jamal Company shows Balance Sheet columns with a debit total of $630,430 and a credit total of $614,210. This is before the amount for net income or net loss has been included. In preparing the income statement from the end-of-period spreadsheet, what is the amount of net income or net loss? ANSWER: Net income, $16,220 RATIONALE: Net Income (excess of revenues over expenses) = Total of Balance Sheet Debit Column – Total of Balance Sheet Credit Column = $630,430 – $614,210 = $16,220 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 95

Chapter 4 - Completing the Accounting Cycle 211. The end-of-period spreadsheet (work sheet) for the current year for Jamal Company shows Balance Sheet columns with a debit total of $614,210 and a credit total of $630,430. This is before the amount for net income or net loss has been included. In preparing the income statement from the work sheet, what is the amount of net income or net loss? ANSWER: Net loss, $16,220 RATIONALE: Net Income (excess of revenues over expenses) = Total of Balance Sheet Debit Column – Total of Balance Sheet Credit Column = $614,210 – $630,430 = $(16,220) DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 212. Austin Enterprises was started by Daniel Austin. During the current year, Daniel Austin invested $8,000 in the business. Based on the following end-of-period spreadsheet, prepare an income statement, statement of owner’s equity, and balance sheet for Austin Enterprises for the year ended December 31. Austin Enterprises End-of-Period Spreadsheet For the Year Ended December 31 Adjusted Trial Balance Income Statement Account Title Dr. Cr. Dr. Cr. Cash 26,500 Accounts Receivable 7,000 Supplies 1,000 Equipment 18,500 Accumulated Depr.—Equip. 5,000 Accounts Payable 11,000 Wages Payable 1,000 Daniel Austin, Capital 8,000 Daniel Austin, Drawing 2,000 Fees Earned 59,500 59,500 Wages Expense 19,000 19,000 Rent Expense 7,000 7,000 Depreciation Expense 3,500 3,500 84,500 84,500 29,500 59,500 Net income 30,000 59,500 59,500 ANSWER:

Balance Sheet Dr. Cr. 26,500 7,000 1,000 18,500 5,000 11,000 1,000 8,000 2,000

55,000 55,000

25,000 30,000 55,000

Austin Enterprises Income Statement For the Year Ended December 31 Fees earned Expenses: Wages expense Rent expense Depreciation expense Total expenses Net income

$59,500 $19,000 7,000 3,500 29,500 $30,000

Page 96

Chapter 4 - Completing the Accounting Cycle Austin Enterprises Statement of Owner’s Equity For the Year Ended December 31 Daniel Austin, capital, January 1 $0 Investment during the year $ 8,000 Net income for the year 30,000 Withdrawals (2,000) Increase in owner’s equity 36,000 $36,000 Daniel Austin, capital, December 31 Austin Enterprises Balance Sheet December 31 Assets Liabilities Current Current assets: liabilities: Accounts Cash $26,500 $11,000 payable Accounts Wages 7,000 1,000 receivable payable Supplies 1,000 Total liabilities $12,000 Total current $34,500 assets Property, plant, and equipment: Equipment $18,500 Less accum. Owner’s 5,000 depr. Equity Total property, plant, and 13,500 Daniel Austin, 36,000 capital equipment Total liabilities and owner’s $48,000 $48,000 Total assets equity DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 97

Chapter 4 - Completing the Accounting Cycle 213. The balances in the ledger of Good Landscape Services as of January 31 before adjustments are as follows: Cash Supplies Prepaid Insurance Equipment Accumulated Depreciation

$ 6,750 3,900 8,400 41,750 9,950

Dalton Good, Capital Dalton Good, Drawing Service Revenue Salary Expense Rent Expense Miscellaneous Expense

$29,775 3,425 56,300 24,300 6,000 1,500

Adjustment data are as follows: supplies on hand, January 31, $900; insurance expired for January, $1,100; depreciation on equipment for January, $1,600; salaries accrued, January 31, $1,650. (a) (b)

Prepare a 10-column end-of-period spreadsheet for Good Landscape Services for January. On the basis of the work sheet in (a), present the following in good order: (1) income statement, (2) statement of owner's equity (assume no additional owner investments were made during the month), and (3) balance sheet. (c) On the basis of the work sheet in (a) journalize the closing entries as of January 31. ANSWER: (a) Good Landscape Services End-of-Period Spreadsheet For the Month Ended January 31

Account Title

Unadjusted Trial Balance Dr. Cr.

Cash Supplies Prepaid Insurance Equipment Accumulated Depreciation

6,750 3,900 8,400 41,750

Dalton Good, Drawing Service Revenue Salary Expense Rent Expense Miscellaneous Expense

3,425

Adjustments Dr. Cr. (a) 3,000 (b) 1,100

29,775

Supplies Expense Insurance Expense Depreciation Expense Salaries Payable

56,300 24,300 6,000 1,500 96,025

(d) 1,650

96,025 (a) 3,000 (b) 1,100 (c) 1,600 7,350

d) 1,650 7,350

Net income

Page 98

Chapter 4 - Completing the Accounting Cycle Adjusted Trial Balance Dr. Cr.

Income Statement Dr. Cr.

6,750 900 7,300 41,750

Balance Sheet Dr. Cr. 6,750 900 7,300 41,750

11,550 29,775 3,425

3,425 56,300

25,950 6,000 1,500 3,000 1,100 1,600 99,275

11,550 29,775 .

56,300 25,950 6,000 1,500 3,000 1,100 1,600

1,650 99,275

39,150 17,150 56,300

56,300

60,125

56,300

60,125

1,650 42,975 17,150 60,125

(b) (1) Good Landscape Services Income Statement For the Month Ended January 31 Service revenue Expenses: Salary expense Rent expense Supplies expense Depreciation expense Supplies expense Insurance expense Miscellaneous expense Total expenses Net income

$56,300 $25,950 6,000 3,000 1,600 3,000 1,100 1,500 39,150 $17,150

(b) (2) Good Landscape Services Statement of Owner's Equity For the Month Ended January 31 Dalton Good, capital, January 1 Net income for the month Withdrawals Increase in owner's equity Dalton Good, capital, January 31

$29,775 $17,150 (3,425) 13,725 $43,500

Page 99

Chapter 4 - Completing the Accounting Cycle (b) (3)

Assets Current assets: Cash Supplies Prepaid insurance Total current assets

Good Landscape Services Balance Sheet January 31 Liabilities Current liabilities: $6,750 Salaries payable 900 7,300

$1,650

$14,950 Owner's Equity Dalton Good, capital Total liabilities and owner's equity

43,500

Property, plant, and equipment: Equipment $41,750 Less accum. depr. 11,550 Total property, plant, and 30,200 equipment Total assets $45,150

$45,150

(c) Closing Entries: Jan. 31 Service Revenue Salary Expense Rent Expense Supplies Expense Depreciation Expense Insurance Expense Miscellaneous Expense Dalton Good, Capital 31

Dalton Good, Capital Dalton Good, Drawing

56,300 25,950 6,000 3,000 1,600 1,100 1,500 17,150 3,425 3,425

DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 100

Chapter 4 - Completing the Accounting Cycle 214. Complete the following end-of-period spreadsheet for Danilo Enterprises.

Account Title Cash Accounts Receivable Supplies Equipment Accumulated Depr.—Equip. Accounts Payable Wages Payable Tony Danilo, Capital Tony Danilo, Drawing Fees Earned Wages Expense Rent Expense Depreciation Expense

Danilo Enterprises End-of-Period Spreadsheet For the Year Ended December 31 Adjusted Income Statement Balance Trial Balance Sheet Dr. Cr. Dr. Cr. Dr. Cr. 14,500 7,500 500 20,500 15,000 9,500 3,060 18,240 1,000 34,000 18,000 9,300 8,500 79,800

79,800

Net loss

Page 101

Chapter 4 - Completing the Accounting Cycle ANSWER: Danilo Enterprises End-of-Period Spreadsheet For the Year Ended December 31 Adjusted Income Balance Sheet Trial Balance Statement Dr. Cr. Dr. Cr. Dr. Cr.

Account Title Cash 14,500 14,500 Accounts 7,500 7,500 Receivable Supplies 500 500 Equipment 20,500 20,500 Accumulated 15,000 15,000 Depr.— Equip. Accounts 9,500 9,500 Payable Wages 3,060 3,060 Payable Tony Danilo, 18,240 18,240 Capital Tony Danilo, 1,000 1,000 Drawing Fees Earned 34,000 34,000 Wages 18,000 18,000 Expense Rent Expense 9,300 9,300 Depreciation 8,500 _____ 8,500 _____ _____ _____ Expense 79,800 79,800 35,800 34,000 44,000 45,800 Net loss 35,800

1,800 1,800 35,800 45,800

45,800

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 102

Chapter 4 - Completing the Accounting Cycle 215. Explain how net income or loss is determined by using the end-of-period spreadsheets. ANSWER: The difference between the debits and credits of the Income Statement columns is compared to the difference between the debits and credits of the Balance Sheet columns. They should be the same amounts but opposite from each other. If the debits are more than the credits in the Income Statement columns, signifying a net loss, then the credits should be higher than the debits in the Balance Sheet columns by the same amount. If the credits are more than the debits in the Income Statement columns, signifying a net income, then the debits should be higher than the credits in the Balance Sheet columns by the same amount. DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 216. If end-of-period spreadsheets are not considered part of the formal accounting records, why are they used? ANSWER: The end-of-period spreadsheets are tools used by accountants to collect and summarize data for various analysis and reports. DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.04-APP1 - 04-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 103

Chapter 4 - Completing the Accounting Cycle 217. Sean Enterprises offers carpet and upholstery cleaning services to residential clients. Below is a partial end-of-period spreadsheet for the year ended December 31. Record the necessary reversing entries on January 1 in proper general journal form. Sean Enterprises End-of-Period Spreadsheet For the Year Ended December 31

Account Title Cash Accounts Receivable Prepaid Insurance Supplies Equipment Accumulated Depreciation Accounts Payable Wages Payable Ruben Ramon, Capital Ruben Ramon, Drawing Service Revenue Advertising Expense Wages Expense Insurance Expense Supplies Expense Depreciation Expense

Unadjusted Trial Balance Dr. Cr. 9,850 8,500 3,400 4,700 100,000 10,000

Adjustments Dr. Cr. 350 425 4,350 10,000

Adjusted Trial Balance Dr. Cr. 9,850 8,850 2,975 350 100,000 20,000

3,600

3,600 1,600 40,000

1,600 40,000 12,000

12,000 125,600

2,350 38,400

179,200

350 2,350 40,000 425 4,350 10,000

1,600 425 4,350 10,000 179,200

ANSWER: Date Jan. 1

16,725

125,950

16,725

191,150

Journal Description Reversing Entries Wages Expense Wages Payable Service Revenue Accounts Receivable

191,150

Debit

Page 1 Credit

1,600 1,600 350 350

DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.04-05 - 04-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 104

Chapter 5 - Accounting Systems True / False 1. The methods and procedures for collecting, classifying, summarizing, and reporting a business's financial and operating information are called the accounting system. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-01 - 05-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 2. Systems analysis is the final phase in the creation or revision of an accounting system. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-01 - 05-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 3. Processing methods are the means by which the system collects, summarizes, and reports accounting information. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-01 - 05-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 4. Accounting systems evolve through a three-step process: analysis, design, and feedback. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-01 - 05-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Page 1

Chapter 5 - Accounting Systems 5. An accounting system design consists of internal controls and information processing methods. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-01 - 05-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 6. Most accounting systems evolve as the business grows and requires changes in its methods for collecting, accumulating, and reporting information. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-01 - 05-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 7. Once an accounting system has been implemented, feedback will be used to continuously analyze and improve the system. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-01 - 05-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 8. Designing a system to meet user needs is the final phase in the creation or revision of an accounting system. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-01 - 05-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Page 2

Chapter 5 - Accounting Systems 9. When specialized journals are used, the general journal is not necessary. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 10. Specialized journals are books of original entry. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 11. Transactions must first be recorded in the general journal before they can be entered in specialized journals. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 12. The format and number of specialized journals that a business uses depend upon the legal organization of the business. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 5 - Accounting Systems 13. The basic procedure of posting from a revenue journal is to make all postings at the end of the month. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 14. The principal ledger that contains all the balance sheet and income statement accounts is the general ledger. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 15. The presence of a subsidiary ledger requires the presence of a summarizing control account in the general ledger. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 16. An account for each supplier of merchandise will appear in the accounts payable subsidiary ledger. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 5 - Accounting Systems 17. The customers subsidiary ledger is controlled by the general ledger account entitled Accounts Payable. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 18. When a sale for $1,350 takes place with a $250 deposit having been received in advance, only the $1,100 on account is recorded in the revenue journal. a. True b. False ANSWER: True RATIONALE: Amount Recorded in the Revenue Journal = $1,350 – $250 = $1,100 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 19. Even when special journals are used, purchases of store equipment on account are recorded in the general journal. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 20. A control account is used to record the details of the individual subsidiary accounts. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 5 - Accounting Systems 21. A cash refund paid to a customer who overpaid an account receivable is recorded in the cash payments journal. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 22. Even when special journals are used, a personal withdrawal of cash is recorded in the general journal. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 23. Services provided for cash are recorded in the revenue journal. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 24. Services provided on account are recorded in the revenue journal. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 5 - Accounting Systems 25. Sales of office supplies for cash, at cost, to a neighboring business as an accommodation are recorded in the revenue journal. a. True b. False ANSWER: False DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 26. The Other Accounts column in the cash receipts journal is used for recording debits to any account for which there is no special debit column. a. True b. False ANSWER: False DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 27. The Other Accounts column in the cash payments journal is used for recording debits to any account for which there is no specialized debit column. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 5 - Accounting Systems 28. Purchases journals will have an Other Accounts Cr. column. a. True b. False ANSWER: False DIFFICULTY: Challenging Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 29. The use of subsidiary ledgers is limited to Accounts Payable and Accounts Receivable. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 30. The revenue journal is designed for the efficient recording of cash sales transactions. a. True b. False ANSWER: False DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 31. The Post. Ref. column of the revenue journal will reference the account number of the customer. a. True b. False ANSWER: False DIFFICULTY: Challenging Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 5 - Accounting Systems 32. The total of the accounts receivable subsidiary accounts and the balance of the accounts receivable control account should equal each other at the end of the period. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 33. Adjusting journal entries are recorded in a special journal. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 34. Even when special journals are used, closing journal entries are recorded in the general journal. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 35. The accounts receivable subsidiary ledger is an example of a special journal. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 5 - Accounting Systems 36. Posting from a revenue journal to the customer account is normally done only at the end of the month. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 37. The purchase of supplies for cash would be recorded in the purchases journal. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 38. When a large number of individual accounts with a common characteristic are grouped together in a separate ledger, the summarizing account in the general ledger is called a control account. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 39. The customers ledger and the creditors ledger refer to subsidiary ledgers. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 5 - Accounting Systems 40. The total on the "Accounts Payable Creditor Balances" report at January 31, the end of the first month of operations, agrees with the total of the Accounts Payable Dr. column in the cash payments journal for the same period. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 41. The columns included in special journals are standardized for all businesses. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 42. Generally, subsidiary ledgers are used for general ledger accounts that consist of a large number of individual items. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 43. In a computerized accounting system, all postings happen automatically at the end of the month. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-03 - 05-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 5 - Accounting Systems 44. In computerized accounting systems, reports may be generated at any time. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-03 - 05-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 45. Computerized accounting systems prevent all journalizing errors. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-03 - 05-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 46. Using the Internet to perform business transactions is called e-commerce. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-04 - 05-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 47. The term B2C refers to transactions conducted between two companies. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-04 - 05-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.FN.02 - Leveraging Technology ACCT.AICPA.FN.03 - Measurement BUSPROG: Technology © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 5 - Accounting Systems 48. E-commerce provides additional business opportunities but at the cost of reduced speed and efficiency. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-04 - 05-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.02 - Leveraging Technology ACCT.AICPA.FN.03 - Measurement BUSPROG: Technology 49. One way to report revenue earned by a company is to present it by the different segments of business. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-05 - 05-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 50. Businesses can only be segmented by type of customer. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-05 - 05-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 5 - Accounting Systems Multiple Choice 51. A(n) ____ system is the methods and procedures for collecting, classifying, summarizing, and reporting a business’s financial and operating information. a. accounting b. fiduciary c. operations d. auditing ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-01 - 05-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 52. The phase of accounting system installation in which the information needs of people in the organization are taken into account is a. analysis b. design c. implementation d. installation ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-01 - 05-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 53. Which of the following is not one of the three phases needed when changing an accounting system, either in its entirety or in part? a. analysis b. design c. review d. implementation ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-01 - 05-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 5 - Accounting Systems 54. Which of the following is not part of a three-step process that a growing business uses for the evolution of its accounting system? a. analysis b. design c. implementation d. feedback ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-01 - 05-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 55. The three phases of setting up an accounting system in correct order are a. design, implementation, analysis b. analysis, design, implementation c. design, analysis, implementation d. implementation, design, analysis ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-01 - 05-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 56. The goal of systems design is to a. determine when to implement a system b. meet user needs c. determine the size of the competitor's system d. make changes to the present system ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-01 - 05-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 5 - Accounting Systems 57. After an accounting system has been set up, what is the next step? a. Create the chart of accounts. b. Obtain input from users to analyze and improve the system. c. Implement analysis and design. d. Set up internal controls. ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-01 - 05-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 58. Processing methods a. are the policies and procedures that protect assets from misuse b. must be computerized c. are the means by which the accounting system collects, summarizes, and reports accounting information d. ensure that business laws and regulations are followed ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-01 - 05-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic 59. The means by which the accounting system collects, summarizes, and reports accounting information is called information a. reporting methods b. accounting methods c. control methods d. processing methods ANSWER: d DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-01 - 05-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 5 - Accounting Systems 60. The primary ledger containing all the balance sheet and income statement accounts is the a. general ledger b. creditors ledger c. customers ledger d. subsidiary ledger ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 61. The subsidiary ledger that includes customer account activity is called the a. asset ledger b. accounts payable ledger c. expense ledger d. accounts receivable ledger ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 62. Every controlling account must have its own a. revenue ledger b. general ledger c. subsidiary ledger d. journal ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 5 - Accounting Systems 63. At the end of the month, the total of the amount column of the revenue journal is posted as a a. debit to Accounts Receivable and a credit to Cash b. debit to Accounts Receivable and a credit to Fees Earned c. debit to Cash and a credit to Fees Earned d. debit to Cash and a credit to Accounts Payable ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 64. The controlling account in the general ledger that summarizes the individual customer accounts in the subsidiary ledger is entitled a. Purchases b. Accounts Payable c. Fees Earned d. Accounts Receivable ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.5-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 65. When there are a large number of individual accounts with a common characteristic, it is common to place them in a separate ledger called a(n) a. general ledger b. income statement ledger c. group ledger d. subsidiary ledger ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 5 - Accounting Systems 66. A purchase of supplies for cash is recorded in the a. revenue journal b. purchases journal c. cash receipts journal d. cash payments journal ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 67. A purchase of supplies on account is recorded in the a. revenue journal b. general journal c. purchases journal d. cash payments journal ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 68. Which of the following transactions is recorded in the purchases journal? a. purchase of store supplies on account b. return of damaged office equipment c. purchase of store supplies for cash d. purchase of office equipment for cash ANSWER: a DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 5 - Accounting Systems 69. When posting column totals in the purchases journal, a credit should be posted to a. Merchandise Inventory b. Accounts Payable c. Sales Returns and Allowances d. Cash ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 70. In which journal would an adjustment for an overcharge by a creditor be recorded? a. general journal b. purchases journal c. cash payments journal d. cash receipts journal ANSWER: a DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 71. Which of the following transactions is recorded in the revenue journal? a. sale of excess office equipment for cash b. rendering services for cash c. rendering services on account d. sale of excess office equipment on account ANSWER: c DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 5 - Accounting Systems 72. Each individual entry in the revenue journal is posted to the a. accounts receivable controlling account b. accounts receivable subsidiary ledger c. revenue controlling account d. accounts receivable subsidiary ledger and the controlling account ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 73. Which of the following is always recorded in the general journal? a. services rendered for cash b. correction of error in billing client c. purchases of equipment on account d. purchases of equipment for cash ANSWER: b DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 74. Which of the following is always recorded in the general journal? a. rendering services for cash b. purchases of supplies on account c. rendering services on account d. closing entries ANSWER: d DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 5 - Accounting Systems 75. Which of the following is recorded in the cash receipts journal? a. cash withdrawn by the owner b. cash purchase of equipment c. cash received on customer's account d. adjusting entry for depreciation ANSWER: c DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 76. Services performed for cash should be recorded in the a. revenue journal b. purchases journal c. cash receipts journal d. cash payments journal ANSWER: c DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 77. Which of the following is recorded in the cash payments journal? a. adjusting entry for accrued salaries b. receipt of cash on supplies returned c. receipt of cash from services rendered d. payment of employees' salaries ANSWER: d DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 5 - Accounting Systems 78. A cash payments journal would not include a(n) a. Cash Cr. column b. Sales Discounts Cr. column c. Accounts Payable Dr. column d. Other Accounts Dr. column ANSWER: b DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 79. In which journal is the return of supplies purchased on account recorded? a. general journal b. cash receipts journal c. cash payments journal d. purchases journal ANSWER: a DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 80. A cash purchase of supplies should be recorded in the a. cash receipts journal b. purchases journal c. general journal d. cash payments journal ANSWER: d DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 5 - Accounting Systems 81. When posting the column totals of a cash payments journal, a debit should be posted to a. Cash b. Accounts Payable c. Sales Discounts d. Unearned Revenue ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 82. In which journal is the receipt of a promissory note from a customer on account recorded? a. revenue journal b. cash receipts journal c. general journal d. purchases journal ANSWER: c DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 83. Subsidiary ledgers a. are used only for Accounts Payable and Accounts Receivable b. may be used for various general ledger accounts c. may be used only for the cash account d. are never used for more than four accounts ANSWER: b DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 5 - Accounting Systems 84. Some of the more common subsidiary ledgers are a. accounts payable, accounts receivable, and owner’s equity subsidiary ledgers b. accounts receivable and accounts payable subsidiary ledgers c. accounts receivable, accounts payable, cash, checking, petty cash, and owner’s equity subsidiary ledgers d. cash and owner’s equity subsidiary ledgers ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 85. If the individual subsidiary ledger accounts contained the following data: Cadence Company, Vendor, $200, credit balance Franklin Enterprises, Customer, $750, debit balance Marcelo Construction, Client, $125, debit balance Peyton Supplies, Supplier, $375, credit balance The accounts receivable (A/R) control account and the accounts payable (A/P) control account balances would be a. A/R, $1,375; A/P, $375 b. A/R, $525; A/P, $175 c. A/R, $875; A/P, $575 d. A/R, $750; A/P, $700 ANSWER: c RATIONALE: A/R A/P Cadence Company, Vendor,$200, credit balance $ 200 Franklin Enterprises, Customer, $750, debit balance $750 Marcelo Construction, Client, $125, debit balance 125 Peyton Supplies, Supplier, $375, credit balance 375 Total $875 $575 DIFFICULTY:

Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 5 - Accounting Systems 86. Which of the following is not considered a special journal? a. purchases journal b. cash receipts journal c. general journal d. cash payments journal ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 87. Which of the following journals is called an all-purpose journal? a. general journal b. purchases journal c. revenue journal d. accounting journal ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 88. Which of the following is true about the revenue journal? a. Cash revenues and revenues on account are recorded in the revenue journal. b. Only cash revenues are recorded in the revenue journal. c. Only revenues on account are recorded in the revenue journal. d. Unearned revenues are also recorded in the revenue journal. ANSWER: c DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 5 - Accounting Systems 89. The cash receipts journal will be used for a. only cash received from customers on account b. all cash received for any purpose c. cash received from customers on account and cash sales d. only cash received from cash sales ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 90. An “Accounts Receivable Customer Balances” report shows a. revenues by customer for a specified date range b. customer balances owed as of a specific date c. cash payments to creditors for a specific date range d. sales by customer as of a specific date ANSWER: b DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 91. A cash investment made by the owner should be recorded in the a. cash receipts journal b. purchases journal c. cash payments journal d. revenue journal ANSWER: a DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 5 - Accounting Systems 92. A withdrawal of cash made by the owner will be found in the a. cash receipts journal b. cash payments journal c. revenue journal d. purchases journal ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 93. An owner transfers a personal automobile to the company with a fair market value of $12,000. The entry will be made in the a. purchases journal b. cash payments journal c. cash receipts journal d. general journal ANSWER: d DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 94. In which journal would adjusting entries be found? a. cash receipts journal b. cash payments journal c. general journal d. purchases journal ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 5 - Accounting Systems 95. In which journal would you find cash revenues recorded? a. cash payments journal b. general journal c. revenues journal d. cash receipts journal ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 96. In which journal would the payment of salaries be posted? a. cash receipts journal b. special journal c. cash payments journal d. expense journal ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 97. The following cash receipts journal headings have been suggested for Tower Tree-Trimming Service Company. Which of the following statements is false? Date

Account Debited

Post. Ref.

Accounts Receivable Cr.

Cash Other Accounts Cr. Dr.

a. The second column should be Account Credited. b. The Cash column should be a debit. c. The Other Accounts column should be a credit. d. The Accounts Receivable column should be a debit. ANSWER: d DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 5 - Accounting Systems 98. Which of the following is not a special journal? a. cash receipts journal b. purchases journal c. accounts receivable journal d. cash payments journal ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 99. Which of the following general ledger accounts normally has a subsidiary ledger? a. Owner's Capital b. Drawing c. Supplies d. Accounts Payable ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 100. Which transaction is normally recorded in a special journal? a. sales returns b. depreciation expense c. purchases on account d. credit from supplier for return of supplies purchased on account ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 5 - Accounting Systems 101. An adjustment resulting from a creditor reducing the amount owed on an unpaid invoice due to an invoicing error would be recorded in the a. general journal b. purchases journal c. cash payments journal d. cash receipts journal ANSWER: a DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 102. If a company uses special journals, a. it must have one for cash, receivables, and payables b. it may have no more than four c. the quantity and design depend on the needs of the company d. the design must comply with the FASB requirements ANSWER: c DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 103. Mocha Coffee Shop has asked the accountant to keep track of the purchases for beverage, food, and retail items. The accountant has implemented a purchases journal. Which of the following columns should be included in the new purchases journal? a. Accounts Payable Cr., Beverage Supplies Dr., Food Supplies Dr., Retail Items Dr., Other Accounts Dr. b. Accounts Payable Dr., Other Accounts Dr., Beverage Supplies Cr., Food Supplies Cr., Retail Items Cr. c. Beverage Supplies Dr., Food Supplies Dr., Retail Items Dr., Other Accounts Dr., Cash Cr. d. Beverage Supplies Dr., Food Supplies Dr., Retail Items Dr., Other Accounts Cr., Accounts Payable Dr. ANSWER: a DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 5 - Accounting Systems 104. When using a purchases journal, a. all cash and credit purchases are recorded in the journal b. posting to creditor accounts is only done at the end of the month c. the “Other Accounts” total is posted to Accounts Payable at month’s end d. there will always be an “Accounts Payable Cr.” column ANSWER: d DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 105. When using a revenue journal, a. separate “Fees Earned” and “Accounts Receivable” columns are included b. both cash sales and sales on account are recorded in the journal c. revenues are normally recorded when the company sends customer invoices d. postings to customer accounts are done at month's end ANSWER: c DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 106. Beachside Coffee Shop, in an effort to streamline its accounting system, has decided to utilize a cash receipts journal in its operations. If the company records the cash sale of food for $18, which is the correct entry? a. Cash Cr., $18; Food Revenue Dr., $18 b. Cash Dr., $18; Food Revenue Dr., $18 c. Cash Dr., $18; Food Revenue Cr., $18 d. Cash Cr., $18; Food Revenue Cr., $18 ANSWER: c DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 5 - Accounting Systems 107. A basic manual accounting system includes all of the following except a a. chart of accounts b. two-column journal c. general ledger d. computer on which the system runs ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 108. Which of the following statements is false? a. Most computerized accounting systems use principles from manual systems. b. Subsidiary ledgers and special journals are only useful when a business doesn’t have a large number of similar transactions. c. Even small companies use computerized accounting systems. d. Large companies often integrate their accounting system with their automated business systems. ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCT.WARD.18.05-03 - 05-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 109. A computerized accounting system will not allow which of the following types of journalizing errors? a. entering an amount in an incorrect account b. reversing the debit and credit accounts in a transaction c. processing a transaction that has unequal debits and credits d. entering a transaction with an incorrect date ANSWER: c DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-03 - 05-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 5 - Accounting Systems 110. Computerized accounting systems a. are only used by medium- and large-sized companies b. are generally not as accurate as manual systems c. record and post transactions at the same time d. must make use of special journals ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-03 - 05-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 111. The total on the "Cash Receipts" report generated by QuickBooks® software at January 31 would be equal to the a. total revenue earned for the month of January b. total of the purchases journal on January 31 c. total of the Cash Dr. column of the cash receipts journal in a manual system d. balance in Accounts Receivable at January 31 ANSWER: c DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-03 - 05-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 112. Put the following into the correct order for processing a sale on account with QuickBooks®. A. Prepare reports. B. Record the sale by completing an electronic invoice form. C. Record collection of payment by completing a "receive payment" form. a. B-C-A b. A-B-C c. B-A-C d. C-B-A ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-03 - 05-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 5 - Accounting Systems 113. Which of the following is not an advantage of a computerized system over a manual system? a. Transactions are recorded and posted at the same time. b. Accuracy is usually better with a computerized system. c. Current balances are always available. d. Internal controls are optional to the computerized system. ANSWER: d DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-03 - 05-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 114. Month-end postings to control accounts in a computerized accounting system are not required because a. control accounts are not used in computerized systems b. transactions are posted to accounts immediately c. the input operator can choose to post to accounts at any time d. transactions are posted at the end of the financial year ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-03 - 05-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 115. Computerized accounting systems a. provide a tedious form of record keeping b. improve the timeliness of reporting c. prevent all journalizing errors d. are only used in medium and large businesses ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-03 - 05-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 5 - Accounting Systems 116. What is meant by the term B2C? a. balance to cash b. business to cash c. book to capital d. business to consumer ANSWER: d DIFFICULTY: Moderate LEARNING OBJECTIVES: ACCT.WARD.18.05-04 - 05-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.FN.02 - Leveraging Technology ACCT.AICPA.FN.03 - Measurement BUSPROG: Technology 117. In addition to B2B and B2C transactions, the Internet is commonly used in all of the following business activities except a. supply chain management b. regulatory compliance management c. customer relationship management d. product life-cycle management ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-04 - 05-04 STATE STANDARDS: United States - AK - AICPA BB Leveraging ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.FN.03 - Measurement BUSPROG: Technology 118. When Richard Miller purchases a fishing pole through Amazon.com, he is utilizing a. B1C e-commerce b. B2B e-commerce c. B2C e-commerce d. B1B e-commerce ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-04 - 05-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.FN.02 - Leveraging Technology BUSPROG: Technology

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Chapter 5 - Accounting Systems 119. Which of the following is not an area where the Internet is used for business purposes? a. business cycle management b. customer relationship management c. supply chain management d. product life-cycle management ANSWER: a DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-04 - 05-04 ACCREDITING STANDARDS: ACCT.AICPA.FN.02 - Leveraging Technology BUSPROG: Technology 120. E-commerce a. accounts for less than 1% of all retail sales b. only relates to transactions between a company and a consumer c. can improve the speed and efficiency of transactions d. increases paperwork ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-04 - 05-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 121. Business may be segmented by all of the following except a. region b. product line c. customer type d. time period ANSWER: d DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-05 - 05-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 5 - Accounting Systems 122. Connie's Specialties Inc. offers exclusive interior design services. The following revenue information was determined from Connie's records. Current Year Consultation services $1,000,000 Design services 1,800,000

Prior Year $ 800,000 1,500,000

Using a horizontal analysis, which is correct? a. Consultation services showed an increase in revenue of 25%. b. Consultation services showed a decrease in revenue of 25%. c. Design services showed an increase in revenue of 25%. d. Design services showed a decrease in revenue of 25%. ANSWER: a RATIONALE: Percentage Change in Revenues from Consultation Services = (Revenue in Current Year – Revenue in Previous Year)/Revenue in Previous Year = ($1,000,000 – $800,000)/$800,000 = 25% Consultation services showed an increase in revenue of 25%. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.05-05 - 05-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 123. Segment data a. can be used for vertical, but not horizontal analysis b. is gathered from invoices entered into the accounting system c. is only useful by product line d. analysis is required by GAAP ANSWER: b DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-05 - 05-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 5 - Accounting Systems 124. Waller Company does business in two regional segments: North and South. The following annual revenue information was determined from the accounting system’s invoice data: Segment Current Year Prior Year North $ 80,000 $100,000 South 260,000 200,000 Total revenues $340,000 $300,000 Using horizontal analysis, determine the percentage change in revenues for the North region. Round to one decimal place. a. 22.4% b. (20.0)% c. 20.0% d. (22.4)% ANSWER: b RATIONALE: Percentage Change in Revenues for the North Region = (Revenue in Current Year – Revenue in Prior Year)/Revenue in Prior Year = ($80,000 – $100,000)/$100,000 = (20.0)% DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.05-05 - 05-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 125. Snelling Company does business in two regional segments: North and South. The following annual revenue information was determined from the accounting system’s invoice data: Segment Current Year Prior Year North $ 75,000 $100,000 South 260,000 220,000 Total revenues $335,000 $320,000 Using horizontal analysis, determine the percentage change in revenues for the South region. Round to one decimal place. a. 18.2% b. 84.6% c. (18.2)% d. 15.4% ANSWER: a RATIONALE: Percentage Change in Revenues for the South Region = (Revenue in Current Year – Revenue in Prior Year)/Revenue in Prior Year = ($260,000 – $220,000)/$220,000 = 18.2% DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.05-05 - 05-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 5 - Accounting Systems 126. The following is an example of

Segment College textbooks High school textbooks Elementary school textbooks Total revenues

Current Year $ 78,000 129,000 105,000 $312,000

Prior Year $ 55,000 115,000 121,000 $291,000

Increase (Decrease) Amount Percent $ 23,000 41.8% 14,000 12.2 (16,000) (13.2) $ 21,000 7.2

a. product analysis b. vertical analysis c. horizontal analysis d. percentage analysis ANSWER: DIFFICULTY:

c Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-05 - 05-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 127. The following is an example of

Segment College textbooks High school textbooks Elementary school textbooks Total revenues

Current Year Amount Percent $ 78,000 25.0% 129,000 41.3 105,000 33.7 $312,000 100.0%

Prior Year Amount Percent $ 55,000 18.9% 115,000 39.5 121,000 41.6 $291,000 100.0%

a. product analysis b. vertical analysis c. horizontal analysis d. percentage analysis ANSWER: DIFFICULTY:

b Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-05 - 05-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 5 - Accounting Systems Matching Match the transactions below with the journal or ledger in which it would be entered. a. Purchases journal b. Revenue journal c. Cash receipts journal d. Cash payments journal e. Accounts receivable subsidiary ledger f. Accounts payable subsidiary ledger g. General journal DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 128. Monthly adjustment for supplies used ANSWER: g 129. Cash receipt posting to an individual customer account ANSWER: e 130. Record sale on account to customer ANSWER: b 131. Record purchase on account from vendor ANSWER: a 132. Record payment received from customer ANSWER: c 133. Record payment made to vendor ANSWER: d 134. Cash payment posting to an individual vendor account ANSWER: f

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Chapter 5 - Accounting Systems Match the following types of journal transactions with the journal in which they would be entered. a. Cash receipts journal b. Cash payments journal c. Revenue journal d. Purchases journal e. General journal DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 135. Sale on account ANSWER: c 136. Payment for supplies bought on account ANSWER: b 137. Adjusting entry ANSWER: e 138. Collection on account ANSWER: a 139. Equipment purchased on account ANSWER: d

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Chapter 5 - Accounting Systems Match each subsidiary ledger and general ledger posting to one of the descriptions of activities (a−e). a. Purchases on account b. Collections from customers on account c. Adjustment for expired insurance d. Payments to creditors on account e. Sales on account DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 140. Accounts receivable subsidiary ledger/Accounts Receivable Dr. ANSWER: e 141. Accounts receivable subsidiary ledger/Accounts Receivable Cr. ANSWER: b 142. Accounts payable subsidiary ledger/Accounts Payable Cr. ANSWER: a 143. Accounts payable subsidiary ledger/Accounts Payable Dr. ANSWER: d 144. No subsidiary ledger posting ANSWER: c

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Chapter 5 - Accounting Systems The transactions completed by Franklin Company during January, its first month of operations, are listed below. Assume that Franklin Company uses the following journals: cash receipts (CR), cash payments (CP), revenue (R), purchases (P), and general (G). Assume that it uses accounts receivable and accounts payable subsidiary ledgers as well as a general ledger. Indicate by letters which journal would be used for each transaction and whether or not the entry requires a posting to a subsidiary ledger. a. CR, no subsidiary posting b. CP, no subsidiary posting c. R, no subsidiary posting d. P, no subsidiary posting e. G, no subsidiary posting f. CR, subsidiary posting g. CP, subsidiary posting h. R, subsidiary posting i. P, subsidiary posting j. G, subsidiary posting DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 145. Issued check for rent ANSWER: b 146. Purchased equipment on account ANSWER: i 147. Issued an invoice to a customer ANSWER: h 148. Received a check from a customer for payment on account ANSWER: f 149. Issued check for advertising expense ANSWER: b 150. Issued check for a payment on account ANSWER: g 151. Issued check for purchase of supplies ANSWER: b 152. Issued check for salary ANSWER: b © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 5 - Accounting Systems 153. Received cash for a sale ANSWER: a 154. Purchased supplies on account ANSWER: i 155. Purchased a computer for cash ANSWER: b 156. Paid for the equipment purchased on account ANSWER: g 157. Recorded the adjustment for supplies used during the month ANSWER: e Objective Short Answer 158. Mickey Co. does business in three regional segments: West, East, and Central. The following information is available: Segment

Current Year (in thousands)

Prior Year (in thousands)

East

$ 776,000

$ 664,000

West

824,000

596,000

Central

495,000

325,000

$2,095,000

$1,585,000

Total revenues

Prepare a horizontal analysis of the segment data. Round percentages to two decimal places. ANSWER:

Increase (Decrease) Segment East West Central Total revenues

Current Year Prior Year (in thousands) (in thousands) $ 776,000 $ 664,000 824,000 596,000 495,000 325,000 $2,095,000 $1,585,000

Amount $112,000 228,000 170,000 $510,000

Percent 16.87% 38.26 52.31 32.18

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.05-05 - 05-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 5 - Accounting Systems 159. Minnie Co. does business in three segments: Theme Parks, Movie Production, and Merchandise. The following information from the current year is available: Segment Theme Parks Movie Production Merchandise Total revenues

Current Year (in thousands) $ 776,000 824,000 495,000 $2,095,000

Prior Year (in thousands) $ 664,000 596,000 325,000 $1,585,000

Prepare a vertical analysis of the segment data. Round percentages to two decimal places. ANSWER:

Segment Theme Parks Movie Production Merchandise Total revenues

Current Year Prior Year Amount Amount (in thousands) Percent (in thousands) Percent $ 776,000 37.04% $ 664,000 41.89% 824,000 39.33 596,000 37.60 495,000 23.63 325,000 20.50 $2,095,000 100.00% $1,585,000 100.00% (rounded)

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.05-05 - 05-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic Subjective Short Answer 160. Briefly describe the three-step process of accounting system development. ANSWER: (1) Analysis. The needs of those who will use the business's financial information are identified. (2) Design. The system is designed so that it will meet the users' needs. (3) Implementation. The chosen system is put in place. DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-01 - 05-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 5 - Accounting Systems 161. Define and describe an accounting system. ANSWER: An accounting system is the methods and procedures for collecting, classifying, summarizing, and reporting a business’s financial and operating information. Accounting systems for large companies often record more than just basic transaction data (i.e. aircraft maintenance for an airline). These systems evolve through the process of (1) analysis of information needs, (2) system design, and (3) implementation of the design. Input from users is used to analyze and improve the system. DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-01 - 05-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 162. Utilizing the revenue journal below, journalize the following five transactions of Porshe Creations: (a) On March 20, Porshe sells 25 cell phone covers to Xtreme at $4.50 per cover on Invoice No. 887. (b) On March 21, Porshe sells 5 cell phone covers to Sidekick for $7.50 per cover on Invoice No. 908. (c) On March 22, Porshe sells 18 cell phone covers to Rock-On at $4.25 per cover on Invoice No. 938. (d) On March 26, Porshe sells 200 cell phone covers to Micro at $3.75 each on Invoice No. 959. (e) On March 29, Porshe sells 6 cell phone covers to Charmers for $8.35 each on Invoice No. 997. Revenue Journal Date

Invoice No.

Account Debited

Post. Ref.

Page 15 Accts. Rec. Dr. Sales Rev. Cr.

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Chapter 5 - Accounting Systems ANSWER:

Revenue Journal

Invoice Post. Date Account Debited No. Ref. Mar. 20 887 Xtreme 21 908 Sidekick 22 938 Rock-On 26 959 Micro 29 997 Charmers DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 15 Accts. Rec. Dr. Fees Earned Cr. 112.50 37.50 76.50 750.00 50.10

163. Discuss the process of posting from a revenue journal to the subsidiary ledger and to the general ledger. ANSWER: Each transaction is posted individually to customer accounts in the accounts receivable subsidiary ledger. This should be done on a regular basis to keep customer balances current. To provide a trail of the entries posted to the subsidiary and general ledgers, the source of the entries is indicated in the Posting Reference column by inserting the letter R for revenue journal and the page number of the revenue journal. A check mark is inserted in the Posting Reference column to indicate that the transaction has been posted to the subsidiary ledger. At the end of the month, the column total is posted to the general ledger as a debit to Accounts Receivable and a credit to Fees Earned. This total is equal to the sum of the month’s debits to the individual accounts in the subsidiary ledger. DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 5 - Accounting Systems 164. Two transactions were posted to the following customer account. NAME: Boogie Board Water Wear ADDRESS: 2340 Xtreme Surf Date Item July 1 Balance Invoice No. 6 406 Invoice No. 24 456

Post. Ref.

Debit

Credit

Balance 805 1,450

645

R42

710

CR56

740

Describe each transaction and the source of each posting. ANSWER:

July 6 July 24

Sold $645 on account to Boogie Board Water Wear, itemized on Invoice No. 406. Amount posted from page 42 of the revenue journal Cash of $710 was collected from Boogie Board Water Wear, Invoice No. 456. Amount posted from page 56 of the cash receipts journal.

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 165. The following purchase transactions occurred during August for Backcountry Kayak Excursions. Aug. 1 Purchased Kevlar kayaks (equipment) for $5,600 on account from Gear Inc. 6 Purchased kayak paddles (supplies) for $3,250 on account from Southland Co. 14 Purchased life vests (supplies) for $2,500 on account from Gear Inc. Record these transactions in a purchases journal.

Date

Account Credited

Post. Ref.

Purchases Journal Accounts Other Payable Supplies Accounts Cr. Dr. Dr.

Page 1 Post. Ref.

Amount

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Chapter 5 - Accounting Systems ANSWER:

Purchases Journal Account Date Credited Aug. 1 Gear Inc. 6 Southland Co. 14 Gear Inc.

Post. Ref.

Page 1

Accounts Other Payable Supplies Accounts Post. Cr. Dr. Dr. Ref. Amount 5,600 Equipment 5,600 3,250 3,250 2,500 2,500

DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 166. For each of the following businesses, explain how a purchases journal might be modified for the specific business. 1. North County Medical Center 2. Tri-County Farms, Inc. 3. Prescott’s Quick Lube and Tire Store ANSWER: The purchases journal for North County Medical Center may include columns for pharmaceutical products (IV solutions, injectable drugs), linens (sheets, blankets, pillows), and disposable medical equipment (needles, syringes). The purchases journal for Tri-County Farms, Inc. may include columns for the various types of seeds (corn, wheat), livestock (cows, hogs, sheep), fertilizer, and fuel. The purchases journal for Prescott’s Quick Lube and Tire Store may include columns for oil products (motor oil, grease), tires, and maintenance fluids (transmission fluid, antifreeze). DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 5 - Accounting Systems 167. For each of the following businesses, explain how a revenue journal might be modified for the specific business. 1. Jon’s Auto Repair Business 2. Esquire Movie Theater 3. Beach Hut Snack Bar, Restaurant, and Lounge ANSWER: Jon’s Auto Repair Business might modify the revenue journal to include columns for each type of major repair service. In addition, columns for warranty repairs and sales taxes may be added. Esquire Movie Theater might modify the revenue journal to include admissions, concessions, and game room revenues from video games in the lobby. Beach Hut Snack Bar, Restaurant, and Lounge might modify the revenue journal to include columns for snack bar sales, restaurant sales, and liquor sales in the lounge. In addition, columns for credit card charges and sales taxes may be added. DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 168. Explain what subsidiary ledgers are and give examples of three types of subsidiary ledgers that a business might use. ANSWER: A subsidiary ledger groups a large number of accounts with a common characteristic together. Each subsidiary ledger is summarized in the general ledger by a controlling account. Most commonly, companies use accounts receivable and accounts payable subsidiary ledgers to detail individual customer or vendor accounts. Businesses often use subsidiary ledgers to keep track of equipment purchased, its location, and other equipment data. DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 169. Two transactions were posted to the following customer account: NAME: Gen-X Products, Inc. Address: 123 My Way Date Item Mar. 1 Balance Invoice No. 10 987 Invoice No. 19 995

Post. Ref. √

Debit

R45 CR78

Credit

Balance 1,150 2,140

990 825

1,315

Describe each transaction and the source of each posting.

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Chapter 5 - Accounting Systems ANSWER:

Mar. 10

Sold $990 on account to Gen-X Products, Inc., itemized on Invoice No. 987. Amount posted from page 45 of the revenue journal. Collected cash of $825 from Gen-X Products, Inc. (Invoice No. 995). Amount posted from page 78 of the cash receipts journal.

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 170. Two transactions were posted to the following customer account: NAME: Roswell Communications, Inc. Address: 345 Alien Way Date Item Post. Ref. May 1 Balance √ Invoice No. 14 CR230 522 Invoice No. 25 R115 545

Debit

Credit

Balance 625

3,500

750 125 3,625

Describe each transaction and the source of each posting. ANSWER:

May 14

Collected cash of $625 from Roswell Communications, Inc. (Invoice No. 522). Amount posted from page 230 of the cash receipts journal. Sold $3,500 on account to Roswell Communications, Inc., itemized on Invoice No. 545. Amount posted from page 115 of the revenue journal.

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 171. Two transactions were posted to the following supplier’s (creditor’s) account: NAME: Banner Computer Services, Inc. Address: 890 Novice Lane Date Item Post. Ref. July 1 Balance √ 19 Invoice No. 45 P16 26 Invoice No. 39 CP36

Debit

Credit 1,755

3,500

Balance 5,645 7,400 3,900

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Chapter 5 - Accounting Systems ANSWER:

July 19

Purchased $1,755 on account from Banner Computer Services, Inc., itemized on Invoice No. 45. Amount posted from page 16 of the purchases journal. Paid $3,500 to Banner Computer Services, Inc. on account (Invoice No. 39). Amount posted from page 36 of the cash payments journal.

DIFFICULTY:

Account Credited

Post. Ref.

Fees Earned Cr.

Accounts Receivable Cr.

Cash Other Accounts Cr. Dr.

ANSWER:

The Cash column should be for debits (not credits). The Other Accounts column should be for credits (not debits). A better order of columns would be to place the Other Accounts Cr. column to the left of the Fees Earned Cr. column. DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 173. Two transactions were posted to the following supplier’s (creditor’s) account: NAME: Xample, Inc. Address: 567 Harrison Blvd. Date Item Nov. 1 Balance Invoice No. 9 564 Invoice No. 18 574

Post. Ref. √

Debit

CP45 P28

Credit

Balance 125 70

55 75

145

Describe each transaction and the source of each posting.

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Chapter 5 - Accounting Systems ANSWER:

Nov. 9

Paid $55 to Xample Inc. on account (Invoice No. 564). Amount posted from page 45 of the cash payments journal.

Purchased $75 on account from Xample Inc., itemized on Invoice No. 574. Amount posted from page 28 of the purchases journal.

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 174. Davidson, Inc. incurred the following transactions during the month of January. Record the appropriate ones in the cash receipts journal. If a transaction should not be recorded in the cash receipts journal, indicate where it should be posted. (a) (b) (c) (d) (e)

Date

On January 3, a one-year insurance policy was purchased for $2,400. The account number for Prepaid Insurance is 16. On January 5, Davidson, Inc. received a payment on account from Pasher Industries of $625. On January 12, Davidson, Inc. made sales on account of $3,500 and sales for cash of $2,300. The account number for Fees Earned is 41. On January 26, Davidson, Inc. received $1,250 in rent revenue from a tenant who leases a portion of its building. The account number for Rent Revenue is 44. On January 29, Davidson, Inc. received a payment on account from Gooden, Inc. for $2,000. Account Credited

Post. Ref.

Other Accounts Accounts Receivable Cr. Cr.

Cash Dr.

ANSWER: Account Date Credited Pasher Jan. 5 Industries 12 Fees Earned 26 Rent Revenue 29 Gooden, Inc.

Post. Ref.

Other Accounts Accounts Receivable Cr. Cr.

√ 41 44

√

625 2,300 1,250 2,000

Cash Dr. 625 2,300 1,250 2,000

Transaction (a) should be recorded in the cash payments journal and the sales on account in transaction (c) should be recorded in the revenue journal.

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Chapter 5 - Accounting Systems DIFFICULTY:

Date

On February 3, the company purchased $650 worth of supplies on account. The supplies account number is 15. On February 5, Harris, Inc. made a payment on account to Sanders Industries in the amount of $1,215 (Check No. 2214). On February 14, Harris, Inc. bought a one-year insurance policy for $1,500. The prepaid insurance account number is 14 (Check No. 2215). On February 22, Harris, Inc. paid monthly rent of $2,000. The rent expense account number is 63 (Check No. 2216). On February 26, Harris, Inc. purchased equipment making a down payment of $3,000 (Check No. 2217) and agreeing to pay the $4,000 balance in 30 days. The equipment account number is 18. Ck. No.

Account Debited

Post. Ref.

Other Accounts Accounts Payable Dr. Dr.

ANSWER: Date Feb. 5 14 22 26

Ck. No. 2214 2215 2216 2217

Account Debited Sanders Industries Prepaid Insurance Rent Expense Equipment

Cash Cr.

Other Post. Accounts Accounts Ref. Dr. Payable Dr. 1,215 √ 14 1,500 63 2,000 18 3,000

Cash Cr. 1,215 1,500 2,000 3,000

Transaction (a) should be recorded in the purchases journal as should the $4,000 balance due on the equipment in transaction (e). DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Page 55

Chapter 5 - Accounting Systems 176. The following purchases journal headings have been suggested for Tower Tree-Trimming Service Company. What problems do you see with these headings?

Date

Account Credited

Post. Ref.

Accounts Payable Dr.

Accounts Receivable Cr.

Cash Cr.

Other Accounts Dr.

ANSWER:

Accounts Receivable and Cash are not needed in the purchases journal, since this journal is for purchases on account by Tower. Accounts Payable should be a credit. There should be a Supplies Dr. column. Also, there should be two columns to the extreme right with the headings "Post. Ref." and "Amount." DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 177. List the four most common special journals used in accounting and describe the transactions recorded in each journal. ANSWER: Purchases journal: for purchases made on account Revenue journal: for sales made on account Cash receipts journal: for all cash receipt transactions Cash payments journal: for all cash payment transactions DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 178. Two transactions were posted to the following creditor’s account: NAME Windsurf, Inc. ADDRESS 343 Coastline Road Date Item Aug. 1 Balance 8 Invoice No. 333 15 Invoice No. 567

Post. Ref.

Debit

CP38 P11

Credit

Balance 1,210

—

1,210 735

735

Describe each transaction and the source of each posting.

Page 56

Chapter 5 - Accounting Systems ANSWER:

Aug. 8 Aug. 15

Payment of $1,210 to Windsurf, Inc. on account (Invoice No. 333). Amount posted from page 38 of the cash payments journal. Purchased $735 on account from Windsurf, Inc. itemized on Invoice No. 567. Amount posted from page 11 of the purchases journal.

DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 179. If a two-column (all-purpose) general journal, a revenue journal, and a cash receipts journal are used, indicate the journal in which each of the following transactions should be recorded: (a) Investment of additional cash in the business by the owner (b) Rendering of services for cash (c) Rendering of services on account (d) Receipt of cash on account from a customer (e) Sale of office supplies for cash, at cost, to a neighboring business (f) Adjustment to record supplies used at the end of the year (g) Closing of drawing account at the end of the year ANSWER: (a) cash receipts journal (b) cash receipts journal (c) revenue journal (d) cash receipts journal (e) cash receipts journal (f) general journal (g) general journal DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 180. If a two-column (all-purpose) general journal, a purchases journal, and a cash payments journal are used, indicate the journal in which each of the following transactions should be recorded: (a) (b) (c) (d) (e) (f) (g) (h)

Payment of rent Purchase of supplies on account Purchase of computer on account Purchase of supplies for cash Advance payment of a one-year fire insurance policy on the office Adjustment to record accrued salaries at the end of the period Adjustment to record depreciation at the end of the month Payment of an account payable

Page 57

Chapter 5 - Accounting Systems ANSWER:

(a) cash payments journal (b) purchases journal (c) purchases journal (d) cash payments journal (e) cash payments journal (f) general journal (g) general journal (h) cash payments journal DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 181. The posting references in the following purchases journal are indicated by letters. Identify each posting reference [(a) through (i)] as representing (1) a posting to a general ledger account, (2) a posting to a subsidiary ledger account, or (3) that no posting is required.

Account Credited

Date

July 3 7 14 26 31

Morton Company Jackson Co. Fallon Inc. Simpson Bros.

Account

Equipment

PURCHASES JOURNAL Accounts Office Post. Payable Supplies Ref. Cr. Dr. (a) (b) (c) (d)

1,150 4,800 7,000 2,350 15,300 (e)

Other Accounts Dr.

Page 1 Store Supplies Dr. 1,150

4,800 7,000 11,800 (f)

Post Ref.

(h)

1,150 (g)

Amount

1,950 1,950 (i)

Page 58

Chapter 5 - Accounting Systems ANSWER:

(1) General ledger account: (e), (f), (g), (h) (2) Subsidiary ledger account: (a), (b), (c), (d) (3) No posting required: (i) DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 182. The following are selected transactions related to purchases on account and cash payments completed during April of the current year. Apr. 1 Issued Check No. 60 in payment of rent for month, $2,400. 5 Purchased office supplies from Clauson Co., $850. 9 Issued Check No. 61 to Dame Co. for $9,750 for cash purchase of equipment. 10 Purchased store supplies from Ewing Co., $425. 15 Issued Check No. 62 to Clauson Co. in payment of April 5 invoice. 17 Purchased store supplies from Patton Co., $7,500. 20 Issued Check No. 63 to Ewing Co. in payment of April 10 invoice of $425. 25 Purchased equipment from Sloan Co., $7,750. 27 Issued Check No. 64 to Patton Co. for partial payment of the April 17 invoice, $4,000. 30 Purchased office supplies from Winthrop Co., $400. (a) (b) (c)

Date

Record the transactions in the purchases and cash payments journals. Total and rule the purchases and cash payments journals as of April 30. Indicate the method of posting the individual items and the totals of the purchases and cash payments journals in the following manner: (1) For individual items and totals to be posted to the subsidiary ledger or not to be posted, insert a check mark in the Post. Ref. column or below the totals. (2) For individual items and totals to be posted to the general ledger, insert the letter "G" (as a substitute for specific account numbers) in the Post. Ref. column or below the totals.

Ck. No.

CASH PAYMENTS JOURNAL Other Accounts Account Post. Accounts Payable Debited Ref. Dr. Dr.

PURCHASES JOURNAL

Date

Account Credited

Post. Ref.

Accounts Payable Cr.

Office Supplies Dr.

Other Accounts Dr.

Post. Ref.

Amount

Page 11 Cash Cr.

Page 22 Store Supplies Dr.

Page 59

Chapter 5 - Accounting Systems ANSWER:

Date Apr. 1 9 15 20 27 30

CASH PAYMENTS JOURNAL Page 11 Other Accounts Check Account Post. Accounts Payable Cash No. Debited Ref. Dr. Dr. Cr. 60 Rent Expense G 2,400 2,400 61 Equipment G 9,750 9,750 62 Clauson Co. √ 850 850 63 Ewing Co. √ 425 425 64 Patton Co. √ 4,000 4,000 12,150 5,275 17,425 (√) (G) (G) PURCHASES JOURNAL

Date Apr. 5 10 17 25 30 30

Account Credited Clauson Co. Ewing Co. Patton Co. Sloan Co. Winthrop Co.

Office Supplies Dr. 850

Post. Ref. √ √ √ √ √

Page 22

Accounts Store Payable Supplies Cr. Dr. 850 425 425 7,500 7,500 7,750 400 16,925 7,925 (G) (G)

Other Accounts Dr.

Post. Ref.

Amount

Equipment

7,750

400 1,250 (G)

7,750 (√ )

DIFFICULTY:

Page 60

Chapter 5 - Accounting Systems 183. Listed below are selected transactions completed by Ridge Company during March of the current year. Mar. 5 Rendered services on account to Quinton Co., Invoice No. 92, $3,250. 10 Rendered services on account to Martin Inc., Invoice No. 93, $4,500. 13 Received $5,000 in payment of monthly rent, which was due on March 1. 15 Received payment from Quinton Co. for invoice of March 5. 19 Received payment from Martin Inc. for balance due on invoice of March 10. 20 Received amount due from Thomas Co. on sale made in February, $5,200. 31 Recorded cash from services rendered for cash during the month, $15,750. (a) (b) (c)

Date

ANSWER:

Record the transactions in the revenue journal and cash receipts journal. Total and rule the revenue and cash receipts journals. Indicate the method of posting the individual items and the columnar totals of the revenue and cash receipts journals in the following manner: (1) For individual items and totals to be posted to the subsidiary ledger or not to be posted, insert a check mark in the Post. Ref. column or below the totals. (2) For individual items and totals to be posted to the general ledger, insert the letter "G" (as a substitute for specific account numbers) in the Post. Ref. column or below the totals.

Invoice No.

Account Credited

REVENUE JOURNAL Post. Account Debited Ref.

Page 10 Accts. Rec. Dr. Fees Earned Cr.

CASH RECEIPTS JOURNAL Other Accounts Post. Accounts Receivable Ref. Cr. Cr.

Page 23 Cash Dr.

REVENUE JOURNAL Post. Date Invoice No. Account Debited Ref. Mar. 5 92 Quinton Co. √ 10 93 Martin Inc. √ 31

Page 10 Accts. Rec. Dr. Fees Earned Cr. 3,250 4,500 7,750 (G)(G)

CASH RECEIPTS JOURNAL Page 23 Other Accounts Account Post. Accounts Receivable Cash Date Credited Ref. Cr. Cr. Dr. Mar. 13 Rent Revenue G 5,000 5,000 15 Quinton Co. √ 3,250 3,250 19 Martin Inc. √ 4,500 4,500 20 Thomas Co. √ 5,200 5,200 31 Services Revenue G 15,750 15,750 31 20,750 12,950 33,700 (√) (G) (G)

Page 61

Chapter 5 - Accounting Systems DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 184. Down-Under, an aquatic supply store, makes the following five payments during August. Journalize them in the cash payments journal as appropriate. (a) On August 2, Down-Under paid Pondmaster, Inc. with Check No. 6420 for 6 pumps at $435.00 each. The pumps had been purchased in July on account. (b) On August 10, Down-Under purchased $785.00 of office supplies from Business Systems with Check No. 6421. (c) On August 15, Down-Under paid Aqua Magic $215.00 on account with Check No. 6422. (d) On August 27, Down-Under paid an invoice for merchandise received earlier from Spindrifter, Inc. for 8 drains at $73.50 each with Check No. 6423. (e) On August 31, Down-Under purchased $65.00 of koi clay from The Natural Wonder Company by writing Check No. 6424. (Record in Pond Supplies Expense.) Cash Payments Journal Date

Ck. No.

Account Debited

Post. Ref.

Page 17 Other Accounts Accounts Payable Cash Cr. Dr. Dr.

ANSWER: Cash Payments Journal Ck. Post. Date No. Account Debited Ref. Aug. 2 6420 Pondmaster, Inc. 10 6421 Office Supplies 15 6422 Aqua Magic 27 6423 Spindrifter, Inc. 31 6424 Pond Supplies Expense DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 17 Other Accounts Accounts Payable Cash Dr. Dr. Cr. 2,610.00 2,610.00 785.00 785.00 215.00 215.00 588.00 588.00 65.00 65.00

Page 62

Chapter 5 - Accounting Systems 185. Voyager Electronic Services has three customers in its accounts receivable subsidiary ledger with beginning balances as follows: Fred Yao Ming, $1,150.00 Kohl Townson, $850.00 Chandra Jahi, $1,075.00 Record the following transactions in a general journal. Then post to the accounts receivable account in the general ledger and to the customer accounts in the accounts receivable subsidiary ledger. June

3 10 15 16 23

Date

Kohl Townson paid $325.00 on account. Chandra Jahi purchased $475.00 on account. Fred Yao Ming paid $395.00 on account. Fred Yao Ming purchased $685.00 on account. Kohl Townson purchased $155.00 on account. General Journal Post. Description Ref.

GENERAL LEDGER Account Accounts Receivable Post. Date Item Ref. Debit Credit June 1 Beg. balance √

Page 41 Debit

Credit

Account No. 12 Balance Debit Credit 3,075.00

Page 63

Chapter 5 - Accounting Systems ACCOUNTS RECEIVABLE SUBSIDARY LEDGER Fred Yao Ming Post. Date Item Ref. Debit Credit Balance 1,150.00 June 1 Beg. balance √

Kohl Townson Date Item June 1 Beg. balance

Post. Ref.

Debit

Credit

Balance

√

850.00

Chandra Jahi Item

Post. Ref.

June 1 Beg. balance

√

Date

Debit

Credit

Balance 1,075.00

ANSWER: General Journal Post. Description Ref.

Date June 3 Cash A/R—Kohl Townson 10 A/R—Chandra Jahi Sales

15 Cash A/R—Fred Yao Ming

Page 41

12/√

Debit Credit 325.00 325.00

12/√

475.00 475.00 395.00

12/√

16 A/R—Fred Yao Ming Sales

12/√

23 A/R—Kohl Townson Sales

12/√

395.00 685.00 685.00 155.00 155.00

Page 64

Chapter 5 - Accounting Systems GENERAL LEDGER Account Accounts Receivable Date Item Post. Ref. June 1 Beg. balance √ 3 J41 10 J41 15 J41 16 J41 23 J41

Debit

475.00 685.00 155.00

Account No. 12 Balance Credit Debit Credit 3,075.00 325.00 2,750.00 3,225.00 395.00 2,830.00 3,515.00 3,670.00

ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER Fred Yao Ming Post. Date Item Debit Credit Ref. June 1 Beg. balance √ 15 J41 395.00 16 J41 685.00

Balance 1,150.00 755.00 1,440.00

Kohl Townson Date Item June 1 Beg. balance 3 23

Post. Ref.

Debit

Credit

√ J41 J41

325.00 155.00

Balance 850.00 525.00 680.00

Chandra Jahi Date Item June 1 Beg. balance 10

Post. Ref.

Debit

Credit

√ J41

475.00

Balance 1,075.00 1,550.00

DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 65

Chapter 5 - Accounting Systems 186. Read each transaction and identify the appropriate journal in which it should be recorded. 1. Owner withdrew supplies 2. Sale made on account 3. Payment to vendor on account 4. Payment received from customer on account 5. Purchases on account 6. Adjusting journal entry for supplies used 7. Owner withdrew cash 8. Company borrows money from bank 9. Record monthly depreciation 10. Close revenue accounts at month's end ANSWER: 1. general journal 2. revenue journal 3. cash payments journal 4. cash receipts journal 5. purchases journal 6. general journal 7. cash payments journal 8. cash receipts journal 9. general journal 10. general journal DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 187. Read each transaction and identify the journal in which the transaction should be recorded. 1. Recorded adjusting journal entry for accrued interest 2. Performed advising services on account 3. Purchased office supplies on account 4. Borrowed money for expansion project 5. Received $500 from Tool Tech. on account 6. Owner withdrew cash for personal use 7. Paid monthly rent 8. Recorded depreciation on equipment 9. Completed Job 34aG for services provided to Beard Co. 10. Purchased inventory on account ANSWER: 1. general journal 2. revenue journal 3. purchases journal 4. cash receipts journal 5. cash receipts journal 6. cash payments journal 7. cash payments journal 8. general journal 9. revenue journal 10. purchases journal © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Page 66

Chapter 5 - Accounting Systems DIFFICULTY:

Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 188. The posting references in the following revenue journal are indicated by letters. Identify each posting reference [(a) through (h)] as representing (1) a posting to a general ledger account, (2) a posting to a subsidiary ledger account, or (3) that no posting is required. REVENUE JOURNAL Date Apr. 3 8 13 17 25 30 30

Invoice No. 190 191 192 193 194 195

Account Debited Hill Company North Supply Macon Inc. White Products Easton Supply Karson Enterprises

Post Ref. (a) (b) (c) (d) (e) (f)

Page 25 Acct. Rec. Dr. Fees Earned Cr. 4,750 5,025 2,100 6,000 2,250 3,750 23,875 (g) (h)

ANSWER:

(1) General ledger account: (g), (h) (2) Subsidiary ledger account: (a), (b), (c), (d), (e), (f) (3) No posting required: none DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 189. Sunrise Coffee Shop, in an effort to streamline its accounting system, has decided to utilize a cash receipts journal. Record the following transactions for the first two weeks in March, total the columns, and include the posting references. A partial chart of accounts is given below. After recording the transactions, indicate if there are any additional columns you would add to this journal.

Date

Account Credited

Cash Receipts Journal Other Beverage Post. Accounts Revenue Ref. Cr. Cr.

Food Revenue Cr.

Cash Cr.

Page 67

Chapter 5 - Accounting Systems Mar. 1 Cash received for beverages, $375. 1 Cash received for food, $250. 1 Cash received for customer sales of Sunrise’s signature coffee mugs, $130. 7 Cash received for beverages, $480. 7 Cash received for food, $325. 7 Cash received for customer sales of Sunrise’s signature coffee mugs, $115. 10 Cash received on account from Central.com, $900. 10 Cash 12 Accounts Receivable 15 Retail Items

Chart of Accounts (Partial) 41 Beverage Revenue 42 Food Revenue 43 Retail Revenue

ANSWER: Cash Receipts Journal Beverage Food Post. Other Revenue Revenue Cash Date Account Credited Ref. Cr. Cr. Cr. Dr. Mar. 1 Cash sales 375 375 √ 1 Cash sales 250 250 √ 1 Retail Revenue 43 130 130 7 Cash sales 480 480 √ 7 Cash sales 325 325 √ 7 Retail Revenue 43 115 115 10 A/R—Central.com 12/√ 900 900 1,145 855 575 2,575 (10) (41) (42) √ Yes. Retail Revenue Cr. and possibly Accounts Receivable Cr. Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.05-02 - 05-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.18 - Special Journals ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DIFFICULTY:

190. Explain whether each of the following would usually be used in a computerized accounting system and why or why not. 1. Special journals 2. Accounts receivable control accounts 3. Electronic invoice form 4. Month-end postings to the general ledger ANSWER: Special journals and accounts receivable control accounts are generally not used in computerized systems. Instead, electronic forms like electronic invoice forms are used to record original transactions. Since the computer automatically posts transactions from electronic forms to the general ledger and individual accounts at the time the transactions are recorded, month-end postings are not necessary in a computerized system. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Page 68

Chapter 5 - Accounting Systems DIFFICULTY:

Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-03 - 05-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.02 - Leveraging Technology ACCT.AICPA.FN.03 - Measurement BUSPROG: Technology 191. The discovery and correction of errors is important in a computerized system. What kinds of errors might occur in these systems? What type(s) of errors will be prevented in a computerized system? ANSWER: Potential errors: 1. Failing to record transactions. 2. Recording a transaction more than once. 3. Recording a transaction in incorrect accounts. 4. Entering an incorrect number in both the debit and credit parts of the transaction. With a computerized system, you cannot process a transaction unless debits equal credits. Additionally, you cannot post to the wrong account, as posting occurs automatically. DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-03 - 05-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 192. Identify the three main advantages of a computerized accounting system over a manual accounting system. ANSWER: 1. Simplification of the recording process by recording transactions electronically and posting to both the general and subsidiary ledgers at the same time. 2. Generally more accurate than manual systems. 3. Provides management with current balance information to support decision making since account balances are updated as transactions are entered. DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-03 - 05-03 STATE STANDARDS: United States - AK - AICPA BB Leveraging ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Technology

Page 69

Chapter 5 - Accounting Systems 193. Define the meaning of the terms B2C and B2B as they relate to e-commerce. ANSWER: B2C: Business to consumer e-commerce: businesses sell directly to consumers via the Internet. B2B: Business to business e-commerce: transactions are conducted between two businesses via the Internet. DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-04 - 05-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.FN.02 - Leveraging Technology ACCT.AICPA.FN.03 - Measurement BUSPROG: Technology 194. Describe and discuss e-commerce. ANSWER: E-commerce is the term for using the Internet to perform business transactions. B2C ecommerce involves transactions between businesses and consumers. B2B ecommerce involves transactions between two businesses. Currently e-commerce sales are over $340 billion in retail sales, or over 7% of all retail sales. B2C allows consumers to shop and receive goods at home and improves the speed and efficiency of transactions. DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-04 - 05-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.03 - Business Forms ACCT.AICPA.FN.02 - Leveraging Technology ACCT.AICPA.FN.03 - Measurement BUSPROG: Technology 195. The Internet creates opportunities for improving the speed and efficiency of transactions. Name and describe three key areas besides e-commerce where the Internet is being used for business purposes. ANSWER: 1. Supply chain management (SCM): Internet applications to plan supply needs and coordinate them with suppliers. 2. Customer relationship management (CRM): Internet applications to plan and coordinate marketing and sales efforts. 3. Product life-cycle management (PLM): Internet applications to plan and coordinate the product development and design process. DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.05-04 - 05-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.AICPA.FN.02 - Leveraging Technology ACCT.AICPA.FN.03 - Measurement BUSPROG: Technology

Page 70

Chapter 5 - Accounting Systems 196. Payton Company has the following segment revenues for the two most recent years. Segment United States Canada Other countries Total revenues

Current Year (in millions) $ 825.00 325.50 215.50 $1,366.00

Prior Year (in millions) $ 600.00 345.50 168.50 $1,114.00

Prepare a horizontal analysis of the segment data. Round to one decimal place. ANSWER:

Increase (Decrease) Segment

Current Year (in millions) $ 825.00 325.50 215.50 $1,366.00

Prior Year (in millions) $ 600.00 345.50 168.50 $1,114.00

United States Canada Other countries Total revenues DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.05-05 - 05-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Amount

Percent

$225.00 (20.0) 47.00 $252.00

37.5% (5.8) 27.9 22.6

197. Payton Company has the following segment revenues for the two most recent fiscal years. Segment China Canada Other countries Total revenues

Current Year (in millions) $ 775.00 325.50 215.50 $1,316.00

Prior Year (in millions) $ 650.00 245.50 168.50 $1,064.00

Prepare a vertical analysis of the segment data. Round to one decimal place. ANSWER: Segment China. Canada Other countries Total revenues

Current Year Amount Percent (in millions) $ 775.00 58.9% 325.50 24.7 215.50 16.4 $1,316.00 100.0%

Prior Year Amount Percent (in millions) $ 650.00 61.1% 245.50 23.1 168.50 15.8 $1,064.00 100.0%

Page 71

Chapter 5 - Accounting Systems DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.05-05 - 05-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 198. Maximilian Corporation provided revenue disclosures for the current year by its major product segments in the notes to its financial statements as follows: Major Product Segments Petroleum-based products Industrial chemicals Refined chemical products Food additives Emulsifiers Pesticides Salts Wetting agents Total revenues

Current Year (in millions) $10,450 9,460 8,575 7,325 6,900 5,870 4,545 3,215 $56,340

Prepare a vertical analysis. Round to one decimal place. ANSWER: Major Product Segments

Current Year (in millions) $10,450 9,460 8,575 7,325 6,900 5,870 4,545 3,215 $56,340

Petroleum-based products Industrial chemicals Refined chemical products Food additives Emulsifiers Pesticides Salts Wetting agents Total revenues *Difference in percentages due to rounding. DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.05-05 - 05-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Percent 18.5% 16.8 15.2 13.0 12.2 10.4 8.1 5.7 100.0%*

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Chapter 5 - Accounting Systems 199. Eastwood Publishing reports the following segment data regarding its textbook sales: Segment College textbooks High school textbooks Elementary school textbooks Total revenues

Current Year $ 78,000 129,000 105,000 $312,000

Prior Year $ 55,000 115,000 121,000 $291,000

Perform a horizontal analysis and a vertical analysis for Eastwood Publishing. Round to one decimal place. ANSWER: Horizontal Analysis: Segment Current Year Prior Year College textbooks $ 78,000 $ 55,000 High school textbooks 129,000 115,000 Elementary school textbooks 105,000 121,000 Total revenues $312,000 $291,000

Increase (Decrease) Amount Percent $ 23,000

41.8%

14,000

12.2

(16,000) $ 21,000

(13.2) 7.2

Vertical Analysis: Segment College textbooks High school textbooks Elementary school textbooks Total revenues

Current Year Prior Year Amount Percent Amount Percent $ 78,000 25.0% $ 55,000 18.9% 129,000 41.3 115,000 39.5 105,000 33.7 121,000 41.6 $312,000 100.0% $291,000 100.0%

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.05-05 - 05-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 200. What is a business segment? How can business segments be analyzed? ANSWER: A business segment is a subset of a business. Businesses may be segmented by region, product or service, or type of customer. Segment analysis uses horizontal and vertical comparisons to analyze the segments’ contributions to the overall performance of the company. DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.05-05 - 05-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 5 - Accounting Systems 201. 123 Kids TV operates in five major international segments. Segment United States Canada England China Brazil Total revenues

Current Year (in millions) $ 9,132 8,248 4,734 11,700 5,645 $39,459

Prior Year (in millions) $ 8,528 6,391 4,141 13,299 6,391 $38,750

Prepare a horizontal analysis of the segment data. Round percentages to two decimal places. ANSWER:

Increase (Decrease) Segment United States Canada England China Brazil Total revenues

Current Year Prior Year (in millions) (in millions) Amount $ 9,132 $ 8,528 $ 604 8,248 6,391 1,857 4,734 4,141 593 11,700 13,299 (1,599) 5,645 6,391 (746) $39,459 $38,750 $ 709

Percent 7.08% 29.06 14.32 (12.02) (11.67) 1.83

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.05-05 - 05-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 5 - Accounting Systems 202. Connie and Jill operate Reardon's Bakery which has the following segment revenues for the most recent two fiscal years. Prepare a vertical analysis. Round percentages to two decimal places. Segment Cakes Cupcakes Desserts Beverages Total revenues

Current Year (in thousands) $ 691,000 512,000 417,000 875,000 $2,495,000

ANSWER: Segment Cakes Cupcakes Desserts Beverages Total revenues

Prior Year (in thousands) $ 662,000 550,000 468,000 815,000 $2,495,000

Current Year Prior Year Amount Amount (in thousands) Percent (in thousands) Percent $ 691,000 27.70% $ 662,000 26.53% 512,000 20.52 550,000 22.04 417,000 16.71 468,000 18.76 875,000 35.07 815,000 32.67 $2,495,000 100.00% $2,495,000 100.00%

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.05-05 - 05-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses True / False 1. The most important differences between a service business and a retail business are reflected in their operating cycles and financial statements. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 2. In a merchandise business, sales minus operating expenses equals net income. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 3. Cost of merchandise sold is the amount that the merchandising company pays for the merchandise it intends to sell. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 4. Service businesses provide services for income, while a merchandising business sells merchandise. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 5. In retail businesses, inventory is reported as a current asset. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 6. Under a perpetual inventory system, the cost of merchandise on hand at the end of the year can only be determined by reviewing the ledger. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 7. In a perpetual inventory system, the merchandise inventory account is only used to reflect the beginning inventory. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 8. Freight is the amount paid by the seller to deliver merchandise sold to a customer under FOB shipping point. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 9. Freight is considered a cost of inventory under FOB shipping point. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 10. The cost of merchandise inventory is limited to the purchase price less any purchase discounts. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 11. Under the perpetual inventory system, when a sale is made, both the sale and cost of merchandise sold are recorded. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 12. If payment is due by the end of the month in which the sale is made, the invoice terms are expressed as n/30. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 13. When merchandise that was sold is returned, a credit to sales returns and allowances is made. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 14. In a perpetual inventory system, when merchandise is returned to the supplier, Cost of Merchandise Sold is debited as part of the transaction. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 15. Customer Refunds Payable is an account used to record merchandise returns from customers. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 6 - Accounting for Merchandising Businesses 16. Estimated Returns Inventory is an account used when adjusting for expected merchandise sales in the next period. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 17. Sales to customers who use bank credit cards, such as MasterCard and VISA, are generally treated as credit sales. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 18. Large businesses that make sales to customers who use credit cards, such as American Express, generally treat these sales as credit sales. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 19. Most retailers record all credit card sales as credit sales. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 6 - Accounting for Merchandising Businesses 20. The fees associated with credit card sales are periodically recorded as expenses. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 21. A seller may grant a buyer a reduction in selling price and this is called a customer discount. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 22. A sales discount encourages customers to pay accounts more quickly than if a discount were not available. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 23. Merchandise Inventory normally has a debit balance. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 6 - Accounting for Merchandising Businesses 24. A buyer who acquires merchandise under credit terms of 1/10, n/30 has 30 days after the invoice date to take advantage of the sales discount. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 25. In a perpetual inventory system, merchandise returned to vendors reduces the merchandise inventory account. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 26. Under the perpetual inventory system, a company purchases merchandise on terms 2/10, n/30. The entry to record the purchase will include a debit to Cash and a credit to Sales. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 27. Purchases of merchandise are typically credited to the merchandise inventory account under the perpetual inventory system. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 6 - Accounting for Merchandising Businesses 28. When the seller offers a sales discount, even if borrowing has to be done, it is generally advantageous for the buyer to pay within the discount period. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 29. Buyers and sellers do not normally record the list prices of merchandise and the trade discounts in accounts. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 30. When a large quantity of merchandise is purchased, a reduction allowed on the sale price is called a trade discount. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 31. A deduction allowed to wholesalers and retailers from the price of merchandise listed in catalogs is called a cash discount. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 32. Sellers and buyers are required to record trade discounts. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 33. If the ownership of merchandise passes to the buyer when the seller delivers the merchandise to the carrier, the terms are stated as FOB destination. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 34. A sale of $750 on account subject to a sales tax of 6% would be recorded as an account receivable of $750. a. True b. False ANSWER: False RATIONALE: Accounts Receivable = Sales + Sales Tax Payable = $750 + ($750 × 6%) = $750 + $45 = $795 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 35. When merchandise is sold for $600 plus a 6% sales tax, the sales account should be credited for $636. a. True b. False ANSWER: False RATIONALE: The sales account is credited for the amount of the sale, which is $600. DIFFICULTY: Bloom's: Applying Moderate LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 36. The abbreviation FOB stands for "free on board." a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 37. Merchandise is sold for $3,600, terms FOB destination, 2/10, n/30, with prepaid freight costs of $150. The amount of the sales recorded is $3,528. a. True b. False ANSWER: True RATIONALE: Amount of Sales Recorded = Sales – Sales Discount = $3,600 – (2% × $3,600) = $3,600 – $72 = $3,528 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 38. If the buyer bears the freight costs related to a purchase, the terms are said to be FOB destination. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 39. When the terms of sale are FOB shipping point, the buyer should pay the freight charges. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 40. If merchandise costing $3,500, terms FOB destination, 2/10, n/30, with prepaid freight costs of $125, is paid within 10 days, the amount of the purchases discount is $70. a. True b. False ANSWER: True RATIONALE: Credit terms of 2/10, n/30, provides a 2% discount if the invoice is paid within 10 days. If not paid within 10 days, the total invoice amount is due within 30 days. Amount of Purchase Discount = 2% × Cost of Merchandise = 2% × $3,500 = $70 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 41. The chart of accounts for a merchandising business would include an account called Delivery Expense. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 42. There is no difference between the recording of cash sales and the recording of MasterCard or VISA sales. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 43. When companies use a perpetual inventory system, the recording of the purchase of inventory will include a debit to Purchases. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 44. Most companies will not take a purchase discount, because 1% or 2% discounts are insignificant. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 45. The seller may prepay the freight costs even though the terms are FOB shipping point. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 46. The seller records the sales tax as part of the sales amount. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 6 - Accounting for Merchandising Businesses 47. Title to merchandise shipped FOB shipping point passes to the buyer upon delivery of the merchandise to the buyer's place of business. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 48. Purchased goods in transit, shipped FOB destination, should be excluded from ending inventory of the buyer. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 49. Because many companies use computerized accounting systems, periodic inventory is widely used. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 50. If the perpetual inventory system is used, an account entitled Cost of Merchandise Sold is included in the general ledger. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 51. Purchased goods in transit should be included in the ending inventory of the buyer if the goods were shipped FOB shipping point. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 52. A business using the perpetual inventory system, with its detailed subsidiary records, does not need to take a physical inventory. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 53. The adjusting entry to record inventory shrinkage would generally include a debit to Cost of Merchandise Sold. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 54. On the income statement in the single-step form, the total of all expenses is deducted from the total of all revenues. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 6 - Accounting for Merchandising Businesses 55. The form of the balance sheet in which assets, liabilities, and owner's equity are presented in a downward sequence is called the report form. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 56. Sales is equal to the cost of merchandise sold less the gross profit. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 57. Income that cannot be associated definitely with operations, such as a gain from the sale of a fixed asset, is listed as Other Income on the multiple-step income statement. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 58. In a multiple-step income statement, the dollar amount for income from operations is always the same as net income. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 59. The single-step income statement is easier to prepare, but a criticism of this format is that gross profit and income from operations are not readily available. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 60. Gross profit minus selling expenses equals net income. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 61. The account form of the balance sheet is presented in a downward sequence in three sections. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 62. In the merchandising income statement, sales will be reduced by administrative expenses to arrive at operating income. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 63. As we compare a merchandise business to a service business, the financial statement that changes the most is the balance sheet. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 64. Cost of merchandise sold is often the largest expense on a merchandising company income statement. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 65. When a merchandising business is compared to a service business, the financial statement that is not affected by that change is the statement of owner's equity. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 66. Other income and expenses are items that are not related to the primary operating activity. a. True b. False ANSWER: True DIFFICULTY: Challenging Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 6 - Accounting for Merchandising Businesses 67. Closing entries for a merchandising business are not similar to those for a service business. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 68. The ratio of sales to assets measures how effectively a business is using its assets to generate sales. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-05 - 06-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 69. Under the periodic inventory system, the cost of merchandise sold is equal to the beginning merchandise inventory plus the cost of merchandise purchased plus the ending merchandise inventory. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 70. In a periodic inventory system, the cost of merchandise purchased includes the cost of freight in. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 71. In the periodic inventory system, purchases of merchandise for resale are debited to the purchases account. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 72. Under the periodic inventory system, the cost of merchandise sold is recorded when sales are made. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 73. The accounts Purchases, Purchases Returns and Allowances, Purchases Discounts, and Freight In are found on the balance sheet. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses Multiple Choice 74. Merchandise inventory is classified on the balance sheet as a a. current liability b. current asset c. long-term asset d. long-term liability ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 75. Which of the following is not a difference between a retail business and a service business? a. in what is sold b. the inclusion of gross profit on the income statement c. accounting equation d. merchandise inventory included on the balance sheet ANSWER: c DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 76. In a merchandising business, operating income plus operating expenses is equal to a. cost of merchandise sold b. cost of merchandise available for sale c. sales d. gross profit ANSWER: d DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 77. What is the term applied to the excess of revenue from sales over the cost of merchandise sold? a. gross profit b. income from operations c. net income d. gross sales ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 78. Calculate income from operations for Jonas Company based on the following data: Sales Operating expenses Cost of merchandise sold a. $485,500 b. $711,500 c. $173,500 d. $226,000 ANSWER: RATIONALE:

$764,000 52,500 538,000

c Income from Operations = Sales – Cost of Merchandise Sold – Operating Expenses = $764,000 – $538,000 – $52,500 = $173,500 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 79. Gross profit is equal to a. sales plus cost of merchandise sold b. sales plus selling expenses c. sales less selling expenses d. sales less cost of merchandise sold ANSWER: d DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 6 - Accounting for Merchandising Businesses 80. When comparing a retail business to a service business, the financial statement that changes the most is the a. balance sheet b. income statement c. statement of owner's equity d. statement of cash flows ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 81. Calculate the gross profit for Jefferson Company based on the following: Sales Selling expenses Cost of merchandise sold a. $495,500 b. $183,500 c. $721,500 d. $226,000 ANSWER: RATIONALE: DIFFICULTY:

$764,000 42,500 538,000

d Gross Profit = Sales – Cost of Merchandise Sold = $764,000 – $538,000 = $226,000 Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 82. The inventory system employing accounting records that continuously disclose the amount of inventory is called a. retail b. periodic c. physical d. perpetual ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 83. Dollar Co. sold merchandise to Pound Co. on account, $25,500, terms 2/15, net 45. Pound Co. paid the invoice within the discount period. What is the amount of sales from the above transactions? a. $25,500 b. $26,010 c. $24,990 d. $16,000 ANSWER: c RATIONALE: Amount of Sales = Invoice Amount – Sales Discount = $25,500 – (2% × $25,500) = $25,500 – $510 = $24,990 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 84. The primary difference between a periodic and perpetual inventory system is that a a. periodic system determines the inventory on hand only at the end of the accounting period b. periodic system keeps a record showing the inventory on hand at all times c. periodic system provides an easy means to determine inventory shrinkage d. periodic system records the cost of the sale on the date the sale is made ANSWER: a DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 85. Using a perpetual inventory system, the entry to record the sale of merchandise on account includes a a. debit to Sales b. debit to Merchandise Inventory c. credit to Merchandise Inventory d. credit to Accounts Receivable ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 86. Which of the following accounts has a normal debit balance? a. Accounts Payable b. Merchandise Inventory c. Sales d. Interest Revenue ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 87. Merchandise is ordered on November 10; the merchandise is shipped by the seller and the invoice is prepared, dated, and mailed by the seller on November 13; the merchandise is received by the buyer on November 18; the entry is made in the buyer's accounts on November 20. The credit period begins with what date? a. November 10 b. November 13 c. November 18 d. November 20 ANSWER: b DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 88. Using a perpetual inventory system, the entry to record the return from a customer of merchandise sold on account includes a a. credit to Customer Refunds Payable b. debit to Merchandise Inventory c. credit to Merchandise Inventory d. debit to Cash ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 89. If merchandise sold on account is returned to the seller, the seller may inform the customer of the details by issuing a a. sales invoice b. purchase invoice c. credit memo d. debit memo ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 90. The arrangements between buyer and seller as to when payments for merchandise are to be made are called a. credit terms b. net cash c. cash on demand d. gross cash ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 91. In credit terms of 3/15, n/45, the "3" represents the a. number of days in the discount period b. full amount of the invoice c. number of days when the entire amount is due d. percent of the cash discount ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.04 - Cash vs. Accrual ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 92. Merchandise with a sales price of $5,000 is sold on account with terms 2/10, n/30. The journal entry to record the sale would include a a. debit to Cash for $5,000 b. debit to Sales Discounts for $100 c. credit to Sales for $4,900 d. debit to Accounts Receivable for $4,880 ANSWER: c RATIONALE: Amount of Sales = Invoice Amount – Sales Discount = $5,000 – (2% × $5,000) = $5,000 – $100 = $4,900. The journal entry to record the sale would include a credit to Sales for $4,900. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic TOPICS: Bloom's: Applying 93. Merchandise subject to terms 2/10, n/30, FOB shipping point, is sold on account to a customer for $25,000. What is the amount of the sales discount allowable? a. $260 b. $500 c. $460 d. $150 ANSWER: b RATIONALE: Sales Discount Allowable = 2% × Sales = 2% × $25,000 = $500 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 94. Which of the following accounts has a normal credit balance? a. Accounts Receivable b. Sales c. Merchandise Inventory d. Delivery Expense ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 6 - Accounting for Merchandising Businesses 95. The entry to record the return of merchandise from a customer would include a a. debit to Sales b. credit to Sales c. debit to Customer Refunds Payable d. debit to Estimated Returns Inventory ANSWER: c DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 96. Sales to customers who use bank credit cards such as MasterCard and VISA are usually recorded by a a. debit to Bank Credit Card Sales, a debit to Credit Card Expense, and a credit to Sales b. debit to Cash and a credit to Sales c. debit to Cash, a credit to Credit Card Expense, and a credit to Sales d. debit to Sales, a debit to Credit Card Expense, and a credit to Cash ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 97. Sales to customers who use bank credit cards, such as MasterCard and VISA, are generally treated as a. sales on account b. sales returns c. cash sales d. sales when the credit card company remits the cash ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 98. When a buyer returns merchandise purchased for cash, the buyer will record the transaction as a a. debit to Merchandise Inventory and a credit to Cash b. debit to Cash and a credit to Merchandise Inventory c. debit to Cash and a credit to Sales d. debit to Sales and a credit to Accounts Payable ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 99. When merchandise purchased on account is returned under the perpetual inventory system, the buyer would debit a. Merchandise Inventory b. Purchases Returns and Allowances c. Accounts Payable d. Accounts Receivable ANSWER: c DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 100. When purchases of merchandise are made on account with a perpetual inventory system, the transaction is recorded with which entry? a. debit Accounts Payable; credit Merchandise Inventory b. debit Merchandise Inventory; credit Accounts Payable c. debit Merchandise Inventory; credit Cash Discounts d. debit Merchandise Inventory; credit Purchases ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 101. Using a perpetual inventory system, the entry to record the purchase of $30,000 of merchandise on account would include a a. debit to Accounts Payable b. debit to Merchandise Inventory c. credit to Merchandise Inventory d. credit to Sales ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 102. Using a perpetual inventory system, the entry to record the return of merchandise purchased on account includes a a. debit to Cost of Merchandise Sold b. credit to Accounts Payable c. credit to Merchandise Inventory d. credit to Sales ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 103. In recording the cost of merchandise sold for cash, based on data available from perpetual inventory records, the journal entry is a a. debit to Cost of Merchandise Sold and a credit to Sales b. debit to Cost of Merchandise Sold and a credit to Merchandise Inventory c. debit to Merchandise Inventory and a credit to Cost of Merchandise Sold d. debit to Accounts Receivable and a credit to Merchandise Inventory ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 104. The amount of the total cash paid to the seller for merchandise purchased for consumption would normally include a. only the list price b. only the sales tax c. the list price plus the sales tax d. the list price less the sales tax ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 105. Norfolk Sporting Goods purchases merchandise with a catalog list price of $30,000. The retailer receives a 30% trade discount and credit terms of 2/10, n/30. What amount should Norfolk debit to the merchandise inventory account? a. $21,000 b. $20,580 c. $30,000 d. $29,400 ANSWER: b RATIONALE: Price after Trade Discount = $30,000 – ($30,000 × 30%) = $30,000 – $9,000 = $21,000; Debit to Merchandise Inventory Account = Price after Trade Discount – Discount as per Credit Term = [$21,000 – (2% × $21,000)] = $21,000 – $420 = $20,580 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 106. A sales invoice included the following information: merchandise price, $12,000; terms 1/10, n/eom, FOB shipping point with prepaid freight of $900 added to the invoice. Assuming that a credit for merchandise returned of $500 is granted prior to payment and the invoice is paid within the discount period, what is the amount of cash that should be received by the seller? a. $12,285 b. $11,500 c. $10,480 d. $11,385 ANSWER: a RATIONALE: Cash Received = Sales – Sales Discount + Prepaid Freight – Cost of Merchandise Returned = $12,000 – (1% × $12,000) + $900 – [$500 – (1% × $500)] = $12,000 – $120 + $900 – ($500 – $5) = $12,780 – $495 = $12,285 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 107. Which of the following accounts usually has a debit balance? a. Accounts Payable b. Sales Tax Payable c. Sales d. Merchandise Inventory ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 108. Merchandise is sold for cash. The selling price of the merchandise is $6,000 and the sale is subject to a 7% state sales tax. The journal entry to record the sale would include a credit to a. Cash for $6,000 b. Sales for $6,240 c. Sales Tax Payable for $420 d. Sales for $5,580 ANSWER: c RATIONALE: Sales Tax Payable = Selling Price × 7% State Sales Tax = $6,000 × 7% = $420. The journal entry to record the sale would include a credit to Sales Tax Payable for $420. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 109. If the buyer is to pay the freight costs of delivering merchandise, delivery terms are stated as a. FOB shipping point b. FOB destination c. FOB n/30 d. FOB buyer ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 110. If the seller is to pay the freight costs of delivering merchandise, the delivery terms are stated as a. FOB shipping point b. FOB destination c. FOB n/30 d. FOB seller ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 111. If title to merchandise purchases passes to the buyer when the goods are shipped from the seller, the terms are a. n/30 b. FOB shipping point c. FOB destination d. consigned ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 112. When goods are shipped FOB destination and the seller pays the freight charges, the buyer a. journalizes a reduction for the cost of the merchandise b. journalizes a reimbursement to the seller c. does not take a discount d. makes no journal entry for the freight ANSWER: d DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 113. Pierce Company sold merchandise to Stanton Company on account FOB shipping point, 2/10, net 30, for $20,000. Pierce prepaid the $500 shipping charge. Which of the following entries does Pierce make to record this sale? a. Accounts Receivable—Stanton, debit $20,000; Sales, credit $20,000 b. Accounts Receivable—Stanton, debit $19,600; Sales, credit $19,600, and Accounts Receivable—Stanton, debit $500; Cash, credit $500 c. Accounts Receivable—Stanton, debit $20,100; Sales, credit $20,100 d. Accounts Receivable—Stanton, debit $20,000; Sales, credit $20,000, and Delivery Expense, debit $500; Cash, credit $500 ANSWER: b RATIONALE: Amount of Sales = Invoice Amount – Sales Discount = $20,000 – (2% × $20,000) = $20,000 – $400 = $19,600. Journal entry: Accounts Receivable—Stanton, debit $19,600; Sales, credit $19,600, and Accounts Receivable—Stanton, debit $500; Cash, credit $500 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 6 - Accounting for Merchandising Businesses 114. Emma Co. sold to Isabella Co. merchandise on account FOB shipping point, 2/10, net 30, for $15,000. Emma Co. prepaid the $750 shipping charge. Using the perpetual inventory method, which of the following entries will Isabella Co. make to record the payment for the merchandise if Isabella Co. pays within the discount period? a. Accounts Payable—Emma Co., debit $15,000; Cash, credit $15,000 b. Accounts Payable—Emma Co., debit $15,450; Cash, credit $15,450 c. Accounts Payable—Emma Co., debit $15,000; Freight In, debit $750; Cash, credit $15,750 d. Accounts Payable—Emma Co., debit $15,750; Merchandise Inventory, debit $300; Cash, credit $16,050 ANSWER: b RATIONALE: Accounts Payable = Cost of Merchandise – Purchase Discount + Shipping Charges = $15,000 – (2% × $15,000) + $750 = $15,000 – $300 + $750 = $15,450. Journal entry: Accounts Payable—Emma Co., debit $15,450; Cash, credit $15,450 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 115. A chart of accounts for a merchandising business a. usually is the same as the chart of accounts for a service business b. usually requires more accounts than does the chart of accounts for a service business c. usually is standardized by the FASB for all merchandising businesses d. always uses a three-digit numbering system ANSWER: b DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 116. Cumberland Co. sells $2,000 of inventory to Hancock Co. for cash. Cumberland paid $1,250 for the merchandise. Under a perpetual inventory system, which of the following journal entry(ies) would be recorded? a. debit Cash, $2,000; credit Merchandise Inventory, $1,250 b. debit Cash, $2,000; credit Sales, $2,000; and debit Cost of Merchandise Sold, $1,250; credit Merchandise Inventory, $1,250 c. debit Cash, $1,250; credit Sales, $1,250 d. debit Accounts Receivable, $2,000; credit Sales, $2,000; and debit Cost of Merchandise Sold, $1,250; credit Merchandise Inventory, $1,250 ANSWER: b DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 6 - Accounting for Merchandising Businesses 117. Jacob Co. sells merchandise on credit to Isaiah Co. for $9,700. The invoice is dated on May 1 with terms of 1/15, net 45. What is the amount of the discount and up to what date must the invoice be paid in order for the buyer to take advantage of the discount? a. $194, May 15 b. $194, May 16 c. $97, May 15 d. $97, May 16 ANSWER: d RATIONALE: Amount of Discount = Sales Price × 1% = $9,700 × 1% = $97; Last Day of Discount Period = Invoice Date of May 1 plus 15 days = May 16 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 118. Kaden Co. sells merchandise on credit to Jase Co. for $9,600. The invoice is dated July 15 with terms of 1/15, net 45. If Jase Co. chooses not to take the discount, by when should the payment be made? a. July 30 b. August 29 c. August 15 d. July 25 ANSWER: b RATIONALE: Credit terms of 1/15, n/45, provides a 1% sales discount if the invoice is paid within 15 days. If not paid within 15 days, the total invoice amount is due within 45 days. Credit period of 45 days = 16 days of July (31 – 15) + 29 days of August (45 – 16). Final due date is August 29. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 119. To encourage a buyer to pay before the end of the credit period, the seller may offer a a. purchases discount b. sales discount c. trade discount d. payment discount ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 120. Taking advantage of a 2/10, n/30 purchases discount is equal to a yearly savings rate of approximately a. 2% b. 24% c. 20% d. 36% ANSWER: d RATIONALE: Yearly Savings Rate = 2% × [360 days/(30 days – 10 days)] = 2% × 18 = 36% DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 121. Who is responsible for the freight costs when the terms are FOB shipping point? a. the ultimate customer b. the buyer c. the seller d. either the seller or the buyer ANSWER: b DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 122. Who is responsible for the freight cost when the terms are FOB destination? a. the seller b. the buyer c. the customer d. either the buyer or the seller ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 123. A retailer purchases merchandise with a catalog list price of $30,000. The retailer receives a 15% trade discount and has credit terms of 2/10, n/30. How much cash will be needed to pay this invoice within the discount period? a. $30,000 b. $24,900 c. $29,400 d. $24,990 ANSWER: d RATIONALE: Price after Trade Discount = Catalog Price – Trade Discount = $30,000 – (15% × $30,000) = $30,000 – $4,500 = $25,500; Cash Required to Pay Invoice = Price after Trade Discount – Purchase Discount = $25,500 – (2% × $25,500) = $25,500 – $510 = $24,990 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 124. What type of company would normally offer trade discounts to its customers? a. service company b. retailer c. wholesaler d. online retailer ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 6 - Accounting for Merchandising Businesses 125. Which of the following accounts will only be found in the chart of accounts of a merchandising company? a. Sales b. Accounts Receivable c. Merchandise Inventory d. Accounts Payable ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 126. Which of the following items would not affect the cost of merchandise inventory acquired during the period? a. quantity discounts b. sales discounts c. freight in d. sales commissions ANSWER: d DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 127. If title to merchandise purchases passes to the buyer when the goods are delivered to the buyer, the terms are a. consigned b. n/30 c. FOB shipping point d. FOB destination ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 128. If title to merchandise purchases passes to the buyer when the goods are shipped from the seller, the terms are a. n/30 b. FOB shipping point c. FOB destination d. consigned ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 129. If merchandise sells for $3,500, with terms of 3/15, n/45, and the cost of the inventory sold is $2,100, the amount charged to sales is a. $3,395 b. $3,500 c. $2,037 d. $2,100 ANSWER: a RATIONALE: Amount Charged to Sales = Sales Price – Sales Discount = $3,500 – (3% × $3,500) = $3,500 – $105 = $3,395 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 130. Under the perpetual inventory system, all purchases of merchandise are debited to the account a. Merchandise Inventory b. Cost of Merchandise Sold c. Cost of Merchandise Available for Sale d. Purchases ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 131. When the perpetual inventory system is used, the inventory sold is debited to a. Supplies Expense b. Cost of Merchandise Sold c. Merchandise Inventory d. Sales ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 132. Under a perpetual inventory system, a. accounting records continuously disclose the amount of inventory b. increases in inventory resulting from purchases are debited to Purchases c. a physical count is required to determine cost of merchandise on hand d. the purchases returns and allowances account is credited when goods are returned to vendors ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 133. The journal entry to record the receipt of inventory purchased for cash in a perpetual inventory system would be a. Jan. 1 Merchandise Inventory 1,500 Cash 1,500 b. Jan. 1 Office Supplies 1,500 Cash 1,500 c. Jan. 1 Purchases 1,500 Accounts Payable 1,500 d. Jan. 1 Cash 1,500 Accounts Receivable 1,500 ANSWER: a DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 134. Which of the following items should not be included in the cost of ending merchandise inventory? a. purchased units in transit, shipped FOB shipping point b. purchased units in transit, shipped FOB destination c. units on hand in the warehouse d. sold units in transit, not invoiced, and shipped FOB destination ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 135. Corbit Corp. sold merchandise for $10,000 cash. The cost of merchandise sold was $7,590. The journal entries to record this transaction under the perpetual inventory system would be a. Cash 10,000 Merchandise Inventory 10,000 Cost of Merchandise Sold Sales b. Cash Sales Cost of Merchandise Sold Merchandise Inventory c. Cash Sales Cost of Merchandise Sold Merchandise Inventory d. Cash Sales

7,590 7,590 10,000 10,000 7,590 7,590 10,000 10,000 10,000 10,000 7,590 7,590

Cost of Merchandise Sold 7,590 Merchandise Inventory 7,590 ANSWER: b DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 136. Merchandise is purchased for $6,000 on September 2 subject to terms of 2/10, n/30, FOB destination. Freight costs paid by the seller totaled $200. What is the cost of the merchandise if paid on September 12, assuming the discount is taken? a. $6,120 b. $5,940 c. $6,090 d. $5,880 ANSWER: d RATIONALE: Cost of Merchandise = Invoice Amount – Purchase Discount = $6,000 – (2% × $6,000) = $6,000 – $120 = $5,880 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 137. Abbey Co. sold merchandise to Gomez Co. on account, $35,000, terms 2/15, net 45. The cost of the merchandise sold was $24,500. Abbey Co. issued a credit memo for $3,600 for merchandise returned that originally cost $1,700. Gomez Co. paid the invoice within the discount period. What is the amount of gross profit earned by Abbey Co. on the above transactions? a. $10,500 b. $30,772 c. $7,972 d. $31,400 ANSWER: c RATIONALE: Gross Profit Earned by Abbey Co. = Sales after Discount – Selling Price of Returned Merchandise after Discount – (Cost of Merchandise Sold – Cost of Merchandise Returned) = [$35,000 – ($35,000 × 2%)] – [$3,600 – ($3,600 × 2%)] – ($24,500 – $1,700) = $7,972 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 138. What is the major difference between a periodic and a perpetual inventory system? a. Under the periodic inventory system, the purchase of inventory will be debited to the purchases account. b. Under the periodic inventory system, no journal entry is recorded at the time of the sale of inventory for the cost of the inventory. c. Under the periodic inventory system, all adjustments such as purchases returns and allowances and discounts are reconciled at the end of the month. d. All of these choices are correct. ANSWER: d DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 139. If the physical count of inventory revealed $158,000 of merchandise on hand and the inventory records reported $163,000, what would be the necessary adjusting entry to record inventory shrinkage? a. debit Merchandise Inventory, $158,000; credit Cost of Merchandise Sold, $158,000 b. debit Merchandise Inventory, $5,000; credit Cost of Merchandise Sold, $5,000 c. debit Cost of Merchandise Sold, $163,000; credit Merchandise Inventory, $158,000 d. debit Cost of Merchandise Sold, $5,000; credit Merchandise Inventory, $5,000 ANSWER: d RATIONALE: Inventory Shrinkage = Account Balance of Merchandise Inventory – Physical Merchandise Inventory on Hand = $163,000 – $158,000 = $5,000 Adjusting entry to record inventory shrinkage: debit Cost of Merchandise Sold, $5,000; credit Merchandise Inventory, $5,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-03 - 06-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic 140. Inventory shrinkage is recorded when a. merchandise is returned by a buyer b. merchandise purchased from a seller is incomplete or short c. merchandise is returned to a seller d. there is a difference between a physical count of inventory and inventory records ANSWER: d DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-03 - 06-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 6 - Accounting for Merchandising Businesses 141. When comparing a retail business to a service business, the financial statement that changes the least is the a. balance sheet b. income statement c. statement of owner's equity d. statement of cash flows ANSWER: c DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 142. Generally, the revenue account for a merchandising business is entitled a. Sales b. Fees Earned c. Gross Sales d. Gross Profit ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 143. Which account is not classified as a selling expense? a. Sales Salaries b. Delivery Expense c. Cost of Goods Sold d. Advertising Expense ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 144. President's salaries, depreciation of office furniture, and office supplies are a. selling expenses b. miscellaneous expenses c. administrative expenses d. inventory expenses ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 145. Expenses that are incurred directly or entirely in connection with the sale of merchandise are classified as a. selling expenses b. general expenses c. other expenses d. administrative expenses ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 146. When the perpetual inventory system is used, the inventory sold is shown on the income statement as a. cost of merchandise sold b. purchases c. purchases returns and allowances d. net purchases ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 147. The statement of owner's equity shows a. only net income and beginning and ending capital b. only total assets and beginning and ending capital c. only net income, beginning capital, and withdrawals d. beginning and ending capital, all the changes in the owner's capital as a result of net income (loss), and withdrawals ANSWER: d DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 148. When the three sections of a balance sheet are presented on a page in a downward sequence, it is called the a. account form b. comparative form c. horizontal form d. report form ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 149. Multiple-step income statements show a. gross profit but not income from operations b. neither gross profit nor income from operations c. both gross profit and income from operations d. income from operations but not gross profit ANSWER: c DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 150. The form of income statement that derives its name from the fact that the total of all expenses is deducted from the total of all revenues is called a a. multiple-step statement b. revenue statement c. report-form statement d. single-step statement ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 151. Which of the following accounts should be closed at the end of the fiscal year? a. Merchandise Inventory b. Accumulated Depreciation c. Drawing d. Cost of Merchandise Sold ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 152. Which account will be included in closing entries of both service and merchandising companies? a. Sales b. Cost of Merchandise Sold c. Customer Refunds Payable d. Estimated Inventory Returns ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 153. Bradford Company had sales of $700,000 for the year. The total assets at the beginning of the year were $240,000, and the total assets at the end of the year were $280,000. The ratio of sales to total assets is (round answer to two decimal places) a. 2.69 b. 0.40 c. 2.92 d. 0.34 ANSWER: a RATIONALE: Average Total Assets = (Beginning Total Assets + Ending Total Assets)/2 = ($240,000 + $280,000)/2 = $260,000 Ratio of Sales to Total Assets = Sales/Average Total Assets = $700,000/$260,000 = 2.69 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-05 - 06-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 154. Bountiful Company had sales of $650,000 and cost of merchandise sold of $200,000 during the year. The total assets balance at the beginning of the year was $175,000 and at the end of the year was $167,000. Calculate the ratio of sales to total assets. a. 3.00 b. 3.80 c. 0.29 d. 0.26 ANSWER: b RATIONALE: Average Total Assets = (Beginning Total Assets + Ending Total Assets)/2 = ($175,000 + $167,000)/2 = $171,000 Ratio of Sales to Total Assets = Sales/Average Total Assets = $650,000/$171,000 = 3.80 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-05 - 06-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 155. Under the periodic inventory system, the journal entry to record the purchase of merchandise inventory will include a debit to a. Merchandise Inventory b. Purchases c. Accounts Payable d. Cost of Merchandise Purchased ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 156. Using the following information, what is the amount of net income? Purchases Merchandise inventory, September 1 Administrative expenses Rent revenue

$32,000 5,700 910 1,200

Selling expenses Merchandise inventory, September 30 Sales Interest expense

$ 960 6,370 63,000 1,040

a. $29,800 b. $29,960 c. $28,760 d. $31,670 ANSWER: RATIONALE:

b Cost of Merchandise Sold = Merchandise Inventory on September 1 + Purchases – Merchandise Inventory on September 30 = $5,700 + $32,000 – $6,370 = $31,330; Income from Operations = Sales – Cost of Merchandise Sold – Administrative Expenses – Selling Expenses = $63,000 – $31,330 – $910 – $960 = $29,800; Net Income = Income from Operations + Rent Revenue – Interest Expense = $29,800 + $1,200 – $1,040 = $29,960 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 157. Using the following information, what is the amount of gross profit? Purchases Merchandise inventory, September 1 Administrative expenses Rent revenue

$32,000 5,700 910 1,200

Selling expenses Merchandise inventory, September 30 Sales Interest expense

960 6,370

63,000 1,040

a. $25,300 b. $31,670 c. $30,600 d. $62,840 ANSWER: RATIONALE:

b Cost of Merchandise Sold = Merchandise Inventory on September 1 + Purchases – Merchandise Inventory on September 30 = $5,700 + $32,000 – $6,370 = $31,330; Gross Profit = Sales – Cost of Merchandise Sold = $63,000 – $31,330 = $31,670 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 158. Using the following information, what is the amount of income from operations? Purchases Merchandise inventory, September 1 Administrative expenses Rent revenue

$32,000 5,700 910 1,200

Selling expenses Merchandise inventory, September 30 Sales Interest expense

960 6,370

63,000 1,040

a. $32,870 b. $31,910 c. $30,710 d. $29,800 ANSWER: RATIONALE:

d Cost of Merchandise Sold = Merchandise Inventory on September 1 + Purchases – Merchandise Inventory on September 30 = $5,700 + $32,000 – $6,370 = $31,330; Income from Operations = Sales – Cost of Merchandise Sold – Administrative Expenses – Selling Expenses = $63,000 – $31,330 – $910 – $960 = $29,800 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 6 - Accounting for Merchandising Businesses 159. A company using the periodic inventory system has the following account balances: Merchandise Inventory at the beginning of the year, $3,600; Freight In, $650; Purchases, $10,700; Purchases Returns and Allowances, $1,950; Purchases Discounts, $330. The cost of merchandise purchased is equal to a. $12,670 b. $9,070 c. $8,420 d. $17,230 ANSWER: b RATIONALE: Cost of Merchandise Purchased = Purchases + Freight In – Purchases Returns and Allowances – Purchases Discounts = $10,700 + $650 – $1,950 – $330 = $9,070 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 160. Which of the following accounts will not be found in the cost of merchandise sold section of the income statement for a company using the periodic inventory method? a. Purchases b. Freight In c. Selling Expense d. Merchandise Inventory ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 161. A company using the periodic inventory system has merchandise inventory costing $210 on hand at the beginning of a period. During the period, merchandise costing $635 is purchased. At year-end, merchandise inventory costing $160 is on hand. The cost of merchandise sold for the year is a. $795 b. $685 c. $265 d. $635 ANSWER: b RATIONALE: Cost of Merchandise Sold = Beginning Inventory + Inventory Purchased – Ending Inventory = $210 + $635 – $160 = $685 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 6 - Accounting for Merchandising Businesses 162. Where are selling and administrative expenses found on the multiple-step income statement? a. before gross profit b. after sales and before gross profit c. after net income and before expenses d. after gross profit ANSWER: d DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 163. Under the periodic inventory system, the journal entry to record the cost of merchandise sold at the point of sale will include which of the following? a. None of these choices b. Cost of Merchandise Sold c. Inventory d. Purchases ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 164. Under a periodic inventory system, closing entries will include a. debits to Sales, Purchases Returns and Allowances, and Purchases Discounts b. credits to Purchases and Sales Discounts c. adjustments to Merchandise Inventory to match physical inventory d. All of these choices ANSWER: a DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 165. The proper journal entry to record the receipt of inventory purchased on account in a periodic inventory system would be a. Jan. 1 Merchandise Inventory 1,600 Accounts Payable 1,600 b. Jan. 1 Office Supplies 1,600 Accounts Payable 1,600 c. Jan. 1 Purchases 1,600 Accounts Payable 1,600 d. Jan. 1 Purchases 1,600 Accounts Receivable 1,600 ANSWER: c DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 166. Using the following information, what is the cost of merchandise sold? Purchases Merchandise inventory, September 1 Administrative expenses Rent revenue a. $32,400 b. $32,670 c. $31,330 d. $38,370 ANSWER: RATIONALE:

$32,000 5,700 910 1,200

Selling expenses Merchandise inventory, September 30 Sales Interest expense

960 6,370

63,000 1,040

c Cost of Merchandise Sold = Merchandise Inventory on September 1 + Purchases – Merchandise Inventory on September 30 = $5,700 + $32,000 – $6,370 = $31,330 DIFFICULTY: Bloom's: Applying Challenging LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses Matching Match each of the following items (a–h) with the appropriate definition below. a. Freight b. Delivery Expense c. Merchandise Inventory d. Sales discount e. Purchases Returns and Allowances f. Debit memo g. Purchase discount h. Trade discount DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 167. Discount taken by the buyer for early payment of invoice. ANSWER: g 168. Account used to record merchandise on hand under a perpetual inventory system. ANSWER: c 169. Early payment discount offered to customers by the seller. ANSWER: d 170. Expense account for recording shipping costs paid by the seller. ANSWER: b 171. Discount to government agencies or customers who purchase large quantities of merchandise. ANSWER: h 172. Account where returned merchandise or price adjustments are recorded by the buyer under the periodic inventory system. ANSWER: e 173. The cost associated with delivery of merchandise to the customer. ANSWER: a 174. Informs the seller of the reasons for the return of merchandise or the request for a price allowance. ANSWER: f

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Chapter 6 - Accounting for Merchandising Businesses Match each of the following terms (a–h) with the correct definition below. a. Credit terms b. FOB destination c. FOB shipping point d. Periodic inventory system e. Perpetual inventory system f. Inventory shrinkage g. Single-step income statement h. Multiple-step income statement DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCT.WARD.18.06-03 - 06-03 ACCT.WARD.18.06-04 - 06-04 ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 175. Shipping terms where the ownership of merchandise passes to the buyer when the buyer receives the merchandise. ANSWER: b 176. Losses of inventory due to theft, damage, spoilage, etc., that cause the actual inventory on hand to be less than that on record. ANSWER: f 177. Statement where net income is determined by deducting all expenses from all revenues. ANSWER: g 178. Payment arrangements determined by the seller as to when invoices are due and whether early payment discount is offered. ANSWER: a 179. Inventory system that updates the merchandise inventory account for every purchase and sales transaction. ANSWER: e 180. Inventory system that updates the merchandise inventory account only at the end of the accounting period based on a physical count of merchandise on hand. ANSWER: d 181. Statement that includes subtotals for net sales, gross profit, and net operating income in determining net income. ANSWER: h 182. Shipping terms where the ownership of merchandise passes to the buyer when the seller delivers the merchandise to the freight carrier. ANSWER: c

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Chapter 6 - Accounting for Merchandising Businesses Subjective Short Answer 183. Discuss the following statement: “Operating cycles for all merchandising businesses are the same, with similar profit margins.” Include an example(s) to illustrate your explanation. ANSWER: This is not true. While the operations of merchandising businesses generally all involve the purchase of merchandise (purchasing), the sale of products to customers (sales), and the receipt of cash from customers (collection), operating cycles may vary in length between merchandisers. This is due to the nature of the product they sell. An example is a grocery store that depends on selling more products in a very short time span. DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 184. Describe the major differences in preparing the financial statements for a service business and a merchandising business. Service Business Income Statement:

Merchandising Business Income Statement:

Balance Sheet:

ANSWER: Service Business Income Statement: Revenues Less operating expenses Equals operating income

Balance Sheet: No merchandise inventory account

Merchandising Business Income Statement: Sales Less cost of merchandise sold Equals gross profit Less operating expenses Equals operating income Balance Sheet: Includes merchandise inventory account in the current assets section

DIFFICULTY:

Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 6 - Accounting for Merchandising Businesses 185. Complete the following data taken from the condensed income statements for merchandising Companies A, B, and C. Operating income Sales Gross profit Operating expenses Cost of merchandise sold

Company A $315 ? 430 ? 545

Company B $ ? 865 ? 125 320

ANSWER: Operating income Sales Gross profit Operating expenses Cost of merchandise sold

Company C $215 560 325 ? ?

Company A Company B Company C $315 $420 $215 975 865 560 430 545 325 115 125 110 545

320

235

OR rearranged in the order of the income statement: Company A Company B Company C Sales $975 $865 $560 Less cost of 545 320 235 merchandise sold Gross profit 430 545 325 Less operating 115 125 110 expenses Operating income 315 420 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

215

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Chapter 6 - Accounting for Merchandising Businesses 186. Complete the following data taken from the condensed income statements for merchandising Companies X, Y, and Z. Operating income (loss) Sales Gross profit Operating expenses Cost of merchandise sold

Company X $220 ? 435 ? 330

Company Y $ ? 1,315 ? 565 775

ANSWER: Operating income (loss) Sales Gross profit Operating expenses Cost of merchandise sold

Company Z $ (70) 890 465 ? ?

Company X Company Y Company Z $220 $ (25) $ (70) 765 1,315 890 435 540 465 215 565 535 330 775 425

OR rearranged in the order of the income statement: Company X Company Y Company Z Sales $765 $1,315 $890 Less cost of merchandise 330 775 425 sold Gross profit 435 Less operating expenses 215 Operating income (loss) 220 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

540 565 (25)

465 535 (70)

187. During the current year, merchandise is sold for $137,500 cash and $425,600 on account. The cost of the merchandise sold is $322,325. What is the amount of the gross profit? ANSWER: $137,500 + $425,600 – $322,325 = $240,775 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 6 - Accounting for Merchandising Businesses 188. During the current year, merchandise is sold for $117,500 cash and $241,750 on account. The cost of the merchandise sold is $157,400. What is the amount of the gross profit? ANSWER: $117,500 + $241,750 – $157,400 = $201,850 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 189. During the current year, merchandise is sold for $86,000 cash and for $93,950 on account. The cost of the merchandise sold is $76,240. What is the amount of the gross profit? ANSWER: Total Sales, $179,950 – Cost of Merchandise Sold, $76,240 = Gross Profit, $103,710 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-01 - 06-01 ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 190. Travis Company purchased merchandise on account from a supplier for $5,700, terms 2/10, net 30. Travis Company paid for the merchandise within the discount period. Under a perpetual inventory system, record the journal entries required for the above transactions. ANSWER: Merchandise Inventory 5,586 Accounts Payable 5,586 Accounts Payable Cash DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

5,586 5,586

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Chapter 6 - Accounting for Merchandising Businesses 191. On March 25, Osgood Company sold merchandise on account, $10,000, terms n/30. The applicable sales tax percentage is 7.5%. Record the transaction. Journal Date

ANSWER:

Description

Post. Ref.

Debit

Credit

Journal

Post. Date Description Debit Credit Ref. Mar. 25 Accounts Receivable 10,750 Sales 10,000 Sales Tax Payable 750 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 192. On March 29, customers who owe $10,500 on account to Sonic Sales Company submit payments of $4,250. Journalize this event. ANSWER: Mar. 29 Cash 4,250 Accounts Receivable 4,250 DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 61

Chapter 6 - Accounting for Merchandising Businesses 193. Journalize the following merchandise transactions: (a)

Sold merchandise on account, $17,300, with terms 2/10, net 30. The cost of the merchandise sold was $12,600. (b) Received payment within the discount period. ANSWER: (a) Accounts Receivable 16,954 Sales Cost of Merchandise Sold Merchandise Inventory

16,954

12,600 12,600

(b) Cash

16,954 Accounts Receivable

16,954

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 194. Determine the amount to be paid in full settlement of each invoice, assuming that credit for returns and allowances was received prior to payment and that all invoices were paid within the discount period. Freight Paid by Freight Terms Seller $4,500 $140 FOB shipping point, 2/10, net 30 7,650 $200 FOB destination, 1/10, net 45

Merchandise (a) (b)

Returns and Allowances $1,200 450

ANSWER:

(a) $3,374 (b) $7,128 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 62

Chapter 6 - Accounting for Merchandising Businesses 195. Sampson Co. sold merchandise to Batson Co. on account, $46,000, terms 2/15, net 45. The cost of the merchandise sold is $38,500. Batson Co. paid the invoice within the discount period. Prepare the entries that both Sampson and Batson would record for the above. Assume both Sampson and Batson use a perpetual inventory system. ANSWER: Sampson Co. Journal Entries: Accounts Receivable—Batson Co. 45,080 Sales 45,080 Cost of Merchandise Sold Merchandise Inventory

38,500

Cash

45,080

38,500

Accounts Receivable—Batson Co. Batson Co. Journal Entries: Merchandise Inventory Accounts Payable—Sampson Co. Accounts Payable—Sampson Co. Cash DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

45,080 45,080 45,080 45,080 45,080

196. Which of the following costs would be included in merchandise inventory? (a) Purchase price (b) Insurance in transit FOB shipping point (c) Freight for delivery FOB shipping point (d) Repair due to negligence of receiving clerk (e) Receiving department employee salary (f) Cost of processing purchase orders ANSWER: (a), (b), and (c) DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 63

Chapter 6 - Accounting for Merchandising Businesses 197. On March 4, Micro Sales makes $4,850 in sales on bank credit cards that charge a 2.5% service charge and deposits the funds into Micro Sales' bank accounts at the end of the business day. Journalize the sales and recognition of expense as a single journal entry. ANSWER: Mar. 4 Cash 4,728.75 Credit Card Expense 121.25 Sales 4,850.00 The sales can be debited to Cash since the deposit is at the end of the business day. Also, since the credit card expense is easily determined (2.5% of sales), that expense can be immediately identified and should be recorded. DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 198. Journalize the following transactions for Armour Inc. using both the periodic inventory system and the perpetual inventory system, presented in the side-by-side format of the form provided below. Oct. 7 Sold merchandise on credit to Rondo Distributors, terms n/30. The cost of the merchandise was $720. 8 Purchased merchandise, $10,000, terms FOB shipping point, 2/15, n/30, with prepaid freight charges of $525 added to the invoice.

Date

PERIODIC INVENTORY SYSTEM Dr. Cr. Description

Page 64

Chapter 6 - Accounting for Merchandising Businesses ANSWER:

PERPETUAL INVENTORY SYSTEM Dr. Cr. Description Dr. Cr. Accounts 1,200 Receivable 1,200 1,200 Sales 1,200

PERIODIC INVENTORY SYSTEM Date Description Oct. Accounts 7 Receivable Sales

Purchases

9,800

Freight In

525

Accounts Payable

Cost of Merchandise Sold 720 Merchandise Inventory 720 Merchandise Inventory 10,325 Accounts Payable 10,325 10,325

DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 199. What is the normal balance of the following accounts? a. Sales Tax Payable b. Merchandise Inventory c. Delivery Expense d. Cost of Merchandise Sold e. Customer Refunds Payable f. Estimated Returns Inventory g. Sales ANSWER: a. credit b. debit c. debit d. debit e. credit f. debit g. credit DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 65

Chapter 6 - Accounting for Merchandising Businesses 200. For each of the following, calculate the cost of inventory reported on the balance sheet. (a) The total merchandise on hand at the end of the year is $62,000. Of the $62,000, $8,000 has been sold FOB destination and is awaiting pickup by the carrier. (b) The total merchandise inventory at the end of the year was $63,000. Excluded from the amount were purchases of $6,000 in transit under FOB shipping point terms. (c) The total merchandise inventory at the end of the year was $75,000. Excluded from the amount were purchases of $5,000 in transit under FOB destination terms. ANSWER:

(a) $62,000 (b) $69,000 (c) $75,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCT.WARD.18.06-03 - 06-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic 201. Using the perpetual inventory system, journalize the entries for the following selected transactions: (a) Sold merchandise on account, for $12,000, terms n/30. The cost of the merchandise sold was $6,500. (b) Sold merchandise to customers who used MasterCard and VISA, $9,500. The cost of the merchandise sold was $5,300. (c) Sold merchandise to customers who used American Express, $2,900. The cost of the merchandise sold was $1,700. (d) Paid an invoice from First National Bank for $385, representing a service fee for processing MasterCard and VISA sales. (e) Paid a $75 processing fee associated with sales made to customers who used American Express. ANSWER: (a) Accounts Receivable 12,000 Sales 12,000 Cost of Merchandise Sold Merchandise Inventory (b) Cash Sales Cost of Merchandise Sold Merchandise Inventory (c) Cash Sales Cost of Merchandise Sold Merchandise Inventory (d) Credit Card Expense Cash

6,500 6,500 9,500 9,500 5,300 5,300 2,900 2,900 1,700 1,700 385 385

Page 66

Chapter 6 - Accounting for Merchandising Businesses (e) Credit Card Expense Cash DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

75 75

202. Merchandise with a list price of $4,200 and costing $2,300 is sold on account, subject to the following terms: FOB destination, 2/10, n/30. The seller prepays the freight costs of $85 (debit Delivery Expense for the freight costs). Prior to payment for the goods, the seller issues a credit memo for $750 to the customer for merchandise costing $425 that is returned. Payment is received within the discount period. The company uses a perpetual inventory system. Record the foregoing transactions of the seller in the sequence indicated below. (a) Sold the merchandise, recognizing the sale and cost of merchandise sold. (b) Paid the freight charges. (c) Issued the credit memo. (d) Received payment from the customer. ANSWER: (a) Accounts Receivable Sales Cost of Merchandise Sold Merchandise Inventory

4,116 4,116 2,300 2,300

(b) Delivery Expense Cash

735

Merchandise Inventory Estimated Returns Inventory (d) Cash Accounts Receivable DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

735 425 425 3,381 3,381

Page 67

Chapter 6 - Accounting for Merchandising Businesses 203. Based on the information below, journalize the entries for the seller and the buyer. Both use a perpetual inventory system. (a) (b) (c)

Seller sold merchandise on account to the buyer, $4,750, terms 2/10, net 30, FOB shipping point. The cost of the merchandise is $2,850. The seller prepays the freight of $75. Buyer returns $700 of merchandise as defective. The cost of the merchandise is $420. Buyer pays within the discount period.

Seller Description

ANSWER:

Buyer Dr.

Cr.

Description

Dr.

Cr.

(a) Seller Description Accounts Receivable Sales

Buyer Dr. Cr. Description Dr. Cr. 4,655 Merchandise Inventory 4,730 4,655 Accounts Payable 4,730

Cost of Merchandise Sold 2,850 Merchandise Inventory 2,850 Accounts Receivable Cash

75 75

(b) Customer Refunds Accounts Payable 686 686 Payable Accounts Receivable 686 Merchandise Inventory 686 Merchandise Inventory 420 Estimated 420 Returns Inventory (c) Cash 3,969 Accounts Payable 3,969 Accounts Receivable 3,969 Cash 3,969 DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Page 68

Chapter 6 - Accounting for Merchandising Businesses 204. Details of a purchase invoice and related credit memo are summarized as follows: Invoice:

Credit memo:

Cost of merchandise listed on purchase invoice Prepaid freight charge added to invoice Terms, FOB shipping point, 1/10, n/eom Cost of merchandise returned

$6,500 150

$1,500

Assume that the credit memo was received prior to payment and that the invoice is paid within the discount period. Determine the following: (a) Amount of the cash discount allowed. (b) Amount to be paid by the purchaser if the discount is taken. (c) Cost of the merchandise to the purchaser if the discount is not taken. ANSWER: (a) $50 (b) $5,100 (c) $5,150 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 205. Conquest Company uses a perpetual inventory system. Conquest purchased $1,500 of merchandise on account and payment was made within the discount period. The credit terms were 2/10, n/30. Journalize Conquest’s purchase and payment. ANSWER: (a) Merchandise Inventory 1,470 Accounts Payable 1,470 (b) Accounts Payable Cash DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

1,470 1,470

Page 69

Chapter 6 - Accounting for Merchandising Businesses 206. Merchandise with a list price of $4,700 is purchased on account, terms FOB shipping point, 1/10, n/30. The seller prepaid freight costs of $100. Prior to payment, $1,600 of the merchandise is returned. The invoice is paid within the discount period. Record the foregoing transactions of the buyer in the sequence indicated below, assuming a perpetual inventory system is used. (a) Purchased the merchandise. (b) Recorded receipt of the credit memo for merchandise returned. (c) Paid the amount owed. ANSWER: (a) Merchandise Inventory Accounts Payable

4,753 4,753

(b) Accounts Payable Merchandise Inventory

1,584 1,584

(c) Accounts Payable Cash DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

3,169 3,169

207. Details of invoices for purchases of merchandise are as follows:

(a) (b) (c) (d)

Merchandise $2,800 7,600 1,400 500

Freight $45 60 55 50

Terms FOB shipping point, 1/10, n/30 FOB destination, n/30 FOB shipping point, 2/10, n/30 FOB destination, 1/10, n/30

Returns and Allowances $200 800 600 0

Determine the amount to be paid in full settlement of each of the invoices, assuming that credit for returns and allowances was received prior to payment and that all invoices were paid within the discount period. ANSWER: (a) $2,800 – $200 – $26 + $45 = $2,619 (b) $7,600 – $800 = $6,800 (c) $1,400 – $600 – $16 + $55 = $839 (d) $500 – $5 = $495 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 70

Chapter 6 - Accounting for Merchandising Businesses 208. Journalize the entries to record the following selected transactions: (a)

Sold $900 of merchandise on account, subject to 7% sales tax. The cost of the merchandise sold was $510. (b) Paid $436 to the state sales tax department for taxes collected. ANSWER: (a) Accounts Receivable Sales Sales Tax Payable Cost of Merchandise Sold Merchandise Inventory (b) Sales Tax Payable Cash DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

963 900 63 510 510 436 436

209. Gadget Palace is a retailer selling unique hardware. Gadget Palace uses a perpetual inventory system. Journalize the following transactions: July 5 Gadget Palace purchases inventory for sale from Turbo Tools for $11,400 with terms 2/10, n/30. 6 Gadget Palace pays Fast Truck Transport $75 for freight on the July 5 order. 8 Gadget Palace receives a credit memo from Turbo Tools for $215 for damaged merchandise. 15 Gadget Palace pays Turbo Tools the balance due. Journal Date

Description

Post. Ref.

Debit

Credit

Page 71

Chapter 6 - Accounting for Merchandising Businesses ANSWER: Journal Date

Description

Post. Ref.

Debit

July 5 Merchandise Inventory A/P—Turbo Tools

11,172.00

6 Merchandise Inventory Cash

75.00

8 A/P—Turbo Tools Merchandise Inventory

210.70

Credit

11,172.00

75.00

210.70

15 A/P—Turbo Tools Cash

10,961.30 10,961.30

DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 210. Bargain Wholesalers sells pet supplies to retailers including Pet World Supplies. Bargain Wholesalers uses a perpetual inventory. Journalize the following transactions: May 4 Bargain Wholesalers sells inventory to Pet World Supplies for $8,250 with terms 1/10, n/30. The cost of the merchandise is $5,755. 7 Bargain Wholesalers sells an additional $10,985 in inventory to Pet World Supplies with terms 1/10, n/30. The cost of the merchandise is $6,925. 13 Bargain Wholesalers receives a check from Pet World Supplies paying the balance due on both invoices.

Date

Description

Journal Post. Ref.

Debit

Credit

Page 72

Chapter 6 - Accounting for Merchandising Businesses ANSWER: Date

Description

Journal Post. Ref.

May 4 A/R—Pet World Supplies Sales Cost of Merchandise Sold Merchandise Inventory 7 A/R—Pet World Supplies Sales Cost of Merchandise Sold Merchandise Inventory 13 Cash A/R—Pet World Supplies

Debit

Credit

8,167.50 8,167.50 5,755.00 5,755.00

10,875.15 10,875.15 6,925.00 6,925.00 19,042.65 19,042.65

DIFFICULTY:

Page 73

Chapter 6 - Accounting for Merchandising Businesses 211. Marshall Supplies is a janitorial supply store that uses perpetual inventory. Journalize the following transactions: July 4 Marshall purchases inventory for sale from Tidy Wholesalers for $8,500 with terms 1/10, n/30. 5 Marshall pays Express Transfer $45 for freight on the July 4 order. 7 Marshall buys an additional $11,985 in inventory from Tidy Wholesalers with terms 1/10, n/30. 13 Marshall pays Tidy Wholesalers the balance due on both invoices.

Date

Description

Journal Post. Ref.

Debit

Credit

ANSWER: Journal Date

Description

July 4 Merchandise Inventory A/P—Tidy Wholesalers 5 Merchandise Inventory Cash

Post. Ref.

Debit

Credit

8,415.00 8,415.00 45.00 45.00

7 Merchandise Inventory A/P—Tidy Wholesalers

11,865.15

13 A/P—Tidy Wholesalers Cash

20,280.15

11,865.15

20,280.15

DIFFICULTY:

Page 74

Chapter 6 - Accounting for Merchandising Businesses 212. On March 3, Bluebird Sales makes $4,350 in cash sales of general merchandise that has a cost of $1,512. Bluebird uses a perpetual inventory system. (a) Journalize the sale. (b) Journal the cost of merchandise sold. ANSWER: (a) Mar. 3 Cash 4,350 Sales 4,350 (b) Mar. 3 Cost of Merchandise Sold 1,512 Merchandise Inventory DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

1,512

213. On March 5, Blowout Sales makes $22,500 in sales on account. The cost of merchandise sold is $16,825. Journalize the sales and recognition of the cost of merchandise sold. ANSWER: Mar. 5 Accounts Receivable 22,500 Sales 22,500 Cost of Merchandise Sold Merchandise Inventory

16,825 16,825

DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 75

Chapter 6 - Accounting for Merchandising Businesses 214. On March 15, Monroe Sales sells $9,525 on account to Garrison Brewer with terms of 2/10, n/30. The cost of merchandise sold was $6,905. (a) Journalize the sale and the recognition of the cost of the sale. (b) On March 20, a $125 credit memo is given to Garrison Brewer due to merchandise that was the wrong color. Journalize this event. The cost of the returned merchandise was $65. (c) On March 25, Garrison Brewer submits payment in full. Journalize this event. ANSWER: (a) Accounts Receivable—Garrison Brewer 9,334.50 Sales 9,334.50 Cost of Merchandise Sold Merchandise Inventory (b) Customer Refunds Payable Accounts Receivable—Garrison Brewer Merchandise Inventory

6,905.00 6,905.00 122.50 122.50 65.00

Estimated Returns Inventory

65.00

9,212.00 9,212.00

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 76

Chapter 6 - Accounting for Merchandising Businesses 215. Journalize the following transactions assuming a perpetual inventory system: May 5 Purchased merchandise from Archie Co., $6,000, terms FOB shipping point, 2/10, n/30. Prepaid freight costs of $100 were added to the invoice. 12 Issued a debit memo to Archie Co. for $2,500 of merchandise returned from purchase on May 5. 14 Paid Archie Co. for invoice of May 5, less debit memo of May 12 and discount. Journal Date

Description

Post. Ref.

Debit

Credit

ANSWER: Journal Date

Description

Post. Ref.

May 5 Merchandise Inventory Accounts Payable 12 Accounts Payable Merchandise Inventory 14 Accounts Payable Cash DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Debit Credit 5,980 5,980 2,450 2,450 3,530 3,530

Page 77

Chapter 6 - Accounting for Merchandising Businesses 216. Record the following transactions for Sparky’s Pet Shop using the general journal form provided below. Assume Sparky’s uses a perpetual inventory system. Omit transaction descriptions from entries. Date Aug. 1 3 7 10 11 20

Transaction Purchased $6,000 of merchandise on account, terms 2/10, n/30. Returned $1,500 of merchandise purchased on August 1 due to defects. Recorded cash sales for the first week of August, $9,750; cost of the merchandise was $4,000. Made sale on account to a local breeder for $500, terms 1/10, net 30; cost of the merchandise was $200. Paid for the merchandise purchased on August 1, less return. Received payment from sale of August 10. The customer took the discount. Journal

Date

Description

Post. Ref.

Debit

Credit

Page 78

Chapter 6 - Accounting for Merchandising Businesses ANSWER: Journal Date Description Aug. 1 Merchandise Inventory Accounts Payable

Post. Ref. Debit Credit 5,880 5,880

3 Accounts Payable Merchandise Inventory

1,470

7 Cash Sales

9,750

7 Cost of Merchandise Sold Merchandise Inventory

4,000

1,470

9,750

4,000

10 Accounts Receivable Sales

495

10 Cost of Merchandise Sold Merchandise Inventory

200

11 Accounts Payable Cash 20 Cash Accounts Receivable

495

200 4,410 4,410 495 495

DIFFICULTY:

Page 79

Chapter 6 - Accounting for Merchandising Businesses 217. Journalize the following transactions for both Abbott Co. (seller) and Dalton Co. (buyer). Assume both the companies use the perpetual inventory system. July 3 5 9 11

Abbott Co. sold merchandise on account to Dalton Co., $7,500, terms FOB shipping point, n/eom. The cost of the merchandise sold was $4,400. Dalton Co. paid $275 freight charges on purchase from Abbott Co. Abbott Co. issued Dalton Co. a credit memo for merchandise returned, $2,250. The cost of the merchandise returned was $1,325. Abbott Co. received payment from Dalton Co. for purchase of July 3.

Date

Abbott Co. Description Debit

Credit

Dalton Co. Description Debit

Credit

ANSWER: Dalton Co. Abbott Co. Date Description Debit Credit Description Debit Credit July Accounts 7,500 Merch. Inventory 7,500 3 Receivable Sales 7,500 Accounts Payable 7,500 Cost of Merch. 4,400 Sold Merch. Inventory 4,400 5

Merch. Inventory

275

Cash 9

275

Customer Refunds 2,250 Accounts Payable 2,250 Payable Accounts Rec. 2,250 Merch. Inventory 2,250 Merchandise Inventory Est. Returns Inventory

11 Cash Accounts Rec.

1,325 1,325 5,250 5,250

Accounts Payable Cash

5,250

5,250 Page 80

Chapter 6 - Accounting for Merchandising Businesses DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 218. Using the list of accounts below, construct a chart of accounts for a merchandising business that rents out a portion of its building, and assign account numbers and arrange the accounts in balance sheet and income statement order (“1” for assets, and so on). Each account number should have three digits. Contra accounts should be designated with a decimal of the account (100.1 for contra of account 100). Assets and liabilities should be in order of liquidity; expenses should be in alphabetical order. Accounts Payable Interest Expense Accounts Receivable Land Accumulated Depr.—Equip. Merchandise Inventory Advertising Expense Notes Payable

Salaries Payable Sales Supplies Expense Unearned Revenue

Cash Cost of Merchandise Sold Depreciation Expense— Equip. Equipment

Utilities Expense

ANSWER:

Office Supplies Owner, Capital Owner, Drawing Rent Revenue Salaries Expense

Acct. No. Description 100 Cash 103 Accounts Receivable 105 Merchandise Inventory 107 Office Supplies 110 120

Land Equipment Accumulated Depr.— Equip. Accounts Payable Salaries Payable Unearned Revenue Notes Payable Owner, Capital

Acct. No. Description 302 Owner, Drawing 400 Sales 500 Cost of Merchandise Sold 502 Advertising Expense Depreciation Expense– 504 Equip. 506 Salaries Expense

120.1 508 200 510 202 600 204 700 207 300 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.05 - Accounting Cycle ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Supplies Expense Utilities Expense Rent Revenue Interest Expense

Page 81

Chapter 6 - Accounting for Merchandising Businesses 219. Journalize the following transactions for Evans Company. Assume the company uses a perpetual inventory system. (a) (b) (c) (d)

Sold merchandise for $645 cash. The cost of merchandise sold was $375. Sold merchandise for $432 and accepted VISA as the form of payment. The cost of merchandise sold was $195. Sold merchandise on account for $670. The cost of merchandise sold was $438. Paid credit card fees for the month of $85. Journal

Date

Post. Ref.

Description

Debit

Credit

ANSWER: Journal Date

Description

(a) Cash Sales Cost of Merchandise Sold Merchandise Inventory (b) Cash

Post. Debit Credit Ref. 645 645 375 375 432

Sales Cost of Merchandise Sold Merchandise Inventory (c) Accounts Receivable Sales Cost of Merchandise Sold Merchandise Inventory (d) Credit Card Expense Cash

432 195 195 670 670 438 438 85 85

Page 82

Chapter 6 - Accounting for Merchandising Businesses DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 220. Abbey Co. sold merchandise to Gomez Co. on account, $35,000, terms 2/15, net 45. The cost of the merchandise sold is $24,500. Abbey Co. issued a credit memo for $3,600 for merchandise returned that originally cost $1,700. Gomez Co. paid the invoice within the discount period. What is the amount of gross profit earned by Abbey Co. on the above transactions? ANSWER: Sales [$35,000 – ($35,000 × 2%)] – [$3,600 – ($3,600 × 2%)] – Cost of Merchandise Sold ($24,500 – $1,700) = Gross Profit $7,972 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 221. Calculate the gross profit for Jonas Company based on the following data: Sales Selling expenses Cost of merchandise sold ANSWER: DIFFICULTY:

$764,000 52,500 538,000 Sales, $764,000 – Cost of Merchandise Sold, $538,000 = Gross Profit, $226,000 Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 83

Chapter 6 - Accounting for Merchandising Businesses 222. Which of the following accounts would be included in the chart of accounts of a merchandising company using the (a) periodic inventory system, (b) perpetual inventory system, or (c) both systems? (1) Purchases (2) Merchandise Inventory (3) Sales (4) Purchases Discounts (5) Cost of Merchandise Sold (6) Freight In (7) Delivery Expense ANSWER: DIFFICULTY:

(1) a (2) c (3) c (4) a (5) b (6) a (7) c Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 223. Using the letter preceding each account, arrange the following selected accounts in the order they would normally appear in a chart of accounts of a company that uses a multiple-step income statement. (a) (b) (c) (d) (e) (f) (g)

Accounts Payable Accounts Receivable Merchandise Inventory Miscellaneous Selling Expense Interest Expense Misc. Admin. Expense Freight Out

ANSWER:

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

DIFFICULTY:

Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.06-02 - 06-02 ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic

Page 84

Chapter 6 - Accounting for Merchandising Businesses 224. Journalize the following transactions assuming the perpetual inventory system: Sold merchandise on account for $3,750 including terms. The cost of the July 3 merchandise sold was $2,000. 5 Issued credit memo for $1,050 for merchandise returned from sale on July 3. The cost of the merchandise returned was $610. 12 Received check for the amount due for sale on July 3 less return on July 5. 17 Sold merchandise for $7,000 plus 6% sales tax to cash customers. The cost of the merchandise sold was $3,830.

Date

Description

Journal Post. Ref.

Debit

Credit

Page 85

Chapter 6 - Accounting for Merchandising Businesses ANSWER: Journal Date Description July 3 Accounts Receivable Sales

Post. Ref.

Debit Credit 3,750 3,750

3 Cost of Merchandise Sold Merchandise Inventory

2,000

5 Customer Refunds Payable Accounts Receivable

1,050

5 Merchandise Inventory Estimated Returns Inventory

2,000

1,050 610 610

12 Cash Accounts Receivable

2,700

17 Cash Sales Sales Tax Payable

7,420

17 Cost of Merchandise Sold Merchandise Inventory

3,830

2,700

7,000 420

3,830

DIFFICULTY:

Oct. 31

Cost of Merchandise Sold Merchandise Inventory

93,400 93,400

DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-03 - 06-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 86

Chapter 6 - Accounting for Merchandising Businesses 226. Selected accounts and amounts appear below. Journalize the closing entry, assuming a perpetual inventory system. Merchandise inventory Cost of merchandise sold

$ 45,500 652,500

ANSWER:

Owner, Capital Cost of Merchandise Sold DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-03 - 06-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.08 - Closing Entries ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

652,500 652,500

227. The records of Penny Co. indicated that $415,000 of merchandise should be on hand on December 31. The physical inventory indicates that $370,000 of merchandise is actually on hand. Journalize the adjusting entry for the inventory shrinkage for the year ended December 31. Journal Date

Description

Post. Ref.

Debit

Credit

ANSWER: Journal Post. Date Description Ref. Dec. 31 Cost of Merchandise Sold Merchandise Inventory DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-03 - 06-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Debit Credit 45,000 45,000

Page 87

Chapter 6 - Accounting for Merchandising Businesses 228. Prepare (a) a single-step income statement, (b) a statement of owner's equity, and (c) a balance sheet in report form from the following data for Burt Co., taken from the ledger after adjustments on December 31, the end of the fiscal year. Accounts Payable Accounts Receivable Accumulated Depreciation—Office Equipment Accumulated Depreciation—Store Equipment Administrative Expenses Cash Cost of Merchandise Sold Interest Expense Maeve Burt, Capital Maeve Burt, Drawing Merchandise Inventory Note Payable (due in two years) Office Equipment Prepaid Insurance Rent Revenue Salaries Payable Sales Selling Expenses Store Equipment Supplies ANSWER:

$97,200 64,300 72,750 162,100 56,500 53,000 121,700 12,000 81,750 52,000 93,250 154,000 149,750 6,500 17,500 28,700 365,500 41,500 325,000 4,000

(a) Burt Co. Income Statement For the Year Ended December 31 Revenues: Sales Rent revenue Total revenues Expenses: Cost of merchandise sold Selling expenses Administrative expenses Interest expense Total expenses Net income

$365,500 17,500 $383,000 $121,700 41,500 56,500 12,000 231,700 $151,300

(b) Burt Co. Statement of Owner's Equity For the Year Ended December 31 Maeve Burt, capital, January 1 Net income for the year Withdrawals Increase in owner's equity Maeve Burt, capital, December 31

$ 81,750 $151,300 (52,000) 99,300 $181,050

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Chapter 6 - Accounting for Merchandising Businesses

(c) Burt Co. Balance Sheet December 31 Assets Current assets: Cash Accounts receivable Merchandise inventory Prepaid insurance Supplies Total current assets Property, plant, and equipment: Store equipment Less accum. depreciation Office equipment Less accum. depreciation Total property, plant, and equipment Total assets

$53,000 64,300 93,250 6,500 4,000 $221,050 $325,000 162,100 $162,900 $149,750 72,750 77,000 239,900 $460,950

Liabilities Current liabilities: Accounts payable Salaries payable Total current liabilities Long-term liabilities: Note payable (due in two years) Total liabilities

$97,200 28,700 $125,900 154,000 $279,900

Owner's Equity Maeve Burt, capital Total liabilities and owner's equity

181,050 $460,950

DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 89

Chapter 6 - Accounting for Merchandising Businesses 229. Prepare a multiple-step income statement for Armstrong Co. from the following data for the year ended December 31. Sales, $755,000; cost of merchandise sold, $330,000; administrative expenses, $35,000; interest expense, $30,000; rent revenue, $25,000; selling expenses, $50,000. ANSWER: Armstrong Co. Income Statement For the Year Ended December 31 Sales Cost of merchandise sold Gross profit Operating expenses: Selling expenses Administrative expenses Total operating expenses Income from operations Other revenue and expense: Rent revenue Interest expense Net income

$755,000 330,000 $425,000 $50,000 35,000 85,000 $340,000 $25,000 (30,000)

(5,000) $335,000

DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 230. Selected data from the ledger of Burt Co., after adjustments, on September 30, the end of the fiscal year, are listed as follows: Accounts Receivable Accumulated Depreciation Administrative Expenses Bob Burt, Capital Bob Burt, Drawing Cost of Merchandise Sold Interest Revenue

$ 39,120 60,540 90,000 85,000 65,000 550,000 10,000

Office Equipment Prepaid Insurance Note Payable Salaries Payable Sales Selling Expenses Supplies

$ 82,700 4,680 77,750 3,060 950,000 102,000 3,125

Prepare a single-step income statement and a statement of owner's equity.

Page 90

Chapter 6 - Accounting for Merchandising Businesses ANSWER:

Burt Co. Income Statement For the Year Ended September 30 Revenues: Sales Interest revenue Total revenues Expenses: Cost of merchandise sold Selling expenses Administrative expenses Total expenses Net income

$950,000 10,000 $960,000 $550,000 102,000 90,000 742,000 $218,000

Burt Co. Statement of Owner's Equity For the Year Ended September 30 Bob Burt, capital, October 1 Net income for the year Withdrawals Increase in owner's equity Bob Burt, capital, September 30

$ 85,000 $218,000 (65,000) 153,000 $238,000

DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 231. The following data for the current year ended June 30 are from the accounting records of Zanadu Co.: Administrative expenses Cost of merchandise sold Interest expense Rent revenue Sales Selling expenses

$ 28,750 181,440 3,600 1,500 534,440 65,000

Prepare a multiple-step income statement for the year ended June 30.

Page 91

Chapter 6 - Accounting for Merchandising Businesses ANSWER:

Zanadu Co. Income Statement For the Year Ended June 30 Sales Cost of merchandise sold Gross profit Operating expenses: Selling expenses Administrative expenses Total operating expenses Income from operations Other revenue and expense: Rent revenue Interest expense Net income

$534,440 181,440 $353,000 $65,000 28,750 93,750 $259,250 $ 1,500 (3,600)

(2,100) $257,150

DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-04 - 06-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 232. Using the following data taken from Hsu’s Imports Inc. which uses a periodic inventory system, determine the gross profit to be reported on the income statement for the year ended March 31. Merchandise inventory, April 1 Merchandise inventory, March 31 Purchases Purchases returns and allowances Purchases discounts Sales Freight in ANSWER:

$ 193,250 180,100 1,079,600 51,200 18,500 1,860,000 19,250

Gross Profit = Sales – COMS* = $1,860,000 – $1,042,300** = $817,700 *Cost of merchandise sold **Cost of merchandise sold: Merchandise inventory, April 1 Cost of merchandise purchased: Purchases Purchases returns and allowances Purchases discounts Net purchases Freight in Total cost of merchandise purchased Merchandise available for sale Merchandise inventory, March 31 Cost of merchandise sold

$ 193,250 $1,079,600 (51,200) (18,500) $1,009,900 19,250

1,029,150 $1,222,400 (180,100) $1,042,300

Page 92

Chapter 6 - Accounting for Merchandising Businesses DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 233. Using the following data taken from Hsu’s Imports Inc. which uses a periodic inventory system, prepare the cost of merchandise sold section of the income statement for the year ended March 31. Merchandise inventory, April 1 Merchandise inventory, March 31 Purchases Purchases returns and allowances Purchases discounts Sales Freight in ANSWER:

$ 193,250 180,100 1,079,600 51,200 18,500 1,860,000 19,250

Cost of merchandise sold: Merchandise inventory, April 1 $193,250 Cost of merchandise purchased: Purchases $1,079,600 Purchases returns and allowances (51,200) Purchases discounts (18,500) Net purchases $1,009,900 Freight in 19,250 Total cost of merchandise 1,029,150 purchased Merchandise available for sale $1,222,400 Merchandise inventory, March 31 (180,100) Cost of merchandise sold $1,042,300

DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 93

Chapter 6 - Accounting for Merchandising Businesses 234. Using the following data taken from Payton Inc. which uses a periodic inventory system, prepare the cost of merchandise sold section of the income statement for the year ended May 31. Merchandise inventory, June 1 Merchandise inventory, May 31 Purchases Purchases returns and allowances Purchases discounts Sales Freight in ANSWER:

$ 393,250 380,100 1,579,600 81,200 16,500 2,060,000 59,250

Cost of merchandise sold: Merchandise inventory, June 1 $393,250 Cost of merchandise purchased: Purchases $1,579,600 Purchases returns and allowances (81,200) Purchases discounts (16,500) Net purchases $1,481,900 Freight in 59,250 Total cost of merchandise 1,541,150 purchased Merchandise available for sale $1,934,400 Merchandise inventory, May 31 (380,100) Cost of merchandise sold $1,554,300

DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 94

Chapter 6 - Accounting for Merchandising Businesses 235. Using the following data taken from Connor Inc., determine the gross profit to be reported on the income statement for the year ended May 31. Merchandise inventory, June 1 Merchandise inventory, May 31 Purchases Purchases returns and allowances Purchases discounts Sales Freight in ANSWER:

393,250 380,100 1,579,600 81,200 16,500 2,060,000 59,250

Gross Profit = Sales – COMS* = $2,060,000 – $1,554,300** = $505,700 *Cost of merchandise sold **Cost of merchandise sold: Merchandise inventory, June 1 Cost of merchandise purchased: Purchases Purchases returns and allowances Purchases discounts Net purchases Freight in Total cost of merchandise purchased Merchandise available for sale Merchandise inventory, May 31 Cost of merchandise sold

$ 393,250 $1,579,600 (81,200) (16,500) $1,481,900 59,250 1,541,150 $1,934,400 380,100 $1,554,300

DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 95

Chapter 6 - Accounting for Merchandising Businesses 236. The following data were extracted from the accounting records of Dana Designs for the year ended March 31. Merchandise inventory, April 1 Merchandise inventory, March 31 Purchases Purchases returns and allowances Purchases discounts Sales Freight in

$530,000 375,000 270,000 25,000 10,000 770,000 3,000

Prepare the cost of merchandise sold section of the income statement for the year ended March 31, using the periodic method. ANSWER:

Dana Designs Income Statement For the Year Ended March 31 Sales Cost of merchandise sold: Merchandise inventory, April 1 Cost of merchandised purchased: Purchases Purchases returns and allowances Purchases discounts Net purchases Freight in Total cost of merchandise purchased Merchandise available for sale Merchandise inventory, March 31 Cost of merchandise sold Gross profit

$770,000 $530,000 $270,000 (25,000) (10,000) $235,000 3,000 238,000 $768,000 (375,000) 393,000 $377,000

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 96

Chapter 6 - Accounting for Merchandising Businesses 237. Based upon the following data for a business with a periodic inventory system, determine the cost of merchandise sold for August. Merchandise inventory, August 1 Merchandise inventory, August 31 Purchases Purchases returns and allowances Purchases discounts Freight in ANSWER:

$ 75,560 96,330 373,880 14,760 10,900 4,135

Cost of merchandise sold: Merchandise inventory, August 1 Cost of merchandise purchased: Purchases Purchases returns and allowances Purchases discounts Net purchases Freight in Total cost of merchandise purchased Merchandise available for sale Merchandise inventory, August 31 Cost of merchandise sold

$ 75,560 $373,880 (14,760) (10,900) $348,220 4,135 352,355 $427,915 (96,330) $331,585

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.06-APP - 06-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 97

Chapter 7 - Inventories True / False 1. One of the two internal control procedures over inventory is to properly report inventory on the financial statements. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-01 - 07-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 2. A purchase order establishes an initial record of the receipt of the inventory. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-01 - 07-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 3. A perpetual inventory system is an effective means of control over inventory. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-01 - 07-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 4. A subsidiary inventory ledger can be an aid in maintaining inventory levels at their proper levels. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-01 - 07-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 1

Chapter 7 - Inventories 5. Safeguarding inventory and proper reporting of the inventory in the financial statements are the reasons for controlling the inventory. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-01 - 07-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 6. Inventory controls start when the merchandise is shelved in the store area. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-01 - 07-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 7. A physical inventory should be taken at the end of every month. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-01 - 07-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 8. The specific identification inventory method should be used when the inventory consists of identical, low-cost units that are purchased and sold frequently. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 2

Chapter 7 - Inventories 9. The choice of an inventory costing method has no significant impact on the financial statements. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 10. Of the three widely used inventory costing methods (FIFO, LIFO, and average cost), the LIFO method of costing inventory assumes costs are charged based on the most recent purchases first. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 11. When using the FIFO inventory costing method, the most recent costs are assigned to the cost of merchandise sold. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 12. FIFO is the inventory costing method that follows the physical flow of the goods. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 3

Chapter 7 - Inventories 13. Under the LIFO inventory costing method, the most recent costs are assigned to ending inventory. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 14. The weighted average inventory cost flow method is the least used of the inventory costing methods. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 15. If the perpetual inventory system is used, the merchandise inventory account is debited for purchases of merchandise. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 16. Under the periodic inventory system, the merchandise inventory account continuously discloses the amount of inventory on hand. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 4

Chapter 7 - Inventories 17. Under the periodic inventory system, a physical inventory is taken to determine the cost of the inventory on hand and the cost of the merchandise sold. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 18. The three inventory costing methods will normally each yield different amounts of net income. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-05 - 07-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 19. The average cost method will always yield results between FIFO and LIFO. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-05 - 07-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 20. During periods of increasing costs, the use of the FIFO method of costing inventory will result in a greater amount of net income than would result from the use of the LIFO cost method. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-05 - 07-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 5

Chapter 7 - Inventories 21. During periods of increasing costs, the use of the FIFO method of costing inventory will yield an inventory amount for the balance sheet that is higher than LIFO would produce. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-05 - 07-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 22. During periods of rapidly rising costs, the use of the LIFO method results in illusory or inventory profits. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-05 - 07-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 23. During periods of decreasing costs, the use of the LIFO method of costing inventory will result in a lower amount of net income than would result from the use of the FIFO method. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-05 - 07-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 24. During periods of increasing costs, an advantage of the LIFO inventory cost method is that it matches more recent costs against current revenues. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-05 - 07-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 7 - Inventories 25. In valuing merchandise for inventory purposes, net realizable value is the estimated selling price less any direct costs of disposal. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 26. Unsold consigned merchandise should be included in the consignee's inventory. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 27. If ending inventory for the year is understated, net income for the year is overstated. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 28. If ending inventory for the year is overstated, owner's equity reported on the balance sheet at the end of the year is understated. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 7 - Inventories 29. The lower of cost or market is a method of inventory valuation. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 30. "Market" as used in the phrase "lower of cost or market" for valuing inventory, refers to the price at which the inventory is being offered for sale by its owner. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 31. A consignor who has goods out on consignment with an agent should include the goods in ending inventory even though they are not in the possession of the consignor. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 32. The use of the lower-of-cost-or-market method of inventory valuation increases net income for the period in which the inventory replacement price declined. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 7 - Inventories 33. The lower-of-cost-or-market method of determining the value of ending inventory can be applied on an item-by-item basis, by major classification of inventory, or by the total inventory. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 34. When merchandise inventory is shown on the balance sheet, both the method of determining the cost of the inventory and the method of valuing the inventory should be shown. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 35. It is not unusual for large companies to use different inventory costing methods for different segments of their inventory. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 36. Direct disposal costs do not include special advertising or sales commissions. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 7 - Inventories 37. Inventory errors, if not discovered, will self-correct within two years. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 38. Generally, the lower the days' sales in inventory, the better. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-07 - 07-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 39. One negative effect of carrying too much inventory is risk that customers will change their buying habits. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.07-07 - 07-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 40. Average inventory is computed by adding the inventory at the beginning of the period to the inventory at the end of the period and dividing by 2. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-07 - 07-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 7 - Inventories 41. Inventory turnover measures the length of time it takes to acquire, sell, and replace the inventory. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-07 - 07-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 42. In the retail inventory method, the cost to retail ratio is equal to the cost of merchandise sold divided by the retail price of the merchandise sold. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-APP - 07-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 43. Use of the retail inventory method requires taking a physical count of inventory. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-APP - 07-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 44. If a fire destroys the merchandise inventory, the gross profit method can be used to estimate the cost of merchandise destroyed. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.07-APP - 07-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 7 - Inventories 45. If a company uses a periodic inventory system, the gross profit method can be used to estimate inventory for monthly or quarterly statements. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.07-APP - 07-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic Multiple Choice 46. Under a perpetual inventory system, the amount of each type of merchandise on hand is available in the a. customer's ledger b. creditor's ledger c. inventory ledger d. purchase ledger ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-01 - 07-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 47. Which document authorizes the purchase of inventory from an approved vendor? a. purchase order b. petty cash voucher c. receiving report d. vendor's invoice ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-01 - 07-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 7 - Inventories 48. The primary objectives of control over inventory are a. safeguarding the inventory from damage and maintaining constant observation of the inventory b. reporting inventory in the financial statements and taking a physical inventory c. maintaining constant observation of the inventory and reporting inventory in the financial statements d. safeguarding inventory from damage and reporting inventory in the financial statements ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-01 - 07-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 49. Taking a physical count of inventory a. is not necessary when a periodic inventory system is used b. should be done near year-end c. has no internal control relevance d. is not necessary when a perpetual inventory system is used ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-01 - 07-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 50. Control of inventory should begin as soon as the inventory is ordered. Which of the following internal control steps is not done to meet this goal? a. check the invoice to the receiving report b. check the invoice to the purchase order c. check the invoice with the person who specifically purchased the item d. check the invoice for mathematical accuracy ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-01 - 07-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 7 - Inventories 51. All of the following are documents used for inventory control except a a. petty cash voucher b. vendor's invoice c. receiving report d. purchase order ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-01 - 07-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 52. Which document establishes an initial record of the receipt of inventory? a. receiving report b. vendor's invoice c. purchase order d. petty cash voucher ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-01 - 07-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 53. Which of the following is not an example of safeguarding inventory? a. storing inventory in restricted areas b. physical devices such as two-way mirrors, cameras, and alarms c. matching receiving documents, purchase orders, and vendor’s invoice d. returning inventory that is defective or broken ANSWER: d DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-01 - 07-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 7 - Inventories 54. Which of the following methods is appropriate for a business whose inventory consists of a relatively small number of unique, high-cost items? a. FIFO b. LIFO c. average d. specific identification ANSWER: d DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 55. Ending inventory is made up of the oldest purchases when a company uses a. first-in, first-out b. last-in, first-out c. average cost d. retail method ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 56. When merchandise sold is assumed to be in the order in which the purchases were made, the company is using a. first-in, last-out b. last-in, first-out c. first-in, first-out d. average cost ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 7 - Inventories 57. The two most widely used methods for determining the cost of inventory are a. FIFO and LIFO b. FIFO and average cost c. LIFO and average cost d. gross profit and average cost ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 58. Cost flow is in the order in which costs were incurred when using a. average cost b. last-in, first-out c. first-in, first-out d. weighted average ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 59. Cost flow is in the reverse order in which costs were incurred when using a. weighted average b. last-in, first-out c. first-in, first-out d. average cost ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 7 - Inventories 60. The inventory method that assigns the most recent costs to cost of merchandise sold is a. FIFO b. LIFO c. weighted average d. specific identification ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 61. The inventory costing method that reports the most current prices in ending inventory is a. FIFO b. specific identification c. LIFO d. average cost ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 62. The inventory costing method that reports the earliest costs in ending inventory is a. FIFO b. LIFO c. weighted average d. specific identification ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 7 - Inventories 63. Which of the following companies would be more likely to use the specific identification inventory costing method? a. Gordon’s Jewelers b. Lowe’s c. Best Buy d. Walmart ANSWER: a DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic Addison, Inc. uses a perpetual inventory system. The following is information about one inventory item for the month of September: Sept. 1 4 10 17 30

Inventory Sale Purchase Sale Purchase

20 units at $20 10 units 30 units at $25 20 units 10 units at $30

64. If Addison uses FIFO, the cost of the ending merchandise inventory on September 30 is a. $800 b. $650 c. $750 d. $700 ANSWER: a RATIONALE: Ending Inventory Using FIFO = 20 units (at $25 from the September 10 purchase) + 10 units (at $30 from the September 30 purchase) = $500 + $300 = $800 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 7 - Inventories 65. Use the information for Addison, Inc. If Addison uses LIFO, the cost of the ending merchandise inventory on September 30 is a. $800 b. $650 c. $750 d. $700 ANSWER: c RATIONALE: Ending Inventory Using LIFO = 10 units (at $20 from the beginning inventory) + 10 units (at $25 from the September 10 purchase) + 10 units (at $30 from the September 30 purchase) = $200 + $250 + $300 = $750 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 66. When using a perpetual inventory system, the journal entry to record the cost of merchandise sold is a. debit Cost of Merchandise Sold; credit Sales b. debit Cost of Merchandise Sold; credit Merchandise Inventory c. debit Merchandise Inventory; credit Cost of Merchandise Sold d. No journal entry is made to record the cost of merchandise sold. ANSWER: b DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 67. Under the _____ inventory method, accounting records maintain a continuously updated inventory value. a. retail b. periodic c. physical d. perpetual ANSWER: d DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 7 - Inventories 68. The inventory data for an item for November are: Nov. 1 Inventory 20 units at $19 4 Sale 10 units 10 Purchase 30 units at $20 17 Sale 20 units 30 Purchase 10 units at $21 Using a perpetual system, what is the cost of merchandise sold for November if the company uses LIFO? a. $610 b. $600 c. $590 d. $580 ANSWER: c RATIONALE: Cost of Merchandise Sold for November Using LIFO = 10 units (at $19 from beginning inventory) + 20 units (at $20 from November 10 purchase) = $190 + $400 = $590 DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 69. The inventory data for an item for November are: Nov. 1 Inventory 20 units at $19 4 Sale 10 units 10 Purchase 30 units at $20 17 Sale 20 units 30 Purchase 10 units at $21 Using a perpetual system, what is the cost of merchandise sold for November if the company uses FIFO? a. $610 b. $600 c. $590 d. $580 ANSWER: d RATIONALE: Cost of Merchandise Sold for November Using FIFO = 20 units (at $19 from beginning inventory) + 10 units (at $20 from November 10 purchase) = $380 + $200 = $580 DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 7 - Inventories Use the information below to answer the following questions. Boxwood Company sells blankets for $60 each. The following was taken from the inventory records during May. The company had no beginning inventory on May 1. Date May 3 10 17 20 23 30

Blankets Purchase Sale Purchase Sale Sale Purchase

Units 5 3 10 6 3 10

Cost $20 24

70. Assuming that the company uses the perpetual inventory system, determine the cost of merchandise sold for the sale of May 20 using the LIFO inventory cost method. a. $136 b. $144 c. $180 d. $120 ANSWER: b RATIONALE: Cost of Merchandise Sold for Sale of May 20 Using LIFO = 6 units (at $24 from May 17 purchase) = $144 DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 71. Assuming that the company uses the perpetual inventory system, determine the cost of merchandise sold for the sale of May 20 using the FIFO inventory cost method. a. $120 b. $180 c. $136 d. $144 ANSWER: c RATIONALE: Cost of Merchandise Sold for Sale of May 20 Using FIFO = 2 units (at $20 from May 3 purchase) + 4 units (at $24 from May 17 purchase) = $40 + $96 = $136 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 7 - Inventories 72. Assuming that the company uses the perpetual inventory system, determine the ending inventory value for the month of May using the FIFO inventory cost method. a. $364 b. $372 c. $324 d. $320 ANSWER: b RATIONALE: Cost of Ending Inventory for Month of May Using FIFO = 3 units (at $24 from May 17 purchase) + 10 units (at $30 from May 30 purchase) = $72 + $300 = $372 DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 73. Assuming that the company uses the perpetual inventory system, determine the gross profit for the sale of May 23 using the FIFO inventory cost method. a. $108 b. $120 c. $72 d. $180 ANSWER: a RATIONALE: Gross Profit for Sale of May 23 = Sales – Cost of Merchandise Sold = 3 units (at $60) – 3 units (at $24 from May 17 purchase) = $180 – $72 = $108 DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 7 - Inventories 74. Assuming that the company uses the perpetual inventory system, determine the ending inventory for the month of May using the LIFO inventory cost method. a. $324 b. $372 c. $320 d. $364 ANSWER: d RATIONALE: Ending Inventory for Month of May Using LIFO = 2 units (at $20 from May 3 purchase) + 1 unit (at $24 from May 17 purchase) + 10 units (at $30 from May 30 purchase) = $40 + $24 + $300 = $364 DIFFICULTY:

c Gross Profit for Month of May = Sales – Cost of Merchandise Sold = 12 units (at $60) – [3 units (at $20 from May 3 purchase) + 9 units (at $24 from May 17 purchase)] = $720 – ($60 + $216) = $444 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 7 - Inventories Use the information below to answer the following questions. The following units of an inventory item were available for sale during the year: Beginning inventory 10 units at $55 First purchase 25 units at $60 Second purchase 30 units at $65 Third purchase 15 units at $70 The firm uses the periodic inventory system. During the year, 60 units of the item were sold. 76. The value of ending inventory using FIFO is a. $1,250 b. $1,350 c. $1,375 d. $1,150 ANSWER: RATIONALE:

c Ending Inventory Using FIFO = 5 units (at $65 from second purchase) + 15 units (at $70 from third purchase) = $325 + $1,050 = $1,375 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 77. The value of ending inventory using LIFO is a. $1,250 b. $1,350 c. $1,375 d. $1,150 ANSWER: RATIONALE:

d Ending Inventory Using LIFO = 10 units (at $55 from beginning inventory) + 10 units (at $60 from first purchase) = $550 + $600 = $1,150 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 7 - Inventories 78. The value of ending inventory rounded to the nearest dollar using average cost is a. $1,353 b. $1,263 c. $1,375 d. $1,150 ANSWER: b RATIONALE: Average Cost per Unit = [($55 × 10 units) + ($60 × 25 units) + ($65 × 30 units) + ($70 × 15 units)]/(10 units + 25 units + 30 units + 15 units) = $63.125 Value of Ending Inventory Using Average Cost = 20 units × $63.125 = $1,26 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic Use the information below to answer the following questions. The following lots of a particular commodity were available for sale during the year: Beginning inventory First purchase Second purchase Third purchase

10 units at $30 25 units at $32 30 units at $34 10 units at $35

79. The firm uses the periodic system, and there are 20 units of the commodity on hand at the end of the year. What is the amount of inventory at the end of the year according to the LIFO method? a. $655 b. $620 c. $690 d. $659 ANSWER: b RATIONALE: Ending Inventory Using LIFO = 10 units (at $30 from beginning inventory) + 10 units (at $32 from first purchase) = $300 + $320 = $620 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 7 - Inventories 80. The firm uses the periodic system, and there are 20 units of the commodity on hand at the end of the year. What is the amount of inventory at the end of the year according to the FIFO method? a. $655 b. $620 c. $690 d. $659 ANSWER: c RATIONALE: Ending Inventory Using FIFO = 10 units (at $34 from second purchase) + 10 units (at $35 from third purchase) = $340 + $350 = $690 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 81. The firm uses the periodic system, and there are 20 units of the commodity on hand at the end of the year. What is the amount of inventory at the end of the year rounded to the nearest dollar according to the average cost method? a. $655 b. $620 c. $690 d. $659 ANSWER: d RATIONALE: Average Cost per Unit = [($30 × 10 units) + ($32 × 25 units) + ($34 × 30 units) + ($35 × 10 units)]/(10 units + 25 units + 30 units + 10 units) = $32.933 Value of Ending Inventory Using Average Cost = 20 units × $32.933 = $659 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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5 units at $61 15 units at $63 10 units at $74 10 units at $77

The firm uses the periodic system, and there are 20 units of the commodity on hand at the end of the year. 82. What is the amount of cost of merchandise sold for the year according to the average cost method? a. $1,380 b. $1,375 c. $1,510 d. $1,250 ANSWER: a RATIONALE: Average Cost per Unit = [($61 × 5 units) + ($63 × 15 units) + ($74 × 10 units) + ($77 × 10 units)]/(5 units + 15 units + 10 units + 10 units) = $69 Cost of Merchandise Sold for Year Using Average Cost Method = $69 × 20 units = $1,380 DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 83. What is the amount of cost of merchandise sold for the year according to the FIFO method? a. $1,380 b. $1,375 c. $1,510 d. $1,250 ANSWER: d RATIONALE: Cost of Merchandise Sold for Year Using FIFO = 5 units (at $61 from beginning inventory) + 15 units (at $63 from first purchase) = $305 + $945 = $1,250 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 7 - Inventories 84. What is the amount of cost of merchandise sold for the year according to the LIFO method? a. $1,380 b. $1,375 c. $1,510 d. $1,250 ANSWER: c RATIONALE: Cost of Merchandise Sold for Year Using LIFO = 10 units (at $74 from second purchase) + 10 units (at $77 from third purchase) = $740 + $770 = $1,510 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 85. Under a periodic inventory system a. accounting records continuously disclose the amount of inventory b. a separate account for each type of merchandise is maintained in a subsidiary ledger c. a physical inventory is taken at the end of the period d. Merchandise Inventory is debited when goods are returned to vendors ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 7 - Inventories Use the information below to answer the following questions. The following lots of a particular commodity were available for sale during the year: Beginning inventory 10 units at $60 First purchase 25 units at $65 Second purchase 30 units at $68 Third purchase 15 units at $75 The firm uses the periodic system, and there are 25 units of the commodity on hand at the end of the year. 86. What is the amount of inventory at the end of the year using the FIFO method? a. $1,685 b. $1,575 c. $1,805 d. $3,585 ANSWER: RATIONALE:

c Ending Inventory Using FIFO = 10 units (at $68 from second purchase) + 15 units (at $75 from third purchase) = $680 + $1,125 = $1,805 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 87. What is the amount of inventory at the end of the year using the LIFO method? a. $1,685 b. $1,575 c. $1,805 d. $3,815 ANSWER: RATIONALE:

b Ending Inventory Using LIFO = 10 units (at $60 from beginning inventory) + 15 units (at $65 from first purchase) = $600 + $975 = $1,575 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 7 - Inventories 88. What is the amount of inventory at the end of the year rounded to the nearest dollar using the average cost method? a. $1,685 b. $1,575 c. $1,805 d. $3,705 ANSWER: a RATIONALE: Average Cost per Unit = [($60 × 10 units) + ($65 × 25 units) + ($68 × 30 units) + ($75 × 15 units)]/(10 units + 25 units + 30 units + 15 units) = $67.375 Ending Inventory Using Average Cost Method = $67.38 × 25 units = $1,685 DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 89. If Beginning Inventory (BI) + Purchases (P) – Ending Inventory (EI) = Cost of Merchandise Sold (COMS), an equivalent equation can be written as a. BI + P = COMS – EI b. BI – P = COMS + EI c. BI + P = COMS + EI d. EI + P = COMS – BI ANSWER: DIFFICULTY:

c Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.BB.07 - Critical Thinking ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 90. During a period of consistently rising prices, the method of inventory that will result in reporting the greatest cost of merchandise sold is a. FIFO b. LIFO c. average cost d. weighted average ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.07-05 - 07-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 7 - Inventories 91. During times of rising prices, which of the following is not an accurate statement? a. Average costing will yield results that are between those of FIFO and LIFO. b. LIFO will result in a higher cost of merchandise sold than FIFO. c. FIFO will result in a higher net income than LIFO. d. LIFO will result in higher income taxes than FIFO. ANSWER: d DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.07-05 - 07-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 92. If the revenues are correctly reported and the gross profit of a company is understated, what is the effect on owner’s equity? a. understated b. overstated c. correctly stated d. None of these choices ANSWER: a DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.07-05 - 07-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 93. If merchandise inventory is being valued at cost and the price level is steadily rising, the method of costing that will yield the highest net income is a. periodic b. LIFO c. FIFO d. average cost ANSWER: c DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.07-05 - 07-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 7 - Inventories 94. If merchandise inventory is being valued at cost and the purchase price is steadily falling, which method of costing will yield the largest net income? a. average cost b. LIFO c. FIFO d. weighted average ANSWER: b DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.07-05 - 07-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 95. Which of the following will be the same amount regardless of the cost flow assumption adopted? a. number of items ordered b. gross profit c. cost of goods sold d. ending merchandise inventory ANSWER: a DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.07-05 - 07-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 96. FIFO reports higher gross profit and net income than the LIFO method when a. prices are increasing b. prices are decreasing c. prices remain stable d. prices are reduced by 50% ANSWER: a DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.07-05 - 07-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 7 - Inventories 97. During a period of falling prices, which of the following inventory methods generally results in the lowest balance sheet amount for inventory? a. average cost method b. LIFO method c. FIFO method d. cannot tell without more information ANSWER: c DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.07-05 - 07-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 98. Damaged merchandise that can be sold only at prices below cost should be valued at a. net realizable value b. LIFO c. FIFO d. average cost ANSWER: a DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 99. If a manufacturer ships merchandise to a retailer on consignment, the unsold merchandise should be included in the inventory of the a. consignee b. retailer c. manufacturer d. shipper ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 7 - Inventories 100. Merchandise inventory at the end of the year was inadvertently overstated. Which of the following statements correctly states the effect of the error on net income, assets, and owner's equity? a. Net income is overstated, assets are overstated, and owner's equity is understated. b. Net income is overstated, assets are overstated, and owner's equity is overstated. c. Net income is understated, assets are understated, and owner's equity is understated. d. Net income is understated, assets are understated, and owner's equity is overstated. ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 101. Merchandise inventory at the end of the year was understated. Which of the following statements correctly states the effect of the error? a. Net income is understated. b. Net income is overstated. c. Cost of merchandise sold is understated. d. Merchandise inventory reported on the balance sheet is overstated. ANSWER: a DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 102. Merchandise inventory at the end of the year is overstated. Which of the following statements correctly states the effect of the error? a. Owner's equity is overstated. b. Cost of merchandise sold is overstated. c. Gross profit is understated. d. Net income is understated. ANSWER: a DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 7 - Inventories 103. If the cost of an item of inventory is $60 and the current replacement cost is $75, the amount included in inventory according to the lower of cost or market is a. $15 b. $60 c. $75 d. $135 ANSWER: b DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 104. Kristin’s Boutique has identified the following items for possible inclusion in its December 31 inventory. Which of the following would not be included in the year-end inventory? a. Merchandise purchased FOB shipping point was picked up by the freight company but had still not arrived at Kristin’s Boutique as of December 31. b. Kristin's has in its warehouse merchandise on consignment from Abby Co. c. Kristin's has sent merchandise to various retailers on a consignment basis. d. Kristin's has merchandise on hand that has been returned by customers because of wrong size. ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 105. During the taking of its physical inventory on December 31, Barry’s Bike Shop incorrectly counted its inventory as $350,000 instead of the correct amount of $280,000. The effect on the balance sheet and income statement would be a. assets overstated by $70,000; retained earnings understated by $70,000; and net income statement understated by $70,000 b. assets overstated by $70,000; retained earnings understated by $70,000; and no effect on the income statement c. assets, retained earnings, and net income all overstated by $70,000 d. assets and retained earnings overstated by $70,000 and net income understated by $70,000 ANSWER: c DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 7 - Inventories 106. If a company mistakenly counts more items during a physical inventory than actually exist, how will the error affect its bottom line? a. There will be no change to net income. b. Net income will be overstated. c. Net income will be understated. d. Only gross profit will be affected. ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 107. If a company mistakenly counts less items during a physical inventory than actually exist, how will the error affect the cost of merchandise sold? a. understated b. overstated c. no change d. only inventory will be affected ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 108. Determine the total value of the merchandise using net realizable value. Item Doll Horse a. $35 b. $80 c. $115 d. $25 ANSWER: RATIONALE:

Quantity 10 5

Selling Price $7 9

Commission $2 3

b Net Realizable Value = Estimated Selling Price – Direct Costs of Disposal Net Realizable Value = [(10 units × $7) + (5 units × $9)] – [(10 units × $2) + (5 units × $3)] = [($70 + $45) – ($20 + $15)] = $80 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 7 - Inventories 109. If a company values inventory at the lower of cost or market, which of the following is the value of merchandise inventory on the balance sheet? Apply the lower-of-cost-or-market method to inventory as a whole. Item Product C Product D a. $6,960 b. $7,700 c. $6,540 d. $7,280 ANSWER: RATIONALE:

Inventory Quantity 420 370

Unit Cost Price $6 12

Unit Market Price $ 5 14

a Total Cost of Inventory = Number of Units × Unit Cost Price = (420 units × $6) + (370 units × $12) = $6,960 Total Market Value of Inventory = Number of Units × Unit Market Price = (420 units × $5) + (370 units × $14) = $7,280 The value of the inventory using the lower-of-cost-or-market method as a whole is $6,960. DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 110. Too much inventory on hand a. ties up funds that could be used to improve operations b. increases the cost to safeguard the assets c. increases the losses due to price declines d. All of these choices ANSWER: d DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.07-07 - 07-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 7 - Inventories 111. Which of the following is used to analyze the efficiency and effectiveness of inventory management? a. inventory turnover only b. days’ sales in inventory only c. both inventory turnover and days’ sales in inventory d. neither inventory turnover nor days’ sales in inventory ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-07 - 07-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 112. Which of the following measures the relationship between cost of merchandise sold and the amount of inventory carried during the period? a. inventory turnover b. fixed asset turnover c. retail method of inventory costing d. gross profit method of inventory costing ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-07 - 07-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 113. Which of the following measures the length of time it takes to acquire, sell, and replace inventory? a. inventory turnover b. days’ sales in inventory c. retail method of inventory costing d. gross profit method of inventory costing ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-07 - 07-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 7 - Inventories 114. Excess inventory results in all of the following except a. tied-up funds that could be used to improve operations b. lost sales c. increased storage expense d. increased risk of loss due to damage ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.07-07 - 07-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 115. The days' sales in inventory measures the a. length of time it takes to acquire, sell, and replace the inventory b. length of time it takes to acquire and receive payment for the inventory c. number of days inventory is on hand prior to sale d. number of days inventory takes to arrive after ordering ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-07 - 07-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 116. For the year ended December 31, Depot Max’s cost of merchandise sold was $56,900. Inventory at the beginning of the year was $6,540. Ending inventory was $7,250. Compute Depot Max’s inventory turnover for the year. a. 8.7 b. 7.8 c. 8.3 d. 44.0 ANSWER: c RATIONALE: Inventory Turnover = Cost of Merchandise Sold/Average Inventory = $56,900 ÷ [($6,540 + $7,250) ÷ 2] = $56,900 ÷ $6,895 = 8.3 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-07 - 07-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 7 - Inventories 117. For the year ended December 31, Depot Max’s cost of merchandise sold was $56,900. Inventory at the beginning of the year was $6,540. Ending inventory was $7,250. Depot Max’s days' sales in inventory is closest to a. 42 b. 46 c. 8 d. 44 ANSWER: d RATIONALE: Days’ Sales in Inventory = Average Inventory/Average Daily Cost of Merchandise Sold = [($6,540 + $7,250) ÷ 2] ÷ [$56,900 ÷ 365] = $6,895 ÷ 156 = 44 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-07 - 07-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 118. The method of estimating inventory that uses records of the selling prices of the merchandise is called the a. retail method b. gross profit method c. inventory turnover method d. average cost method ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-APP - 07-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 7 - Inventories 119. On the basis of the following data, what is the estimated cost of the merchandise inventory on May 31 using the retail method? May 1 May 1–31 May 1–31

Merchandise inventory Purchases Sales

Cost $125,000 235,000

Retail $166,667 313,333 230,000

a. $250,000 b. $360,000 c. $172,500 d. $187,500 ANSWER: RATIONALE:

d Merchandise Available for Sale = Merchandise Inventory, May 1 + Purchases Merchandise Available for Sale at Cost = $125,000 + $235,000 = $360,000 Merchandise Available for Sale at Retail = $166,667 + $313,333 = $480,000 Ratio of Cost to Retail Price = $360,000 ÷ $480,000 = 75% Merchandise Inventory, May 31, at Retail = Merchandise Available for Sale at Retail – Sales for May = $480,000 – $230,000 = $250,000 Merchandise Inventory, May 31, at Cost = Merchandise Inventory, May 31, at Retail × Ratio of Cost to Retail Price = $250,000 × 75% = $187,500 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-APP - 07-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 120. If the estimated rate of gross profit is 30%, what is the estimated cost of the merchandise inventory on September 30, based on the following data? Sept. 1 Sept. 1–30 Sept. 1–30

Merchandise inventory (at cost) Purchases, net (at cost) Sales

$125,000 300,000 150,000

a. $320,000 b. $192,500 c. $275,000 d. $105,000 ANSWER: RATIONALE:

a Estimated Cost of Merchandise Sold = Sales for September – Estimated Gross Profit = $150,000 – ($150,000 × 30%) = $150,000 – $45,000 = $105,000 Estimated Merchandise Inventory, September 30 = Merchandise Available for Sale – Estimated Cost of Merchandise Sold = ($125,000 + $300,000) – $105,000 = $320,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-APP - 07-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Page 41

Chapter 7 - Inventories 121. All of the following are reasons to use an estimated method of costing inventory except a. perpetual inventory records are not maintained b. purchase records are not maintained c. a disaster has destroyed the inventory records and the inventory d. interim financial statements are required but physical inventory is only taken at the end of the financial accounting period ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.07-APP - 07-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 122. Garrison Company uses the retail method of inventory costing. It started the year with an inventory that had a retail cost of $45,000. During the year, Garrison purchased an inventory with a retail sales value of $300,000. After performing a physical inventory, Garrison calculated the inventory at retail to be $80,000. The markup is 100% of cost. Determine the ending inventory at its estimated cost. a. $160,000 b. $80,000 c. $40,000 d. $45,000 ANSWER: RATIONALE:

c As the markup is 100% of cost, the ratio of cost to retail is 50%. Ending Inventory at Cost = Ending Inventory at Retail × Ratio of Cost to Retail = $80,000 × 50% = $40,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-APP - 07-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 123. A company will most likely use an estimated method of determining inventory when a. the company decides not to do a physical inventory b. a natural disaster has destroyed most of the inventory c. the company has not kept up with its inventory records d. the company is preparing annual financial statements ANSWER: b DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-APP - 07-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Page 42

Chapter 7 - Inventories 124. Stevens Company started the year with an inventory cost of $145,000. During the month of January, Stevens purchased inventory that cost $53,000. January sales totaled $140,000. Estimated gross profit is 35%. The estimated ending inventory as of January 31 is a. $58,000 b. $91,000 c. $107,000 d. $69,300 ANSWER: c RATIONALE: Estimated Cost of Merchandise Sold = Sales for January – Estimated Gross Profit = $140,000 – ($140,000 × 35%) = $140,000 – $49,000 = $91,000 Estimated Merchandise Inventory, January 31 = Merchandise Available for Sale – Estimated Cost of Merchandise Sold = ($145,000 + $53,000) – $91,000 = $107,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-APP - 07-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic Matching Match each description to the appropriate document used for inventory control (a–c). a. Receiving report b. Vendor’s invoice c. Purchase order DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-01 - 07-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 125. Last document in the chain, use to compare all three for accuracy ANSWER: b 126. Authorizes the purchase of inventory from an approved vendor ANSWER: c 127. Establishes an initial record of the receipt of inventory ANSWER: a

Page 43

Chapter 7 - Inventories Match each description to the appropriate cost flow assumption (a–d). a. Weighted average b. First-in, first-out (FIFO) c. Last-in, first-out (LIFO) d. Specific identification DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 128. The cost of the units sold and in ending inventory is a weighted average of the purchase costs. ANSWER: a 129. Cost flow is assumed to be in the reverse order of costs incurred. ANSWER: c 130. Cost flow matches the unit sold to the unit purchased. ANSWER: d 131. Cost flow is in the order in which the costs were incurred. ANSWER: b Match each description to the appropriate inventory system (a or b). a. Perpetual b. Periodic DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 132. This system can be costly and time consuming if not computerized. ANSWER: a 133. Average cost is rarely used with this system. ANSWER: a 134. Under this system, only revenue is recorded when sales are made. ANSWER: b 135. When using this system, a physical inventory is necessary to determine cost of merchandise sold. ANSWER: b

Page 44

Chapter 7 - Inventories Match each description to the appropriate cost flow assumption (a–c). a. FIFO b. LIFO c. Weighted average DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCT.WARD.18.07-03 - 07-03 ACCT.WARD.18.07-04 - 07-04 ACCT.WARD.18.07-05 - 07-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 136. Produces the same cost of merchandise sold under both the periodic and the perpetual inventory systems ANSWER: a 137. Rarely used with a perpetual inventory system ANSWER: c 138. Produces results that are similar to the specific identification method ANSWER: a 139. Widely used for tax purposes ANSWER: b 140. Never results in either the highest or lowest possible net income ANSWER: c 141. Produces the highest gross profit when costs are decreasing ANSWER: b 142. Produces the highest ending inventory when costs are increasing ANSWER: a 143. Assigns the same value to all inventory units ANSWER: c 144. Prohibited under International Financial Reporting Standards (IFRS) ANSWER: b 145. Does not follow the physical flow of goods in most cases ANSWER: b 146. Cost of the latest purchases are assigned to ending inventory ANSWER: a © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Page 45

Chapter 7 - Inventories Match each situation to its impact (a–c) on the current year's net income. a. Net income for the current year will be overstated. b. Net income for the current year will be understated. c. There will be no error effect on net income. DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 147. Purchased merchandise was shipped FOB shipping point on the last day of the year. The cost of the merchandise was not included in ending inventory. ANSWER: b 148. Merchandise was purchased FOB destination on the last day of the year. The cost of the merchandise purchased was not included in ending inventory. ANSWER: c 149. Merchandise held on consignment was included in the count of ending inventory. ANSWER: a 150. A consignor included merchandise in the hands of the consignee in ending inventory. ANSWER: c 151. Beginning inventory was understated. ANSWER: a 152. Merchandise that was sold and shipped FOB destination on the last day of the year was not included in the seller’s ending inventory. ANSWER: b 153. Merchandise that was sold and shipped FOB shipping point on the last day of the year was not included in the seller’s ending inventory. ANSWER: c 154. The beginning inventory was recorded as $10,000, when actual inventory on hand was $12,000. ANSWER: a

Page 46

Chapter 7 - Inventories Subjective Short Answer 155. Safeguarding inventory from damage or theft is a primary objective for the control of inventory. If you were running a clothing store, name three specific controls you would implement to guard inventory from theft. ANSWER: Answers will vary but may include ink tags, alarm tags, bells that signal a customer is entering the area to try on clothing, chains that hook through the sleeves of garments and are locked onto clothing racks, scanners to screen customers as they leave the store for unpaid merchandise, and greeters at the store's entrance to keep customers from bringing in bags that can be used to shoplift merchandise. DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.07-01 - 07-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 156. List three different security measures taken to safeguard inventory. ANSWER: Answers will vary and may include: - Storing inventory in areas that are restricted to only authorized employees. - Using physical devices such as two-way mirrors, cameras, and security guards. - Locking high-priced inventory in cabinets. - Placing sensors at each of the exits that are set off by alarm tags. DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-01 - 07-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 157. List the internal control objectives illustrated by the following: (a) (b) (c)

Keeping the inventory storeroom locked Counting the inventory at the end of the accounting period and comparing it with the inventory ledger clerk's records Using subsidiary ledgers and a perpetual inventory system

ANSWER:

(a) (b) (c)

Safeguarding the inventory from damage or theft Safeguarding the inventory from damage or theft and reporting inventory in the financial statements Keeping inventory at proper levels and reporting inventory in the financial statements

DIFFICULTY:

Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-01 - 07-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 47

Chapter 7 - Inventories 158. Three identical units of merchandise were purchased during March, as shown:

Mar. 3 10 19 Total

Steele Plate Purchase Purchase Purchase

Units 1 1 1 3

Cost $ 830 840 880 $2,550

Assume that one unit is sold on March 23 for $1,125. Determine the gross profit for March and ending inventory on March 31 using (a) FIFO, (b) LIFO, and (c) average cost methods. ANSWER:

Gross Profit

Ending Inventory

First-in, first-out (FIFO)

$295 ($1,125 – $830)

$1,720 ($840 + $880)

Last-in, first-out (LIFO)

$245 ($1,125 – $880)

$1,670 ($830 + $840)

Average cost

$2,550/3 = $850 avg. cost $275 ($1,125 – $850)

$1,700 ($850 × 2)

DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 159. Three identical units of merchandise were purchased during May, as follows:

May 3 10 19 Total

Magnesium XP Units Purchase 1 Purchase 1 Purchase 1 3

Cost $130 136 142 $408

Assume that two units are sold on May 23 for $313 total. Determine the gross profit for May and ending inventory on May 31 using (a) FIFO, (b) LIFO, and (c) average cost methods. ANSWER: a.

First-in, first-out (FIFO)

Gross Profit $47 [$313 – ($130 + $136)]

Ending Inventory $142

Last-in, first-out (LIFO)

$35 [$313 – ($142 + $136)]

$130

Average cost

$408/3 = $136 average cost $41 [$313 – ($136 × 2 units)]

$136

DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Page 48

Chapter 7 - Inventories 160. Assume that three identical units of merchandise were purchased during October, as follows:

Oct.

5 12 28

Purchase Purchase Purchase

Total

Units 1 1 1 3

Cost $5 13 15 $33

Assume one unit is sold on October 31 for $28. Determine cost of merchandise sold, gross profit, and ending inventory under the LIFO method. ANSWER: October 31 Sales $28 Cost of merchandise sold 15 Gross profit $13 Ending inventory ($5 + $13) $18 DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 161. Assume that three identical units of merchandise were purchased during October, as follows:

Oct.

5 12 28

Purchase Purchase Purchase

Total

Units 1 1 1 3

Cost $ 5 13 15 $33

Assume one unit is sold on October 31 for $28. Determine cost of merchandise sold, gross profit, and ending inventory under the average cost method. ANSWER: Sales Cost of merchandise sold ($33/3) Gross profit Ending inventory ($11 × 2)

October 31 $28 11 $17 $22

DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 49

Chapter 7 - Inventories 162. Assume that three identical units of merchandise are purchased during October, as follows:

Oct.

5 12 28

Units 1 1 1 3

Purchase Purchase Purchase

Total

Cost $5 13 15 $33

Assume one unit is sold on October 31 for $28. Determine cost of merchandise sold, gross profit, and ending inventory under the FIFO method. ANSWER:

October 31 $28 5 $23

Sales Cost of merchandise sold Gross profit Ending inventory ($13 + $15)

$28

DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 163. Three identical units of merchandise were purchased during July, as follows: Date July 3 10 24

Product Basic H Purchase Purchase Purchase

Total

Units 1 1 1 3

Average cost per unit

Cost $ 35 36 37 $108 $36

Assume one unit sells on July 28 for $45. Determine the gross profit, cost of merchandise sold, and ending inventory on July 31 using the (a) first-in, first-out, (b) last-in, first-out, and (c) average cost flow methods. ANSWER: Cost of Merchandise Gross Profit Sold Ending Inventory a) First-in, first-out $45 – $35 = $10 $35 $108 – $35 = $73 b) Last-in, first-out

$45 – $37 = $8

$37

$108 – $37 = $71

c) Average

$45 – $36 = $9

$36

$108 – $36 = $72

Page 50

Chapter 7 - Inventories DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 164. Describe three inventory cost flow assumptions and how they impact the financial statements. ANSWER: 1. Cost flow is in the order in which costs were incurred or first-in, first-out (FIFO). The first units purchased are assumed sold, so the oldest costs flow to the income statement and the cost of the newest purchases are on the balance sheet. 2. Cost flow is in the reverse order in which costs were incurred or last-in, first-out (LIFO). The last units purchased are assumed sold, so the newest costs flow to the income statement and the cost of the oldest purchases are on the balance sheet. 3. Cost flow is an average of the costs. Under the average cost method, all units are assigned the same average cost for the period. DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.07-02 - 07-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 165. The following data regarding purchases and sales of a commodity were taken from the related perpetual inventory account: June 1 6 8 16 20 23 30

Balance Sale Purchase Sale Purchase Sale Purchase

25 units at $60 20 units 20 units at $61 10 units 20 units at $62 25 units 15 units at $63

Calculate the cost of the ending inventory at June 30, using (a) the first-in, first-out (FIFO) method and (b) the last-in, first-out (LIFO) method. Identify the quantity, unit price, and total cost of each lot in the inventory. ANSWER: (a) June 20 10 units at $62 $ 620 30 15 units at $63 945 $1,565 Total (b)

June 1 8 30

5 units at $60 5 units at $61 15 units at $63 Total

$ 300 305 945 $1,550

Page 51

Chapter 7 - Inventories DIFFICULTY:

Inventory Purchase Sale Purchase Sale

12 units at $15 13 units at $17 18 units 9 units at $20 10 units

Assuming the business maintains a perpetual inventory system, complete the inventory cards and calculate the cost of merchandise sold and ending inventory under the following assumptions: (a) First-in, first-out Cost of Merchandise Sold

Purchases Qty. Date Mar. 3 11 14 21 25 Balances

Unit Cost

Total Cost

Qty.

Unit Cost

Total Cost

Inventory Unit Cost

Qty.

Total Cost

(b) Last-in, first-out Cost of Merchandise Sold

Purchases

Date Qty. Mar. 3 11 14 21 25 Balances

Unit Cost

Total Cost

Qty.

Unit Cost

Total Cost

Inventory

Qty.

Unit Total Cost Cost

Page 52

Chapter 7 - Inventories ANSWER:

a. First-in, first-out Purchases

Date Mar. 3 11

Cost of Merchandise Sold

Inventory

Unit Total Qty. Cost Cost Qty. 13

Unit Total Unit Total Cost Cost Qty. Cost Cost 12 $15 $180 12 $15 $180 13 $17 221 12 $15 $180 7 $17 $119 6 $17 102 7 $17 $119 9 $20 180 7 $17 $119 6 $20 $120 3 $20 60 $461 $120

$17 $221

14 9

$20 $180

25 Balances b. Last-in, first-out

Cost of Merchandise Sold

Purchases

Unit Total Cost Cost Qty.

Date Mar. 3

Qty.

$17

$221

$20

$180

14 21 25

Inventory

Unit Total Unit Total Qty. Cost Cost Cost Cost 12 $15 $180 12 $15 $180 13 $17 221 13 $17 $221 7 $15 $105 5 $15 75 7 $15 $105 9 $20 180 9 $20 $180 6 $15 $90 1 $15 15

Balances

$491

$90

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 53

Chapter 7 - Inventories 167. Beginning inventory, purchases, and sales for an inventory item are as follows: Sept. 1 Beginning inventory 5 Sale 17 Purchase 30 Sale

24 units 17 units 10 units 8 units

$15

$20

Assuming a perpetual inventory system and the first-in, first-out method, determine (a) the cost of the merchandise sold for the September 30 sale and (b) the inventory on September 30. ANSWER:

a) Cost of merchandise sold: 7 units @ $15 = $105 1 unit @ $20 = 20 8 units $125

b) Inventory, September 30: 9 units @ $20 = $180 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 168. Beginning inventory, purchases, and sales for an inventory item are as follows: Beginning inventory Sale First purchase Sale Second purchase Sale

150 units @ $755 120 units 400 units @ $785 200 units 300 units @ $805 290 units

The firm uses the perpetual inventory system and there are 240 units of the item on hand at the end of the year. What is the total cost of ending inventory according to FIFO? ANSWER: $805 × 240 units = $193,200 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 54

Chapter 7 - Inventories 169. Beginning inventory, purchases, and sales for an inventory item are as follows: Beginning inventory Sale First purchase Sale Second purchase Sale

150 units @ $755 120 units 400 units @ $785 200 units 300 units @ $805 290 units

The firm uses the perpetual inventory system and there are 240 units of the item on hand at the end of the year. What is the total cost of ending inventory according to LIFO? ANSWER: ($755 × 30 units) + ($785 × 200 units) + ($805 × 10 units) = $187,700 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 170. Beginning inventory, purchases, and sales for an inventory item are as follows: Sept. 1 Beginning inventory 5 Sale 17 Purchase 30 Sale

24 units 17 units 10 units 8 units

$10

$15

Assuming a perpetual inventory system and the last-in, first-out method, determine (a) the cost of the merchandise sold for the September 30 sale and (b) the inventory on September 30. ANSWER:

(a) Cost of merchandise sold: 8 units @ $15 = $120

(b) Inventory on September 30: 7 units @ $10 = $ 70 2 units @ $15 = 30 9 units $100 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 55

Chapter 7 - Inventories 171. Using a LIFO perpetual cost flow, calculate the value of the ending inventory and the cost of merchandise sold for the month of November of Beamer Company using the data below. Nov. 1 4 11 12 22 23

Purchase Sale Purchase Sale Purchase Sale

600 units 200 units 350 units 275 units 175 units 155 units

$80 each $82 each $84 each

Calculate the following: (a) Inventory valuation at the end of November (b) Cost of merchandise sold for November ANSWER: (a) Inventory valuation: 400 @ $80 = $32,000 75 @ $82 = 6,150 20 @ $84 = 1,680 $39,830 (b) Cost of merchandise sold: 200 @ $80 = $16,000 275 @ $82 = 22,550 155 @ $84 = 13,020 $51,570 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 56

Chapter 7 - Inventories 172. Complete the following table using the perpetual FIFO method of inventory flow. Inventory Valuation—Perpetual FIFO Date July 2 Bal. July 5

Purchased Units

Unit Cost

600

$12

200

$13

Units Sold

Unit Cost

Inventory Inventory Unit Units Dollar Costs Balance Balance

Bal. July 7 Bal. July 10

300 325

$14

Bal. July 12 Bal. July 18

300 150 250

$13

Bal. July 22

50 205

Bal. July 25 Bal. July 28

120 180 330

$15

Bal. July 31 Ending Balance

70 5 FIFO INVENTORY VALUATION:

Page 57

Chapter 7 - Inventories ANSWER:

Inventory Valuation—Perpetual FIFO Date July 2 Bal. July 5

Purch. Units 600

Unit Cost $12

200

$13

Bal. July 7 Bal. July 10

300

325

300 150 250

Bal. July 25

Bal. July 31 End Bal.

330

Inventory Units Unit Balance Costs 600 $12

$12

$12 $13

$13

Bal. July 22

Bal. July 28

Unit Cost

$14

Bal. July 12 Bal. July 18

Units Sold

600 200

$12 $13

300 200

$12 $13

300 200 325

$12 $13 $14

50 325

$13 $14

50 325 250

$13 $14 $13

50 205

$13 $14

120 250

$14 $13

120 180

$14 $13

$13

$15

70 330 70 5

$13 $15

$13 $15 $15 325 FIFO INVENTORY VALUATION:

Inventory Dollar Balance $ 7,200 $ 7,200 $ 7,200 2,600 $ 9,800 $ 3,600 2,600 $ 6,200 $ 3,600 2,600 4,550 $10,750 $ 650 4,550 $ 5,200 $ 650 4,550 3,250 $ 8,450 $ 1,680 3,250 $ 4,930 $ 910 $ $

910 910 4,950 $ 5,860 $ 4,875 $4,875

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 58

Chapter 7 - Inventories 173. Beginning inventory, purchases, and sales data for tennis rackets are as follows: Apr.

3 Inventory 11 Purchase 14 Sale 21 Purchase 25 Sale

12 units 13 units 18 units 9 units 10 units

@ @

$45 $47

$60

Complete the inventory cost card assuming the business maintains a perpetual inventory system and calculates the cost of merchandise sold and ending inventory using FIFO. Cost of Merchandise Sold

Purchases

Date Qty.

Unit Cost

Total Cost

Qty.

Unit Cost

Total Cost

Total cost of merchandise sold

Inventory

Qty.

Unit Cost

Total Cost

Ending inventory value

ANSWER: Cost of Merchandise Inventory Sold Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Apr. 3 12 $45 $540 13 $47 $611 12 $45 $540 11 13 $47 611 12 $45 $540 7 $47 $329 14 6 $47 282 9 $60 $540 7 $47 $329 21 9 $60 540 7 $47 $329 6 $60 $360 25 3 $60 180 Total cost of Ending inventory sold inventory $1,331 value $360 Purchases

DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Page 59

Chapter 7 - Inventories 174. Beginning inventory, purchases, and sales data for tennis rackets are as follows: Apr. 3 Inventory 11 Purchase 14 Sale 21 Purchase 25 Sale

12 units 13 units 18 units 9 units 10 units

@ @

$45 $47

$60

Complete the inventory cost card assuming the business maintains a perpetual inventory system and calculates the cost of merchandise sold and ending inventory using LIFO. Cost of Merchandise Sold

Purchases Date

Qty.

Unit Cost

Total Cost

Qty.

Unit Cost

Total cost of merchandise sold

Total Cost

Inventory Qty.

Unit Cost

Total Cost

Ending inventory value

ANSWER: Cost of Purchases Inventory Merchandise Sold Unit Total Unit Total Unit Total Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Date Apr. 3 12 $45 $540 13 $47 $611 12 $45 $540 11 13 $47 611 13 $47 $611 7 $45 $315 14 5 $45 225 9 $60 $540 7 $45 $315 21 9 $60 540 9 $60 $540 6 $45 $270 25 1 $45 45 Total cost of Ending merchandise inventory sold $1,421 value $270 DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 60

Chapter 7 - Inventories 175. Beginning inventory, purchases, and sales data for widgets are as follows: Apr.

3 Inventory 11 Purchase 14 Sale 21 Purchase 25 Sale

15 units 12 units 18 units 7 units 10 units

@ @

$30 $27

$25

Complete the inventory cost card assuming the business maintains a perpetual inventory system and calculates the cost of merchandise sold and ending inventory using FIFO. Cost of Merchandise Sold

Purchases Unit Date Qty. Cost

Total Cost

Qty.

Unit Cost

Total Cost

Total cost of merchandise sold

Inventory Qty.

Unit Cost

Total Cost

Ending inventory value

ANSWER: Cost of Inventory Merchandise Sold Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Apr. 3 15 $30 $450 12 $27 $324 15 $30 $450 11 12 27 324 15 $30 $450 9 $27 $243 14 3 $27 81 7 $25 $175 9 $27 $243 21 7 25 175 9 $27 $243 6 $25 $150 25 1 $25 25 Total cost of Ending merchandise inventory sold $799 value $150 Purchases

DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 61

Chapter 7 - Inventories 176. Beginning inventory, purchases, and sales data for widgets are as follows: Apr.

3 Inventory 11 Purchase 14 Sale 21 Purchase 25 Sale

15 units 12 units 18 units 7 units 10 units

@ @

$30 $27

$25

Complete the inventory cost card assuming the business maintains a perpetual inventory system and calculates the cost of merchandise sold and ending inventory using LIFO. Cost of Merchandise Sold

Purchases Date Qty.

Unit Cost

Total Cost

Qty.

Unit Cost

Inventory

Total Cost

Total cost of merchandise sold

Qty.

Unit Cost

Total Cost

Ending inventory value

ANSWER: Cost of Inventory Merchandise Sold Unit Total Unit Total Unit Total Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost 15 $30 $450 12 $27 $324 15 $30 $450 12 $27 324 12 $27 $324 9 $30 $270 6 $30 180 7 $25 $175 9 $30 $270 7 $25 175 7 $25 $175 6 $30 $180 3 $30 90 Total cost of Ending merchandise inventory sold $769 value $180 Purchases

Date Apr. 3 11 14 21 25

DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 62

Chapter 7 - Inventories 177. Brutus Corporation, a newly formed corporation, has the following transactions during May, its first month of operations. May 1 Purchased 500 units @ $25.00 each. 4 Purchased 300 units @ $24.00 each. 6 Sold 400 units @ $38.00 each. 8 Purchased 700 units @ $23.00 each. 13 Sold 450 units @ $37.50 each. 20 Purchased 250 units @ $25.25 each. 22 Sold 275 units @ $36.00 each. 27 Sold 300 units @ $37.00 each. 28 Purchased 550 units @ $26.00 each. 30 Sold 100 units @ $39.00 each. Calculate total sales, cost of merchandise sold, gross profit, and ending inventory using each of the following inventory methods: 1. FIFO perpetual 2. FIFO periodic 3. LIFO perpetual 4. LIFO periodic 5. Average cost periodic (round average to nearest cent) ANSWER: Total sales (not dependent on inventory method): May 6 400 @ $38.00 = $15,200.00 13 450 @ $37.50 = 16,875.00 22 275 @ $36.00 = 9,900.00 27 300 @ $37.00 = 11,100.00 30 100 @ $39.00 = 3,900.00 Total sales 1,525 units $56,975.00 Total merchandise available for sale: May 1 500 @ $25.00 = $12,500.00 4 300 @ $24.00 = 7,200.00 8 700 @ $23.00 = 16,100.00 20 250 @ $25.25 = 6,312.50 28 550 @ $26.00 = 14,300.00 Total 2,300 units $56,412.50 1. and 2. FIFO perpetual, FIFO periodic: There is no difference between these methods since FIFO is always first-in, first-out. Ending inventory: Total Units – Units Sold = Ending Inventory 2,300 – 1,525 = 775 units 225 @ $25.25 = 550 @ $26.00 = Ending inventory

$ 5,681.25 14,300.00 $19,981.25

Cost of merchandise sold: Total goods available Less ending inventory Cost of merchandise sold

$56,412.50 19,981.25 $36,431.25

Page 63

Chapter 7 - Inventories Gross profit: Total sales Less cost of merchandise sold Gross profit

$56,975.00 36,431.25 $20,543.75

3. LIFO perpetual: Inventory Valuation Date May 1 May 4 Bal. May 6 Bal. May 8 Bal. May 13 Bal. May 20 Bal. May 22 May 27 Bal. May 28 May 30 Bal.

Purchased Units Inventory Units/ Balance Price Sold Cost Balance 500 25.00 12,500.00 300 24.00 7,200.00 19,700.00 300 24.00 (7,200.00) 100 25.00 (2,500.00) 400 25.00 10,000.00 700 23.00 16,100.00 10,000.00 400 25.00 16,100.00 700 23.00 26,100.00 450 23.00 (10,350.00) 25.00 10,000.00 400 23.00 5,750.00 250 15,750.00 250 25.25 6,312.50 22,062.50 250 25.25 (6,312.50) 25 23.00 (575.00) 225 23.00 (5,175.00) 75 25.00 (1,875.00) 325 25.00 8,125.00 550 26.00 14,300.00 100 26.00 (2,600.00) 325 25.00 8,125.00 450 26.00 11,700.00 Ending inventory

Cost of merchandise sold: Total goods available Less ending inventory Cost of merchandise sold

$56,412.50 19,825.00 $36,587.50

Gross profit: Total sales Less COMS Gross profit

$56,975.00 36,587.50 $20,387.50

19,825.00

Page 64

Chapter 7 - Inventories 4. LIFO periodic: Ending inventory: 500 @ $25.00 = 275 @ $24.00 = Ending inventory

$12,500.00 6,600.00 $19,100.00

Cost of merchandise sold: Total goods available Less ending inventory Cost of merchandise sold

$56,412.50 19,100.00 $37,312.50

Gross profit: Total sales Less COMS Gross profit

$56,975.00 37,312.50 $19,662.50

5. Average cost periodic: Average cost: $56,412.50/2,300 units = $24.53 Ending inventory: 775 units × $24.53 = $19,010.75 Cost of merchandise sold: $56,412.50 – $19,010.75 = $37,401.75 Gross profit: $56,975.00 – $37,401.75 = $19,573.25 DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-03 - 07-03 ACCT.WARD.18.07-04 - 07-04 ACCT.WARD.18.07-05 - 07-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 65

Chapter 7 - Inventories 178. The units of an item available for sale during the year were as follows: January 10 February 27 July 11 November 13

Inventory Purchase Purchase Purchase

27 units @ $90 54 units @ $98 63 units @ $106 36 units @ $115

There are 50 units of the item in the physical inventory at December 31. The periodic inventory system is used. Determine the ending inventory cost by (a) the first-in, first-out method, (b) the last-in, first-out method, and (c) the average cost method. Show your work. ANSWER:

(a) (b) (c)

$5,624 (36 units at $115 + 14 units at $106 = $4,140; $4,140 + $1,484) $4,684 (27 units at $90 + 23 units at $98 = $2,430; $2,430 + $2,254) $5,150 ($18,540*/180 units = $103; 50 units at $103) *Cost of merchandise available for sale: 27 units at $90 $ 2,430 54 units at $98 5,292 63 units at $106 6,678 36 units at $115 4,140 180 units (at average cost of $103) $18,540 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 179. The units of an item available for sale during the year were as follows: January 11 February 27 November 21

Inventory Purchase Purchase

60 units @ $145 90 units @ $150 75 units @ $154

There are 48 units of the item in the physical inventory at December 31. The periodic inventory system is used. Determine the inventory cost by (a) the first-in, first-out method, (b) the last-in, first-out method, and (c) the average cost method. Show your work. ANSWER: (a) $7,392 (48 units × $154) (b) $6,960 (48 units × $145) (c) $7,200 ($33,750*/225 units = $150; 48 units × $150) *Cost of merchandise available for sale: 60 units at $145 $ 8,700 90 units at $150 13,500 75 units at $154 11,550 225 units (at average cost of $150) $33,750 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Page 66

Chapter 7 - Inventories 180. The units of Manganese Plus available for sale during the year were as follows: Mar. 1 June 16 Nov. 28

Inventory Purchase Purchase

16 units 30 units 45 units 91 units

@ $30 @ $35 @ $39

$ 480 1,050 1,755 $3,285

There are 15 units of the product in the physical inventory at November 30. The periodic inventory system is used. Determine the inventory cost by the (a) FIFO, (b) LIFO, and (c) average cost methods. ANSWER: (a) 15 units @ $39 = $585 (b) 15 units @ $30 = $450 (c) $3,285/91 = $36.10 per unit; 15 units @ $36.10 = $541.50 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 181. The units of an item available for sale during the year were as follows: Jan. 1 Inventory Mar. 4 Purchase June 7 Purchase Nov. 15 Purchase

25 units at $45 15 units at $50 35 units at $58 20 units at $65

There are 30 units of the item in the physical inventory at December 31. The periodic inventory system is used. Determine the ending inventory cost using FIFO. ANSWER: $1,880 (20 units at $65 and 10 units at $58) DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 182. The units of an item available for sale during the year were as follows: Jan. 1 Apr. 4 May 20 Oct. 30

Inventory Purchase Purchase Purchase

10 units at $25 15 units at $24 20 units at $28 18 units at $30

There are 19 units of the item in the physical inventory at December 31. The periodic inventory system is used. Determine the ending inventory cost using LIFO. ANSWER: $466 (10 units at $25 and 9 units at $24) DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Page 67

Chapter 7 - Inventories 183. The beginning inventory and purchases of an item for the period were as follows: Beginning inventory First purchase Second purchase Third purchase

6 units at $70 each 10 units at $75 each 18 units at $80 each 10 units at $90 each

The company uses the periodic system, and there were 15 units in the inventory at the end of the period. Determine the cost of the 15 units in the inventory by each of the following methods, presenting details of your computations: (a) first-in, first-out; (b) last-in, first-out; (c) average cost. Do not round your intermediate calculations. Round your final answer to two decimal places. ANSWER: (a) 10 units @ $90 $ 900 5 units @ $80 400 Total $1,300 (b) 6 units @ $70 9 units @ $75 Total

$ 420 675 $1,095

(c) Average unit cost = $3,510/44 = 15 units @ $79.7727 = DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

$79.7727 $1,196.59

184. Beginning inventory and purchases and sales data for T-shirts are as follows: Apr.

3 Inventory 11 Purchase 14 Sale 21 Purchase 25 Sale

24 units 26 units 36 units 18 units 20 units

@ @

$10 $12

$15

Assuming the business maintains a periodic inventory system, calculate the cost of merchandise sold and ending inventory under the following assumptions: a. FIFO b. LIFO c. Average cost (round cost of merchandise sold and ending inventory to the nearest dollar)

Page 68

Chapter 7 - Inventories ANSWER:

a. FIFO Apr.

3 Inventory 11 Purchase 21 Purchase Available for sale

24 units @ 10 26 units @ 12 18 units @ 15 68

$240 312 270 $822

14 Sale

Cost of merchandise sold

24 units @ 10 12 units @ 12 14 units @ 12 6 units @ 15 56

$240 144 168 90 $642

Ending inventory

12 units @ 15

$180

3 Inventory 11 Purchase 21 Purchase Available for sale

24 units @ 10 26 units @ 12 18 units @ 15 68

$240 312 270 $822

14 Sale

Cost of merchandise sold

18 units @ 15 18 units @ 12 8 units @ 12 12 units @ 10 56

$270 216 96 120 $702

Ending inventory

12 units @ 10

$120

c. Average cost Apr. 3 Inventory 11 Purchase 21 Purchase Available for sale

24 units @ 10 26 units @ 12 18 units @ 15 68

$240 312 270 $822

56 × $12.09

$677

12 × $12.09

$145

Page 69

25 Sale

b. LIFO Apr.

25 Sale

Average cost $822/68 = $12.09 Apr. 14 and 25 Cost of merchandise sold Ending inventory DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Chapter 7 - Inventories 185. The units of Product Green-2 available for sale during the year were as follows: Apr. 1 June 16 Sept. 28

Inventory Purchase Purchase

15 units 29 units 45 units

@ @ @

$30 $33 $35

There are 17 units of the product in the physical inventory at September 30. The periodic inventory system is used. Determine the cost of merchandise sold by the (a) FIFO, (b) LIFO, and (c) average cost methods. ANSWER: (a) FIFO 15 units @ $30 = $ 450 29 units @ $33 = 957 28 units @ $35 = 980 $2,387 Total (b) LIFO

45 units @ $35 = 27 units @ $33 =

$1,575 891 $2,466

Total (c) Average cost

$2,982/89 = $33.51 $2,412.72

72 units @ $33.51 = DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-04 - 07-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 186. Complete the chart, indicating whether LIFO or FIFO would give the highest and lowest amounts for each item, assuming a period of increasing costs. Highest Amount

Lowest Amount

Cost of merchandise sold Gross profit Net income Ending merchandise inventory ANSWER: Cost of merchandise sold Gross profit Net income Ending merchandise inventory

Highest Amount LIFO FIFO FIFO FIFO

Lowest Amount FIFO LIFO LIFO LIFO

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-05 - 07-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Page 70

Chapter 7 - Inventories 187. The units of Manganese Plus available for sale during the year were as follows: Mar. 1 June 16 Nov. 28

Inventory Purchase Purchase

16 units 30 units 45 units 91 units

@ $30 @ $35 @ $39

$ 480 1,050 1,755 $3,285

There are 15 units of the product in the physical inventory at November 30. The periodic inventory system is used. Determine the difference in gross profit between the LIFO and FIFO inventory cost systems. ANSWER: FIFO cost of merchandise sold (16 × $30) + (30 × $35) + $2,700 (30 × $39) LIFO cost of merchandise sold (45 × $39) + (30 × $35) + 2,835 (1 × $30) Difference $ 135 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-05 - 07-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 188. Applying the lower of cost or market to each item of inventory, what should the total inventory value be for the following items?

Item

Inventory Quantity

Cost per Unit

A B C

300 200 100

$15.00 14.00 17.00

Market value per Unit $14.50 15.00 17.50

Total Cost

Total Market

$4,500 2,800 1,700

$4,350 3,000 1,750

ANSWER: Total Item A B C

Inventory Cost Market Value Quantity per Unit per Unit 300 $15.00 $14.50 200 14.00 15.00 100 17.00 17.50

Total

Cost Market LCM $4,500 $4,350 $4,350 2,800 3,000 2,800 1,700 1,750 1,700 $8,850

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 71

Chapter 7 - Inventories 189. Determine the total value of the merchandise using net realizable value. Item Doll Horse ANSWER:

Quantity 10 5 Item Doll Horse

Selling Price

Commission $7 9

Quantity 10 5

Selling Price $7 9

$2 3 Commission

Total $2 3

$50 30 $80

Total DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 190. During the taking of its physical inventory on December 31, Almond Supplies Company incorrectly counted its inventory as $545,000 instead of the correct amount of $554,000. Indicate the effects of the misstatement on Almond Supplies Company’s balance sheet and income statement for the year ended December 31. ANSWER: Amount of Misstatement Overstatement (Understatement) Balance Sheet: Merchandise inventory understated $(9,000) Current assets understated (9,000) Total assets understated (9,000) Owner’s equity understated (9,000) Income Statement: Cost of merchandise sold overstated Gross profit understated Net Income understated

$ 9,000 (9,000) (9,000)

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 72

Chapter 7 - Inventories 191. While taking a physical inventory, a company counts its inventory as less than the actual amount on hand. How will this error affect the income statement? ANSWER: Net income will be understated. DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 192. On the basis of the following data, determine the value of the inventory at the lower of cost or market. Apply lower of cost or market to each inventory item. Show your work. Item Product C Product D

Inventory Quantity 300 420

Unit Cost Price $6 12

Unit Market Price $ 5 14

ANSWER: Total

Item Product C Product D Total

Market Inventory Cost per Value Quantity Unit per Unit

Cost

Market

LCM

300

$1,800

$1,500

420

5,040

5,880

5,040

$6,840

$7,380

$6,540

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 73

Chapter 7 - Inventories 193. On the basis of the following data, determine the value of the inventory at the lower of cost or market. Apply lower of cost or market to each inventory item. Show your work. Item Gear X Gear Y

Inventory Quantity 175 225

Unit Cost Price $33 27

Unit Market Price $29 28

ANSWER: Total

Item Gear X Gear Y

Market Inventory Cost per Value per Quantity Unit Unit 175 $33 $29 225 27 28

Total

Cost Market $ 5,775 $ 5,075 6,075 6,300 $11,850 $11,375

LCM $ 5,075 6,075 $11,150

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 194. Basic inventory data for April 30 are presented below for a business that employs the lower-of-cost-or-market basis of inventory valuation to each category. Inventory Commodity Quantity A 35 B 20 C 25 D 40

Cost per Unit $ 52 155 82 58

Market Value per Unit $ 55 150 85 55

Total Cost _______ _______ _______ _______

Market _______ _______ _______ _______

LCM _______ _______ _______ _______

(a) (b)

Complete the table. Determine the amount of reduction in the inventory at April 30 attributable to market decline. ANSWER: (a) Total Cost Market Inventory per Value Commodity Quantity Unit per Unit Cost Market A 35 $ 52 $ 55 $1,820 $1,925 B 20 155 150 3,100 3,000 C 25 82 85 2,050 2,125 D 40 58 55 2,320 2,200 Total $9,290 $9,250

LCM $1,820 3,000 2,050 2,200 $9,070

Page 74

Chapter 7 - Inventories DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 195. Hampton Co. took a physical count of its inventory on December 31. In addition, it had to decide whether or not the following items should be added to this count. (a) (b) (c)

(d) (e) (f)

Merchandise on hand had been sold earlier in the year but had been returned by customers for various warranty repairs. Hampton Co. sent merchandise on a consignment basis on December 31 just prior to the physical count. On December 22, Hampton Co. ordered merchandise on FOB destination terms. The merchandise was shipped by the supplier on December 30 but had not been received by December 31. On December 27, Hampton Co. ordered merchandise on FOB shipping point terms. The merchandise was shipped on December 29 but had not been received by December 31. Merchandise sold FOB shipping point on December 31 was picked up by the freight company just before closing on December 31. Merchandise shipped to a customer FOB destination was picked up by the freight company on December 28 but had not arrived at its destination as of December 31.

Answer "yes" or "no" to indicate which items should and should not be added to the December 31 inventory count. ANSWER: (a) no (b) yes (c) no (d) yes (e) no (f) yes DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 75

Chapter 7 - Inventories 196. a. Explain the effect of the following on the financial statements: Goods held on consignment were included in the ending inventory count. Goods purchased FOB shipping point were in transit on the last day of the year. These goods were not counted as part of ending inventory. Goods sold FOB shipping point were in transit on the last day of the year. These goods were not counted as part of ending inventory. b. What happens if inventory errors are not found and corrected? ANSWER: a. Goods held on consignment were included in the ending inventory count: Goods held on consignment should not be included in the consignee’s ending inventory. By including these goods, ending inventory, gross profit and net income are overstated and cost of merchandise sold is understated. On the balance sheet, inventory, current assets, total assets, and owner's equity are all overstated. Goods purchased FOB shipping point were in transit on the last day of the year. These goods were not counted as part of ending inventory: Goods purchased FOB shipping point become part of inventory when they are shipped to the purchaser. Thus, these goods should have been included in ending inventory even though they were not yet received. By excluding these goods, ending inventory, gross profit, and net income are understated and cost of merchandise sold is overstated. On the balance sheet, inventory, current assets, total assets, and owner's equity are all understated. Goods sold FOB shipping point were in transit on the last day of the year. These goods were not counted as part of ending inventory: When goods are sold FOB shipping point, title transfers when they are shipped to the purchaser. As such, they should not have been included in ending inventory so this transaction has no error effect on the financial statements. b. The income statement and balance sheet will have errors in the current year. Inventory errors reverse themselves within two years. If the errors are not discovered, the income statement and balance sheet will be correct at the end of the next year. DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 76

Chapter 7 - Inventories 197. On the basis of the following data for Sanford Industries as of December 31, determine the value of the inventory at the lower of cost or market. Also, show how the merchandise inventory would appear on the balance sheet (assume that the cost was determined by the FIFO method). Apply lower of cost or market to each inventory item. Commodity Size 4 Size 5 Size 6 Size 7 ANSWER:

Inventory Quantity Cost per Unit 9 $17 10 17 14 20 12 13 Inventory valuation = $729

Market Value per Unit $19 14 22 15

Total Commodity Size 4 Size 5 Size 6 Size 7

Market Inventory Cost per Value per Quantity Unit Unit 9 $17 $19 10 17 14 14 20 22 12 13 15

Totals

Cost

Market

$153 170 280 156 $759

$171 140 308 180 $799

LCM $153 140 280 156 $729

Sanford Industries Balance Sheet December 31 Assets Current assets: Merchandise inventory at lower of cost (first-in, first-out) or market DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-06 - 07-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

$729.00

Page 77

Chapter 7 - Inventories 198. Based on the following information compute (a) inventory turnover, (b) average daily cost of merchandise sold, and (c) days' sales in inventory for the current year. Use a 365-day year. (d) If an inventory turnover of 12 is average for the industry, how is this company doing? Item Cost of merchandise sold Inventory ANSWER:

Prior Year Current Year $172,900 $215,000 18,000 12,000 (a) $215,000 ÷ [($18,000 + $12,000)/2] = $215,000 ÷ $15,000 = 14.33 times (b) $215,000 ÷ 365 = $589.04 (c) $15,000 ÷ $589.04 = 25.5 days (d) This company is doing worse than the overall industry. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-07 - 07-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 199. The following data were taken from Castle, Inc. Cost of merchandise sold Inventory, end of year Inventory, beginning of the year

$894,000 78,000 92,000

Determine the inventory turnover ratio and the days’ sales in inventory for Castle Inc. Round to two decimal places. ANSWER: Inventory Turnover = Cost of Merchandise Sold/Average Inventory Inventory Turnover = $894,000/[($78,000 + $92,000)/2] Inventory Turnover = 10.52 Days’ Sales in Inventory = Average Inventory/Average Daily Cost of Merchandise Sold Days’ Sales in Inventory = $85,000/($894,000/365) Days’ Sales in Inventory = 34.70 days DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-07 - 07-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 7 - Inventories 200. Based on the following information, compute (a) inventory turnover (b) average daily cost of merchandise sold using a 365-day year and (c) days’ sales in inventory. Cost of merchandise sold Inventory: Beginning Ending ANSWER:

$195,640 20,500 18,628 (a) $195,640 ÷ [($20,500 + $18,628)/2] = $195,640 ÷ $19,564 = 10 (b) $195,640 ÷ 365 = $536

(c) $19,564 ÷ $536 = 36.5 days DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-07 - 07-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 201. The following data were taken from the annual reports of Big Bang Inc., a manufacturer of fireworks, and Orange Inc., a manufacturer of computers.

Cost of merchandise sold Inventory, end of year Inventory, beginning of year

Big Bang Inc. $830,000 190,000 240,000

Orange Inc. $11,540,000 320,000 290,000

(a) Determine the (1) inventory turnover and (2) days' sales in inventory for Big Bang and Orange. Round your answers to two decimal places. (b) How would you expect these measures to compare between the companies? Why? ANSWER: (a) (1) Inventory Turnover: Big Bang Inc.: 3.86 {$830,000/[($190,000 + $240,000)/2]} Orange Inc.: 37.84 {$11,540,000/[($320,000 + $290,000)/2]} (a) (2) Days' Sales in Inventory: Big Bang Inc. Ave. Inv.: ($190,000 + $240,000)/2 = $215,000 Ave. Daily COMS: $830,000/365 = $2,274 $215,000/$2,274 = 94.55 days Orange Inc. Ave. Inv.: ($320,000 + $290,000)/2 = $305,000 Ave. Daily COMS: $11,540,000/365 = $31,616 $305,000/$31,616 = 9.65 days

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Chapter 7 - Inventories You would expect Big Bang’s inventory turnover to be lower. Big Bang’s business is seasonal in nature, with most of its revenue generated during the major holidays. Much of its nonholiday inventory will most likely turn over very slowly. Orange, on the other hand, turns its inventory over very quickly. A computer manufacturer maintains a low inventory, which allows it to respond quickly to customer needs. Additionally, computer products can quickly become obsolete, so Orange cannot risk building large inventories. For these same reasons, Big Bang’s days' sales in inventory is expected to be higher than Orange’s. DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-07 - 07-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic (b)

202. Based on the following data, calculate the estimated cost of the merchandise inventory on March 31 using the retail method. March 1 Merchandise inventory March 1–31 Purchases (net) March 1–31 Sales ANSWER: March 1 March 1–31

Cost $225,000 454,245

Merchandise inventory Purchases (net) Merchandise available for sale

Retail $357,600 612,750 835,000 Cost $225,000 454,245 $679,245

Retail $357,600 612,750 $970,350

Ratio of cost to retail: $679,245/$970,350 = 70% March 1–31 March 1–31

Sales Merchandise inventory (at retail) Estimated merchandise inventory at estimated cost ($135,350 × 70%)

835,000 $135,350 $ 94,745

DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-APP - 07-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 7 - Inventories 203. A business using the retail method of inventory costing determines that merchandise inventory at retail is $2,300,000. If the ratio of cost to retail price is 55%, what is the amount of inventory to be reported on the financial statements? ANSWER: $2,300,000 × 55% = $1,265,000 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-APP - 07-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 204. Based on the following data, estimate the cost of ending merchandise inventory using the gross profit method. Sales Estimated gross profit rate

$250,000 25%

Beginning merchandise inventory $ 9,000 Purchases (net) 211,000 Merchandise available for sale $220,000 ANSWER: Merchandise available for sale Sales Less estimated gross profit ($250,000 × 25%) Estimated cost of merchandise sold Estimated ending merchandise inventory DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-APP - 07-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

$220,000 $250,000 62,500 187,500 $ 32,500

205. Fill in the missing amounts from the chart below regarding the calculation of Bean Corporation’s estimated inventory using the retail method of estimation.

Merchandise inventory, October 1 Purchases for October (net) Merchandise available for sale Ratio of cost to retail price: ? Sales for October

Cost $13,687 ? $82,528

Retail $19,553 98,344 $ ?

Merchandise at retail, October 31

? $25,340

Merchandise at cost, October 31

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Chapter 7 - Inventories ANSWER: Merchandise inventory, October 1 Purchases for October (net) Merchandise available for sale Ratio of cost to retail price: 70% ($82,528/$117,897) Sales for October

Cost Retail $13,687 $ 19,553 68,841 98,344 $82,528 $117,897

Merchandise at retail, October 31

92,557 $ 25,340

Merchandise at cost, October 31 ($25,340 × 70%)

$17,738

DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-APP - 07-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.BB.07 - Critical Thinking ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 206. During August, the first month of the fiscal year, sales totaled $875,000 and the cost of merchandise available for sale totaled $850,000. Estimate the cost of the merchandise inventory as of August 31, based on an estimated gross profit rate of 45%. ANSWER: Merchandise available for sale in August $850,000 August sales $875,000 Less estimated gross profit ($875,000 × 45%) 393,750 Estimated cost of merchandise sold 481,250 Estimated ending merchandise inventory $368,750 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-APP - 07-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 7 - Inventories 207. On the basis of the following data, estimate the cost of the merchandise inventory at March 31 by the retail method. March 1 March 1–31 March 1–31 ANSWER:

Merchandise inventory Purchases (net) Sales

Cost $250,000 850,000

Retail $ 350,000 1,650,000 845,000

March 1 Merchandise inventory March 1-31 Purchases (net) Merchandise available for sale Ratio of cost to retail price: 55% ($1,100,000/$2,000,000) Sales for March Merchandise inventory, March 31 at retail Merchandise inventory, March 31 at est. cost ($1,155,000 × 55%) DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-APP - 07-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Cost $ 250,000 850,000 $1,100,000

Retail $ 350,000 1,650,000 $2,000,000

845,000 $1,155,000 $ 635,250

208. On the basis of the following data, determine the estimated cost of the inventory as of March 31 by the retail method, presenting details of the computation in good order. March 1 March 1–31 March 1–31

Merchandise inventory Purchases (net) Sales

Cost $310,000 307,250

ANSWER: Merchandise inventory, March 1 Purchases in March (net) Merchandise available for sale Ratio of cost to retail price: $617,250 ÷ $1,065,000 = 58% Sales in March Merchandise inventory, March 31, at retail price Merchandise inventory, March 31, at

Retail $550,000 515,000 400,000 Cost $310,000 307,250 $617,250

Retail $ 550,000 515,000 $1,065,000

400,000 $ 665,000

estimated cost price ($665,000 × 58%)

$385,700

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.07-APP - 07-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.17 - Inventories Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 10 - Long-Term Assets: Fixed and Intangible True / False 1. Long-lived assets that are intangible in nature, used in the operations of the business, and not held for sale in the ordinary course of business are called fixed assets. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 2. The acquisition costs of property, plant, and equipment should include all normal, reasonable and necessary costs to get the asset in place and ready for use. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 3. When land is purchased to construct a new building, the cost of removing any structures on the land should be charged to the building account. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 4. Land acquired as a speculation is reported under Investments on the balance sheet. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 5. Standby equipment held for use in the event of a breakdown of regular equipment is reported as property, plant, and equipment on the balance sheet. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 6. The cost of repairing damage to a machine during installation is debited to a fixed asset account. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 7. During construction of a building, the cost of interest on a construction loan should be charged to an expense account. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 8. The cost of computer equipment does not include the consultant's fee to supervise installation of the equipment. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 9. An asset leased under an operating lease will appear on the balance sheet as a long-term asset. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 10. Long-lived assets held for sale are classified as fixed assets. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 11. A tangible asset is one that lacks physical existence. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 12. Capital expenditures are costs that improve a fixed asset or extend its useful life. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 13. The cost of new equipment is called a revenue expenditure because it will help generate revenues in the future. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 14. Expenditures that increase operating efficiency or capacity for the remaining useful life of a fixed asset are called capital expenditures. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 15. The cost of replacing an engine in a truck is an example of ordinary maintenance. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 16. Functional depreciation occurs when a fixed asset is no longer able to provide services at the level for which it was intended. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 17. The normal balance of the accumulated depreciation account is a debit. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 18. As a company records depreciation expense for a period of time, cash is accumulated to replace fixed assets as they wear out. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 19. All property, plant, and equipment assets are depreciated over time. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 20. The book value of a fixed asset reported on the balance sheet represents its market value on that date. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 21. The depreciable cost of a building is the same as its acquisition cost. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 22. It is necessary for a company to use the same depreciation method for all of its depreciable assets. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 23. It is not necessary for a company to use the same depreciation method for all of its fixed assets. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 24. An estimate of the amount for which an asset can be sold at the end of its useful life is called residual value. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 25. The units-of-activity depreciation method provides a good match of expenses against revenue. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 26. Once the useful life of a depreciable asset has been estimated and the amount to be depreciated each year has been determined, the amounts cannot be changed. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 27. Residual value is not incorporated in the initial calculations for double-declining-balance depreciation. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 28. The double-declining-balance method is an accelerated depreciation method. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 29. The double-declining-balance depreciation method calculates depreciation each year by taking twice the straight-line rate times the book value of the asset at the beginning of each year. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 30. The amount of depreciation expense for the first full year of use of a fixed asset costing $95,000, with an estimated residual value of $5,000 and a useful life of five years, is $19,000 by the straight-line method. a. True b. False ANSWER: False RATIONALE: Annual Depreciation = (Cost – Residual Value)/Useful Life = ($95,000 – $5,000)/5 = $18,000. DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 31. The amount of depreciation expense for a fixed asset costing $95,000, with an estimated residual value of $5,000 and a useful life of five years or 20,000 operating hours, is $21,375 by the units-of-activity method during a period when the asset was used for 4,500 hours. a. True b. False ANSWER: False RATIONALE: Depreciation per Operating Hour = (Cost – Residual Value)/Total Units of Output = ($95,000 – $5,000)/20,000 hours Depreciation Expense = Depreciation per Operating Hour × Total Units of Output Used = $4.5 × 4,500 hours = $20,250 DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 32. The amount of the depreciation expense for the second full year of use of a fixed asset costing $100,000, with an estimated residual value of $5,000 and a useful life of four years, is $25,000 by the double-declining-balance method. a. True b. False ANSWER: True RATIONALE: Double-Declining-Balance Rate = (1/4) × 2 = 50% First-Year Depreciation = $100,000 × 50% = $50,000 Second-Year Depreciation = ($100,000 – $50,000) × 50% = $25,000 DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 33. When depreciation estimates are revised, all years of the asset’s life are affected. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 34. The double-declining-balance method of depreciation uses a declining percentage rate in determining the depreciation amount. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 35. Regardless of the depreciation method, the amount that will be depreciated during the life of the asset will be the same. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 36. Revising depreciation estimates affects the amounts of depreciation expense recorded in past periods. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 37. Capital expenditures are costs that are charged to stockholders' equity accounts. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 38. The difference between the balance in a fixed asset account and its related accumulated depreciation account is the asset's book value. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCT.WARD.18.10-06 - 10-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 39. Though a piece of equipment is still being used, the equipment should be removed from the accounts if it has been fully depreciated. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.10-03 - 10-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 40. When selling a piece of equipment for cash, a loss will result when the proceeds of the sale are less than the book value of the asset. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.10-03 - 10-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 41. Losses on the discarding of fixed assets are reported in the income statement. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-03 - 10-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 10 - Long-Term Assets: Fixed and Intangible 42. A gain can be realized when a fixed asset is discarded. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-03 - 10-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 43. The entry to record the disposal of fixed assets will include a credit to Accumulated Depreciation. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.10-03 - 10-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 44. Both the initial cost of the asset and the accumulated depreciation will be taken off the books with the disposal of the asset. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.10-03 - 10-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 45. Minerals removed from the earth are classified as intangible assets. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-04 - 10-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 46. The method used to calculate the depletion of a natural resource is the straight-line method. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-04 - 10-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 47. Intangible assets differ from property, plant, and equipment assets in that they lack physical substance. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-05 - 10-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 48. The cost of a patent with a remaining legal life of 10 years and an estimated useful life of seven years is amortized over 10 years. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.10-05 - 10-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 49. The transfer to expense of the cost of intangible assets attributed to the passage of time or decline in usefulness is called amortization. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-05 - 10-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 50. Costs associated with normal research and development activities should be treated as intangible assets. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.10-05 - 10-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 51. Patents are exclusive rights to produce and sell goods with one or more unique features. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-05 - 10-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 52. When a company establishes an outstanding reputation and has a competitive advantage because of it, the company should record goodwill on its financial statements. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.10-05 - 10-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 53. When a property, plant, and equipment asset is sold for cash, any gain or loss on the asset sold should be recorded. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.10-APP - 10-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 54. When old equipment is traded in for a new equipment, the difference between the list price and the trade-in allowance is called boot. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-APP - 10-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 55. When a plant asset is traded for another similar asset, losses on the asset traded are not recognized. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.10-APP - 10-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 56. When exchanging equipment, if the trade-in allowance is greater than the book value a loss results. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.10-APP - 10-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 57. If a fixed asset with a book value of $10,000 is traded for a similar fixed asset, a trade-in allowance of $15,000 is granted by the seller, and the transaction is deemed to have commercial substance, the buyer would report a gain on exchange of fixed assets of $5,000. a. True b. False ANSWER: True RATIONALE: Gain on Exchange = Trade-In Allowance – Book Value of Asset = $15,000 – $10,000 = $5,000 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-APP - 10-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 58. When a seller allows a buyer an amount for old equipment that is traded in for new equipment of similar use, this amount is known as boot. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-APP - 10-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 59. An exchange is said to have commercial substance if future cash flows remain the same as a result of the exchange. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-APP - 10-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible Multiple Choice 60. A characteristic of a fixed asset is that it is a. intangible b. used in the operations of a business c. held for sale in the ordinary course of the business d. a short-term investment ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 61. Land acquired so it can be resold in the future is listed on the balance sheet as a(n) a. fixed asset b. current asset c. investment d. intangible asset ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 62. Which of the following should be included in the acquisition cost of a piece of equipment? a. transportation costs b. installation costs c. testing costs prior to placing the equipment into production d. All of these choices ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 63. Which of the following is included in the cost of constructing a building? a. insurance costs during construction b. cost of paving the parking lot c. cost of repairing vandalism damage during construction d. cost of removing the demolished building existing on the land when it was purchased ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 64. Which of the following is included in the cost of land? a. cost of paving a parking lot b. brokerage commission c. outdoor parking lot lighting attached to the land d. fences on the land ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 65. The proper journal entry to purchase a computer costing $975 on account to be utilized within the business would be a. Office Supplies 975 Accounts Payable 975 b. Office Equipment 975 Accounts Payable 975 c. Office Supplies 975 Accounts Receivable 975 d. Office Equipment 975 Accounts Receivable 975 ANSWER: b DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 66. A building with an appraisal value of $154,000 is made available at an offer price of $172,000. The purchaser acquires the property for $40,000 in cash, a 90-day note payable for $45,000, and a mortgage amounting to $75,000. The cost basis recorded in the buyer's accounting records to recognize this purchase is a. $154,000 b. $172,000 c. $160,000 d. $120,000 ANSWER: c RATIONALE: The cost basis recorded in the buyer's accounting records to recognize this purchase is calculated as $40,000 + $45,000 + $75,000 = $160,000. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 67. A used machine with a purchase price of $77,000, requiring an overhaul costing $8,000, installation costs of $5,000, and special acquisition fees of $3,000, would have a cost basis of a. $93,000 b. $90,000 c. $82,000 d. $85,000 ANSWER: a RATIONALE: Cost Basis of Machine = Purchase Price + Overhaul Cost + Installation Cost + Special Acquisition Fees = $77,000 + $8,000 + $5,000 + $3,000 = $93,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 68. A new machine with a purchase price of $109,000, with transportation costs of $12,000, installation costs of $5,000, and special acquisition fees of $6,000, would have a cost basis of a. $114,000 b. $126,000 c. $121,000 d. $132,000 ANSWER: d RATIONALE: Cost Basis of Machine = Purchase Price + Transportation Cost + Installation Cost + Special Acquisition Fees = $109,000 + $12,000 + $5,000 + $6,000 = $132,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 69. In a lease contract, the party who legally owns the asset is the a. lessee b. lessor c. operator d. banker ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 70. The journal entry for recording payment for the short-term lease of a fixed asset would a. be a memo entry only b. debit the fixed asset and credit Cash c. debit Rent Expense and credit Cash d. debit a liability and credit Cash ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 71. Which of the following are criteria for determining whether to record an asset as a fixed asset? a. must be an investment and long-lived b. must be long-lived and used by the company in its normal operations c. must be short-lived and tangible d. must be tangible and an investment ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 72. Expenditures that add to the utility of fixed assets for more than one accounting period are a. committed expenditures b. revenue expenditures c. utility expenditures d. capital expenditures ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 73. A capital expenditure results in a debit to a(n) a. expense account b. capital account c. liability account d. asset account ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 74. Which of the following is an example of a capital expenditure? a. cleaning the carpet in the front room b. tune-up for a company truck c. replacing an engine in a company car d. replacing all burned-out light bulbs in the factory ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 75. Factors contributing to a decline in the usefulness of a fixed asset may be divided into which of the following two categories? a. salvage and functional b. physical and functional c. residual and salvage d. functional and residual ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 76. A fixed asset's estimated value at the time it is to be retired from service is called a. book value b. residual value c. market value d. carrying value ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 77. All of the following are needed for the calculation of straight-line depreciation except a. cost b. residual value c. estimated life d. units produced ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 78. The method of determining depreciation that yields successive reductions in the periodic depreciation charge over the estimated life of the asset is the a. units-of-production method b. double-declining-balance method c. straight-line method d. time-valuation method ANSWER: b DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 79. When the amount of use of a fixed asset varies from year to year, the method of determining depreciation expense that best matches allocation of cost with revenue is a. the double-declining-balance method b. the straight-line method c. the units-of-activity method d. MACRS ANSWER: c DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 80. A machine with a cost of $120,000 has an estimated residual value of $15,000 and an estimated life of five years or 15,000 hours. It is to be depreciated by the units-of-activity method. What is the amount of depreciation for the second full year, during which the machine was used 5,000 hours? a. $5,000 b. $35,000 c. $21,000 d. $45,000 ANSWER: b RATIONALE: Depreciation per Operating Hour = (Cost – Residual Value)/Total Units of Output = ($120,000 – $15,000)/15,000 hours = $7 Depreciation Expense = Depreciation per Operating Hour × Total Units of Output Used = $7 × 5,000 hours = $35,000 DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 81. Equipment with a cost of $220,000 has an estimated residual value of $30,000 and an estimated life of 10 years or 19,000 hours. It is to be depreciated by the straight-line method. What is the amount of depreciation for the first full year, during which the equipment was used 2,100 hours? a. $19,000 b. $21,000 c. $22,000 d. $30,000 ANSWER: a RATIONALE: Annual Depreciation = (Cost – Residual Value)/Useful Life = ($220,000 – $30,000)/10 = $19,000 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 82. A machine with a cost of $75,000 has an estimated residual value of $5,000 and an estimated life of four years or 18,000 hours. What is the amount of depreciation for the second full year, using the double-declining-balance method? a. $17,500 b. $37,500 c. $18,750 d. $16,667 ANSWER: c RATIONALE: Double-Declining-Balance Rate = (1/4) × 2 = 50% First-Year Depreciation = $75,000 × 50% = $37,500 Second-Year Depreciation = ($75,000 – $37,500) × 50% = $18,750 DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 83. Equipment with a cost of $160,000, an estimated residual value of $40,000, and an estimated life of 15 years was depreciated by the straight-line method for four years. Due to obsolescence, it was determined that the remaining useful life should be shortened by three years and the residual value changed to zero. The depreciation expense for the current and future years is a. $11,636 b. $16,000 c. $11,000 d. $8,000 ANSWER: b RATIONALE: Depreciation for First 4 Years = [(Initial Cost – Residual Value)/Estimated Life] × 4 Depreciation for First 4 Years = [($160,000 – $40,000) ÷ 15] × 4 = $32,000 Book Value at End of 4th Year = $160,000 – $32,000 = $128,000 Depreciation Expense for Current and Future Years = $128,000/(15 – 4 – 3) = $16,000 DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 84. The depreciation method that does not use residual value in calculating the first year's depreciation expense is a. straight-line b. units-of-activity c. double-declining-balance d. sum-of-the-years-digits ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 85. If a fixed asset, such as a computer, were purchased on January 1 for $3,750 with an estimated life of three years and a salvage or residual value of $150, the journal entry for monthly expense under straight-line depreciation is a. Depreciation Expense 100 Accumulated Depreciation 100 b. Depreciation Expense 1,200 Accumulated Depreciation 1,200 c. Accumulated Depreciation 1,200 Depreciation Expense 1,200 d. Accumulated Depreciation 100 Depreciation Expense 100 ANSWER: a RATIONALE: Monthly Depreciation Expense = (Cost – Residual Value)/Useful Life = [($3,750 – $150)/3]/12 = $100 Depreciation Expense 100 Accumulated Depreciation 100 DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 86. Accumulated Depreciation a. is used to show the amount of cost expiration of intangibles b. is the same as Depreciation Expense c. is a contra asset account d. is used to show the amount of cost expiration of natural resources ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 87. Residual value is also known as all of the following except a. scrap value b. trade-in value c. salvage value d. net book value ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 88. The formula for depreciable cost is a. Initial Cost + Residual Value b. Initial Cost – Residual Value c. Initial Cost – Accumulated Depreciation d. Depreciable Cost = Initial Cost ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 89. Expected useful life is a. calculated when the asset is sold b. estimated at the time that the asset is placed in service c. determined each year that the depreciation calculation is made d. None of these choices ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 90. The calculation for annual depreciation using the straight-line depreciation method is a. Initial Cost/Estimated Useful Life b. Depreciable Cost/Estimated Useful Life c. Depreciable Cost × Estimated Useful Life d. Initial Cost × Estimated Useful Life ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 91. The calculation for annual depreciation using the units-of-activity method is a. (Initial Cost/Estimated Output) × Actual Yearly Output b. (Depreciable Cost/Yearly Output) × Estimated Output c. Depreciable Cost/Yearly Output d. (Depreciable Cost/Estimated Output) × Actual Yearly Output ANSWER: d DIFFICULTY: Challenging Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 92. On June 1, Aaron Company purchased equipment at a cost of $120,000 that has a depreciable cost of $90,000 and an estimated useful life of three years and 30,000 hours, which ends on December 31. Using straight-line depreciation, calculate depreciation expense for the final (partial) year of service. a. $17,500 b. $30,000 c. $12,500 d. $40,000 ANSWER: RATIONALE:

c Annual Depreciation = Depreciable Cost/Useful Life = $90,000/3 = $30,000 Depreciation Expense for Final (partial) Year of Service = ($30,000/12) × 5 = $12,500

DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 93. On June 1, Michael Company purchased equipment at a cost of $120,000 that has a depreciable cost of $90,000 and an estimated useful life of three years or 30,000 hours. Using straight-line depreciation, calculate depreciation expense for the second year. a. $17,500 b. $30,000 c. $12,500 d. $40,000 ANSWER: b RATIONALE: Annual Depreciation = Depreciable Cost/Useful Life = $90,000/3 = $30,000 Depreciation Expense for the Second Year = $30,000 DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 94. On June 1, Scotter Company purchased equipment at a cost of $120,000 that has a depreciable cost of $90,000 and an estimated useful life of three years or 30,000 hours. Using straight-line depreciation, calculate depreciation expense for the first year, which ends on December 31. a. $17,500 b. $30,000 c. $12,500 d. $40,000 ANSWER: a RATIONALE: Annual Depreciation = Depreciable Cost/Useful Life = $90,000/3 = $30,000 Depreciation Expense for Second Year = ($30,000/12) × 7 = $17,500 DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 95. Computer equipment was acquired at the beginning of the year at a cost of $57,000 that has an estimated residual value of $9,000 and an estimated useful life of five years. Determine the second-year depreciation using the straight-line method. a. $13,200 b. $19,200 c. $9,600 d. $9,000 ANSWER: c RATIONALE: Annual Depreciation = (Cost – Residual Value)/Useful Life = ($57,000 – $9,000)/5 = $9,600 Depreciation Expense for the Second Year = $9,600 DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 96. Which of the following is true? a. If using the double-declining-balance method, the total amount of depreciation expense during the life of the asset will be the highest. b. If using the units-of-activity method, it is possible to depreciate more than the depreciable cost. c. If using the straight-line method, the amount of depreciation expense during the first year is higher than that of the double-declining-balance. d. Regardless of the depreciation method, the amount of total depreciation expense during the life of the asset will be the same. ANSWER: d DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 97. An asset was purchased for $120,000 on January 1, Year 1 and originally estimated to have a useful life of 10 years with a residual value of $10,000. At the beginning of the third year, it was determined that the remaining useful life of the asset was only four years with a residual value of $2,000. Calculate the third-year depreciation expense using the revised amounts and straight-line method. a. $25,000 b. $11,000 c. $24,000 d. $24,500 ANSWER: c RATIONALE: Depreciation for First 2 years = [($120,000 – $10,000) ÷ 10] × 2 = $22,000 Book Value at End of 4th Year = $120,000 – $22,000 = $98,000 Depreciation Expense for Third Year = ($98,000 – $2,000)/4 = $24,000 DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 98. Machinery was purchased on January 1 for $51,000. The machinery has an estimated life of seven years and an estimated salvage value of $9,000. Double-declining-balance depreciation for the second year would be (round calculations to the nearest dollar): a. $10,929 b. $6,000 c. $10,500 d. $10,408 ANSWER: d RATIONALE: Double-Declining-Balance Rate = (1/7) × 2 = 28.57% First-Year Depreciation = $51,000 × 28.57% = $14,571 Second-Year Depreciation = ($51,000 – $14,571) × 28.57% = $10,408 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 99. A fixed asset with a cost of $30,000 and accumulated depreciation of $28,500 is sold for $3,500. What is the amount of the gain or loss on disposal of the fixed asset? a. $2,000 loss b. $1,500 loss c. $3,500 gain d. $2,000 gain ANSWER: d RATIONALE: Gain on Sale = Selling Price – Book Value of Asset = $3,500 – ($30,000 – $28,500) = $2,000 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-03 - 10-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 100. When a company discards machinery that is fully depreciated, this transaction would be recorded as a a. debit to Accumulated Depreciation and credit to Machinery b. debit to Machinery and a credit to Accumulated Depreciation c. debit to Cash and a credit to Accumulated Depreciation d. debit to Depreciation Expense and a credit Accumulated Depreciation ANSWER: a DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.10-03 - 10-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 10 - Long-Term Assets: Fixed and Intangible 101. When a company sells machinery at a price equal to its book value, this transaction would be recorded as a a. debit to Cash and Accumulated Depreciation and a credit to Machinery b. debit to Machinery and a credit to Cash and Accumulated Depreciation c. debit to Cash and Machinery and a credit to Accumulated Depreciation d. debit to Cash and Depreciation Expense and a credit to Accumulated Depreciation ANSWER: a DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.10-03 - 10-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 102. On December 31, Strike Company has decided to discard one of its batting cages. The equipment had an initial cost of $310,000 and has accumulated depreciation of $260,000. Depreciation has been recorded up to the end of the year. Which of the following will be included in the entry to record the disposal? a. Accumulated Depreciation, debit, $310,000 b. Loss on Disposal of Asset, debit, $260,000 c. Equipment, credit, $310,000 d. Gain on Disposal of Asset, credit, $50,000 ANSWER: c DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-03 - 10-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 103. On December 31, Strike Company sold one of its batting cages for $50,000. The equipment had an original cost of $310,000 and has accumulated depreciation of $260,000. Depreciation has been recorded up to the end of the year. What is the amount of the gain or loss on this transaction? a. gain of $50,000 b. loss of $50,000 c. no gain or loss d. cannot be determined ANSWER: c RATIONALE: Gain on Sale = Selling Price – Book Value of Asset = $50,000 – ($310,000 – $260,000) = $0 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-03 - 10-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 104. On December 31, Strike Company sold one of its batting cages for $20,000. The equipment had an initial cost of $310,000 and has accumulated depreciation of $260,000. Depreciation has been recorded up to the end of the year. What is the amount of the gain or loss on this transaction? a. gain of $20,000 b. gain of $30,000 c. loss of $20,000 d. loss of $30,000 ANSWER: d RATIONALE: Loss on Sale = Selling Price – Book Value of Asset = $20,000 – ($310,000 – $260,000) = $(30,000) DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-03 - 10-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 105. On December 31, Strike Company sold one of its batting cages for $55,000. The equipment had an initial cost of $310,000 and has accumulated depreciation of $260,000. Depreciation has been taken up to the end of the year. What is the amount of the gain or loss on this transaction? a. loss of $55,000 b. loss of $5,000 c. gain of $5,000 d. gain of $55,000 ANSWER: c RATIONALE: Gain on Sale = Selling Price – Book Value of Asset = $55,000 – ($310,000 – $260,000) = $5,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-03 - 10-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 106. The accumulated depletion account is a. an expense account b. an intangible asset account c. reported on the income statement as other expense d. reported on the balance sheet as a deduction from the cost of the mineral deposit ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.10-04 - 10-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 10 - Long-Term Assets: Fixed and Intangible 107. The accumulated depletion of a natural resource is reported on the a. balance sheet as depreciation from the cost of the resource b. income statement as an increase in revenue c. balance sheet as a deduction from the cost of the resource d. income statement as a deduction from revenues ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.10-04 - 10-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 108. The process of transferring the cost of metal ores and other minerals removed from the earth to an expense account is called a. depletion b. deferral c. amortization d. depreciation ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-04 - 10-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 109. Sands Company purchased mining rights for $500,000. It expects to harvest 1 million tons of ore over the next five years. During the current year, Sands mined 350,000 tons of ore. The entry to record the depletion would include a a. debit to Depletion Expense for $175,000 b. credit to Depletion Expense for $350,000 c. debit to Accumulated Depletion for $175,000 d. credit to Accumulated Depletion for $350,000 ANSWER: a RATIONALE: Depletion Rate = Cost of Resource/Estimated Total Units of Resource = $500,000/1,000,000 tons = $0.50 Depletion Expense = Depletion Rate × Quantity Extracted = $0.50 × 350,000 tons = $175,000 The entry to record the depletion would include a debit to Depletion Expense for $175,000. DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-04 - 10-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 110. The natural resources of some companies include a. timber, metal ores, and minerals b. timber, equipment, and patents c. minerals, trademarks, and land d. metal ores, copyrights, and supplies ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-04 - 10-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 111. Weber Company purchased a mining site for $1,750,000 on July 1. The company expects to mine ore for the next 10 years and anticipates that a total of 400,000 tons will be recovered. The estimated residual value of the property is $150,000. During the first year, the company extracted 6,500 tons of ore. The depletion expense is a. $17,500 b. $16,000 c. $26,000 d. $15,000 ANSWER: c RATIONALE: Depletion Rate = Cost of Resource/Estimated Total Units of Resource = ($1,750,000 – $150,000)/400,000 = $4 Depletion Expense = Depletion Rate × Quantity Extracted = $4 × 6,500 tons = $26,000 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-04 - 10-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 112. Expenditures for research and development are generally recorded as a. current operating expenses b. assets and amortized over their estimated useful life c. assets and amortized over 40 years d. current assets ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-05 - 10-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 113. The term applied to the amount of cost to transfer to expense resulting from a decline in the utility of intangible assets is a. amortization b. depletion c. depreciation d. allocation ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-05 - 10-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 114. Xtra Company purchased a business from Argus for $96,000 above the fair value of its net assets. Argus had developed the goodwill over 12 years. How much would Xtra amortize the goodwill for its first year? a. $7,000 b. $8,000 c. Goodwill is not amortized. d. not enough information to calculate amortization ANSWER: c DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-05 - 10-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 115. Which intangible assets are amortized over their useful life? a. trademarks b. goodwill c. patents d. All of these choices ANSWER: c DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.10-05 - 10-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 116. The name, term, or symbol used to identify a business and its products is called a. goodwill b. a patent c. a trademark d. a copyright ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-05 - 10-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 117. The process of transferring the cost of an asset to an expense account is called all of the following except a. depletion b. allocation c. amortization d. depreciation ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCT.WARD.18.10-04 - 10-04 ACCT.WARD.18.10-05 - 10-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 118. Fixed assets are ordinarily presented on the balance sheet a. at current market values b. at replacement costs c. at cost less accumulated depreciation d. in a separate section along with intangible assets ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-06 - 10-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 119. The ratio measuring the number of dollars of sales earned per dollar of fixed assets is the a. fixed asset turnover ratio b. days' in assets ratio c. current asset turnover ratio d. intangible asset ratio ANSWER: a DIFFICULTY: Bloom's: Remembering Easy LEARNING OBJECTIVES: ACCT.WARD.18.10-07 - 10-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 120. The higher the fixed asset turnover, the a. less efficiently a company is using its fixed assets in generating sales b. more efficiently a company is using its fixed assets in generating sales c. more efficiently a company is using its current assets in generating sales d. more efficiently a company is using its intangible assets in generating sales ANSWER: b DIFFICULTY: Bloom's: Understanding Moderate LEARNING OBJECTIVES: ACCT.WARD.18.10-07 - 10-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 121. Which of the following statements is true? a. A larger fixed asset turnover ratio is associated with firms that are more labor intensive and require smaller fixed asset investments. b. The fixed asset ratio cannot be compared across time for an individual company. c. A smaller fixed asset turnover ratio is associated with firms that are more labor intensive and require smaller fixed asset investments. d. The fixed asset ratio is not useful for comparing different companies. ANSWER: a DIFFICULTY: Bloom's: Understanding Easy LEARNING OBJECTIVES: ACCT.WARD.18.10-07 - 10-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 122. Newport Company has sales of $2,025,000 for the current year. The book value of its fixed assets at the beginning of the year was $550,000 and at the end of the year was $800,000. The fixed asset turnover ratio for Newport is a. 3.0 b. 3.6 c. 3.7 d. 2.5 ANSWER: a RATIONALE: Fixed Asset Turnover Ratio = Sales/Average Book Value of Fixed Assets = $2,025,000/[($550,000 + $800,000)/2)] = 3.0 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-07 - 10-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 123. A fixed asset with a cost of $52,000 and accumulated depreciation of $47,500 is traded for a similar asset priced at $60,000 (fair market value) in a transaction with commercial substance. Assuming a trade-in allowance of $5,000, at what cost will the new equipment be recorded in the books? a. $54,000 b. $59,500 c. $60,000 d. $60,500 ANSWER: c DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-APP - 10-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 124. A fixed asset with a cost of $41,000 and accumulated depreciation of $36,000 is traded for a similar asset priced at $50,000 (fair market value) in a transaction with commercial substance. Assuming a trade-in allowance of $4,000, at what cost will the new equipment be recorded in the books? a. $54,000 b. $45,000 c. $51,000 d. $50,000 ANSWER: d DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-APP - 10-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 125. A fixed asset with a cost of $41,000 and accumulated depreciation of $36,500 is traded for a similar asset priced at $60,000. Assuming a trade-in allowance of $3,000, the recognized loss on the trade is a. $3,000 b. $4,500 c. $500 d. $1,500 ANSWER: d RATIONALE: Loss on Exchange = Trade-In Allowance – Book Value of Asset = $3,000 – ($41,000 – $36,500) = $(1,500) DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-APP - 10-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 126. Bacon Company acquired new machinery with a price of $15,200 by trading in similar old machinery and paying $12,700. The old machinery originally cost $9,000 and had accumulated depreciation of $5,000. In recording this transaction, Bacon Company should record a. the new machinery at $16,700 b. the new machinery at $12,700 c. a gain of $1,500 d. a loss of $1,500 ANSWER: d RATIONALE: Loss on Exchange = Trade-In Allowance – Book Value of Asset = ($15,200 – $12,700) – ($9,000 – $5,000) = $(1,500) DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-APP - 10-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 127. When a company exchanges machinery and receives a trade-in allowance greater than the book value, this transaction would be recorded with which of the following entries (assuming the exchange was considered to have commercial substance)? a. debit Machinery and Accumulated Depreciation; credit Machinery, Cash, and Gain on Exchange of Machinery b. debit Machinery and Accumulated Depreciation; credit Machinery and Cash c. debit Cash and Machinery; credit Accumulated Depreciation d. debit Cash and Machinery; credit Accumulated Depreciation and Machinery ANSWER: a DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.10-APP - 10-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 128. When a company exchanges machinery and receives a trade-in allowance less than the book value, this transaction would be recorded with which of the following entries? a. debit Machinery and Accumulated Depreciation; credit Machinery and Cash b. debit Cash and Machinery; credit Accumulated Depreciation c. debit Cash and Machinery; credit Accumulated Depreciation and Machinery d. debit Machinery, Accumulated Depreciation, and Loss on Exchange of Machinery; credit Machinery and Cash ANSWER: d DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.10-APP - 10-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 129. On December 31, Strike Company traded in one of its batting cages for another one that has a cost of $500,000. Strike receives a trade-in allowance of $11,000. The old equipment had an initial cost of $215,000 and has accumulated depreciation of $185,000. Depreciation has been recorded up to the end of the year. The difference will be paid in cash. What is the amount of the gain or loss on this transaction? a. loss of $11,000 b. gain of $11,000 c. loss of $19,000 d. No loss or gain will be recorded. ANSWER: c RATIONALE: Loss on Exchange = Trade-In Allowance – Book Value of Asset = $11,000 – ($215,000 – $185,000) = $(19,000) DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-APP - 10-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible Matching Classify each of the following costs associated with long-lived assets as one of the following: a. Buildings b. Machinery and equipment c. Land d. Land improvements DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 130. Fees paid to architect to design new office building ANSWER: a 131. Cost of insurance during the construction of new office building ANSWER: a 132. Interest on money borrowed to finance construction of new office building ANSWER: a 133. Sales taxes paid on new factory equipment ANSWER: b 134. Freight costs paid on purchase of new equipment ANSWER: b 135. Repairs made to used office equipment ANSWER: b 136. Costs to survey a new piece of land for a new business location ANSWER: c 137. Costs of government permits required to develop land for a new business location ANSWER: c 138. Purchase price of land purchased for new business site ANSWER: c 139. Landscaping at new business location ANSWER: d

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Chapter 10 - Long-Term Assets: Fixed and Intangible Classify each of the following costs associated with long-lived assets as one of the following: a. Land improvements b. Buildings c. Land d. Machinery and equipment DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 140. Fences around land at new business location ANSWER: a 141. Paved parking areas at new business location ANSWER: a 142. Outdoor lighting at new business location ANSWER: a 143. Walkways to surround new business location ANSWER: a 144. Modifying a building purchased for new business location ANSWER: b 145. Supplies (materials) used to test new equipment ANSWER: d 146. Cost of installing new equipment ANSWER: d 147. Cost of grading and leveling land to be used for a new business site ANSWER: c 148. Cost of removing an existing building to ready land for use as a new business site ANSWER: c 149. Cost assessed by city for paving a public street that borders land on which a new business location will be constructed ANSWER: c

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Chapter 10 - Long-Term Assets: Fixed and Intangible Classify each of the following as: a. Ordinary maintenance and repairs b. Asset improvements c. Extraordinary repairs DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 150. Overhauling an engine in a large truck ANSWER: c 151. Exterior and interior painting ANSWER: a 152. Paving a new parking lot ANSWER: b 153. New landscaping ANSWER: b 154. Installing a new air conditioning system in an old building ANSWER: b 155. Resurfacing a pool in an apartment building ANSWER: c 156. Adding refrigerant to an air conditioning system ANSWER: a 157. Fixing damage due to a car accident ANSWER: a

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Chapter 10 - Long-Term Assets: Fixed and Intangible Match the intangible assets described with their proper classification (a–d). a. Patent b. Copyright c. Trademark d. Goodwill DIFFICULTY:

Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-05 - 10-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 158. Rights to sell a book and make a profit ANSWER: b 159. McDonald’s golden arches ANSWER: c 160. A new kitchen gadget that can be produced by only one company ANSWER: a 161. Location of a company ANSWER: d 162. iTunes music ANSWER: b 163. Reputation of a company ANSWER: d 164. Nike swoosh ANSWER: c 165. Mickey Mouse ANSWER: c

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Chapter 10 - Long-Term Assets: Fixed and Intangible Match each account name to the financial statement section (a–i) in which it would appear. a. Current assets b. Fixed assets c. Intangible assets d. Current liability e. Long-term liability f. Owner's equity g. Revenues h. Operating expenses i. Other revenue and expense DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.10-06 - 10-06 ACCT.WARD.18.10-AP - 10-AP ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 166. Accumulated Depreciation—Buildings ANSWER: b 167. Depreciation Expense ANSWER: h 168. Amortization Expense ANSWER: h 169. Land Improvements ANSWER: b 170. Gain on Sale of Equipment ANSWER: i 171. Loss on Disposal of Asset ANSWER: i 172. Loss from Impaired Goodwill ANSWER: i 173. Research and Development Costs ANSWER: h

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Chapter 10 - Long-Term Assets: Fixed and Intangible Subjective Short Answer 174. What is the cost of the land, based on the following data? Land purchase price Broker's commission Payment for demolition and removal of existing building Cash received from sale of materials salvaged from demolished building

$178,000 15,000 5,000 2,000

ANSWER:

$196,000 Cost of Land = Land Purchase Price + Broker's Commission + Payment for the Demolition and Removal of Existing Building – Cash Received from Sale of Materials Salvaged from Demolished Building = $178,000 + $15,000 + $5,000 – $2,000 = $196,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 175. Falcon Company acquired an adjacent lot to construct a new warehouse, paying $40,000 and giving a short-term note for $410,000. Legal fees paid were $13,275, delinquent taxes assessed were $14,500, and fees paid to remove an old building from the land were $15,800. Materials salvaged from the demolition of the building were sold for $6,800. A contractor was paid $890,000 to construct the new warehouse. Determine the cost of the land to be reported on the balance sheet and show your work. ANSWER: Initial cost of land ($40,000 + $410,000) $450,000 Plus: Legal fees $13,275 Delinquent taxes 14,500 Demolition of building 15,800 43,575 $493,575 Less: Salvaged materials 6,800 Cost of land $486,775 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 176. Identify each of the following expenditures as chargeable to (a) Land, (b) Land Improvements, (c) Buildings, (d) Machinery and Equipment, or (e) other account. (1) Cost of paving parking area for employees and customers (2) Insurance during construction of building (3) Interest incurred on loan during construction of building (4) Fee paid for installation of equipment (5) Special foundation for new equipment acquired (6) Insurance on new equipment while in transit (7) Freight charges on new equipment (8) Cost of repairing vandalism damage to equipment during installation (9) Sales tax on new equipment (10) Cost incurred in repairing damage resulting from installation of new equipment (11) Cost of land fill for building site (12) Cost of lubricating oil purchased for periodic oil changes for equipment (13) Parking lot lighting (14) Installing a fence around the parking lot (15) Repainting the trim on a building (16) Special assessment paid to city for extension of water main to property (17) Cost of razing and removing the old building on property acquired for a building site (18) Delinquent real estate taxes assumed by purchaser on property acquired for a building site (19) Attorney's fee for title search (20) Architect's fee for building plans and supervision of construction ANSWER: (a) 11, 16, 17, 18, 19 (b) 1, 13, 14 (c) 2, 3, 20 (d) 4, 5, 6, 7, 9 (e) 8, 10, 12, 15 DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 177. Eagle Country Club has acquired a lot to construct a clubhouse. Eagle had the following costs related to the construction: Architects’ fees Construction labor Engineers’ fees Fences around building Grading and leveling Insurance costs incurred during construction Interest on money borrowed for construction Land Building materials Sales taxes Trees and shrubs

$ 45,000 80,000 15,000 9,000 10,000 7,000 5,000 73,000 237,000 6,000 6,000

Determine the cost of the club house to be reported on the balance sheet. Architects’ fees Construction labor Engineers’ fees Insurance costs incurred during construction Interest on money borrowed for construction Building materials Sales taxes Cost of club house DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic ANSWER:

$ 45,000 80,000 15,000 7,000 5,000 237,000 6,000 $395,000

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Chapter 10 - Long-Term Assets: Fixed and Intangible 178. A number of major structural repairs completed at the beginning of the current fiscal year at a cost of $1,000,000 are expected to extend the life of a building 10 years beyond the original estimate. The original cost of the building was $6,552,000, and it has been depreciated by the straight-line method for 25 years. Estimated residual value is negligible and has been ignored. The related accumulated depreciation account after the depreciation adjustment at the end of the preceding fiscal year is $4,550,000. (a) What has the amount of annual depreciation been in past years? (b) What was the original life estimate of the building? (c) To what account should the $1,000,000 be debited? (d) What is the book value of the building after the extraordinary repairs have been made? (e) What is the expected remaining life of the building after the extraordinary repairs have been made? (f) What is the amount of straight-line depreciation for the current year, assuming that the repairs were completed at the very beginning of the current year? Round to the nearest dollar. ANSWER: (a) $182,000 ($4,550,000 ÷ 25) (b) 36 years ($6,552,000 ÷ $182,000) (c) Accumulated Depreciation—Building (d) $3,002,000 ($6,552,000 + $1,000,000 – $4,550,000) (e) 21 years (36 – 25 + 10) (f) $142,952 ($3,002,000 ÷ 21) DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 179. Journalize each of the following transactions: (a) (b) (c)

A wing costing $2,345,000 was added to the building. A new mortgage was issued for the cost. Equipment was upgraded to increase its capacity to produce widgets. The upgrade cost of $11,500 was paid in cash. A major overhaul costing $8,000 on a machine increased the useful life by four years. The payment was made in cash.

ANSWER:

(a) Building Mortgage Payable (b) Equipment Cash

(c) Accumulated Depreciation—Machinery Cash DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

2,345,000 2,345,000 11,500 11,500 8,000

8,000

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Chapter 10 - Long-Term Assets: Fixed and Intangible 180. On April 15, Compton Co. paid $2,800 to upgrade a delivery truck and $125 for an oil change. Journalize the entries for the upgrade to the delivery truck and oil change expenditures. ANSWER: Apr. 15 Delivery Truck 2,800 Cash 2,800 15 Repairs and Maintenance Expense Cash

125 125

DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 181. XYZ Co. incurred the following costs related to the office building used in operating its sports supply company: (a) (b) (c) (d) (e) (f) (g)

Replaced a broken window. Replaced the roof that had been on the building 23 years. Serviced all the air conditioners before summer started. Replaced the air conditioners in the customer service areas. Added a warehouse to the back of the building. Repainted the interior walls. Installed window shutters on all windows.

Classify each of the costs as a capital expenditure or a revenue expenditure. ANSWER: (a) Revenue expenditure (b) Capital expenditure (c) Revenue expenditure (d) Capital expenditure (e) Capital expenditure (f) Revenue expenditure (g) Capital expenditure DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 182. Comment on the validity of the following statements. "As an asset loses its ability to provide services, cash needs to be set aside to replace it. Depreciation accomplishes this goal." ANSWER: Depreciation is the periodic transfer of the cost of an asset to expense. Depreciation is a noncash expense. Depreciation does not accumulate cash for replacements. DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 183. Computer equipment was acquired at the beginning of the year at a cost of $65,000 that has an estimated residual value of $3,800 and an estimated useful life of eight years. Determine the (a) depreciable cost, (b) straight-line rate, and (c) annual straight-line depreciation. ANSWER: (a) $61,200 (Initial Cost – Estimated Residual Value = $65,000 – $3,800) (b) 12.5% (1/8) (c) $7,650 ($61,200 × 0.125) DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 184. The double-declining-balance rate for calculating depreciation expense is determined by doubling the straight-line rate. Assuming that an asset has a useful life of 25 years, determine the rate to be used under the double-declining-balance method. ANSWER: 4% × 2 = 8% DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 185. Copy equipment was acquired at the beginning of the year at a cost of $72,000 that has an estimated residual value of $9,000 and an estimated useful life of five years. It is estimated that the machine will output an estimated 1,000,000 copies. This year, 315,000 copies were made. Determine the (a) depreciable cost, (b) depreciation rate, and (c) units-ofactivity depreciation for the year. ANSWER: (a) $63,000 (Initial Cost – Estimated Residual Value = $72,000 – $9,000) $0.063 per copy (Depreciable Cost/Total Units of Output = $63,000/1,000,000 (b) copies) (c) $19,845 (315,000 copies × $0.063) DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 10 - Long-Term Assets: Fixed and Intangible 186. A machine costing $57,000 with a six-year life and $54,000 depreciable cost was purchased January 1. Compute the yearly depreciation expense using straight-line depreciation. ANSWER: $54,000 ÷ 6 years = $9,000 per year DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 187. A machine costing $185,000 with a five-year life and $20,000 residual value was purchased January 2. Compute depreciation for each of the five years, using the double-declining-balance method. ANSWER: (1) Year 1 $185,000 × 0.40 = $74,000 (2) Year 2 $111,000 × 0.40 = $44,400 (3) Year 3 $66,600 × 0.40 = $26,640 (4) Year 4 $39,960 × 0.40 = $15,984 (5) Year 5 $23,976 – $20,000 = $3,976 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 188. Computer equipment was acquired at the beginning of the year at a cost of $63,000 that has an estimated residual value of $3,000 and an estimated useful life of five years. Determine the (a) depreciable cost (b) double-declining-balance rate, and (c) double-declining-balance depreciation for the first year. ANSWER: (a) $60,000 (Initial Cost – Estimated Residual Value = $63,000 – $3,000) (b) 40% (1/5) × 2 (c) $25,200 ($63,000 × 40%) DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 189. Convert each of the following estimates of useful life to a straight-line depreciation rate, stated as a percentage. (a) 2 years (b) 8 years (c) 10 years (d) 20 years (e) 25 years (f) 40 years (g) 50 years ANSWER: (a) 50% (1/2) (b) 12.5% (1/8) (c) 10% (1/10) (d) 5% (1/20) (e) 4% (1/25) (f) 2.5% (1/40) (g) 2% (1/50) DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 190. Prior to adjustment at the end of the year, the balance in Trucks is $300,900 and the balance in Accumulated Depreciation—Trucks is $88,200. Details of the subsidiary ledger are as follows: Truck No. 1 2 3 4

Estimated Estimated Useful Cost Residual Value Life $100,000 $13,000 300,000 72,900 9,900 300,000 38,000 3,000 200,000 90,000 13,000 200,000

Accumulated Depreciation at Beginning of Year

Miles Operated During Year — 30,000 $60,000 25,000 8,050 45,000 20,150 40,000

Required (a) Based on the units-of-activity method, determine the depreciation rates per mile and the amount to be credited to the Accumulated depreciation section of each of the subsidiary accounts for the miles operated during the current year. (b) Journalize the entry to record depreciation for the year. ANSWER: (a) Truck No. Rate per Mile Miles Operated Depreciation 1 2 3 4

29.0 cents 21.0 17.5 38.5

30,000 25,000 45,000 40,000

$ 8,700 3,000* 7,875 15,400 $34,975

Total

*Mileage depreciation of $5,250 (21 cents × 25,000) is limited to $3,000, which reduces the book value of the truck to $9,900, its residual value. (b) Depreciation Expense—Trucks 34,975 Accumulated Depreciation—Trucks DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

34,975

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Chapter 10 - Long-Term Assets: Fixed and Intangible 191. An asset was purchased for $58,000 and originally estimated to have a useful life of 10 years with a residual value of $3,000. After two years of straight-line depreciation, it was determined that the remaining useful life of the asset was only two years with a residual value of $2,000. (a) Determine the amount of the annual depreciation for the first two years. (b) Determine the book value at the end of Year 2. (c) Determine the depreciation expense for each of the remaining years after revision. ANSWER: (a) $5,500 (Cost – Residual Value)/Useful Life = ($58,000 – $3,000)/10 (b) $47,000 [Initial Cost – Total Depreciation for Year 1 and 2 = $58,000 – ($5,500 × 2)] (c) $22,500 [( Book Value at End of Year 2 – Revised Residual Value)/Revised Useful Life = ($47,000 – $2,000)/2] DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 192. For each of the following fixed assets, determine the depreciation expense for Year 3: Disposal date is N/A if asset is still in use. Method: SL = straight-line; DDB = double-declining-balance Assume the estimated life is five years for each asset. Item

Cost

$40,000

50,000

60,000

80,000

Residual Value

Depr. Purchase Date Disposal Date Depr. Method Expense Year 3

$ 4,000 July 1, Year N/A 3 5,000 Jan. 1, Year 1 Aug. 31,Year 3 2,000 Oct. 1, Year N/A 3 10,000 Jan. 1, Year 2 Apr. 1, Year 3

SL SL DDB DDB

ANSWER: Item

Cost

Residual Value Purchase Date

Disposal Date

A B C D

$40,000 $ 4,000 July 1, Year 3 50,000 5,000 Jan. 1, Year 1 60,000 2,000 Oct. 1, Year 3 80,000 10,000 Jan. 1, Year 2

N/A Aug. 31, Year 3 N/A Apr. 1, Year 3

Depr. Depr. Expense Method Year 3

SL SL DDB DDB

$3,600 6,000 6,000 4,800

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 10 - Long-Term Assets: Fixed and Intangible 193. Equipment purchased at the beginning of the fiscal year for $360,000 is expected to have a useful life of five years, or 14,000 operating hours, and a residual value of $10,000. Compute the depreciation for the first and second years of use by each of the following methods: (a) Straight-line (b) Units-of-activity (1,200 hours first year; 2,250 hours second year) (c) Double-declining-balance ANSWER: (a) (b) (c)

1st Year $70,000 [($360,000 – $10,000) ÷ 5] $30,000 [($360,000 – $10,000) ÷ 14,000 hours × 1,200] $144,000 ($360,000 × 0.40)

2nd Year (a) $70,000 [($360,000 – $10,000) ÷ 5] (b) $56,250 [($360,000 – $10,000) ÷ 14,000 hours × 2,250] (c) $86,400 [($360,000 – $144,000) × 0.40] DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 194. Machinery is purchased on July 1 of the current fiscal year for $240,000. It is expected to have a useful life of four years, or 25,000 operating hours, and a residual value of $15,000. Compute the depreciation for the last six months of the current fiscal year ending December 31 by each of the following methods: (a) Straight-line (b) Double-declining-balance (c) Units-of-activity (used for 1,600 hours during the current year) (a) $28,125 [($240,000 – $15,000) ÷ 4 × 6/12] (b) $60,000 ($240,000 × 0.50 × 6/12) (c) $14,400 [($240,000 – $15,000) ÷ 25,000 hours × 1,600 hours] DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic ANSWER:

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Chapter 10 - Long-Term Assets: Fixed and Intangible 195. Determine the depreciation for the year of acquisition and for the following year of a fixed asset acquired on October 1 for $500,000 with an estimated life of five years, and residual value of $50,000, using (a) the double-declining-balance method and (b) the straight-line method. Assume a fiscal year ending December 31. ANSWER: (a) Year of acquisition: $50,000 ($500,000 × 0.40 × 3/12) Following year: $180,000 ($500,000 – $50,000 × 0.40) (b) Year of acquisition: $22,500 [($500,000 – $50,000/5) × 3/12] Following year: $90,000 [($500,000 – $50,000)/5] DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 196. Equipment costing $80,000 with a useful life of 10 years and a residual value of $8,000 has been depreciated for six years by the straight-line method. Assume a fiscal year ending December 31. (a) (b)

What is the book value at the end of the sixth year of use? If early in the seventh year it is estimated that the remaining useful life is five years (instead of four) and the residual value is $6,000, what is the amount of depreciation for the seventh year?

($80,000 – $8,000) = $72,000 $72,000/10 = $7,200 $7,200 × 6 = $43,200 $80,000 – $43,200 = $36,800 (b) ($36,800 – $6,000)/5 = $6,160 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic ANSWER:

(a)

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Chapter 10 - Long-Term Assets: Fixed and Intangible 197. Golden Sales has bought $135,000 in fixed assets on January 1 associated with sales equipment. The residual value of these assets is estimated at $10,000 at the end of their four-year service life. Golden Sales managers want to evaluate the options of depreciation. (a) Compute the annual straight-line depreciation and provide the sample depreciation journal entry to be posted at the end of each of the years. (b) Write the journal entries for each year of the service life for these assets using the double-declining-balance method. ANSWER: (a) Acquisition cost $135,000 Less residual value 10,000 Depreciable value $125,000 Divided by service life 4 years $ 31,250 Annual depreciation Dec. 31 Depreciation Expense—Sales Equipment Accumulated Depreciation—Sales Equipment

31,250 31,250

(b)$135,000 × 50% = $67,500 ($135,000 – $67,500) × 50% = $33,750 ($135,000 – $67,500 – $33,750) × 50% = $16,875 $135,000 – $67,500 – $33,750 – $16,875 – $10,000 = $6,875* *Depreciation cannot bring book value below $10,000 residual. Year 1 Dec. 31 Depreciation Expense—Sales Equipment Accumulated Depreciation—Sales Equipment Year 2 Dec. 31

Year 3 Dec. 31

Depreciation Expense—Sales Equipment Accumulated Depreciation—Sales Equipment Depreciation Expense—Sales Equipment Accumulated Depreciation—Sales Equipment

Year 4 Dec. 31 Depreciation Expense—Sales Equipment Accumulated Depreciation—Sales Equipment

67,500 67,500 33,750 33,750

16,875 16,875 6,875 6,875

DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Page 61

Chapter 10 - Long-Term Assets: Fixed and Intangible 198. On July 1, Harding Construction purchases a bulldozer for $228,000. The equipment has an eight-year life with a residual value of $16,000. Harding uses straight-line depreciation. (a) Calculate the depreciation expense and provide the journal entry for the first year ending December 31. (b) Calculate the third year’s depreciation expense and provide the journal entry for the third year ending December 31. (c) Calculate the last year’s depreciation expense and provide the journal entry for the last year. ANSWER: Annual depreciation is: Acquisition cost $228,000 Less residual value 16,000 Depreciable cost $212,000 Divided by service life in years 8 $ 26,500 Annual depreciation (a) First-year depreciation is $26,500 × 6/12 = $13,250 (July through December) Dec. 31 Depreciation Expense 13,250 Accumulated Depreciation 13,250 (b) Journal entry for the third year (It is also the same for all years other than the first and last year.) Dec. 31 Depreciation Expense 26,500 Accumulated Depreciation 26,500 (c) Last year depreciation is $26,500 × 6/12 = $13,250 (January through June) Dec 31 Depreciation Expense 13,250 Accumulated Depreciation 13,250 DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 62

Chapter 10 - Long-Term Assets: Fixed and Intangible 199. On July 1, Hartford Construction purchases a bulldozer for $228,000. The equipment has a nine-year life with a residual value of $16,000. Hartford uses the units-of-activity method of depreciation, and the bulldozer is expected to yield 26,500 operating hours. (a) Calculate the depreciation expense per hour of operation. (b) The bulldozer is operated 1,250 hours in the first year, 2,755 hours in the second year, and 1,225 hours in the third year of operations. Journalize the depreciation expense for each year. ANSWER:

(a) Hourly depreciation is: Acquisition cost Less residual value Depreciable cost Service life in hours Hourly depreciation

$228,000 16,000 $212,000 ÷ 26,500 $ 8

(b) First year: 1,250 hours × $8 per hour = $10,000 Year 1 Depreciation Expense 10,000 Accumulated Depreciation

10,000

Second year: 2,755 hours × $8 per hour = $22,040 Year 2 Depreciation Expense 22,040 Accumulated Depreciation

22,040

Third year: 1,225 hours × $8 per hour = $9,800 Year 3 Depreciation Expense 9,800 Accumulated Depreciation DIFFICULTY: Challenging Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

9,800

Page 63

Chapter 10 - Long-Term Assets: Fixed and Intangible 200. Equipment was purchased on January 5, Year 1, at a cost of $90,000. The equipment had an estimated useful life of eight years and an estimated residual value of $8,000. After using the equipment for three years, the useful life was revised to a total of 10 years and the residual value was reduced to $2,004. Determine the straight-line depreciation expense for Year 4 and the following years. ANSWER: Book value at beginning of Year 4: Cost $90,000 Residual 8,000 Depreciable cost $82,000 Depreciation expense for first 3 years: $82,000/8 = $10,250 $10,250 × 3 = $30,750 Book value Jan. 1, Year 4 = $59,250 Revised depreciation expense calculation: Book value at beginning of Year 4 $59,250 Less revised residual value 2,004 Remaining depreciable amount $57,246 Divided by remaining life 7 Depreciation expense for Year 4 $ 8,178 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 201. A copy machine acquired on May 1 with a cost of $2,545 has an estimated useful life of three years. Assuming that it will have a residual value of $445, determine the depreciation for the first and second year by the straight-line method. Round your answers to the nearest whole dollar. ANSWER: Straight-Line Depreciation = (Cost – Estimated Residual Value) ÷ Estimated Life Straight-Line Depreciation = ($2,545 – $445) ÷ 3 Straight-Line Depreciation = $700 per year First Year = $467 ($700 × 8/12) Second Year = $700 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 64

Chapter 10 - Long-Term Assets: Fixed and Intangible 202. A copy machine acquired with a cost of $1,410 has an estimated useful life of four years. It is also expected to have a useful operating life of 13,350 copies. Assuming that it will have a residual value of $75, determine the depreciation for the first year by the following methods: (a) Straight-line (b) Double-declining-balance (c) Units-of-activity method (4,500 copies were made the first year) ANSWER:

(a) Straight-Line Depreciation = (Cost – Estimated Residual Value)/Estimated Life Straight-Line Depreciation = ($1,410 – $75)/4 Straight-Line Depreciation = $333.75 per year (b) Double-Declining-Balance = $705, determined as follows: Year 1

Cost $1,410

Book Value at Beginning of Year $1,410

Rate 50%*

Depreciation for Year $705

*Rate = (100%/Life) × 2 Rate = 1/4 × 2 Rate = 0.50 (c)

Units-of-Activity = (Cost – Estimated Residual Value)/Estimated Copies Units-of-Activity = ($1,410 – $75)/13,350 Units-of-Activity = $0.10 per copy First-Year Depreciation = $450 ($0.10 × 4,500)

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 65

Chapter 10 - Long-Term Assets: Fixed and Intangible 203. On July 1, Andrew Company purchased equipment at a cost of $150,000 that has a depreciable cost of $120,000 and an estimated useful life of three years or 60,000 hours. Using straight-line depreciation, prepare the journal entry to record depreciation expense for (a) the first year, (b) the second year, and (c) the last year. ANSWER: $120,000 ÷ 3 years = $40,000 per full year $40,000 × 6/12 = $20,000 for first and final (partial) years (a) Depreciation Expense 20,000 Accumulated Depreciation 20,000 (b) Depreciation Expense 40,000 Accumulated Depreciation 40,000 (c) Depreciation Expense 20,000 Accumulated Depreciation 20,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 204. A copy machine acquired on July 1 with a cost of $1,450 has an estimated useful life of four years. Assuming that it will have a residual value of $250, determine the depreciation for the first year by the double-declining-balance method. ANSWER: First-Year Depreciation = $362.50 ($725 × 6/12) Year 1

Cost $1,450

Book Value at Beginning of Year $1,450

Rate 50%*

Depreciation for Year $725.00

*Rate = (100%/Life) × 2 Rate = 1/4 × 2 Rate = 0.50 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 66

Chapter 10 - Long-Term Assets: Fixed and Intangible 205. Champion Company purchased and installed carpet in its new general offices on March 31 for a total cost of $18,000. The carpet is estimated to have a 15-year useful life and no residual value. (a)

Prepare the journal entries necessary for recording the purchase of the new carpet.

Record the December 31 adjusting entry for the partial-year depreciation expense for the carpet assuming that Champion Company uses the straight-line method. ANSWER: (a) Mar. 31 Carpet 18,000 Cash 18,000 (b)

(b) Dec. 31 Depreciation Expense Accumulated Depreciation Carpet depreciation [($18,000/15 years) × 9/12]. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCT.WARD.18.10-02 - 10-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

900 900

Page 67

Chapter 10 - Long-Term Assets: Fixed and Intangible 206. Computer equipment (office equipment) purchased 6½ years ago for $170,000, with an estimated life of eight years and a residual value of $10,000, is now sold for $60,000 cash. (Appropriate entries for depreciation had been made for the first six years of use.) Journalize the following entries: (a) Record the depreciation for the one-half year prior to the sale, using the straight-line method. (b) Record the sale of the equipment. (c) Assuming that the equipment had been sold for $25,000 cash, prepare the entry to record the sale. ANSWER: (a) Depreciation Expense—Office Equipment 10,000 Accumulated Depreciation—Office Equipment 10,000 [($170,000 – $10,000)/8]/2 = $10,000 (b) Cash 60,000 Accumulated Depreciation—Office Equipment 130,000 Office Equipment 170,000 Gain on Sale of Equipment 20,000 Accumulated Depreciation at Time of Sale = [($170,000 – $10,000)/8] × 6.5 = $130,000 Book Value at Time of Sale = $170,000 – $130,000 = $40,000 Gain on Sale = Selling Price – Book Value of Asset at Time of Sale = $60,000 – $40,000 = $20,000 (c) Cash 25,000 Accumulated Depreciation—Office Equipment 130,000 Loss on Sale of Equipment 15,000 Office Equipment 170,000 DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-03 - 10-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 68

Chapter 10 - Long-Term Assets: Fixed and Intangible 207. Equipment was acquired at the beginning of the year at a cost of $75,000. The equipment was depreciated using the straight-line method based on an estimated useful life of six years and an estimated residual value of $7,500. (a) What was the depreciation expense for the first year? (b) Assuming the equipment was sold at the end of the second year for $59,000, determine the gain or loss on sale of the equipment. (c) Journalize the entry to record the sale. ANSWER: (a) $11,250 [(Cost – Residual Value)/Useful Life = ($75,000 – $7,500)/6] (b) $6,500 gain [Accumulated Depreciation at End of Second Year = $11,250 × 2 = $22,500 Book Value at End of Second Year = $75,000 – $22,500 = $52,500 Gain on Sale = Selling Price – Book Value of Asset at End of Second Year = $59,000 – $52,500 = $6,500] (c) Cash 59,000 Accumulated Depreciation 22,500 Equipment 75,000 Gain on Sale Equipment 6,500 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-03 - 10-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 69

Chapter 10 - Long-Term Assets: Fixed and Intangible 208. Equipment acquired on January 2, Year 1, at a cost of $525,000 has an estimated useful life of eight years and an estimated residual value of $45,000. Required (a) What is the annual amount of depreciation for the first three years, assuming the straight-line method of depreciation is used? (b) What is the book value of the equipment on January 1, Year 4? (c) Assuming that the equipment is sold on January 2, Year 4, for $326,000, journalize the entry to record the sale. (d) Assuming that the equipment is sold on January 2, Year 4, for $394,000, journalize the entry to record the sale. ANSWER: (a) Year 1 depreciation expense: $60,000 [($525,000 – $45,000)/8] Year 2 depreciation expense: $60,000 Year 3 depreciation expense: $60,000 (b) $345,000 [$525,000 – ($60,000 × 3)] (c) Cash Accumulated Depreciation—Equipment Loss on Sale of Equipment Equipment

326,000 180,000 19,000

(d) Cash 394,000 Accumulated Depreciation—Equipment 180,000 Equipment Gain on Sale of Equipment DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-03 - 10-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

525,000

525,000 49,000

Page 70

Chapter 10 - Long-Term Assets: Fixed and Intangible 209. Williams Company acquired machinery on July 1, Year 1, at a cost of $130,000. The estimated useful life of the machinery was 10 years, and the estimated residual value was $10,000. Williams uses the double-declining-balance method of depreciation. On October 1, Year 4, Williams sold the equipment for $75,000. (a) Record the journal entry for the depreciation on this machinery for Year 4. (b) Record the journal entry for the sale of the machinery. ANSWER: (a) $13,000 ($130,000 × 0.20 × 6/12) Depreciation Expense Accumulated Depreciation—Machinery

13,000

Cash 75,000 Accumulated Depreciation—Machinery 66,352 Machinery Gain on Sale of Machinery DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-03 - 10-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

13,000

(b)

130,000 11,352

210. Solare Company acquired mineral rights for $60,000,000. The diamond deposit is estimated at 6,000,000 tons. During the current year, 2,300,000 tons were mined and sold. (a) Determine the depletion rate. (b) Determine the amount of depletion expense for the current year. (c) Journalize the adjusting entry to recognize the depletion expense. ANSWER: (a) $10 per ton ($60,000,000/6,000,000 tons) (b) $23,000,000 ($10 × 2,300,000 tons) (c) Dec. 31 Depletion Expense 23,000,000 Accumulated Depletion 23,000,000 Depletion of mineral deposit. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-04 - 10-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 71

Chapter 10 - Long-Term Assets: Fixed and Intangible 211. Carter Co. acquired drilling rights for $18,550,000. The oil deposit is estimated at 74,200,000 gallons. During the current year, 6,000,000 gallons were drilled. Journalize the adjusting entry at December 31 to recognize the depletion expense. Journal Date

ANSWER:

Description

Post. Ref.

Debit

Credit

Journal Date Description Dec. 31 Depletion Expense Accumulated Depletion

Post. Ref.

Debit Credit 1,500,000* 1,500,000

*Depletion Rate = Cost/Estimated Size Depletion Rate = $18,550,000/74,200,000 Depletion Rate = $0.25 per gallon Depletion Expense = Depletion Rate × Quantity Extracted Depletion Expense = $0.25 × 6,000,000 gallons Depletion Expense = $1,500,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-04 - 10-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 212. Chasteen Company acquired mineral rights for $9,100,000. The mineral deposit is estimated at 65,000,000 tons. During the current year, 18,375,000 tons were mined and sold. Required (a) Determine the amount of depletion expense for the current year. (b) Journalize the adjusting entry to recognize the depletion expense. ANSWER: (a) $9,100,000/65,000,000 tons = $0.14 depletion per ton 18,375,000 × $0.14 = $2,572,500 depletion expense (b) Depletion Expense 2,572,500 Accumulated Depletion 2,572,500 Depletion of mineral deposit. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-04 - 10-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Page 72

Chapter 10 - Long-Term Assets: Fixed and Intangible 213. On December 31, Bowman Company estimated that goodwill of $80,000 was impaired. On June 1, a patent with an estimated useful economic life of 10 years was acquired for $252,000. Required (a) Journalize the adjusting entry on December 31 for the impaired goodwill. (b) Journalize the adjusting entry on December 31 for the amortization of the patent rights. ANSWER: (a) Dec. 31 Loss from Impaired Goodwill 80,000 Goodwill (b) Dec.31 Amortization Expense—Patents Patents

80,000

14,700 14,700

Amortized Patent Rights = [($252,000/10) × 7/12] = $14,700 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-05 - 10-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 214. On December 31, it was estimated that goodwill of $65,000 was impaired. On July 1, a patent with an estimated useful economic life of 10 years was acquired for $60,000. (a) Journalize the adjusting entry on December 31 for the impaired goodwill. (b) Journalize the adjusting entry on December 31 for the amortization of the patent rights. ANSWER: (a) Loss from Impaired Goodwill 65,000 Goodwill 65,000 (b) Amortization Expense—Patents 3,000 Patents 3,000 Annual Patent Amortization = Acquisition Cost/Useful Life = $60,000/10 = $6,000 Amortization expense from July 1 to December 31 = $6,000/2 = $3,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-05 - 10-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 73

Chapter 10 - Long-Term Assets: Fixed and Intangible 215. On July 1, Sterns Co. acquired patent rights for $36,000. The patent has a useful life of six years and a legal life of 15 years. Journalize the adjusting entry on December 31 to recognize the amortization. Journal Date

ANSWER:

Description

Post. Ref.

Debit

Credit

Journal

Post. Date Description Credit Ref. Debit Dec. 31 Amortization Expense 3,000 Patents 3,000 Annual Patent Amortization = Acquisition Cost/Useful Life = $36,000/6 = $6,000 Amortization expense from July 1 to December 31 = $6,000/2 = $3,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-05 - 10-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 216. Identify the following as a fixed asset (FA), or intangible asset (IA), natural resource (NR), or none of these (N). (a) Computer (b) Patent (c) Oil reserve (d) Goodwill (e) U.S. Treasury note (f) Land used for employee parking (g) Gold mine ANSWER:

FA (a) (f) IA (b) (d) NR (c) (g) N (e) DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.10-01 - 10-01 ACCT.WARD.18.10-04 - 10-04 ACCT.WARD.18.10-05 - 10-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 74

Chapter 10 - Long-Term Assets: Fixed and Intangible 217. The following information was taken from a recent annual report of Harrison Company (in millions): Current Year Preceding Year Land and buildings $726 $361 Machinery, equipment, and internal-use software 595 470 Office furniture and equipment 94 81 Other fixed assets related to leases 760 569 Accumulated depreciation and amortization 894 644 Required (a) Compute the book value of the fixed assets for the current year and the preceding year and explain the differences, if any. (b)

Would you normally expect the book value of fixed assets to increase or decrease during the year? ANSWER: (a) Property, plant, and equipment (in millions): CurrentPreceding Year Year Land and buildings Machinery, equipment, and internal-use software Office furniture and equipment Other fixed assets related to leases Less accumulated depreciation Book value

$ 726 595 94 760 $2,175 894 $1,281

$ 361 470 81 569 $1,481 644 $ 837

A comparison of the book values of the current and preceding years indicates that they increased. A comparison of the total cost and accumulated depreciation reveals that Harrison purchased $694 million ($2,175 – $1,481) of additional fixed assets, which was offset by the additional depreciation expense of $250 million ($894 – $644) taken during the current year. (b) The book value of fixed assets should normally increase during the year. Although additional depreciation expense will reduce the book value, most companies invest in new assets in an amount that is at least equal to the depreciation expense. However, during periods of economic downturn, companies purchase fewer fixed assets, and the book value of their fixed assets may decline. DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-06 - 10-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 75

Chapter 10 - Long-Term Assets: Fixed and Intangible 218. Fill in the missing numbers using the formula for fixed asset turnover: Sales Beginning fixed assets Ending fixed assets Fixed asset turnover

Company A Company B Company C Company D $5,000,000 $720,000 $900,000 ? $450,000 $275,000 ? $380,000 $800,000 ? $310,000 $420,000 ? 2.4 3.0 2.6

ANSWER: Sales Beginning fixed assets Ending fixed assets Fixed asset turnover

Company Company Company Company A B C D $5,000,000 $720,000 $900,000 $1,040,000 $450,000 $275,000 $290,000 $380,000 $800,000 $325,000 $310,000 $420,000 8.0 2.4 3.0 2.6

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-07 - 10-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 76

Chapter 10 - Long-Term Assets: Fixed and Intangible 219. Financial statement data for the years ended December 31 for Parker Corporation are as follows: Sales Fixed assets (net): Beginning of year End of year

Current Year $2,595,600

Prior Year $2,409,498

$901,070 829,330

$820,000 901,070

(a) Determine the fixed asset turnover for the current and prior years. (b) Does the change in fixed asset turnover from the prior year to the current year indicate a favorable or unfavorable trend? ANSWER: Fixed assets: Beginning of year End of year Average fixed assets (a) Sales divided by average fixed assets: Current year ($2,595,600/$865,200) Prior year ($2,409,498/$860,535)

Current Year

Prior Year

$901,070 829,330 $865,200

$820,000 901,070 $860,535 3.0 2.8

(b) The change in fixed asset turnover indicates an increase in efficiency of using fixed assets to generate sales. DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-07 - 10-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 77

Chapter 10 - Long-Term Assets: Fixed and Intangible 220. On the first day of the fiscal year, a new walk-in cooler with a list price of $58,000 was acquired in exchange for an old cooler and $44,000 cash. The old cooler had a cost of $25,000 and accumulated depreciation of $16,000. Assume the transaction has commercial substance. (a) Determine the gain to be recorded on the exchange. (b) Journalize the entry to record the exchange. ANSWER: (a) List price $58,000 Book value of old cooler $ 9,000 Cash paid 44,000 53,000 $ 5,000 Gain on exchange (b) Equipment (new) 58,000 Accumulated Depreciation 16,000 Equipment (old) Gain on Exchange of Equipment Cash DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-APP - 10-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

25,000 5,000 44,000

221. On October 1, Sebastian Company acquired new equipment with a fair market value of $458,000. Sebastian received a trade-in allowance of $92,000 on the old equipment of a similar type and paid cash of $366,000. The following information about the old equipment is obtained from the account in the equipment ledger: Cost, $336,000; accumulated depreciation on December 31, the end of the preceding fiscal year, $220,000; annual depreciation, $20,000. Assuming the exchange has commercial substance, journalize the entries to record: (a) the current depreciation of the old equipment to the date of trade-in and (b) the exchange transaction on October 1. ANSWER: (a) Depreciation Expense—Equipment 15,000 Accumulated Depreciation—Equipment 15,000 Equipment depreciation ($20,000 × 9/12). (b) Accumulated Depreciation—Equipment Equipment Loss on Exchange of Equipment Equipment Cash DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-APP - 10-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

235,000 458,000 9,000

336,000 366,000

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Chapter 10 - Long-Term Assets: Fixed and Intangible 222. Machinery acquired at a cost of $80,000 and on which there is accumulated depreciation of $55,000 (including depreciation for the current year to date) is exchanged for similar machinery. Assume that the transaction has commercial substance. For financial reporting purposes, present entries to record the exchange of the machinery under each of the following assumptions: (a) Price of new, $120,000; trade-in allowance on old, $4,000; balance paid in cash. (b) Price of new, $120,000; trade-in allowance on old, $34,000; balance paid in cash. ANSWER: (a) Accumulated Depreciation—Machinery 55,000 Machinery 120,000 Loss on Disposal of Fixed Assets 21,000 Machinery 80,000 Cash 116,000 (b) Accumulated Depreciation—Machinery Machinery Machinery Gain on Exchange of Machinery Cash DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-APP - 10-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

55,000 120,000

80,000 9,000 86,000

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Chapter 10 - Long-Term Assets: Fixed and Intangible 223. Equipment acquired at a cost of $126,000 has a book value of $42,000. Journalize the disposal of the equipment under the following independent assumptions. (a) The equipment had no market value and was discarded. (b) The equipment is sold for $54,000. (c) The equipment is sold for $24,000. (d) The equipment is traded in for a similar asset. The list price of the new equipment is $63,000. The buyer gave no cash in the exchange. The transaction lacks commercial substance. Journal Date

Description

Post. Ref.

Debit

Credit

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Chapter 10 - Long-Term Assets: Fixed and Intangible ANSWER:

Journal Date (a)

Description Loss on Disposal of Equipment

Post. Ref.

Accumulated Depreciation—Equipment

Debit Credit 42,000 84,000

Equipment (b)

126,000

Cash

54,000

Accumulated Depreciation—Equipment

84,000

Equipment Gain on Sale of Equipment (c)

Cash

24,000

Accumulated Depreciation—Equipment

84,000 18,000

Loss on Sale of Equipment Equipment (d)

126,000 12,000

126,000

Equipment (new)

42,000

Accumulated Depreciation—Equipment

84,000

Equipment (old)

126,000

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.10-03 - 10-03 ACCT.WARD.18.10-APP - 10-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 11 - Current Liabilities and Payroll True / False 1. Receiving payment prior to delivering goods or services causes a current liability to be incurred. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 2. All long-term liabilities eventually become current liabilities. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 3. For a current liability to exist, the liability must be due usually within a year and must be paid out of current assets. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 4. The borrower issues a note payable to a creditor. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

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Chapter 11 - Current Liabilities and Payroll 5. Notes payable may be issued to creditors to satisfy previously created accounts payable. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 6. Interest expense is reported in the Operating expense section of the income statement. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 7. An interest-beating note is a loan in which the lender deducts interest from the amount loaned before the money is advanced to the borrower. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 8. The amount borrowed is equal to the face amount of the note on an interest-bearing note payable. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

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Chapter 11 - Current Liabilities and Payroll 9. The amount of money a borrower receives from the lender is called the discount rate. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 10. The proceeds of a discounted note are equal to the face value of the note. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 11. The discount on a note payable is charged to an account that has a normal credit balance. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 12. The proceeds from discounting a $20,000, 60-day note payable at 6% is $20,200. a. True b. False ANSWER: False RATIONALE: Proceeds = $20,000 − ($20,000 × 6% × 60 ÷ 360) = $19,800 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

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Chapter 11 - Current Liabilities and Payroll 13. Amounts withheld from each employee for social security and Medicare vary by state. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 14. An employee's take-home pay is equal to gross pay less all voluntary deductions. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 15. Form W-4 is a form authorizing employers to withhold a portion of employee earnings for payment of an employee’s federal income taxes. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 16. Taxes deducted from an employee's earnings to finance social security and Medicare benefits are called FICA taxes. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 11 - Current Liabilities and Payroll 17. Generally, all deductions made from an employee's gross pay are required by law. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 18. Payroll taxes are based on the employee's net pay. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 19. Most employers are required to withhold federal unemployment taxes from employee earnings. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 20. FICA tax is a payroll tax that is paid only by employers. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 11 - Current Liabilities and Payroll 21. Medicare taxes are paid by both the employee and the employer. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 22. Federal unemployment taxes are paid by the employer and the employee. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 23. Federal unemployment compensation taxes that are collected by the federal government are not paid directly to the unemployed but are allocated among the states for use in state programs. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 24. Federal income taxes are subject to a maximum amount per employee per year. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 11 - Current Liabilities and Payroll 25. Federal unemployment compensation tax becomes an employer's liability at the time the employee is paid. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 26. Form W-2 is called the Wage and Tax Statement. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 27. FICA tax becomes a liability to the federal government at the time an employee's payroll is prepared. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 28. Payroll taxes only include social security taxes and federal unemployment and state unemployment taxes. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 11 - Current Liabilities and Payroll 29. Federal income taxes withheld increase the employer's payroll tax expense. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 30. The use of a separate payroll bank account is not an advantageous control, because it creates more complexity in reconciliation functions for a company and invites theft. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 31. Employers are required to compute and report payroll taxes on a calendar-year basis, even if a different fiscal year is used for financial reporting and income tax purposes. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

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Chapter 11 - Current Liabilities and Payroll 32. Payroll taxes levied against employers become an employer liability at the time the employee wages are incurred. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 33. Most employers use payroll checks drawn on a special bank account for paying the payroll. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 34. The payroll register is a multicolumn form used to assemble the payroll-related data for all employees. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 35. The total net pay for a period is determined from the payroll register. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

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Chapter 11 - Current Liabilities and Payroll 36. Internal controls for cash payments apply to payrolls. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 37. For proper matching of revenues and expenses, the estimated cost of fringe benefits must be recognized as an expense of the period during which the employee earns the benefits. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 38. Depending on when an unfunded pension liability is to be paid, it will be classified on the balance sheet as either a long-term or a current liability. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 39. During the first year of operations, employees earned vacation pay of $35,000. The vacations will be taken during the second year. The vacation pay expense should be recorded in the second year as the vacations are taken by the employees. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 11 - Current Liabilities and Payroll 40. One of the more popular defined contribution plans is the 401k plan. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 41. A defined contribution plan promises employees a fixed annual pension benefit. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 42. In a defined benefits plan, the employer bears the investment risks in funding a future retirement income benefit. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 43. The accounting for defined benefit plans is usually very easy and straightforward. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

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Chapter 11 - Current Liabilities and Payroll 44. During the first year of operations, a company granted warranties on its products at an estimated cost of $8,500. The product warranty expense should be recorded in the years of the expenditures to repair the products covered by the warranty payments. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 45. Obligations that may arise from past transactions only if certain events occur in the future are contingent liabilities. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 46. In order to be a recorded contingent liability, the liability must be possible and easily estimated. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 47. The journal entry to record the cost of warranty repairs that were incurred during the current period, but related to sales made in prior years, includes a debit to Warranty Expense. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 11 - Current Liabilities and Payroll Multiple Choice 48. Current liabilities are due a. but not receivable for more than one year b. but not payable for more than one year c. and receivable within one year d. and payable within one year ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 49. Notes may be issued a. when assets are purchased b. to creditors to temporarily satisfy an account payable created earlier c. when borrowing money d. All of these choices ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 50. On June 8, Smith Technologies issued a $75,000, 6%, 140-day note payable to Johnson Company. What is the due date of the note? a. October 28 b. October 27 c. October 26 d. October 25 ANSWER: c RATIONALE: Due Date of Note = Invoice Date of June 8 + 140 days = October 26 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

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Chapter 11 - Current Liabilities and Payroll 51. On June 8, Williams Company issued an $80,000, 5%, 120-day note payable to Brown Industries. Assuming a 360day year, what is the maturity value of the note? a. $82,600 b. $84,000 c. $81,333 d. $88,200 ANSWER: c RATIONALE: Maturity Value of Note = $80,000 + ($80,000 × 5% × 120 ÷ 360) = $81,333 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 52. On July 8, Jones Inc. issued an $80,000, 6%, 120-day note payable to Miller Company. Assume that the fiscal year of Jones ends on July 31. Using the 360-day year, what is the amount of interest expense recognized by Jones in the current fiscal year? a. $700 b. $4,200 c. $307 d. $1,400 ANSWER: c RATIONALE: Interest Expense Recognized = ($80,000 × 6% × 120 ÷ 360) × 23/120 = $307 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 53. On June 1, Davis Inc. issued an $84,000, 5%, 120-day note payable to Garcia Company. Assume that the fiscal year of Garcia ends June 30. Using the 360-day year, what is the amount of interest revenue (rounded) recognized by Garcia in the following year? a. $700 b. $1,600 c. $1,062 d. $4,200 ANSWER: c RATIONALE: Amount of Revenue Recognized = [($84,000 × 5% × 120 ÷ 360) × (120 – 29)/120] = $1,062 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 11 - Current Liabilities and Payroll 54. On May 18, Rodriguez Co. issued an $84,000, 6%, 120-day note payable on an overdue account payable to Wilson Company. Assume that the fiscal year of Rodriguez ends on June 30. Which of the following relationships is true? a. Rodriguez is the creditor and credits Accounts Receivable. b. Wilson is the creditor and debits Accounts Receivable. c. Wilson is the borrower and credits Accounts Payable. d. Rodriguez is the borrower and debits Accounts Payable. ANSWER: d DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 55. Martinez Co. borrowed $50,000 on March 1 of the current year by signing a 60-day, 9%, interest-bearing note. Assuming a 360-day year, when the note is paid on April 30, the entry to record the payment should include a a. debit to Interest Payable for $750 b. debit to Interest Expense for $750 c. credit to Cash for $50,000 d. credit to Cash for $54,500 ANSWER: b RATIONALE: Interest Expense = $50,000 × 9% × 60 ÷ 360 = $750 The entry to record the payment of the note should include a debit to Notes Payable for $50,000, a debit to Interest Expense for $750, and a credit to Cash for $50,750. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 56. When a borrower receives the face amount of a discounted note less the discount, the amount is known as the a. note proceeds b. note discount c. note deferred interest d. note principal ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

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Chapter 11 - Current Liabilities and Payroll 57. Assuming a 360-day year, the interest charged by the bank, at the rate of 6%, on a 90-day, discounted note payable of $100,000 is a. $6,000 b. $1,500 c. $500 d. $3,000 ANSWER: b RATIONALE: Interest Charged = $100,000 × 6% × 90 ÷ 360 = $1,500 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 58. Assuming a 360-day year, when a $50,000, 90-day, 9% interest-bearing note payable matures, the total payment will be a. $51,125 b. $54,500 c. $1,125 d. $4,500 ANSWER: a RATIONALE: Total Payment = $50,000 + ($50,000 × 9% × 90 ÷ 360) = $51,125 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 59. Assuming a 360-day year, proceeds of $48,750 were received from discounting a $50,000, 90-day note at a bank. The discount rate used by the bank in computing the proceeds was a. 6.25% b. 10% c. 10.26% d. 9.75% ANSWER: b RATIONALE: Discount Amount = $50,000 – $48,750 = $1,250 Discount rate = ($1,250 ÷ $50,000) × (360 ÷ 90) = 10% DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

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Chapter 11 - Current Liabilities and Payroll 60. Anderson Co. issued a $50,000, 60-day, discounted note to National Bank. The discount rate is 6%. At maturity, assuming a 360-day year, the borrower will pay a. $53,000 b. $50,500 c. $50,000 d. $49,500 ANSWER: c RATIONALE: Maturity Amount = $50,000 The borrower must repay the face amount of the note on the due date. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 61. Chang Co. issued a $50,000, 120-day, discounted note to Guarantee Bank. The discount rate is 6%. Assuming a 360day year, the cash proceeds to Chang Co. are a. $49,750 b. $47,000 c. $49,000 d. $51,000 ANSWER: c RATIONALE: Cash Proceeds = $50,000 – ($50,000 × 6% × 120 ÷ 360) = $49,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 62. The journal entry to record the issuance of a note for the purpose of converting an existing account payable would be a. debit Cash; credit Accounts Payable b. debit Accounts Payable; credit Cash c. debit Cash; credit Notes Payable d. debit Accounts Payable; credit Notes Payable ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

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Chapter 11 - Current Liabilities and Payroll 63. The journal entry used to record the issuance of an interest-bearing note for the purpose of borrowing funds for the business is a. debit Accounts Payable; credit Notes Payable b. debit Cash; credit Notes Payable c. debit Notes Payable; credit Cash d. debit Cash and Interest Expense; credit Notes Payable ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 64. The journal entry used to record the issuance of a discounted note for the purpose of borrowing funds for the business is a. debit Cash and Interest Expense; credit Notes Payable b. debit Cash and Interest Payable; credit Notes Payable c. debit Accounts Payable; credit Notes Payable d. debit Notes Payable; credit Cash ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 65. The journal entry used to record the payment of a discounted note is a. debit Notes Payable and Interest Expense; credit Cash b. debit Notes Payable; credit Cash c. debit Cash; credit Notes Payable d. debit Accounts Payable; credit Cash ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

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Chapter 11 - Current Liabilities and Payroll 66. The journal entry to record the payment of an interest-bearing note is a. debit Cash; credit Notes Payable b. debit Accounts Payable; credit Cash c. debit Notes Payable and Interest Expense; credit Cash d. debit Notes Payable and Interest Receivable; credit Cash ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 67. A current liability is a debt that is reasonably expected to be paid a. between 6 and 18 months b. out of currently recognized revenues c. within one year d. out of cash currently on hand ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

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Chapter 11 - Current Liabilities and Payroll 68. Taylor Bank lends Guarantee Company $150,000 on January 1. Guarantee Company signs a $150,000, 8%, ninemonth note. The entry made by Guarantee Company on January 1 to record the proceeds and issuance of the note is a. Interest Expense Cash Notes Payable

12,000 138,000

b. Cash Notes Payable

150,000

c. Cash Interest Expense Notes Payable

162,000

d. Notes Payable Interest Payable Cash Interest Expense ANSWER: DIFFICULTY:

120,000 7,200

150,000 150,000 12,000 150,000

120,000 7,200

b Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 69. The journal entry to record the conversion of a $6,300 account payable to a note payable would be a. Cash Notes Payable

6,300

b. Notes Receivable Notes Payable

6,300

c. Notes Payable Cash

6,300

6,300 6,300

d. Accounts Payable 6,300 Notes Payable 6,300 ANSWER: d DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

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Chapter 11 - Current Liabilities and Payroll 70. Current liabilities are a. due and receivable within one year b. due and to be paid out of current assets within one year c. due, but not payable for more than one year d. payable if a possible subsequent event occurs ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 71. Which of the following would most likely be classified as a current liability? a. two-year note payable b. bond payable c. mortgage payable d. unearned rent ANSWER: d DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 72. Assuming a 360-day year, when a $20,000, 90-day, 5% interest-bearing note payable matures, total payment will be a. $21,000 b. $1,000 c. $20,250 d. $250 ANSWER: c RATIONALE: Total Payment = $20,000 + ($20,000 × 5% × 90 ÷ 360) = $20,250 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

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Chapter 11 - Current Liabilities and Payroll 73. The current portion of long-term debt should a. be classified as a long-term liability b. not be separated from the long-term portion of debt c. be paid immediately d. be reclassified as a current liability ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 74. On January 5, Thomas Company, which follows a calendar year, issued $1,000,000 of notes payable, of which $250,000 is due on January 1 each of the next four years. The proper balance sheet presentation on December 31 is a. Current liabilities, $1,000,000 b. Current liabilities, $250,000; Long-term debt, $750,000 c. Long-term debt, $1,000,000 d. Current liabilities, $750,000; Long-term debt, $250,000 ANSWER: b RATIONALE: Current Liabilities = $250,000; Long-Term Debt = $1,000,000 – $250,000 = $750,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 75. Proper payroll accounting methods are important for a business for all of the following reasons except a. good employee morale requires timely and accurate payroll payments b. payroll is subject to various federal and state regulations c. to help a business with cash flow problems by delayed payments of payroll taxes to federal and state agencies d. payroll and related payroll taxes have a significant effect on the net income of most businesses ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

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Chapter 11 - Current Liabilities and Payroll 76. The amount of federal income taxes withheld from an employee's gross pay is recorded as a(n) a. payroll expense b. contra account c. asset d. liability ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 77. Which of the following is not a determinant in calculating federal income taxes withheld from an individual's pay? a. filing status b. type of earnings c. gross pay d. number of exemptions ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 78. Which of the following would be used to compute the federal income taxes to be withheld from an employee's earnings? a. FICA tax rate b. wage and tax statement c. FUTA tax rate d. wage bracket and withholding table ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

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Chapter 11 - Current Liabilities and Payroll 79. Which of the following taxes would be deducted in determining an employee's net pay? a. FUTA taxes b. SUTA taxes c. FICA taxes d. All of these choices ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 80. Which of the following taxes are employers required to withhold from employees? a. FICA tax b. FICA tax and state and federal unemployment tax c. state unemployment tax d. federal unemployment tax ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 81. Thomas Martin receives an hourly wage rate of $40, with time-and-a-half pay for all hours worked in excess of 40 hours during a week. Payroll data for the current week are as follows: hours worked, 48; federal income tax withheld, $350; social security tax rate, 6.0%; and Medicare tax rate, 1.5%. What is the gross pay for Martin? a. $449 b. $1,730 c. $2,080 d. $1,581 ANSWER: c RATIONALE: Gross Pay for Martin = Earnings at Regular Rate + Earnings at Overtime Rate = (40 × $40) + (8 × $40 × 1.5) = $2,080 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

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Chapter 11 - Current Liabilities and Payroll 82. Martin Jackson receives an hourly wage rate of $30, with time-and-a-half pay for all hours worked in excess of 40 hours during a week. Payroll data for the current week are as follows: hours worked, 46; federal income tax withheld, $350; social security tax rate, 6.0%; and Medicare tax rate, 1.5%. What is the net amount to be paid to Jackson? a. $1,470.00 b. $1,009.75 c. $1,097.95 d. $460.25 ANSWER: b RATIONALE: Gross Pay = Earnings at Regular Rate + Earnings at Overtime Rate Gross Pay = [($30 × 40) + ($30 × 1.5 × 6)] = $1,470 Net Pay = Gross Pay – (Federal Income Tax + Social Security Tax + Medicare Tax) Net Pay = $1,470 – [$350 + ($1,470 × 6.0%) + ($1,470 × 1.5%)] = $1,009.75 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 83. The total earnings of an employee for a payroll period is referred to as a. take-home pay b. pay net of taxes c. net pay d. gross pay ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 84. Most employers are levied a tax on payrolls for a. sales tax b. medical insurance premiums c. federal unemployment compensation tax d. union dues ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

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Chapter 11 - Current Liabilities and Payroll 85. Which of the following will have no effect on an employee’s take-home pay? a. social security tax b. unemployment tax c. marital status d. number of exemptions claimed ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 86. Sadie White receives an hourly wage rate of $30, with time-and-a-half pay for all hours worked in excess of 40 during a week. Payroll data for the current week are as follows: hours worked, 48; federal income tax withheld, $300; social security tax rate, 6.0%; and Medicare tax rate, 1.5%. What is the net amount to be paid to White? a. $1,443.00 b. $1,143.00 c. $1,260.00 d. $1,000.00 ANSWER: b RATIONALE: Gross Pay = Earnings at Regular Rate + Earnings at Overtime Rate = ($30 × 40) + ($30 × 1.5 × 8) = $1,560 Net Pay = Gross Pay – (Federal Income Tax + Social Security Tax + Medicare Tax) = $1,560 – [$300 + ($1,560 × 6.0%) + ($1,560 × 1.5%)] = $1,143.00 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

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Chapter 11 - Current Liabilities and Payroll 87. Davis and Thompson have earnings of $850 each. The social security tax rate is 6.0%, and the Medicare tax rate is 1.5%. Assuming that the payroll will be paid on December 29, what will be the employer's total FICA tax for this payroll period? a. $102.00 b. $127.50 c. $96.00 d. $25.50 ANSWER: b RATIONALE: Earnings Subject to 6.0% Social Security Tax and 1.5% Medicare Tax = $850 × 2 = $1,700 Total FICA Tax = Social Security Tax + Medicare Tax Total FICA Tax = ($1,700 × 6.0%) + ($1,700 × 1.5%) = $102.00 + $25.50 = $127.50 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 88. The following totals for the month of June were taken from the payroll register of Arcon Company: Salaries expense Social security and Medicare taxes withheld Income taxes withheld Retirement savings

$14,000 1,050 2,600 1,000

The entry to record the payment of net pay would include a a. debit to Salaries Payable for $14,000 b. debit to Salaries Payable for $9,350 c. credit to Salaries Expense for $9,350 d. credit to Salaries Payable for $9,350 ANSWER: b RATIONALE: Net Pay = Salaries Expenses – Social Security and Medicare Taxes Withheld – Income Taxes Withheld – Retirement Savings = $14,000 – $1,050 – $2,600 – $1,000 = $9,350 The entry to record the payment of net pay would include a debit to Salaries Payable for $9,350. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

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Chapter 11 - Current Liabilities and Payroll 89. Which of the following is included in the employer's payroll taxes? a. SUTA tax b. FUTA tax c. social security tax d. All of these choices ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 90. Which of the following is required to be withheld from an employee's gross pay? a. both federal and state unemployment compensation taxes b. only federal unemployment compensation tax c. only federal income tax d. only state unemployment compensation tax ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 91. Each year, there is a ceiling for the amount that is subject to all of the following except a. social security tax b. federal income tax c. federal unemployment tax d. state unemployment tax ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

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Chapter 11 - Current Liabilities and Payroll 92. Lee Company has the following information for the pay period of December 15–31: Gross payroll Social security rate Medicare rate

$16,000 6.0% 1.5%

Federal income tax withheld Federal unemployment tax rate State unemployment tax rate

$4,000 0.8% 5.4%

Assuming no employees are subject to ceilings for taxes on their earnings, Salaries Payable would be recorded for a. $16,000 b. $9,808 c. $10,800 d. $11,040 ANSWER: c RATIONALE: Salaries Payable = Gross Payroll – Social Security Tax – Medicare Tax – Federal Income Tax Salaries Payable = $16,000 – ($16,000 × 6.0%) – ($16,000 × 1.5%) – $4,000 = $10,800 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 93. Payroll taxes levied against employees become liabilities a. the first of the following month b. when the payroll is paid to employees c. when data are entered in a payroll register d. at the end of an accounting period ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

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Chapter 11 - Current Liabilities and Payroll 94. Payroll entries are made with data from the a. wage and tax statement b. employee's earnings record c. employer's quarterly federal tax return d. payroll register ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 95. Which of the following forms is typically given to employees at the end of the calendar year so that employees can file their individual income tax forms? a. Employee’s Withholding Allowance Certificate (Form W-4) b. Wage and Tax Statement (Form W-2) c. Employer's Quarterly Federal Tax Return (Form 941) d. 401k plans ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 96. The employee's earnings record would contain which of the following data that the payroll register would probably not contain? a. deductions b. payment c. earnings d. cumulative earnings ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

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Chapter 11 - Current Liabilities and Payroll 97. The detailed record indicating the data for each employee for each payroll period and the cumulative total earnings for each employee is called the a. payroll register b. payroll check c. employee's earnings record d. employer's earnings record ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 98. An employee receives an hourly wage rate of $15, with time-and-a-half for all hours worked in excess of 40 during the week. Payroll data for the current week are as follows: hours worked, 48; federal income tax withheld, $120; social security tax rate, 6.0%; Medicare tax rate, 1.5%; state unemployment compensation tax, 3.4% on the first $7,000; and federal unemployment compensation tax, 0.8% on the first $7,000. What is the net amount to be paid to the employee? a. $568.74 b. $601.50 c. $660.00 d. $574.90 ANSWER: b RATIONALE: Gross Pay = Earnings at Regular Rate + Earnings at Overtime Rate Gross Pay = ($15 × 40) + ($15 × 1.5 × 8) = $780 Net Pay = Gross Pay – (Federal Income Tax + Social Security Tax + Medicare Tax) Net Pay = $780 – [$120 + ($780 × 6.0%) + ($780 × 1.5%)] = $601.50 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic Use this information for Magnum Company to answer the following questions. The following totals for the month of April were taken from the payroll register of Magnum Company: Salaries FICA taxes withheld Income taxes withheld Medical insurance deductions Federal unemployment taxes State unemployment taxes

$12,000 900 2,500 450 32 216

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Chapter 11 - Current Liabilities and Payroll 99. The journal entry to record the monthly payroll on April 30 would include a a. credit to Salaries Payable for $8,150 b. debit to Salaries Expense for $7,902 c. debit to Salaries Payable for $8,150 d. debit to Salaries Payable for $7,902 ANSWER: a RATIONALE: Salaries Payable = Gross Pay – (FICA Tax Withheld + Income Taxes Withheld + Medical Insurance Deductions) = $12,000 – ($900 + $2,500 + $450) = $8,150 The journal entry to record the monthly payroll on April 30 would include a credit to Salaries Payable for $8,150. DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 100. The entry to record the accrual of the employer’s payroll taxes would include a a. debit to Payroll Tax Expense for $2,500 b. debit to FICA Taxes Payable for $1,800 c. credit to Payroll Tax Expense for $248 d. debit to Payroll Tax Expense for $1,148 ANSWER: d RATIONALE: Payroll Tax Expense = FICA Taxes Withheld + Federal Unemployment Taxes + State Unemployment Taxes = $900 + $32 + $216 = $1,148 The entry to record the accrual of the employer’s payroll taxes would include a debit to Payroll Tax Expense for $1,148. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

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Chapter 11 - Current Liabilities and Payroll 101. The following totals for the month of April were taken from the payroll register of Magnum Company: Salaries FICA taxes withheld Income taxes withheld Medical insurance deductions Unemployment taxes

$10,000 750 2,000 450 420

The entry to record the accrual of the employer’s payroll taxes would include a a. debit to Payroll Tax Expense for $1,170 b. debit to FICA Taxes Payable for $1,500 c. credit to Payroll Tax Expense for $420 d. debit to Payroll Tax Expense for $1,620 ANSWER: a RATIONALE: Payroll Tax Expense = FICA Taxes Withheld + Unemployment Taxes = $750 + $420 = $1,170 The entry to record the accrual of the employer’s payroll taxes would include a debit to Payroll Tax Expense for $1,170. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 102. An employee receives an hourly wage rate of $15, with time and a half for all hours worked in excess of 40 during the week. Payroll data for the current week are as follows: hours worked, 46; federal income tax withheld, $110; cumulative earnings for the year prior to this week, $24,500; social security tax rate, 6.0%; Medicare tax rate, 1.5%; state unemployment compensation tax, 3.4% on the first $7,000; and federal unemployment compensation tax, 0.8% on the first $7,000. What is the net amount to be paid to the employee? a. $569.88 b. $539.00 c. $625.00 d. $544.88 ANSWER: a RATIONALE: Gross Pay = Earnings at Regular Rate + Earnings at Overtime Rate = ($15 × 40) + ($15 × 1.5 × 6) = $735 Net Pay = Gross Pay – (Federal Income Tax + Social Security Tax + Medicare Tax) = $735 – [$110 + ($735 × 6.0%) + ($735 × 1.5%)] = $569.88 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

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Chapter 11 - Current Liabilities and Payroll 103. The following totals for the month of June were taken from the payroll register of Young Company: Salaries expense Social security and Medicare taxes withheld Income taxes withheld Retirement savings Salaries subject to federal and state unemployment taxes of 6.2%

$15,000 1,125 3,000 500 4,000

The entry to record the accrual of the employer’s payroll taxes would include a debit to a. Payroll Tax Expense for $2,498 b. Social Security and Medicare Tax Payable for $2,250 c. Payroll Tax Expense for $1,373 d. Payroll Tax Expense for $3,000 ANSWER: c RATIONALE: Payroll Tax Expense = Social Security and Medicare Taxes Withheld + Federal and State Unemployment Taxes = $1,125 + ($4,000 × 6.2%) = $1,125 + $248 = $1,373 The entry to record the accrual of the employer’s payroll taxes would include a debit to Payroll Tax Expense for $1,373. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic Use this information for Harris Company to answer the following questions. Assuming no employees are subject to ceilings for their earnings, Harris Company has the following information for the pay period of January 15–31. Gross payroll Social security rate Medicare rate

$10,000 6.0% 1.5%

Federal income tax withheld Federal unemployment tax rate State unemployment tax rate

$1,800 0.8% 5.4%

104. Salaries Payable would be recorded for a. $8,200 b. $6,830 c. $8,630 d. $7,450 ANSWER: d RATIONALE: Salaries Payable = Gross Payroll – (Federal Income Tax Withheld + Social Security Tax + Medicare Tax) = $10,000 – [$1,800 + ($10,000 × 6.0%) + ($10,000 × 1.5%)] = $7,450 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 11 - Current Liabilities and Payroll 105. Assuming that all wages are subject to federal and state unemployment taxes, the employer's payroll tax expense would be a. $1,370 b. $750 c. $620 d. $2,870 ANSWER: a RATIONALE: Employer's Payroll Tax Expense = Social Security Tax + Medicare Tax + Federal Unemployment Tax + Sate Unemployment Tax = ($10,000 × 6.0%) + ($10,000 × 1.5%) + ($10,000 × 0.8%) + ($10,000 × 5.4%) = $600 + $150 + 80 + $540 = $1,370 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 106. Assume that social security taxes are payable at a 6.0% rate, Medicare taxes are payable at a 1.5% rate with no maximum earnings, and federal and state unemployment compensation taxes total 4.6% on the first $7,000 of earnings. If an employee earns $2,500 for the current week and the employee's year-to-date earnings before this week were $6,800, what is the total payroll tax related to the current week? a. $187.50 b. $196.70 c. $344.50 d. $9.20 ANSWER: b RATIONALE: Employer's Payroll Tax Expense = Social Security Tax + Medicare Tax + Federal and State Unemployment Tax = ($2,500 × 6.0%) + ($2,500 × 1.5%) + [($7,000 – $6,800) × 4.6%] = $150 + $37.50 + $9.20 = $196.70 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

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Chapter 11 - Current Liabilities and Payroll 107. According to a summary of the payroll of Scotland Company, $450,000 was subject to the 6.0% social security tax and $500,000 was subject to the 1.5% Medicare tax. Federal income tax withheld was $98,000. Also, $15,000 was subject to state (4.2%) and federal (0.8%) unemployment taxes. The journal entry to record the accrued payroll taxes would include a a. debit to SUTA Payable for $630 b. debit to SUTA Payable for $18,900 c. credit to SUTA Payable for $630 d. credit to SUTA Payable for $18,900 ANSWER: c RATIONALE: SUTA Payable = $15,000 × 4.2% = $630 The journal entry to record the accrued payroll taxes would include a credit to SUTA Payable of $630. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 108. Which of the following is an example of a variable component of a payroll system? a. hours worked b. Medicare tax rate c. rate of pay d. social security number ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 109. According to a summary of the payroll of Scotland Company, $450,000 was subject to the 6.0% social security tax and $500,000 was subject to the 1.5% Medicare tax. Federal income tax withheld was $98,000. Also, $15,000 was subject to state (4.2%) and federal (0.8%) unemployment taxes. The journal entry to record accrued salaries would include a a. debit to Salaries Payable of $450,000 b. credit to Salaries Payable of $500,000 c. debit to Salaries Expense of $500,000 d. credit to Salaries Expense of $450,000 ANSWER: c DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 11 - Current Liabilities and Payroll 110. According to a summary of the payroll of Scotland Company, $500,000 was subject to the 6.0% social security tax and to the 1.5% Medicare tax. Federal income tax withheld was $98,000. Also, $15,000 was subject to state (4.2%) and federal (0.8%) unemployment taxes. The journal entry to record the accrued salaries would include a a. debit to Salaries Payable for $313,000 b. credit to Salaries Payable for $364,500 c. debit to Salaries Expense for $364,500 d. credit to Salaries Expense for $313,000 ANSWER: b RATIONALE: Salaries Payable = Gross Pay – (Federal Income Tax + Social Security Tax + Medicare Tax) = $500,000 – [$98,000 + ($500,000 × 6.0%) + ($500,000 × 1.5%)] = $364,500 The journal entry to record the accrued salaries would include a credit to Salaries Payable of $364,500. DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 111. An aid in internal control over payrolls that indicates employee attendance is the a. time card b. voucher system c. payroll register d. employee's earnings record ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 112. A pension plan that requires the employer to make annual pension contributions, with no promise to employees regarding future pension payments, is termed a. funded b. unfunded c. defined benefit d. defined contribution ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 11 - Current Liabilities and Payroll 113. During its first year of operations, a company granted its employees vacation privileges and pension rights estimated at a cost of $21,500 and $15,000, respectively. The vacations are expected to be taken in the next year, and the pension rights are expected to be paid in the future 5–30 years. What is the total cost of vacation pay and pension rights to be recognized in the first year? a. $15,000 b. $36,500 c. $6,500 d. $21,500 ANSWER: b RATIONALE: Total Cost of Vacation Pay and Pension Rights to Be Recognized = Vacation Pay + Pension Expense = $21,500 + $15,000 = $36,500 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 114. A pension plan that promises employees a fixed annual pension benefit, based on years of service and compensation, is called a(n) a. defined contribution plan b. defined benefit plan c. unfunded plan d. compensation plan ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 115. Vacation pay payable is reported on the balance sheet as a(n) a. current liability or long-term liability, depending on when the vacations will be taken by employees b. current liability c. expense d. long-term liability ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

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Chapter 11 - Current Liabilities and Payroll 116. An unfunded pension liability is reported on the balance sheet as a. a current liability b. owner's equity c. a long-term liability d. a current liability or long-term liability, depending on when the pension liability is to be paid ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 117. The journal entry a company uses to record accrued vacation privileges for its employees at the end of the year is a. debit Vacation Pay Expense; credit Vacation Pay Payable b. debit Vacation Pay Payable; credit Vacation Pay Expense c. debit Salaries Expense; credit Cash d. debit Salaries Expense; credit Salaries Payable ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 118. The journal entry a company uses to record fully funded pension rights for its salaried employees at the end of the year is a. debit Salaries Expense; credit Cash b. debit Pension Expense; credit Unfunded Pension Liability c. debit Pension Expense; credit Unfunded Pension Liability and Cash d. debit Pension Expense; credit Cash ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

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Chapter 11 - Current Liabilities and Payroll 119. The journal entry a company uses to record partially funded pension rights for its salaried employees at the end of the year is a. debit Salaries Expense; credit Cash b. debit Pension Expense; credit Unfunded Pension Liability c. debit Pension Expense; credit Unfunded Pension Liability and Cash d. debit Pension Expense; credit Cash ANSWER: c DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 120. The journal entry a company uses to record pension rights that have not been funded for its salaried employees at the end of the year is a. debit Salaries Expense; credit Cash b. debit Pension Expense; credit Unfunded Pension Liability c. debit Pension Expense; credit Unfunded Pension Liability and Cash d. debit Pension Expense; credit Cash ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 121. Zennia Company provides its employees with varying amounts of vacation per year, depending on their length of employment. The estimated amount of the current year’s vacation cost is $135,000. On December 31, the end of the current year, the current month’s accrued vacation pay is a. $135,000 b. $67,500 c. $0 d. $11,250 ANSWER: d RATIONALE: Current Month's Accrued Vacation Pay = Current Year's Vacation Pay ÷ 12 months Current Month's Accrued Vacation Pay = $135,000 ÷ 12 = $11,250 DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

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Chapter 11 - Current Liabilities and Payroll 122. Hall Company sells merchandise with a one-year warranty. In the current year, sales consist of 4,500 units. It is estimated that warranty repairs will average $10 per unit sold and 30% of the repairs will be made in the current year and 70% in the next year. In the current year's income statement, Hall should show warranty expense of a. $45,000 b. $13,500 c. $31,500 d. $0 ANSWER: a RATIONALE: Warranty Expense = Sales Units × Average Warranty Repairs = 4,500 units × $10 = $45,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 123. Excom sells radios, and each unit carries a two-year replacement warranty. The cost of repair defects under the warranty is estimated at 5% of the sales price. During September, Excom sells 100 radios for $50 each. One radio is actually replaced during September. For what amount in September would Excom debit Product Warranty Expense? a. $50 b. $250 c. $30 d. $120 ANSWER: b RATIONALE: Product Warranty Expense = 5% × Sales = 5% × $5,000 = $250 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

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Chapter 11 - Current Liabilities and Payroll 124. Wright Company sells merchandise with a one-year warranty. In the current year, sales consisted of 2,000 units. It is estimated that warranty repairs will average $15 per unit sold and 30% of the repairs will be made in the current year and 70% in the next year. In the current year's income statement, Wright should show warranty expense of a. $9,000 b. $21,000 c. $30,000 d. $0 ANSWER: c RATIONALE: Warranty Expense = Sales Units × Average Warranty Repair Cost per Unit Sold = 2,000 units × $15 = $30,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 125. Scott Company sells merchandise with a one-year warranty. Sales consisted of 2,500 units in Year 1 and 2,000 units in Year 2. It is estimated that warranty repairs will average $10 per unit sold, and 30% of the repairs will be made in Year 1 and 70% in Year 2 for the Year 1 sales. Similarly, 30% of repairs will be made in Year 2 and 70% in Year 3 for the Year 2 sales. In the Year 3 income statement, how much of the warranty expense shown will be due to Year 1 sales? a. $6,000 b. $14,000 c. $20,000 d. $0 ANSWER: d DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 126. The cost of a product warranty should be included as an expense in the a. period the cash is collected for a product sold on account b. future period when the cost of repairing the product is paid c. period of the sale of the product d. future period when the product is repaired or replaced ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

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Chapter 11 - Current Liabilities and Payroll 127. McKay Company sells merchandise with a one-year warranty. In Year 1, sales consisted of 1,200 units. It is estimated that warranty repairs will average $10 per unit sold and 30% of the repairs will be made in Year 1 and 70% in Year 2. In the Year 1 income statement, McKay should show warranty expense of a. $3,600 b. $8,400 c. $12,000 d. $0 ANSWER: c RATIONALE: The warranty expense is recorded in the same period in which the sale is recorded. Warranty Expense in the Year 1 Income Statement = Sales Units × Average Warranty Repair Cost per Unit = 1,200 units × $10 = $12,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 128. Blast sells portable CD players, and each unit carries a one-year replacement warranty. The cost of repair defects under the warranty is estimated at 10% of the sales price. During May, Blast sells 650 portable CD players for $50 each. For what amount in May would Blast debit Product Warranty Expense? a. $3,250 b. $1,625 c. $650 d. $1,300 ANSWER: a RATIONALE: Product Warranty Expense = 10% × (Number of CD Players × Sale Price per CD Player) = 10% × (650 × $50) = $3,250 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 129. Estimating and recording product warranty expense in the period of the sale best follows the a. cost concept b. business entity concept c. matching concept d. materiality concept ANSWER: c DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 11 - Current Liabilities and Payroll 130. The journal entry a company uses to record the estimated product warranty liability expense is a. debit Product Warranty Expense; credit Product Warranty Payable b. debit Product Warranty Payable; credit Cash c. debit Product Warranty Expense; credit Cash d. debit Product Warranty Payable; credit Product Warranty Expense ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 131. Which of the following is the most desirable quick ratio? a. 2.20 b. 1.80 c. 1.95 d. 1.50 ANSWER: a DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-06 - 11-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 132. Crafter Company has the following assets and liabilities: Assets Cash Accounts receivable Inventory Equipment

$28,000 15,000 20,000 50,000

Liabilities Current portion of long-term debt Accounts payable Long-term debt

$10,000 2,000 25,000

Determine the quick ratio (rounded to one decimal point). a. 5.3 b. 3.6 c. 3.3 d. 2.3

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Chapter 11 - Current Liabilities and Payroll ANSWER: RATIONALE:

b Quick Ratio = Quick Assets/Current Liabilities = (Cash + Accounts Receivable)/(Current Portion of Long-Term Debt + Accounts Payable) = ($28,000 + $15,000)/($10,000 + $2,000) = $43,000/$12,000 = 3.6 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-06 - 11-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 133. Based on the following data, what is the quick ratio (rounded to one decimal point)? Accounts payable Accounts receivable Accrued liabilities Cash Intangible assets Inventory Long-term investments Long-term liabilities Marketable securities Fixed assets Prepaid expenses

$ 30,000 60,000 5,000 30,000 50,000 69,000 80,000 100,000 30,000 670,000 1,000

a. 3.4 b. 3.0 c. 2.2 d. 1.8 ANSWER: RATIONALE:

a Quick Ratio = Quick Assets/Current Liabilities = (Accounts Receivable + Cash + Marketable Securities)/(Accounts Payable + Accrued Liabilities) = ($60,000 + $30,000 + $30,000)/($30,000 + $5,000) = $120,000/$35,000 = 3.4 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-06 - 11-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

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Chapter 11 - Current Liabilities and Payroll 134. Quick assets include a. cash, cash equivalents, receivables, prepaid expenses, and inventory b. cash, cash equivalents, receivables, and prepaid expenses c. cash, cash equivalents, receivables, and inventory d. cash, cash equivalents, and receivables ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-06 - 11-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 135. Young Company has the following assets and liabilities: Assets Cash Accounts receivable Inventory Equipment

$35,000 15,000 30,000 50,000

Liabilities Current portion of long-term debt Accounts payable Long-term debt

$10,000 2,000 25,000

Determine the quick ratio (rounded to one decimal point). a. 6.7 b. 13.0 c. 4.2 d. 3.5 ANSWER: c RATIONALE: Quick Ratio = Quick Assets/Current Liabilities = (Cash + Accounts Receivable)/(Current Portion of Long-Term Debt + Accounts Payable) = ($35,000 + $15,000)/($10,000 + $2,000) = $50,000/$12,000 = 4.2 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-06 - 11-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

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Chapter 11 - Current Liabilities and Payroll 136. Which of the following is the most desirable quick ratio? a. 1.20 b. 1.00 c. 0.95 d. 0.50 ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.11-06 - 11-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic Matching Match each payroll item that follows to the one item (a–f) that best describes its characteristics. a. Amount is limited, withheld from employee only b. Amount is limited, withheld from employee and matched by employer c. Amount is limited, paid by employer only d. Amount is not limited, withheld from employee only e. Amount is not limited, withheld from employee and matched by employer f. Amount is not limited, paid by employer only DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 137. Federal income tax ANSWER: d 138. FICA—Social security ANSWER: b 139. FICA—Medicare ANSWER: e 140. Federal unemployment compensation tax (FUTA) ANSWER: c 141. State unemployment compensation tax (SUTA) ANSWER: c

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Chapter 11 - Current Liabilities and Payroll Use the following key (a–d) to identify the proper treatment of each contingent liability. a. Record only b. Record and disclose c. Disclose only d. Do not record or disclose DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 142. Event is reasonably possible and amount is estimable ANSWER: c 143. Event is reasonably possible but amount is not estimable ANSWER: c 144. Event is probable and amount is estimable ANSWER: b 145. Event is probable but amount is not estimable ANSWER: c 146. Event is remote and amount is estimable ANSWER: d 147. Event is remote and amount is not estimable ANSWER: d Match each of the following items with the term or phrase (a–g) that best describes it. Terms or phrases may be used more than once. a. Current ratio b. Working capital c. Quick assets d. Quick ratio e. Record an accrual and disclose in the notes to the financial statements f. Disclose only in notes to financial statements g. No disclosure needed in notes to financial statements DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCT.WARD.18.11-06 - 11-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 11 - Current Liabilities and Payroll 148. Current assets/Current liabilities ANSWER: a 149. Remote contingent liability ANSWER: g 150. Current assets – Current liabilities ANSWER: b 151. Cash + Temporary investments + Accounts receivable ANSWER: c 152. (Cash + Temporary investments + Accounts receivable)/Current liabilities ANSWER: d 153. Probable likelihood and estimable liability ANSWER: e 154. Probable likelihood of a liability but cannot be estimated ANSWER: f 155. Reasonably possible likelihood of a liability ANSWER: f 156. Measures the “instant” debt-paying ability of a company ANSWER: d Subjective Short Answer 157. A business issued a 120-day, 6% note for $10,000 to a creditor on account. The company uses a 360-day year for interest calculations. Journalize the entries to record (a) the issuance of the note and (b) the payment of the note at maturity, including interest. Journal Description Debit Credit (a) (b) ANSWER:

Journal Description (a) Accounts Payable Notes Payable (b) Notes Payable Interest Expense Cash *$10,000 × 6% × 120/360 = $200

Debit 10,000

Credit 10,000

10,000 200* 10,200

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Chapter 11 - Current Liabilities and Payroll DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 158. On August 1, Batson Company issued a 60-day note with a face amount of $140,000 to Jergens Company for merchandise inventory. (Assume a 360-day year is used for interest calculations.) a. Determine the proceeds of the note assuming the note carries an interest rate of 6%. b. Determine the proceeds of the note assuming the note is discounted at 6%. ANSWER: a. $140,000 b. $138,600 $140,000 – ($140,000 × 6% × 60/360) DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 159. Journalize the following, assuming a 360-day year is used for interest calculations: Apr. 30 Issued a $150,000, 30-day, 6% note dated April 30 to Misner Co. on account. May 30 Paid Misner Co. the amount owed on the note dated April 30. ANSWER: Apr. 30 Accounts Payable—Misner Co. 150,000 Notes Payable—Misner Co. 150,000 May 30

Notes Payable—Misner Co. Interest Expense Cash

150,000 750 150,750

DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 160. Roseland Design borrowed $700,000 on a 90-day note from CorpOne Funding Company. CorpOne discounts the note at 8%. (Assume a 360-day year is used for interest calculations.) (a) Journalize Roseland’s entries to record: a. The issuance of the note. b. The payment of the note at maturity. (b) Journalize CorpOne’s entries to record: a. The receipt of the note. b. The receipt of the payment of the note at maturity.

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Chapter 11 - Current Liabilities and Payroll ANSWER:

(a) a. Cash Interest Expense Notes Payable

686,000 14,000*

b. Notes Payable Cash

700,000

(b) a. Notes Receivable Cash Interest Revenue b. Cash

700,000

700,000 700,000 686,000 14,000* 700,000

Notes Receivable

700,000

*$700,000 × 8% × 90/360 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 161. Journalize the following entries on the books of the borrower and creditor. Label accordingly. (Assume a 360-day year is used for interest calculations.) June

30 Aug. 29 ANSWER:

James Co. purchased merchandise on account from O’Leary Co., $90,000, terms n/30. The cost of merchandise sold was $54,000. James Co. issued a 60-day, 5% note for $90,000 on account. James Co. paid the amount due. James Co. (Borrower) June 1 Merchandise Inventory Accounts Payable

90,000 90,000

30 Accounts Payable Notes Payable

90,000

Aug. 29 Notes Payable Interest Expense Cash

90,000 750

90,000

90,750

O’Leary Co. (Creditor) June 1 Accounts Receivable Sales

90,000

Cost of Merchandise Sold

54,000

90,000

Merchandise Inventory 30 Notes Receivable Accounts Receivable

54,000 90,000 90,000

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Chapter 11 - Current Liabilities and Payroll Aug. 29 Cash 90,750 Notes Receivable Interest Revenue DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

90,000 750

162. Journalize the following entries on the books of the borrower and creditor. Label accordingly. (Assume a 360-day year is used for interest calculations.) June

30 Aug. 29 ANSWER:

Regis Co. purchased merchandise on account from Winthrop Co., $60,000, terms n/30. The cost of merchandise sold was $36,000. Regis Co. issued a 60-day, 5% note for $60,000 on account. Regis Co. paid the amount due. Regis Co. (Borrower) June 1

Merchandise Inventory Accounts Payable

60,000 60,000

30 Accounts Payable Notes Payable

60,000

Aug. 29 Notes Payable Interest Expense Cash

60,000 500

60,000

60,500

Winthrop Co. (Creditor) June 1

Accounts Receivable Sales

60,000

Cost of Merchandise Sold

36,000

60,000

Merchandise Inventory 30 Notes Receivable Accounts Receivable

36,000 60,000

Aug. 29 Cash 60,500 Notes Receivable Interest Revenue DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

60,000

60,000 500

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Chapter 11 - Current Liabilities and Payroll 163. On October 1, Ramos Co. signed a $90,000, 60-day discounted note at the bank. The discount rate was 6%, and the note was paid on November 30. (Assume a 360-day year is used for interest calculations.) (a) (b)

Journalize the entries for October 1 and November 30. Assume that Ramos Co. signed a 6% note. Journalize the entries for October 1 and November 30. ANSWER: (a) Oct. 1 Cash 89,100 Interest Expense 900 Notes Payable Nov. 30 Notes Payable Cash

90,000

(b) Oct. 1 Cash Notes Payable

90,000

Nov. 30 Notes Payable 90,000 Interest Expense 900 Cash DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

90,900

164. Journalize the following entries on the books of Winston Co. for August 1, September 1, and November 30. (Assume a 360-day year is used for interest calculations.) Aug. 1 Sept. 1 Nov. 30 ANSWER:

Winston Co. purchased merchandise for $75,000 on account from Bagley Co., terms n/30. Winston Co. issued a 90-day, 6% note for $75,000 on account. Winston Co. paid the amount due. Aug. 1 Merchandise Inventory 75,000 Accounts Payable 75,000 Sept. 1 Accounts Payable Notes Payable

75,000

Nov. 30 Notes Payable 75,000 Interest Expense 1,125 Cash DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

75,000

76,125

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Chapter 11 - Current Liabilities and Payroll 165. A borrower has two alternatives for a loan: (1) issue a $480,000, 60-day, 8% note or (2) issue a $480,000, 60-day note that the creditor discounts at 8%. (Assume a 360-day year is used for interest calculations.) (a) Calculate the amount of the interest expense for each option. (b) Determine the proceeds received by the borrower in each situation. ANSWER: (a) $480,000 × 8% × 60/360 = $6,400 for each alternative. (b) (1) $480,000 simple interest note: $480,000 proceeds (2) $480,000 discounted note: $480,000 – $6,400 interest = $473,600 proceeds DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-01 - 11-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 166. Baker Green’s weekly gross earnings for the week ending December 7 were $2,500, and her federal income tax withholding was $525. Prior to this week Green had earned $98,000 for the year. Assuming the social security rate is 6.0% and Medicare is 1.5%, what is Green’s net pay? ANSWER: Total wage payment $2,500.00 Less: Federal income tax withholding (525.00) Earnings subject to social security tax: $2,500 Lesser of ($120,000 – $98,000) or $2,500 Social security tax rate × 6.0% Social security tax (150.00) Medicare tax ($2,500 × 1.5%) (37.50) Net pay $1,787.50 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 167. John Woods’ weekly gross earnings for the present week were $2,500. Woods has two exemptions. Using an $80 value for each exemption and the tax rate schedule below, what is Woods’ federal income tax withholding? Single person (including head of household) If amount of wages (after subtracting The amount of income tax withholding withholding is: allowance) is: Not over $43 $0 Over – But not over – $43 –$222.......$0.00 plus 10% $222 –$767.......$17.90 plus 15% $767 –$1,796....$99.65 plus 25% $1,796 –$3,700....$356.90 plus 28% $3,700 –$7,992....$890.02 plus 33% $7,992 –$8,025....$2,306.38 plus 35% $8,025 .................$2,317.93 plus 39.6%

of excess over – –$43 –$222 –$767 –$1,796 –$3,700 –$7,992 –$8,025

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Chapter 11 - Current Liabilities and Payroll ANSWER:

Total wage payment Allowance per exemption Multiplied by allowances claimed on Form W-4 Amount subject to withholding

Base withholding from wage bracket above Plus additional withholding: 28% of excess over $1,796 Federal income tax withholding DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

$2,500 $80 × 2

160 $2,340 $356.90 152.32 $509.22

168. An employee earns $40 per hour and 1.5 times that rate for all hours in excess of 40 hours per week. Assume that the employee worked 60 hours during the week and that the gross pay prior to the current week totaled $58,000. Assume further that the social security tax rate was 6.0%, the Medicare tax rate was 1.5%, and the federal income tax to be withheld was $614. (a) Determine the gross pay for the week. (b) Determine the net pay for the week. ANSWER: (a) Regular pay (40 hrs. × $40) Overtime pay (20 hrs. × $60) Gross pay (b) Gross pay Less:

$1,600.00 1,200.00 $2,800.00 $2,800.00 Social security tax (6.0% × $2,800) $168.00 Medicare tax (1.5% × $2,800) 42.00 Federal withholding 614.00

Net pay DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

824.00 $1,976.00

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Chapter 11 - Current Liabilities and Payroll 169. Dixon Sales has seven sales employees that receive weekly paychecks. Each earns $10.25 per hour and each has worked 40 hours in the pay period. Each employee pays 12% of gross in federal income tax, 3% in state income tax, 6.0% of gross in social security tax, 1.5% of gross in Medicare tax, and 0.5% in state disability insurance. Journalize the recognition of the pay period ending January 19 that will be paid to the employees January 26. ANSWER: 7 employees × 40 Jan. 19 Sales Wages Expense 2,870.00 hours × $10.25 Federal Income Tax Payable

344.40 $2,870.00 × 12%

State Income Tax Payable

86.10 $2,870.00 × 3%

Social Security Tax Payable

172.20 $2,870.00 × 6.0%

Medicare Tax Payable

43.05 $2,870.00 × 1.5%

State Disability Insurance

14.35 $2,870.00 × 0.5% Wages Expense – 2,209.90 Deductions

Sales Wages Payable DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 170. Mobile Sales has five sales employees that receive weekly paychecks. Each earns $11.50 per hour and each has worked 40 hours in the pay period. Each employee pays 12% of gross in federal income tax, 3% in state income tax, 6.0% of gross in social security tax, 1.5% of gross in Medicare tax, and 0.5% in state disability insurance. Journalize the pay period ending January 19 that will be paid to the employees January 26. ANSWER: Jan. 19 Sales Wages Expense 2,300.00 5 employees × 40 hours × $11.50 Federal Income Tax Payable 276.00 $2,300.00 × 12% State Income Tax Payable 69.00 $2,300.00 × 3% Social Security Tax Payable 138.00 $2,300.00 × 6.0% Medicare Tax Payable 34.50 $2,300.00 × 1.5% State Disability Insurance 11.50 $2,300.00 × 0.5% Wages Expense – Sales Wages Payable 1,771.00 Deductions DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

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Chapter 11 - Current Liabilities and Payroll 171. The following information is for employee Ella Dodd for the week ended March 15. Total hours worked: 48 Rate: $15 per hour, with double time for all hours in excess of 40 Federal income tax withheld: $200 United Fund deduction: $50 Cumulative earnings prior to current week: $6,400 Tax rates: Social security: 6.0% on maximum earnings of $120,000 Medicare tax: 1.5% on all earnings State unemployment: 3.4% on maximum earnings of $7,000; on employer Federal unemployment: 0.8% on maximum earnings of $7,000; on employer (a) (b)

Determine (1) total earnings, (2) total deductions, and (3) cash paid. Determine each of the employer's payroll taxes related to the earnings of Ella Dodd for the week ended March 15. ANSWER: (a) (1) 40 hours at $15 $600.00 8 hours at $30 240.00 $840.00 (2) Deductions: Income tax $200.00 United Fund deduction 50.00 Social security tax, 6.0% of $840 50.40 Medicare tax, 1.5% of $840 12.60 Total deductions 313.00 (3) Cash paid $527.00 (b) Social security and Medicare taxes, 7.5% × $840 $63.00 State unemployment tax, 3.4% × $600 20.40 Federal unemployment tax, 0.8% × $600 4.80 Total $88.20 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 172. The summary of the payroll for the monthly pay period ending July 15 indicated the following: Sales salaries Federal income tax withheld Office salaries Medical insurance withheld Social security tax withheld Medicare tax withheld

$125,000 32,300 35,000 7,370 10,200 2,550

Journalize the entries to record (a) the payroll and (b) the employer's payroll tax expense for the month. The state unemployment tax rate is 3.1%, and the federal unemployment tax rate is 0.8%. Only $25,000 of salaries are subject to unemployment taxes.

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Chapter 11 - Current Liabilities and Payroll ANSWER:

(a) Sales Salaries Expense 125,000 Office Salaries Expense 35,000 Social Security Tax Payable Medicare Tax Payable Federal Income Tax Payable Medical Insurance Payable Salaries Payable (b) Payroll Taxes Expense 13,725 Social Security Tax Payable Medicare Tax Payable State Unemployment Tax Payable Federal Unemployment Tax Payable DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

10,200 2,550 32,300 7,370 107,580

10,200 2,550 775 200

173. Excel Products Inc. pays its employees semimonthly. The summary of the payroll for December 31, indicated the following: Salaries expense Federal income tax withheld

$120,000 20,000

For the year ended December 31, $40,000 of the December 31 payroll is subject to social security tax of 6.0%; $120,000 is subject to Medicare tax of 1.5%; $10,000 is subject to state unemployment tax of 4.3% and federal unemployment tax of 0.8%. As of January 1, of the following year, all of the $120,000 is subject to all payroll taxes. Prepare the journal entries for payroll tax expense if the employees are paid (a) December 31 of the current year or (b) January 2 of the following year. ANSWER: (a) Social security tax, 6.0% × $40,000 $2,400 Medicare tax, 1.5% × $120,000 1,800 State unemployment, 4.3% × $10,000 430 Federal unemployment, 0.8% × $10,000 80 Total payroll tax expense $4,710 Payroll Tax Expense Social Security Tax Payable Medicare Tax Payable State Unemployment Tax Payable Federal Unemployment Tax Payable

4,710 2,400 1,800 430 80

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Chapter 11 - Current Liabilities and Payroll (b) Social security tax, 6.0% × $120,000 Medicare tax, 1.5% × $120,000 State unemployment tax, 4.3% × $120,000 Federal unemployment tax, 0.8% × $120,000 Total payroll tax expense

$7,200 1,800 5,160 960 $15,120

Payroll Tax Expense 15,120 Social Security Tax Payable 7,200 Medicare Tax Payable 1,800 State Unemployment Tax Payable 5,160 Federal Unemployment Tax Payable 960 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 174. An employee receives an hourly rate of $15, with time and a half for all hours worked in excess of 40 during the week. Payroll data for the current week are as follows: hours worked, 46; federal income tax withheld, $120; cumulative earnings for the year prior to this week, $5,500; social security tax rate, 6.0%; and Medicare tax rate, 1.5%; state unemployment compensation tax, 3.4% on the first $7,000; federal unemployment compensation tax, 0.8% on the first $7,000. Prepare the journal entries to record the salaries expense and the employer payroll tax expense. ANSWER: Salaries Expense [($15 × 40) + ($22.50 × 6)] Social Security Taxes Payable ($735 × 6.0%) Medicare Taxes Payable ($735 × 1.5%) Federal Withholding Taxes Payable Salaries Payable

735.00 44.10 11.03 120.00 559.87

Payroll Tax Expense 86.00 Social Security Taxes Payable ($735 × 6.0%) 44.10 Medicare Taxes Payable ($735 × 1.5%) 11.03 State Unemployment Comp. Taxes Payable 24.99 ($735 × 3.4%) Fed. Unemployment Comp. Taxes Payable 5.88 ($735 × 0.8%) DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-02 - 11-02 ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

Page 59

Chapter 11 - Current Liabilities and Payroll 175. Townson Company had gross wages of $200,000 during the week ended December 10. The amount of wages subject to social security tax was $180,000, while the amount of wages subject to federal and state unemployment taxes was $24,000. Tax rates are as follows: Social security 6.0% Medicare 1.5 State unemployment 5.3 Federal unemployment 0.8 The total amount withheld from employee wages for federal income taxes was $32,000. (a) (b)

Journalize the entry to record the payroll for the week of December 10. Journalize the entry to record the payroll tax expense incurred for the week of December 10.

ANSWER:

(a) Wages Expense Social Security Tax Payable ($180,000 × 6.0%) Medicare Tax Payable ($200,000 × 1.5%) Employees Federal Income Tax Payable Wages Payable

200,000 10,800 3,000 32,000 154,200

(b) Payroll Tax Expense 15,264 Social Security Tax Payable 10,800 Medicare Tax Payable 3,000 State Unemployment Tax Payable ($24,000 × 5.3%) 1,272 Federal Unemployment Tax Payable ($24,000 × 0.8%) 192 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 176. According to a summary of the payroll of Scotland Company, $450,000 was subject to the 6.0% social security tax and $500,000 was subject to the 1.5% Medicare tax. Federal income tax withheld was $98,000. Also, $15,000 was subject to state (4.2%) and federal (0.8%) unemployment taxes. (a) Journalize the entry to record the accrual of payroll. (b) Journalize the entry to record the accrual of payroll taxes. ANSWER: (a) Salaries Expense Social Security Tax Payable (6.0% × $450,000) Medicare Tax Payable (1.5% × $500,000) Employees Federal Income Tax Payable Salaries Payable (b) Payroll Tax Expense Social Security Tax Payable Medicare Tax Payable State Unemployment Tax Payable Federal Unemployment Tax Payable

500,000 27,000 7,500 98,000 367,500 35,250

27,000 7,500 630 120

Page 60

Chapter 11 - Current Liabilities and Payroll DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 177. The payroll register of Seaside Architecture Company indicates $970 of social security and $257 of Medicare tax withheld on total salaries of $16,500 for the period. Federal withholding for the period totaled $4,235. Prepare the journal entry for the period’s payroll. ANSWER: Salaries Expense 16,500 Social Security Tax Payable 970 Medicare Tax Payable 257 Federal Withholding Tax Payable 4,235 Salaries Payable 11,038 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 178. The payroll register of Seaside Architecture Company indicates $870 of social security and $217 of Medicare tax withheld on total salaries of $14,500 for the period. Assume earnings subject to state and federal unemployment compensation taxes are $5,250 at the federal rate of 0.8% and state rate of 5.4%. Prepare the journal entry to record the payroll tax expense for the period. ANSWER: Payroll Tax Expense 1,412.50 Social Security Tax Payable 870.00 Medicare Tax Payable 217.00 State Unemployment Tax Payable 283.50* Federal Unemployment Tax Payable 42.00** *$5,250 × 5.4% **$5,250 × 0.8% DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

Page 61

Chapter 11 - Current Liabilities and Payroll 179. List five internal controls that relate directly to payroll. ANSWER: All of the cash payment controls. Proper written authorization of additions and deletions of employees. Proper written authorization of payroll rate changes. Control of employee attendance records. Verification that employees are correctly recording their time and attendance. Blank payroll checks controlled and accounted for. Controlled access to check-signing machine. Separate payroll bank account. DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 180. The payroll summary for December 31 for Waters Co. revealed total earnings of $80,000. Earnings subject to 6.0% social security tax were $60,000; earnings subject to 1.5% Medicare tax were $80,000; and earnings of $3,000 were subject to 4.3% state and 0.8% federal unemployment compensation tax. Journalize the entry to record the accrual of payroll taxes. ANSWER: Payroll Tax Expense 4,953 Social Security Tax Payable ($60,000 × 6.0%) 3,600 Medicare Tax Payable ($80,000 × 1.5%) 1,200 State Unemployment Tax Payable 129 ($3,000 × 4.3%) Federal Unemployment Tax 24 Payable ($3,000 × 0.8%) DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 181. Perez Company has the following information for the pay period of January 15–31: Gross payroll Social security rate Medicare rate

$20,000 6.0% 1.5%

Federal income tax withheld Federal unemployment tax rate State unemployment tax rate

$2,500 0.8% 5.4%

Assuming no employees are subject to ceilings for their earnings, calculate salaries payable and payroll tax expense. ANSWER:

Salaries payable: Gross payroll Less: Social security ($20,000 × 6.0%) Medicare ($20,000 × 1.5%) Federal income tax withheld

$20,000 $1,200 300 2,500

4,000 $16,000

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Chapter 11 - Current Liabilities and Payroll Payroll tax expense: Social security ($20,000 × 6.0%) $1,200 Medicare ($20,000 × 1.5%) 300 Federal unemployment ($20,000 × 0.8%) 160 State unemployment ($20,000 × 5.4%) 1,080 $2,740 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 182. An employee receives an hourly rate of $45, with time and a half for all hours worked in excess of 40 during the week. Payroll data for the current week are as follows: hours worked, 48; federal income tax withheld, $950; social security tax rate, 6.0%; Medicare tax rate, 1.5%; state unemployment compensation tax, 3.4% on the first $7,000; federal unemployment compensation tax, 0.8% on the first $7,000. Calculate the employer's payroll tax expense if: (a) This is the first payroll of the year and the employee has no cumulative earnings for the year to date. (b) The employee’s cumulative earnings for the year prior to this week equal $6,200. (c) The employee’s cumulative earnings for the year prior to this week equal $118,700. ANSWER: Employee wages = (40 × $45) + (8 × $67.50) = $2,340 (a)

Social security: $2,340 × 6.0% Medicare: $2,340 × 1.5% State unemployment: $2,340 × 3.4% Federal unemployment: $2,340 × 0.8% Total

$140.40 35.10 79.56 18.72 $273.78

(b)

Social security: $2,340 × 6.0% Medicare: $2,340 × 1.5% State unemployment: $800 × 3.4% Federal unemployment: $800 × 0.8% Total

$140.40 35.10 27.20 6.40 $209.10

(c)

Social security: $1,300 × 6.0% Medicare: $2,340 × 1.5%

$ 78.00 35.10

Total

$113.10

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

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Chapter 11 - Current Liabilities and Payroll 183. The following totals for the month of February were taken from the payroll register of Arcon Company: Salaries expense Social security and Medicare taxes withheld Income taxes withheld Retirement savings Salaries subject to federal and state unemployment taxes of 6.2%

$13,000 975 2,600 500 4,000

(a) How much is the total payroll tax expense for Arcon Company for this payroll? (b) Assume that the monthly salaries expense remains the same for the entire year and no employees are hired or fired during that time. Based on what you learned in Chapter 11 about payroll taxes, do you expect the total payroll tax expense to stay the same every month? Explain. ANSWER: (a) Total payroll expense: $975 matching social security and Medicare taxes + $248 ($4,000 × 6.2%) unemployment taxes = $1,223 (b) Total payroll tax expense is not expected to stay the same every month. The salaries subject to unemployment taxes should soon be zero, and it is possible that some employees may exceed the limit for social security tax before the year ends, so total payroll tax expense should decrease. DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 184. According to a summary of the payroll of Sinclair Company, $505,000 was subject to the 6.0% social security tax and $545,000 was subject to the 1.5% Medicare tax. Also, $10,000 was subject to state and federal unemployment taxes. Calculate the employer’s payroll taxes using the following rates: State unemployment, 4.2%; Federal unemployment, 0.8%. (b) Journalize the entry to record the accrual of the employer's payroll taxes. ANSWER: (a) Social security tax (6.0% × $505,000) $30,300 Medicare tax (1.5% × $545,000) 8,175 State unemployment (4.2% × $10,000) 420 Federal unemployment (0.8% × $10,000) 80 $38,975 (a)

(b) Payroll Tax Expense 38,975 Social Security Tax Payable 30,300 Medicare Tax Payable 8,175 State Unemployment Tax Payable 420 Federal Unemployment Tax Payable 80 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-03 - 11-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 11 - Current Liabilities and Payroll 185. Martin Services Company provides its employees vacation benefits and a defined contribution pension plan. Employees earned vacation pay of $39,500 for the period. The pension plan requires a contribution to the plan administrator equal to 9% of employee salaries. Salaries were $750,000 during the period. Provide the journal entries for (a) the vacation pay and (b) the pension benefit. ANSWER: (a) Vacation Pay Expense 39,500 Vacation Pay Payable 39,500 (b) Pension Expense 67,500 Cash 67,500 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 186. Below are two independent sets of transactions for Welcott Company: (a) Welcott provides its employees with varying amounts of vacation per year, depending on the length of employment. The estimated amount of the current year’s vacation pay is $78,000. Journalize the adjusting entry required on January 31, the end of the first month of the year, to record the accrued vacation pay. (b) Welcott maintains a defined contribution pension plan for its employees. The plan requires quarterly installments to be paid to the funding agent, Northern Trust, by the fifteenth of the month following the end of each quarter. Assuming that the pension cost is $119,600 for the quarter ended December 31, journalize entries to record (1) the accrued pension liability on December 31 and (2) the payment to the funding agent on January 15. ANSWER: (a) Vacation Pay Expense 6,500 Vacation Pay Payable 6,500 (b) (1) Dec. 31 Pension Expense 119,600 Unfunded Pension Liability 119,600 (2)

Jan. 15 Unfunded Pension Liability 119,600 Cash 119,600 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

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Chapter 11 - Current Liabilities and Payroll 187. Journalize the following transactions for Riley Corporation: Dec. 31 The accrued product warranty expense for the year is estimated to be 2.5% of sales. Sales for the year totaled $8,850,000. 31 The accrued vacation pay for the year is estimated to be $75,000. 31 Paid First Insurance Co. $55,000 as fund trustee for the pension plan. The annual pension cost is $87,000. ANSWER: Dec. 31 Product Warranty Expense 221,250 Product Warranty Payable 221,250 $8,850,000 × 0.025 = $221,250 31 Vacation Pay Expense Vacation Pay Payable

75,000 75,000

31 Pension Expense 87,000 Cash Unfunded Pension Liability DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

55,000 32,000

188. Kelly Howard has the following transactions. Prepare the journal entries. Dec. 31 31 31 ANSWER:

The accrued product warranty expense for the year is estimated to be 2.3% of sales. Sales for the year totaled $6,005,000. The accrued vacation pay for the year is estimated to be $75,225. Paid Reliable Insurance Co. $275,000 as fund trustee for the pension plan. The annual pension cost is $350,000. Dec. 31 Product Warranty Expense Product Warranty Payable *$6,005,000 × 2.3% = $138,115

138,115

31 Vacation Pay Expense Vacation Pay Payable

75,225

138,115*

31 Pension Expense 350,000 Cash Unfunded Pension Liability DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

75,225 275,000 75,000

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Chapter 11 - Current Liabilities and Payroll 189. Journalize the following transactions: Dec. 31

The accrued product warranty expense for the year is estimated to be 1.5% of sales. Sales for the year totaled $7,760,000. 31 The accrued vacation pay for the year is estimated to be $46,000. 31 Paid Reliable Insurance Co. $85,000 as fund trustee for the pension plan. The annual pension cost is $109,000. ANSWER: Dec. 31 Product Warranty Expense 116,400 Product Warranty Payable 116,400* *$7,760,000 × 0.015 = $116,400 31 Vacation Pay Expense Vacation Pay Payable

46,000 46,000

31 Pension Expense 109,000 Cash Unfunded Pension Liability DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-04 - 11-04 ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

85,000 24,000

190. Nelson Industries warrants its products for one year. The estimated product warranty is 4.3% of sales. Sales were $475,000 for September. In October, a customer received warranty repairs requiring $215 of parts and $65 of labor. (a) (b)

Journalize the adjusting entry required at September 30, the end of the first month of the current year, to record the estimated product warranty expense. Journalize the entry to record the warranty work provided in October.

ANSWER: (a) Product Warranty Expense 20,425 Product Warranty Payable To record warranty expense for September, 4.3% × $475,000. (b) Product Warranty Payable Supplies Wages Payable

20,425

280 215 65

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.14 - Payroll/Other Compensation ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 11 - Current Liabilities and Payroll 191. Ecco Company sold $150,000 of kitchen appliances with six-month warranties during September. The cost to repair defects under the warranty is estimated at 6% of the sales price. On October 15, a customer required a $200 part replacement, plus $85 labor under the warranty. Provide the journal entry for (a) the estimated expense on September 30 and (b) the October 15 warranty work. ANSWER: (a) Product Warranty Expense 9,000* Product Warranty Payable 9,000 *$150,000 × 6% (b) Product Warranty Payable 285 Supplies Wages Payable DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

200 85

192. Florida Keys Construction installs swimming pools. It calculates that warranty obligations are 3% of sales. For the year just ending, Florida Keys’ sales were $1,450,000. Previous quarterly entries debiting Warranty Expense totaled $28,700. Determine the estimated warranty expense for the year and make the journal entry necessary to bring the account to the needed balance. ANSWER: Due to sales of $1,450,000, warranty liability is $43,500 ($1,450,000 × 3%). Since $28,700 has already been recognized, $14,800 ($43,500 – $28,700) must still be recognized. Dec. 31

Warranty Expense Warranty Payable

14,800 14,800

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 193. Aqua Construction installs swimming pools. It calculates that warranty obligations are 5% of sales. For the year just ending, Aqua’s sales were $1,500,000. Previous quarterly entries debiting Warranty Expense totaled $48,700. Determine the estimated warranty expense for the year and make the journal entry necessary to bring the account to the needed balance. ANSWER: The sales were $1,500,000, thus the warranty liability is $75,000 ($1,500,000 × 5%). Since $48,700 has already been recognized, $26,300 ($75,000 – $48,700) must still be recognized. Dec. 31

Warranty Expense Warranty Payable

26,300 26,300

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Chapter 11 - Current Liabilities and Payroll DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 194. Lamar Industries warrants its products for one year. The estimated product warranty expense is 3% of sales. Sales for June were $190,000. In July, a customer received warranty repairs requiring $185 of parts and $50 of labor. (a)

Journalize the adjusting entry required at June 30, the end of the first month of the current year, to record the estimated product warranty expense. (b) Journalize the entry to record the warranty work provided in July. ANSWER: (a) Product Warranty Expense 5,700 Product Warranty Payable To record warranty expense for June, 3% × $190,000. (b) Product Warranty Payable 235 Supplies Wages Payable DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

5,700

185 50

195. Several months ago, Jones Company experienced a spill of hazardous materials into the White River from one of its plants. As a result, the Environmental Protection Agency (EPA) fined the company $405,000. The company contested the fine. In addition, an employee is seeking $180,000 damages related to the spill. Finally, a homeowner has sued the company for $260,000. Although the homeowner lives 30 miles downstream from the plant, he believes that the spill has reduced his home’s resale value by $260,000. Jones’ legal counsel believes the following will happen in relationship to these incidents: (a) (b) (c) (d) (1)

(2)

It is probable that the EPA fine will stand. An out-of-court settlement for $165,000 has recently been reached with the employee, with the final papers to be signed next week. Counsel believes that the homeowner’s case is weak and will be decided in favor of Jones Company. Other litigation related to the spill is possible, but the damage amounts are uncertain. Based on this information, journalize the contingent liabilities associated with the spill. Use the account “Damage Awards and Fines” to recognize the expense for the period. Prepare any note disclosure related to the spill.

Page 69

Chapter 11 - Current Liabilities and Payroll ANSWER:

(1) Damage Awards and Fines EPA Fines Payable Litigation Claims Payable

570,000 405,000 165,000

Note: “Damage Awards and Fines” would be disclosed on the income statement under “Other expenses.” (2) The company experienced a hazardous materials spill at one of its plants during the previous period. This spill has resulted in a number of lawsuits to which the company is a party. The Environmental Protection Agency (EPA) has fined the company $405,000, which the company is contesting in court. Although the company does not admit fault, legal counsel believes that the fine payment is probable. In addition, an employee has sued the company. A $165,000 out-of-court settlement has been reached with the employee. The EPA fine and out-of-court settlement have been recognized as an expense for the period. There is one other outstanding lawsuit related to this incident. Counsel does not believe that the lawsuit has merit. Other lawsuits and unknown liabilities may arise from this incident. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 196. Several months ago, Maximilien Company experienced a spill of radioactive materials into the Missouri River from one of its plants. As a result, the Environmental Protection Agency (EPA) fined the company $1,750,000. The company contested the fine. In addition, an employee is seeking $975,000 damages related to the spill. Finally, a homeowner has sued the company for $580,000. Although the homeowner lives 15 miles downstream from the plant, he believes that the spill has reduced his home’s resale value by $580,000. Maximilien's legal counsel believes the following will happen in relationship to these incidents: (a) It is probable that the EPA fine will stand. (b) An out-of-court settlement for $650,000 has recently been reached with the employee, with the final papers to be signed next week. (c) Counsel believes that the homeowner’s case is weak and will be decided in favor of Maximilien Company. (d) Other litigation related to the spill is possible, but the damage amounts are uncertain. (1)

Based on this information, prepare the journal entries for the contingent liabilities associated with the spill. Use the account “Damage Awards and Fines” to recognize the expense for the period.

(2)

Prepare any note disclosure related to the spill.

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Chapter 11 - Current Liabilities and Payroll ANSWER:

(1) Damage Awards and Fines EPA Fines Payable Litigation Claims Payable

2,400,000 1,750,000 650,000

Note: “Damage Awards and Fines” would be disclosed on the income statement under “Other expenses.” (2) The company experienced a radioactive materials spill at one of its plants during the previous period. This spill has resulted in a number of lawsuits to which the company is a party. The Environmental Protection Agency (EPA) has fined the company $1,750,000, which the company is contesting in court. Although the company does not admit fault, legal counsel believes that the fine payment is probable. In addition, an employee has sued the company. A $650,000 out-of-court settlement has been reached with the employee. The EPA fine and out-of-court settlement have been recognized as an expense for the period. There is one other outstanding lawsuit related to this incident. Counsel does not believe that the lawsuit has merit. Other lawsuits and unknown liabilities may arise from this incident. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 197. Hadley Industries warrants its products for one year. The estimated product warranty expense is 4% of sales. Assume that sales were $210,000 for June. In July, a customer received warranty repairs requiring $205 of parts and $75 of labor. (a)

Journalize the adjusting entry required at June 30, the end of the first month of the current year, to record the estimated product warranty expense. (b) Journalize the entry to record the warranty work provided in July. ANSWER: (a) Product Warranty Expense 8,400 Product Warranty Payable 8,400 To record warranty expense for June, 4% × $210,000. (b) Product Warranty Payable Supplies Wages Payable DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-05 - 11-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

280 205 75

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Chapter 11 - Current Liabilities and Payroll 198. The current assets and current liabilities for Kolbie Company and Newton Company are as follows: Kolbie Company (in millions) For the Year Ending December 31 Current assets: Cash and cash equivalents Short-term investments Accounts receivable Inventories Other current assets* Total current assets Current liabilities: Accounts payable Accrued and other current liabilities Total current liabilities

Newton Company (in millions) For the Year Ending December 31

$ 8,352 6,034 3,029 446 2,195 $20,056

$ 8,546 752 5,152 660 2,829 $17,939

$4,970 3,329 $8,299

$10,430 6,361 $16,791

*These represent prepaid expenses and other non-quick current assets. (a) Determine the quick ratio for both companies. Round to two decimal places. (b) Interpret the quick ratio difference between the two companies. ANSWER:

(a) Quick Ratio = Quick Assets/Current Liabilities Kolbie Company: Quick Ratio = ($8,352 + $6,034 + $3,029)/$8,299 = 2.10 Newton Company: Quick Ratio = ($8,546 + $752 + $5,152)/$16,791 = 0.86

(b) It is clear that Kolbie’s short-term liquidity is stronger than Newton’s. Kolbie’s quick ratio is 144% [(2.10 – 0.86)/0.86] higher. Kolbie has a much stronger relative cash and short-term investment position than does Newton. Kolbie’s cash and shortterm investments are over 72% of total current assets (173% of current liabilities), compared to Newton’s 52% of total current assets (55% of current liabilities). In addition, Newton’s relative accounts payable position is larger than Kolbie’s, indicating the possibility that Newton has longer supplier payment terms than does Kolbie. A quick ratio of 2.10 for Kolbie suggests ample flexibility to make strategic investments with its excess cash, while a quick ratio of 0.86 for Newton indicates an efficient but tight quick asset management policy. DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-06 - 11-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 11 - Current Liabilities and Payroll 199. Core Company had the following assets and liabilities as of December 31: Assets Cash Accounts receivable Inventory Equipment

$58,000 25,000 20,000 50,000

Liabilities Current portion of long-term debt Accounts payable Long-term debt

$20,000 12,000 25,000

Calculate the current ratio, working capital, and quick ratio. ANSWER:

Current ratio: ($58,000 + $25,000 + $20,000)/($20,000 + $12,000) = 3.2 Working capital: $103,000 – $32,000 = $71,000 Quick ratio: ($58,000 + $25,000)/($20,000 + $12,000) = 2.6 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-06 - 11-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 200. Use the following information and calculate the quick ratio for Davis Company and for Bender Inc. (a) Calculate the quick ratio for each company. (b) Comment on which one is more able to meet current liabilities. Account Cash Cash equivalents Current notes receivable Accounts receivable Prepaid expenses Merchandise inventory Fixed assets Accumulated depreciation—fixed assets Accounts payable Current accrued liabilities Mortgage payable Capital Totals

Davis Company Dr. Cr. $ 321 88 56 603 55 714 920 $ 415 260 213 917 952 $2,757 $2,757

Bender Inc. Dr. Cr. $ 425 95 46 307 85 898 755 $ 225 198 149 824 1,215 $2,611 $2,611

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Chapter 11 - Current Liabilities and Payroll ANSWER:

(a) Davis Company quick ratio: $1,068 ÷ $473 = 2.26 Bender Inc. quick ratio: $873 ÷ $347 = 2.52

(b) Bender Inc. is more liquid. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-06 - 11-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 201. For Company A and Company B: (a) Calculate the quick ratio for each company. (b) Comment on which one is more able to meet current liabilities.

Account Cash Cash equivalents Trade notes receivable Accounts receivable Prepaid expenses Merchandise inventory Fixed assets Accumulated depreciation—fixed assets

Company A Dr. Cr. $21 8 7 6 5 14 20 $5

Accounts payable Current accrued liabilities Mortgage payable Capital Total ANSWER:

Company B Dr. $25 10 6 7 5 8 55

$25

26 13 17

$81

20 $81

Cr.

8 19 24

$116

40 $116

(a) Company A quick ratio: $42 ÷ $39 = 1.08 Company B quick ratio: $48 ÷ $27 = 1.78

(b) Company B is more liquid. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.11-06 - 11-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.16 - Current Liabilities Reporting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies True / False 1. There are only four legal structures to form and operate a business. a. True b. False ANSWER: False DIFFICULTY: Bloom's: Remembering Easy LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 2. In a general partnership, each partner is individually liable to creditors for debts incurred by the partnership, to the extent of the partner's capital balance. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 3. A partnership is a legal entity separate from its owners. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 4. A partnership is subject to federal income taxes. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 5. A disadvantage of partnerships is the mutual agency of all partners. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 6. A partnership requires only an agreement between two or more persons to organize. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 7. Each partner may withdraw the assets he or she contributed to the partnership at any time. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 8. When compared to a corporation, one of the major disadvantages of the partnership is its limited life. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 9. When compared to a corporation, one of the major advantages of a partnership is its relative ease of formation. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 10. An advantage of the partnership form of business is that each partner’s potential loss is limited to that partner’s investment in the partnership. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 11. A limited liability company is a business entity form designed to overcome some of the disadvantages of the partnership form. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 12. For tax purposes, a limited liability company may elect to be treated as a partnership. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 13. The limited liability company may elect to be manager-managed rather than member-managed, which means that only authorized members may legally bind the corporation. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 14. Each partner has a separate capital and withdrawal account. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 15. One reason that distributions of income and loss are prepared is to obtain the information to record a closing entry. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 16. If the partnership agreement does not otherwise state, partnership income is divided in proportion to the individual partner's capital balance. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 17. The salary allocation to partners used in dividing net income would also appear as salary expense on the partnership income statement. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 18. If the articles of partnership provide for annual salary allowances of $36,000 and $18,000 to X and Y, respectively, and net income is $30,000, X's share of net income is $20,000. a. True b. False ANSWER: False RATIONALE: X Y Total Annual salary allowance $36,000 $18,000 $54,000 Deduct excess of allowances over 12,000 12,000 24,000* income Net income $24,000 $6,000 $30,000 *Excess of Allowances over Net Income = $54,000 – $30,000 = $24,000 As there is no specification, income and losses are divided equally between X and Y. DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 19. If the net income of a partnership is less than the total of the allowances provided by the partnership agreement, the difference must be divided among the partners in the income-sharing ratio. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 20. The amount that a partner withdraws as a monthly salary allowance does not affect the division of net income. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 21. Partner A devotes full time and partner B devotes one-half time to their partnership. If the partnership agreement is silent concerning the division of net income, Partner A will receive a $20,000 share of a net income of $30,000. a. True b. False ANSWER: False RATIONALE: If the partnership agreement is silent concerning the division of net income, income and losses are divided equally. Amount Received by Partner A = $30,000 × 0.5 = $15,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 22. In the distribution of income, the net income is less than the salary and interest allowances granted; the remaining balance will be a negative amount that must be divided among the partners as though it were a loss. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 23. Details of the division of partnership income should normally be disclosed in the financial statements. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic 24. When a partner invests noncash assets in a partnership, the assets are recorded at the partner's book value. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 25. A new partner contributes accounts receivable to a partnership, which appears in the ledger of his sole proprietorship at $20,500, and there was an allowance for doubtful accounts of $750. If $600 of the accounts receivable are completely worthless, the partnership Accounts Receivable should be debited for $19,900. a. True b. False ANSWER: True RATIONALE: Amount Debited to Partnership Accounts Receivable = Accounts Receivable Contributed by Partner – Worthless Accounts Receivable = $20,500 – $600 = $19,900 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: - Analytic 26. Many partnerships provide for the admission of new partners or withdrawals of present partners by amending existing partnership agreements, so that the firm may continue to operate without executing a new agreement. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 27. A partnership's asset accounts should be changed from cost to fair market value when a new partner is admitted to a firm or an existing partner withdraws or dies. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 28. In admitting a new partner who purchases an interest, the capital interest of the new partner is obtained from the current partners and both the total assets and total capital are increased. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 29. When a new partner purchases the entire interest of an old partner, the new partner's capital account should be credited for the amount he or she paid to the old partner. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 30. If a new partner is given a 20% interest in the firm, the new partner will receive a 20% interest in earnings. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 31. When a new partner is admitted by making an investment in the partnership, the old partners' capital accounts are always credited. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 32. When a new partner is admitted by making an investment of assets in the partnership and the new partner has to pay a premium for admission, a bonus is divided among the old partners' capital accounts. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 33. Sarno has a capital balance of $42,000 after adjusting the assets to fair market value. Minton contributes $22,000 to receive a 30% interest in the new partnership. The bonus paid by Minton is $2,800. a. True b. False ANSWER: True RATIONALE: Total Owners’ Equity after Admitting Minton = Sarno's Capital Balance + Minton's Contribution Total Owners’ Equity after Admitting Minton = $42,000 + $22,000 = $64,000 Minton's Capital = $64,000 × 30% = $19,200 Bonus Paid by Minton = Minton's Contribution – Minton's Capital = $22,000 – $19,200 = $2,800 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 34. When a partner withdraws from the partnership, the partnership dissolves. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 35. If not enough partnership cash or other assets are available to pay the withdrawing partner, a liability may be created for the amount owed the withdrawing partner. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 36. When a partner withdraws from the partnership by selling his or her interest back to the partnership, the remaining partners must pay the withdrawing partner a specified amount from their personal assets. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 37. X sells to A one-half of a partnership capital interest that totals $70,000 for $40,000. A's capital account in the partnership should be credited for $40,000. a. True b. False ANSWER: False RATIONALE: Partnership's capital is $70,000. A's one-half of the partnership capital interest = $70,000 × 1/2 = $35,000; A's capital account in the partnership should be credited for $35,000. DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 38. When a new partner is admitted to a partnership, all partnership assets should be revised to reflect current values. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 39. If a new partner is to be admitted to a partnership and a bonus is attributed to the old partnership, the bonus should be divided between the capital accounts of the original partners according to their capital balances. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 40. When a new partner is admitted to a partnership, bonuses attributable to either the old partnership or to the incoming partner may be recognized in accordance with the agreement among the partners. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 41. Dissolution is the term that solely means to liquidate the partnership. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 42. In a partnership liquidation, gains and losses on the sale of partnership assets are divided among the partners' capital accounts on the basis of their capital balances. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 43. If the share of losses on realization of the sale of noncash assets exceed the balance in a partner's capital account, the resulting balance is called a deficiency. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 44. In a partnership liquidation, if a partner has a debit capital balance in his or her capital account, he or she is responsible for contributing personal assets sufficient to eliminate the deficit. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 45. The process of winding up the affairs of a partnership is referred to as realization. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 46. The distribution of cash, as the final process in winding up the affairs of a partnership, is based on the income-sharing ratio. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 47. If a partner's capital balance is a debit after it has absorbed its share of the loss on realization, the balance is referred to as a deficiency. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 48. In the liquidating process, any uncollected cash becomes a loss to the partnership and is divided among the remaining partners' capital balances based on their income-sharing ratio. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 49. After all noncash assets have been converted to cash and all liabilities paid, A, B, and C have capital balances of $10,000 (debit), $5,000 (debit), and $25,000 (credit). The cash available for distribution to the partners is $10,000. a. True b. False ANSWER: True RATIONALE: Cash Available for Distribution is equal to the sum of the capital account balances. Cash Available for Distribution = ($10,000) + ($5,000) + $25,000 = $10,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 50. The statement of members’ equity is used for equity reporting of a partnership. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-05 - 12-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 51. The partner capital accounts may change due to capital additions, net income, or withdrawals. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-05 - 12-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 52. The equity reporting for a limited liability company is similar to that of a partnership, but the changes in capital are shown on a statement of members' equity. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-05 - 12-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 53. The chart of accounts for a partnership, with the exception of additional drawing and capital accounts, does not differ from the chart of accounts for a sole proprietorship. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-05 - 12-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 54. Revenue per employee may be used to measure partnership (LLC) efficiency. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-06 - 12-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic Multiple Choice 55. Which of the following is a characteristic of a general partnership? a. The partners have co-ownership of partnership property. b. The partnership is subject to federal income tax. c. The partnership has an unlimited life. d. The partners have limited liability. ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 56. Which of the following is not a characteristic of a general partnership? a. The partnership is created by a contract. b. Mutual agency exists. c. Partners share equally in net income or net losses unless an agreement states differently. d. Dissolution occurs only when all partners agree. ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 57. Which of the following is an advantage of a general partnership when compared to a corporation? a. A partnership is more likely to have a positive net income. b. The partnership is relatively inexpensive to organize. c. Creditors to a partnership cannot attach personal assets of partners. d. The partnership usually hires professional managers. ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 58. Which of the following is a disadvantage of a partnership when compared to a corporation? a. The partnership is more likely to have a net loss. b. The partnership is easier to organize. c. The partnership is less expensive to organize. d. The partnership has limited life. ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 59. An advantage of the partnership form of business organization is a. unlimited liability b. mutual agency c. ease of formation d. limited life ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 60. The characteristic of a partnership that gives the authority to any partner to legally bind the partnership and all other partners to business contracts is called a. unlimited liability b. ease of formation c. mutual agency d. dissolution ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 61. When a limited liability company is formed, a. the partnership activities are limited b. all partners have limited liability c. some of the partners have limited liability d. none of the partners has limited liability ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 62. Which of the following is not one of the four major forms of business entities that are discussed in this chapter? a. sole proprietorship b. corporation c. partnership d. subchapter S corporation ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 63. Which of the following is not a characteristic of a limited liability company? a. unlimited life b. limited legal liability c. taxable d. moderate ability to raise capital ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.03 - Business Forms ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 64. When a partnership is formed, assets contributed by the partners should be recorded on the partnership books at their a. book values on the partners' books prior to their being contributed to the partnership b. fair market value at the time of the contribution c. original costs to the partner contributing them d. assessed values for property tax purposes ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 65. As part of the initial investment, Ray Blake contributes equipment that had originally cost $125,000 and on which accumulated depreciation of $100,000 has been recorded. If similar equipment would cost $150,000 to replace and the partners agree on a valuation of $29,000 for the contributed equipment, what amount should be debited to the equipment account? a. $29,000 b. $150,000 c. $125,000 d. $100,000 ANSWER: a RATIONALE: The amount to be debited to the equipment account should be the value agreed on by the partners. Debit to Equipment Account = $29,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 66. Luke and John share income and losses in a 2:1 ratio after allowing for salaries of $48,000 to Luke and $60,000 to John. Net income for the partnership is $93,000. Income should be divided as a. Luke, $46,500; John, $46,500 b. Luke, $55,000; John, $38,000 c. Luke, $65,000; John, $28,000 d. Luke, $38,000; John, $55,000 ANSWER: d RATIONALE: Net Loss after Salary Allowance = Total Salary Paid to Luke and John – Net Income of Partnership = ($48,000 + $60,000) – $93,000 = $15,000 Luke's Share of Loss = $15,000 × (2/3) = $10,000 Luke's Net Income = Luke's Salary – Luke's Share of Loss = $48,000 – $10,000 = $38,000 John's Share of Loss = $15,000 × (1/3) = $5,000 John's Net Income = John's Salary – John's Share of Loss = $60,000 – $5,000 = $55,000 Income should be divided as : Luke, $38,000; John, $55,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 67. As part of the initial investment, Jackson contributes accounts receivable that had a balance of $22,500 in the accounts of a sole proprietorship. Of this amount, $3,000 is deemed completely worthless. For the remaining accounts, the partnership will establish a provision for possible future uncollectible accounts of $1,500. The amount debited to Accounts Receivable for the new partnership is a. $18,000 b. $22,500 c. $21,000 d. $19,500 ANSWER: d RATIONALE: Amount of Debit to Accounts Receivable = Accounts Receivable Contributed by Partner – Worthless Accounts Receivable = $22,500 – $3,000 = $19,500 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 68. Jordon and Heidi share income equally. For the current year, the partnership net income is $40,000. Jordon made withdrawals of $14,000, and Heidi made withdrawals of $15,000. At the beginning of the year, the capital account balances were: Jordon, Capital, $40,000; Heidi, Capital, $58,000. Jordon’s apital account balance at the end of the year is a. $68,000 b. $54,000 c. $74,000 d. $46,000 ANSWER: d RATIONALE: Jordon's Capital Account Balance at End of Year = Beginning Capital Account Balance + Share of Partnership Net Income – Withdrawals = $40,000 + ($40,000/2) – $14,000 = $46,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 69. Sadie and Sam share income equally. For the current year, the partnership net income is $40,000. Sadie made withdrawals of $14,000 and Sam made withdrawals of $15,000. At the beginning of the year, the capital account balances were: Sadie, Capital, $42,000; Sam, Capital, $58,000. Sam’s capital account balance at the end of the year is a. $78,000 b. $43,000 c. $63,000 d. $93,000 ANSWER: c RATIONALE: Sam's Capital Account Balance at End of Year = Beginning Capital Account Balance + Share of Partnership Net Income – Withdrawals = $58,000 + ($40,000/2) – $15,000 = $63,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 70. Partnership income and losses are usually divided on the basis of interest, salaries, and stated ratios because a. partners seldom contribute time and resources equally b. this method reflects the amount of time devoted to the partnership by the partners c. it is simpler than following the legal rules d. it prevents arguments among the partners ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 71. A ratio of 4:2:1 is the same as a. 40%:20%:10% b. 4/7:2/7:1/7 c. 4/10:2/10:1/20 d. 7/4:7/2:7/1 ANSWER: b RATIONALE: A ratio of 4:2:1 = 4/(4 + 2 + 1):2/(4 + 2 + 1):1/(4 + 2 + 1) = 4/7:2/7:1/7 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 72. Carrie and Callie form a partnership in which Carrie contributes $85,000 in assets and agrees to devote half time to the partnership. Callie contributed $50,000 in assets and agrees to devote full time to the partnership. If no additional information is available, how will Carrie and Callie share in the division of income? a. 5:8.5 b. 1:2 c. 1:1 d. 2:1 ANSWER: c RATIONALE: If the partnership agreement is silent concerning the division of net income, income and losses are divided equally. Therefore, Carrie and Callie will share their income in 1:1 ratio. DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 73. Seth and Rachel have original investments of $50,000 and $100,000, respectively, in a partnership. The articles of partnership include the following provisions regarding the division of net income: interest on original investments at 15%; salary allowances of $24,000 and $20,000, respectively; and the remainder to be divided equally. How much of the net income of $90,000 is allocated to Seth? a. $42,750 b. $47,750 c. $45,000 d. $43,250 ANSWER: d RATIONALE: Excess of Income over Allowances = Net Income – Interest on Original Investments – Salary Allowances = $90,000 – [(15% × $50,000) + (15% × $100,000)] – ($24,000 + $20,000) = $90,000 – $22,500 – $44,000 = $23,500 Seth's Share of Net Income = Interest on Original Investments + Salary Allowance + Half of Remaining Profit = (15% × $50,000) + $24,000 + (1/2 × $23,500) = $43,250 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 74. Seth and Beth have original investments of $50,000 and $100,000, respectively, in a partnership. The articles of partnership include the following provisions regarding the division of net income: interest on original investment at 10%; salary allowances of $27,000 and $18,000, respectively; and the remainder to be divided equally. How much of the net income of $42,000 is allocated to Seth? a. $20,000 b. $23,000 c. $32,000 d. $0 ANSWER: b RATIONALE: Excess of Income over Allowances = Net Income – Interest on Original Investments – Salary Allowances = $42,000 – [(10% × $50,000) + (10% × $100,000)] – ($27,000 + $18,000) = $42,000 – $15,000 – $45,000 = ($18,000) Seth's Share = Interest on Original Investments + Salary Allowance – Half of Net Loss Seth's Share = (10% × $50,000) + $27,000 – (1/2 × $18,000) = $23,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 75. Seth and Rachel have original investments of $50,000 and $100,000, respectively, in a partnership. The articles of partnership include the following provisions regarding the division of net income: interest on original investment at 10%; salary allowances of $27,000 and $18,000, respectively; and the remainder divided equally. How much of the net loss of $16,000 is allocated to Seth? a. $8,000 b. $6,000 c. $4,000 d. $16,000 ANSWER: b RATIONALE: Net Loss after Allowances = Net Loss + Interest on Original Investments + Salary Allowances = $16,000 + [(10% × $50,000) + (10% × $100,000)] + ($27,000 + $18,000) = $16,000 + $15,000 + $45,000 = $76,000 Seth's Share of Loss = Half of Net Loss – Interest on Original Investments + Salary Allowance Seth's Share of Loss = [(1/2 × ($76,000)] – [(10% × $50,000) + $27,000] = $6,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 76. If there is no written agreement as to the way income will be divided among partners, a. they will share income and losses equally b. they will share income and losses according to their capital balances c. they will share income and losses according to the time devoted to the business d. there really is no partnership agreement ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 77. Jefferson has a capital balance of $65,000 and devotes full time to a partnership. Washington has a capital balance of $45,000 and devotes half time to the partnership. If no other information is available regarding distributions, in what ratio is net income to be divided? a. 6.5:4.5 b. 1:1 c. 4.5:6.5 d. 1:2 ANSWER: b RATIONALE: If the partnership agreement is silent concerning the division of net income, income and losses are divided equally. Therefore, the net income is to be divided in the ratio of 1:1. DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 78. Details of the division of net income for a partnership should be disclosed in the a. Assets section of the balance sheet b. partners’ subsidiary ledger c. statement of cash flows d. partnership income statement ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 79. Patty and Paul are partners who share income in the ratio of 3:2. Their capital balances are $90,000 and $130,000, respectively, on January 1. The partnership generated net income of $40,000 for the year. What is Paul’s capital balance after closing the revenue and expense accounts to the capital accounts? a. $120,000 b. $146,000 c. $164,000 d. $160,000 ANSWER: b RATIONALE: Paul's Capital Balance after Closing Entries = Capital Balance on January 1 + Paul's Share of Income = $130,000 + ($40,000 × 2/5) = $130,000 + $16,000 = $146,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 80. Rex and Kelsey are partners who share income in the ratio of 3:2. Their capital balances are $95,000 and $140,000, respectively, on January 1. The partnership generated net income of $40,000 for the year. What is Rex’s capital balance after closing the revenue and expense accounts to the capital accounts? a. $71,000 b. $119,000 c. $146,000 d. $111,000 ANSWER: b RATIONALE: Rex's Capital Balance after Closing Entries = Capital Balance on January 1 + Rex's Share of Income = $95,000 + ($40,000 × 3/5) = $95,000 + $24,000 = $119,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies Use the information below to answer the questions that follow. Sandra and Kelsey are forming a partnership. Sandra will invest a piece of equipment with a book value of $7,500 and a fair market value of $18,000. Kelsey will invest a building with a book value of $40,000 and a fair market value of $44,000. 81. What amount will be recorded to the building account? a. $24,000 b. $14,000 c. $40,000 d. $44,000 ANSWER: d RATIONALE: Amount recorded to the building account is equal to the fair market value of the building of $44,000. DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 82. What amount will be recorded to Sandra’s capital account? a. $18,000 b. $7,500 c. $25,500 d. $10,500 ANSWER: a RATIONALE: Sandra's capital account is equal to the fair market value of her investment of $18,000. DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 83. What amount will be recorded to Kelsey’s capital account? a. $14,000 b. $24,000 c. $40,000 d. $44,000 ANSWER: d RATIONALE: Kelsey's capital account balance is equal to the fair market value of his investment of $44,000. DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 84. Hannah Johnson contributed equipment, inventory, and $53,000 cash to a partnership. The equipment had a book value of $25,000 and a market value of $28,000. The inventory had a book value of $50,000 but only had a market value of $15,000 due to obsolescence. The partnership also assumed a $12,000 note payable owed by Hannah that was originally used to purchase the equipment. What amount should be recorded to Hannah’s capital account? a. $96,000 b. $84,000 c. $108,000 d. $116,000 ANSWER: b RATIONALE: Hannah's Capital Account Balance = Hannah's Cash Contribution + Market Value of Hannah's Equipment Contribution + Market Value of Hannah's Inventory Contribution – Hannah's Note Payable Assumed by Partnership = $53,000 + $28,000 + $15,000 – $12,000 = $84,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 85. Henry Jones contributed equipment, inventory, and $44,000 cash to a partnership. The equipment had a book value of $35,000 and market value of $28,000. The inventory had a book value of $25,000 but only had a market value of $12,000 due to obsolescence. The partnership also assumed a $15,000 note payable owed by Henry that was originally used to purchase the equipment. What amount should be recorded to Henry’s capital account? a. $104,000 b. $89,000 c. $69,000 d. $84,000 ANSWER: c RATIONALE: Henry's Capital Account Balance = Henry's Cash Contribution + Market Value of Henry's Equipment Contribution + Market Value of Henry's Inventory Contribution – Henry's Note Payable Assumed by Partnership = $44,000 + $28,000 + $12,000 – $15,000 = $69,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 86. Tanner and Teresa share income and losses in a 2:1 ratio after allowing for salaries of $42,000 to Tanner and $60,000 to Teresa. Net income of the partnership is $132,000. Income should be divided as follows: a. Tanner, $57,000; Teresa, $75,000 b. Tanner, $58,000; Teresa, $74,000 c. Tanner, $75,000; Teresa, $57,000 d. Tanner, $62,000; Teresa, $70,000 ANSWER: d RATIONALE: Tanner: $42,000 + 2/3($132,000 – $42,000 – $60,000) = $62,000 Teresa: $60,000 + 1/3($132,000 – $42,000 – $60,000) = $70,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 87. Carla and Eliza share income equally. For the current year, the partnership net income is $40,000. Carla made withdrawals of $12,000, and Eliza made withdrawals of $21,000. At the beginning of the year, the capital account balances were: Carla, Capital, $42,000; Eliza, Capital, $55,000. Eliza’s capital account balance at the end of the year is a. $34,000 b. $54,000 c. $78,000 d. $75,000 ANSWER: b RATIONALE: 1/2($40,000) + $55,000 – $21,000 = $54,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 88. Xavier and Yolanda have original investments of $50,000 and $100,000, respectively, in a partnership. The articles of partnership include the following provisions regarding the division of net income: interest on original investment at 20%; salary allowances of $27,000 and $18,000, respectively; and the remainder to be divided equally. How much of the net income of $81,000 is allocated to Xavier? a. $37,000 b. $40,000 c. $42,000 d. $42,500 ANSWER: b RATIONALE: 20%($50,000) + $27,000 + 1/2($81,000 – $30,000 – $45,000) = $40,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 89. Xavier and Yolanda have original investments of $50,000 and $100,000, respectively, in a partnership. The articles of partnership include the following provisions regarding the division of net income: interest on original investment at 20%; salary allowances of $34,000 and $26,000, respectively; and the remainder to be divided equally. How much of the net income of $120,000 is allocated to Yolanda? a. $46,000 b. $61,000 c. $60,000 d. $66,000 ANSWER: b RATIONALE: 20%($100,000) + $26,000 + 1/2($120,000 – $30,000 – $60,000) = $61,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 90. Xavier and Yolanda have original investments of $50,000 and $100,000, respectively, in a partnership. The articles of partnership include the following provisions regarding the division of net income: interest on original investment at 20%; salary allowances of $34,000 and $26,000, respectively; and the remainder to be divided equally. How much of the net income of $120,000 is allocated to Xavier? a. $59,000 b. $61,000 c. $49,000 d. $44,000 ANSWER: a RATIONALE: 20%($50,000) + $34,000 + 1/2($120,000 – $30,000 – $60,000) = $59,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 91. Xavier and Yolanda have original investments of $50,000 and $100,000, respectively, in a partnership. The articles of partnership include the following provisions regarding the division of net income: interest on original investment at 10%; salary allowances of $38,000 and $28,000, respectively; and the remainder to be divided equally. How much of the net income of $77,000 is allocated to Yolanda? a. $77,000 b. $38,000 c. $36,000 d. $44,000 ANSWER: c RATIONALE: 10%($100,000) + $28,000 + 1/2($77,000 – $15,000 – $66,000) = $36,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 92. Xavier and Yolanda have original investments of $50,000 and $100,000, respectively, in a partnership. The articles of partnership include the following provisions regarding the division of net income: interest on original investment at 10%; salary allowances of $38,000 and $28,000, respectively; and the remainder to be divided equally. How much of the net income of $77,000 is allocated to Xavier? a. $66,000 b. $41,000 c. $36,000 d. $43,000 ANSWER: b RATIONALE: 10%($50,000) + $38,000 + 1/2($77,000 – $30,000 – $66,000) = $41,000 DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 93. Xavier and Yolanda have original investments of $50,000 and $100,000, respectively, in a partnership. The articles of partnership include the following provisions regarding the division of net income: interest on original investment at 10%; salary allowances of $27,000 and $18,000, respectively; and the remaining income equally. How much of the net loss of $6,000 is allocated to Yolanda? a. $1,000 b. $3,000 c. $5,000 d. $0 ANSWER: c RATIONALE: $5,000 (positive because the question is "how much of the net loss") 10%($100,000) + $18,000 + 1/2(–$6,000 – $15,000 – $45,000) = –$5,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 94. Tucker and Titus are partners who share income in the ratio of 3:1. Their capital balances are $40,000 and $60,000, respectively. The partnership generated net income of $40,000 for the year. What is Tucker’s capital balance after closing the revenue and expense accounts to the capital accounts? a. $40,000 b. $70,000 c. $10,000 d. $80,000 ANSWER: b RATIONALE: Tucker's Capital Account Balance = Capital Balance + Tucker's Share of Income = $40,000 + ($40,000 × 3/4) = $40,000 + $30,000 = $70,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 95. Tomas and Saturn are partners who share income in the ratio of 3:1. Their capital balances are $80,000 and $120,000, respectively. The partnership generated net income of $30,000. What is Tomas’s capital balance after closing the revenue and expense accounts to the capital accounts? a. $102,500 b. $22,500 c. $57,500 d. $127,500 ANSWER: a RATIONALE: Tomas's Capital Account Balance = Capital Balance + Tomas's Share of Income = $80,000 + ($30,000 × 3/4) = $80,000 + $22,500 = $102,500 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 96. Tomas and Saturn are partners who share income in the ratio of 3:1. Their capital balances are $80,000 and $120,000, respectively. The partnership generated net income of $30,000. What is Saturn’s capital balance after closing the revenue and expense accounts to the capital accounts? a. $102,500 b. $120,000 c. $112,500 d. $127,500 ANSWER: d RATIONALE: Saturn's Capital Account Balance = Capital Balance + Saturn's Share of Income = $120,000 + ($30,000 × 1/4) = $120,000 + $7,500 = $127,500 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 97. Tomas and Saturn are partners who share income in the ratio of 3:1. Their capital balances are $40,000 and $60,000, respectively. The partnership generated net income of $20,000. What is Saturn’s capital balance after closing the revenue and expense accounts to the capital accounts? a. $55,000 b. $75,000 c. $45,000 d. $65,000 ANSWER: d RATIONALE: Saturn's Capital Account Balance = Capital Balance + Saturn's Share of Income = $60,000 + ($20,000 × 1/4) = $60,000 + $5,000 = $65,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 98. Franco and Jason share income and losses in a 2:1 ratio after allowing for salaries of $15,000 and $30,000, respectively. If the partnership suffers a $15,000 loss, by how much would Jason’s capital account increase? a. $10,000 b. $20,000 c. $40,000 d. $25,000 ANSWER: a RATIONALE: Net Income after Salary Allowance = Partnership Loss – Total Salary Allowance = – $15,000 – ($15,000 + $30,000) = –$15,000 – $45,000 = –$60,000 Jason's Capital Increase = Share in Net Loss after Salary Allowance + Salary Allowance = (–$60,000 × 1/3) + $30,000 = –$20,000 + $30,000 = $10,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 99. Singer and McMann are partners in a business. Singer’s original capital was $40,000 and McMann’s was $60,000. They agree to salaries of $12,000 and $18,000 for Singer and McMann, respectively, and 10% interest on original capital. If they agree to share the remaining profits and losses on a 3:2 ratio, what will Singer’s share of the income be if the income for the year is $50,000? a. $24,000 b. $22,000 c. $16,000 d. $23,400 ANSWER: b RATIONALE: Income Remaining after Interest and Salary Allowances = $50,000 – [10% × ($40,000 + $60,000)] – ($12,000 + $18,000) = $50,000 – $10,000 – $30,000 = $10,000 Singer's Share in Net Income = Interest on Original Investment + Salary Allowance + 3/5 Share in Remaining Income = (10% × $40,000) + $12,000 + ($10,000 × 3/5) = $4,000 + $12,000 + $6,000 = $22,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 100. Singer and McMann are partners in a business. Singer’s original capital was $40,000 and McMann’s was $60,000. They agree to salaries of $12,000 and $18,000 for Singer and McMann, respectively, and 10% interest on original capital. If they agree to share the remaining profits and losses on a 3:2 ratio, what will McMann's share of the income be if the income for the year is $30,000? a. $20,000 b. $18,000 c. $18,600 d. $17,400 ANSWER: a RATIONALE: Net Income Remaining after Interest and Salary Allowances = $30,000 – [10% × ($40,000 + $60,000)] – ($12,000 + $18,000) = $30,000 – $10,000 – $30,000 = –$10,000 Net Income Allocated to McMann = Interest on Original Investment + Salary Allowance – 2/5 Share in Remaining Loss = (10% × $60,000) + $18,000 – ($10,000 × 2/5) = $6,000 + $18,000 – $4,000 = $20,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 101. Singer and McMann are partners in a business. Singer’s original capital was $40,000 and McMann’s was $60,000. They agree to salaries of $12,000 and $18,000 for Singer and McMann, respectively, and 10% interest on original capital. If they agree to share the remaining profits and losses in a 3:2 ratio, what will Singer’s share of the income (loss) be if the net loss for the year is $10,000? a. ($12,600) b. ($14,000) c. ($6,000) d. ($10,000) ANSWER: b RATIONALE: Net Income Remaining after Interest and Salary Allowances = (–$10,000) – [10% × ($40,000 + $60,000)] – ($12,000 + $18,000) = –$10,000 – $10,000 – $30,000 = ($50,000) Net Loss Allocated to Singer = 3/5 Share in Loss – (Interest on Original Investment + Salary Allowance) = [3/5 × ($50,000)] – [(10% × $40,000) + $12,000] = ($30,000) – ($4,000 + $12,000) = ($14,000) DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 102. Paul and Roger are partners who share income in the ratio of 3:2. Their capital balances are $90,000 and $130,000, respectively. The partnership generated net income of $50,000 for the year. What is Roger’s capital balance after closing the revenue and expense accounts to the capital accounts? a. $155,000 b. $150,000 c. $110,000 d. $115,000 ANSWER: b RATIONALE: Roger's Capital Account Balance after Closing Entries = Capital Balance + Roger's Share of Income = $130,000 + ($50,000 × 2/5) = $130,000 + $20,000 = $150,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 103. Paul and Roger are partners who share income in the ratio of 3:2. Their capital balances are $90,000 and $130,000, respectively. The partnership generated net income of $50,000 for the year. What is Paul’s capital balance after closing the revenue and expense accounts to the capital accounts? a. $108,000 b. $120,000 c. $115,000 d. $180,000 ANSWER: b RATIONALE: Paul's Capital Account Balance after Closing Entries = Capital Balance + Paul's Share of Income = $90,000 + ($50,000 × 3/5) = $90,000 + $30,000 = $120,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 104. Jackson and Campbell have capital balances of $100,000 and $300,000, respectively. Jackson devotes full time and Campbell devotes one-half time to the business. Determine the division of $150,000 of net income when there is no reference to division in the partnership agreement. a. $75,000 and $75,000 b. $37,500 and $112,500 c. $100,000 and $50,000 d. $112,500 and $37,500 ANSWER: RATIONALE:

a If the partnership agreement is silent concerning the division of net income, income and losses are divided equally. Jackson's Share of Net Income = $150,000 × 1/2 = $75,000 Campbell's Share of Net Income = $150,000 × 1/2 = $75,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 105. Jackson and Campbell have capital balances of $100,000 and $300,000, respectively. Jackson devotes full time and Campbell devotes one-half time to the business. Determine the division of $150,000 of net income in the ratio of time devoted to business. a. $75,000 and $75,000 b. $37,500 and $112,500 c. $100,000 and $50,000 d. $112,500 and $37,500 ANSWER: RATIONALE:

c As Jackson devotes full time and Campbell devotes one-half time to the business, the ratio for net income division is 2:1. Jackson's Share = $150,000 × 2/3 = $100,000 Campbell's Share = $150,000 × 1/3 = $50,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 106. Jackson and Campbell have capital balances of $100,000 and $300,000, respectively. Jackson devotes full time and Campbell devotes one-half time to the business. Determine the division of $150,000 of net income in the ratio of capital balances. a. $75,000 and $75,000 b. $37,500 and $112,500 c. $100,000 and $50,000 d. $50,000 and $100,000 ANSWER: RATIONALE:

b As Jackson devotes full time and Campbell devotes one-half time to the business, the ratio for net income division is 2:1. Jackson's Share = $150,000 × 1/4 = $37,500 Campbell's Share = $150,000 × 3/4 = $112,500 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 107. Singer and McMann are partners in a business. Singer’s original capital was $40,000 and McMann’s was $60,000. They agree to salaries of $12,000 and $18,000 for Singer and McMann, respectively, and 10% interest on original capital. If they agree to share the remaining profits and losses on a 3:2 ratio, what will McMann’s share of the income be if the income for the year is $15,000? a. $6,000 b. $9,400 c. $12,600 d. $14,000 ANSWER: d RATIONALE: Income Remaining after Interest and Salary Allowances = $15,000 – [10% × ($40,000 + $60,000)] – ($12,000 + $18,000) = $15,000 – $10,000 – $30,000 = ($25,000) McMann's Share in Net Income = Interest on Original Investment + Salary Allowance + 2/5 Share in Remaining Income = (10% × $60,000) + $18,000 – ($25,000 × 2/5) = $6,000 + $18,000 – $10,000 = $14,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 108. Lambert invests $20,000 for a 1/3 interest in a partnership in which the other partners have capital totaling $34,000 before admitting Lambert. After distribution of the bonus, what is Lambert’s capital? a. $18,000 b. $20,000 c. $6,667 d. $11,333 ANSWER: a RATIONALE: Total Owners’ Equity before Admitting Lambert = $34,000 Total Owners’ Equity after Admitting Lambert = $34,000 + $20,000 = $54,000 Lambert's Equity Interest after Admission = 1/3; Lambert's Capital = $54,000 × (1/3) = $18,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 109. Douglas pays Selena $45,000 for her 30% interest in a partnership with net assets of $125,000. Following this transaction, Douglas’s capital account should have a credit balance of a. $37,500 b. $45,000 c. $13,500 d. more than $45,000 ANSWER: a RATIONALE: Douglas's Capital Account Balance = 30% of Total Net Assets = 30% × $125,000 = $37,500 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 110. Nick is admitted to an existing partnership by investing cash. Nick agrees to pay a bonus for his ownership interest because of the past success of the partnership. When Nick’s investment in the partnership is recorded, a. his capital account will be credited for more than the cash he invested b. his capital account will be credited for the amount of cash he invested c. a bonus will be credited for the amount of cash he invested d. a bonus will be distributed to the old partners' capital accounts ANSWER: d DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 111. Bobbi and Stuart are partners. The partnership capital of Bobbi is $40,000 and that of Stuart is $70,000. Bobbi sells his interest in the partnership to John for $50,000. The journal entry to record the admission of John as a new partner would include a credit to a. John’s capital account for $40,000 b. Stuart’s capital account for $10,000 c. John’s capital account for $50,000 d. John’s capital account for $40,000 and a credit to Stuart’s capital account for $10,000 ANSWER: a RATIONALE: The journal entry to record the admission of John as a new partner would include a credit to John's capital account, equal to Bobbi's capital, of $40,000. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 112. When a partner dies, the capital account balances of the remaining partners a. will increase b. will decrease c. will remain the same d. may increase, decrease, or remain the same ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 113. A partner withdraws from a partnership by selling her interest to another person who currently is not associated with the firm. As a result of this transaction, the capital account balance of the other partners in the partnership a. will increase b. will decrease c. will remain the same d. may increase, decrease, or remain the same ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 114. Samuel and Darci are partners. The partnership capital for Samuel is $50,000 and that of Darci is $60,000. Josh is admitted as a new partner by investing $50,000 cash. Josh is given a 20% interest in return for his investment. The amount of the bonus to the old partners is a. $0 b. $18,000 c. $8,000 d. $10,000 ANSWER: b RATIONALE: Total Owners’ Equity before Admitting Josh = $50,000 + $60,000 = $110,000 Total Owners’ Equity after Admitting Josh = Josh's Investment + Existing Partnership Capital Total Owners’ Equity after Admitting Josh = $50,000 + $110,000 = $160,000 Josh's Capital in Partnership = 20% × Partnership's Total Capital = 20% × $160,000 = $32,000 Bonus to Old Partners = Josh's Investment in Partnership – Josh's Capital in Partnership Bonus to Old Partners = $50,000 – $32,000 = $18,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 115. Abby and Bailey are partners who share income in the ratio of 2:1 and have capital balances of $60,000 and $30,000, respectively. With the consent of Bailey, Sandra buys one-half of Abby's interest for $35,000. For what amount will Abby's capital account be debited to record admission of Sandra to the partnership? a. $40,000 b. $15,000 c. $35,000 d. $30,000 ANSWER: d RATIONALE: Abby's Capital = $60,000 Share of Abby's Capital Purchased by Sandra = 1/2 Debit to Abby's Capital Account = $60,000 × (1/2) = $30,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 116. A new partner may be admitted to a partnership by a. inheriting a partnership interest b. contributing assets to the partnership c. purchasing a specific quantity of assets from the partnership d. a written approval under the federal law ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 117. A change in the ownership of a partnership results in the a. consolidating of the partnership b. liquidating of the partnership c. realization of the partnership d. dissolution of the partnership ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 118. When a new partner is admitted to a partnership, there should be a(n) a. revaluation of assets b. realization of assets c. allocation of assets d. return of assets ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 119. When a new partner is admitted to a partnership, there should be a(n) a. increase in the total assets of the partnership b. new capital account added to the ledger for the new partner c. increase in the total owners' equity of the partnership d. debit amount to the partner’s capital account for the cash received by the current partner ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 120. When an additional partner is admitted to a partnership by contribution of assets to the partnership, a. the total assets of the partnership do not change b. no liabilities can be contributed at the same time c. the amount of the cash contribution is the same as the amount of the debit to the new partner's capital account d. the total of the owners' equity accounts increases ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 121. When a new partner is admitted to a partnership, a. a bonus may be attributable to the old partner b. a bonus may only result from more cash being given by the new partner than the value of the assets being purchased c. a bonus agreed upon by the partners is recorded as an asset so long as the amount is within the range set by the SEC d. a bonus is not recorded ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 122. The Calvin-Dogwood Partnership owns inventory that was purchased for $90,000, has a current replacement cost of $85,900, and is priced to sell for $125,000. At what amount should the inventory be recorded in the accounts of the new partnership if Alexis is to be admitted? a. $129,100 b. $85,900 c. $90,000 d. $125,000 ANSWER: b RATIONALE: In the accounts of the new partnership, inventory should be valued at the current replacement cost of $85,900. DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 123. Immediately prior to the admission of Abbott, the Smith-Jones Partnership assets had been adjusted to current market prices and the capital balances of Smith and Jones were $40,000 and $60,000, respectively. If the parties agree that the business is worth $120,000, what is the amount of bonus that should be recognized in the accounts at the admission of Abbott? a. $60,000 b. $80,000 c. $40,000 d. $20,000 ANSWER: d RATIONALE: Amount of Bonus = Agreed Business Value – Total Capital before Abbott's Admission Amount of Bonus = $120,000 – ($40,000 + $60,000) = $120,000 – $100,000 = $20,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 124. Benson and Orton are partners who share income in the ratio of 2:3 and have capital balances of $60,000 and $40,000, respectively. Ramsey is admitted to the partnership and is given a 40% interest by investing $20,000. What is Benson’s capital balance after admitting Ramsey? a. $20,000 b. $24,000 c. $48,800 d. $71,200 ANSWER: c RATIONALE: Total Owners’ Equity after Admitting Ramsey = $60,000 + $40,000 + $20,000 = $120,000 Ramsey's Share in Total Owners’ Equity = 40% × $120,000 = $48,000 Ramsey's Bonus = Ramsey's Share in Equity – Ramsey's Investment = $48,000 – $20,000 = $28,000 Benson's Capital Balance after Ramsey's Admission = Benson's Existing Capital Balance – Share of Bonus to Ramsey = $60,000 – ($28,000 × 40%) = $60,000 – $11,200 = $48,800 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 125. Benson and Orton are partners who share income in the ratio of 2:3 and have capital balances of $60,000 and $40,000, respectively. Ramsey is admitted to the partnership and is given a 10% interest by investing $20,000. What is Orton’s capital balance after admitting Ramsey? a. $44,800 b. $35,200 c. $20,000 d. $16,000 ANSWER: a RATIONALE: Total Owners’ Equity after Admitting Ramsey = $60,000 + $40,000 + $20,000 = $120,000 Ramsey's Share in Total Owners’ Equity = 10% × $120,000 = $12,000 Ramsey's Bonus to Existing Partners = Ramsey's Investment – Ramsey's Share in Owners’ Equity Ramsey's Bonus to Existing Partners = $20,000 – $12,000 = $8,000 Orton's Capital Balance after Ramsey's Admission = Orton's Existing Capital Balance + Share of Bonus from Ramsey = $40,000 + ($8,000 × 3/5) = $40,000 + $4,800 = $44,800 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 126. Benton and Orton are partners who share income in the ratio of 1:3 and have capital balances of $70,000 and $30,000, respectively. Ramsey is admitted to the partnership and is given a 40% interest by investing $20,000. What is Benton’s capital balance after admitting Ramsey? a. $20,000 b. $7,000 c. $70,000 d. $63,000 ANSWER: d RATIONALE: Total Owners’ Equity after Admitting Ramsey = $70,000 + $30,000 + $20,000 = $120,000 Ramsey's Share in Total Owners’ Equity = 40% × $120,000 = $48,000 Ramsey's Bonus = Ramsey's Share in Equity – Ramsey's Investment = $48,000 – $20,000 = $28,000 Benton's Capital Balance after Ramsey's Admission = Benton's Existing Capital Balance – Share of Bonus to Ramsey = $70,000 – ($28,000 × 1/4) = $70,000 – $7,000 = $63,000 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 127. Benson and Orton are partners who share income in the ratio of 1:3 and have capital balances of $70,000 and $30,000, respectively. Ramsey is admitted to the partnership and is given a 40% interest by investing $20,000. What is Orton’s capital balance after admitting Ramsey? a. $20,000 b. $9,000 c. $70,000 d. $63,000 ANSWER: b RATIONALE: Total Owners’ Equity after Admitting Ramsey = $70,000 + $30,000 + $20,000 = $120,000 Ramsey's Share in Total Owners’ Equity = 40% × $120,000 = $48,000 Ramsey's Bonus = Ramsey's Share in Equity – Ramsey's Investment = $48,000 – $20,000 = $28,000 Orton's Capital Balance after Ramsey's Admission = Orton's Existing Capital Balance – Share of Bonus to Ramsey = $30,000 – ($28,000 × 3/4) = $30,000 – $21,000 = $9,000 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 128. Singer and McMann are partners in a business. Singer’s original capital was $40,000 and McMann’s was $60,000. They agree to salaries of $12,000 and $18,000 for Singer and McMann, respectively, and 10% interest on original capital. If they agree to share the remaining profits and losses in a 3:2 ratio, what will Singer’s share of the income be if the income for the year is $15,000? a. $9,000 b. $2,400 c. $1,000 d. $5,600 ANSWER: c RATIONALE: Income Remaining after Interest and Salary Allowances = $15,000 – [10% × ($40,000 + $60,000)] – ($12,000 + $18,000) = $15,000 – $10,000 – $30,000 = ($25,000) Singer's Share in Net Income = Interest on Original Investment + Salary Allowance + 3/5 Share in Remaining Income = (10% × $40,000) + $12,000 – ($25,000 × 3/5) = $4,000 + $12,000 – $15,000 = $1,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 129. Immediately prior to the admission of Allen, the Sanson-Jeremy Partnership assets had been adjusted to current market prices and the capital balances of Sanson and Jeremy were $80,000 and $120,000, respectively. If the parties agree that the business is worth $240,000, what is the amount of bonus that should be recognized in the accounts at the admission of Allen? a. $60,000 b. $80,000 c. $40,000 d. $100,000 ANSWER: c RATIONALE: Amount of Bonus = Agreed Business Value – Total Capital before Allen's Admission = $240,000 – ($80,000 + $120,000) = $240,000 – $200,000 = $40,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 130. The Craig-Doran Partnership owns inventory that was purchased for $85,000, has a current replacement cost of $54,500, and is priced to sell for $98,000. At what amount should the inventory be recorded in the accounts of the new partnership if Alexis is to be admitted? a. $98,000 b. $54,500 c. $85,000 d. $79,167 ANSWER: b RATIONALE: In the accounts of the new partnership, inventory should be valued at the current replacement cost of $54,500. DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 131. Alpha and Beta are partners who share income in the ratio of 1:2 and have capital balances of $40,000 and $70,000, respectively, at the time they decide to terminate the partnership. After all noncash assets are sold and all liabilities are paid, there is a cash balance of $50,000. What amount of loss on realization should be allocated to Alpha? a. $60,000 b. $20,000 c. $30,000 d. $50,000 ANSWER: b RATIONALE: Loss on Realization Allocated to Alpha = 1/3(Total Capital – Cash Available) = 1/3 × ($110,000 – $50,000) = $20,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 132. Teri, Doug, and Brian are partners with capital balances of $20,000, $30,000, and $50,000, respectively. They share income and losses in the ratio of 3:2:1. Revenue accounts for the period total $350,000. Expense accounts for the period total $380,000. The revenue and expense accounts are closed to the capital accounts. Doug withdraws from the partnership. How much cash does he receive upon withdrawal? a. $30,000 b. $20,000 c. $40,000 d. $24,000 ANSWER: b RATIONALE: Cash Received by Doug on Withdrawal = Doug's Capital – Doug's Share of Loss for the Period = $30,000 – (2/6 × $30,000) = $30,000 – $10,000 = $20,000 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 133. A partnership liquidation occurs when a. a new partner is admitted b. a partner dies c. the ownership interest of one partner is sold to a new partner d. the assets are sold, liabilities paid, and business operations terminated ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 134. The balance sheet of Morgan and Rockwell was as follows immediately prior to the partnership's liquidation: cash, $20,000; other assets, $160,000; liabilities, $40,000; Morgan, capital, $60,000; Rockwell, capital, $80,000. The other assets were sold for $139,000. Morgan and Rockwell share profits and losses in a 2:1 ratio. As a final cash distribution from the liquidation, Morgan will receive cash totaling a. $46,000 b. $51,000 c. $60,000 d. $49,500 ANSWER: a RATIONALE: Morgan's Capital Balance = Capital Balance Prior to Partnership's Liquidation – (Loss on Realization of Other Assets) = $60,000 – [2/3 × ($160,000 – $139,000)] = $60,000 – (2/3 × $21,000) = $60,000 – $14,000 = $46,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 135. Harriet, Mickey, and Zack decide to liquidate their partnership. All assets are sold, and the liabilities are paid. Following these transactions, the capital balances and profit and loss percentages are as follows: Harriet, $27,000 and 30%; Mickey, ($12,000) and 40%; Zack, $43,000 and 30%. Mickey is unable to contribute any assets to reduce the deficit. How much cash will Harriet receive as a result of the partnership liquidation? a. $27,000 b. $21,000 c. $23,400 d. $15,000 ANSWER: b RATIONALE: Cash Received by Harriet = Harriet's Capital Balance – Allocation of Mickey's Deficiency = $27,000 – ($12,000 × 1/2) = $27,000 – $6,000 = $21,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 136. The remaining cash of a partnership (after creditors have been paid) upon liquidation is divided among partners according to their a. capital balances b. contribution of assets c. drawing balances d. income sharing ratio ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 137. A gain or loss on realization is divided among partners according to their a. income sharing ratio b. capital balances c. drawing balances d. contribution of assets ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 138. Adriana and Belen are partners who share income in the ratio of 3:2 and have capital balances of $50,000 and $90,000 at the time they decide to terminate the partnership. After all noncash assets are sold and all liabilities are paid, there is a cash balance of $90,000. How much cash should be distributed to Adriana? a. $50,000 b. $20,000 c. $30,000 d. $45,000 ANSWER: b RATIONALE: Cash Distributed to Adriana = Capital – Loss on Liquidation = $50,000 – [($50,000 + $90,000 – $90,000) × 3/5] = $50,000 – $30,000 = $20,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 139. Everett, Miguel, and Ramona are partners, sharing income 1:2:3. After selling all of the assets for cash, dividing losses on realization, and paying liabilities, the balances in the capital accounts are as follows: Everett, $50,000 Cr.; Miguel, $40,000 Dr.; and Ramona, $30,000 Cr. How much cash is available for distribution to the partners? a. $120,000 b. $30,000 c. $40,000 d. $90,000 ANSWER: c RATIONALE: Cash Available for Distribution = Everett's Capital + Ramona's Capital – Miguel's Deficiency = $50,000 + $30,000 – $40,000 = $40,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 140. Everett, Miguel, and Ramona are partners, sharing income 1:2:3. After selling all of the assets for cash, dividing losses on realization, and paying liabilities, the balances in the capital accounts are as follows: Everett, $50,000 Cr.; Miguel, $40,000 Dr.; and Ramona, $30,000 Cr. How much cash should be distributed to Everett assuming that Miguel pays the deficiency? a. $50,000 b. $20,000 c. $30,000 d. $40,000 ANSWER: a RATIONALE: Capital Everett Miguel Ramona Cash Liabilities (1/6) (2/6) (3/6) Balance after $30,000 $40,000 $ 0 $50,000 $(40,000) realization Receipt of deficiency

40,000

Balances Cash distributed

$80,000 $(80,000)

$50,000 $50,000

40,000 $

0 $30,000 $30,000

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 141. Antonio and Barbara are partners who share income in the ratio of 1:2 and have capital balances of $40,000 and $70,000, respectively, at the time they decide to terminate the partnership. After all noncash assets are sold and all liabilities are paid, there is a cash balance of $80,000. What amount of loss on realization should be allocated to Barbara? a. $80,000 b. $10,000 c. $20,000 d. $30,000 ANSWER: c RATIONALE: Amount of Loss on Realization Allocated to Barbara = (Capital Balance – Cash Balance) × 2/3 = ($40,000 + $70,000 – $80,000) × 2/3 = ($30,000) × 2/3 = $20,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 142. Soledad and Winston are partners who share income in the ratio of 1:3 and have capital balances of $100,000 and $140,000, respectively, at the time they decide to terminate the partnership. After all noncash assets are sold and all liabilities are paid, there is a cash balance of $130,000. What amount of loss on realization should be allocated to Soledad? a. $60,000 b. $27,500 c. $92,500 d. $32,500 ANSWER: b RATIONALE: Amount of Loss on Realization Allocated to Soledad = (Total Capital Balance – Cash Balance) × 1/4 = ($100,000 + $140,000 – $130,000) × 1/4 = $110,000 × 1/4 = $27,500 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 143. Soledad and Winston are partners who share income in the ratio of 1:3 and have capital balances of $100,000 and $140,000 at the time they decide to terminate the partnership. After all noncash assets are sold and all liabilities are paid, there is a cash balance of $130,000. What amount of loss on realization should be allocated to Winston? a. $110,000 b. $97,500 c. $42,500 d. $82,500 ANSWER: d RATIONALE: Amount of Loss on Realization Allocated to Winston = (Total Capital Balance – Cash Balance) × 3/4 = ($100,000 + $140,000 – $130,000) × 3/4 = $110,000 × 3/4 = $82,500 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 144. Partners Ken and Macki each have a $40,000 capital balance and share income and losses in the ratio of 3:2. Cash equals $20,000, noncash assets equal $120,000, and liabilities equal $60,000. If the noncash assets are sold for $80,000, Macki’s capital account will a. decrease by $16,000 b. decrease by $24,000 c. increase by $24,000 d. decrease by $40,000 ANSWER: a RATIONALE: Loss on Sale of Other Assets = $120,000 – $80,000 = $40,000 Loss Allocated to Macki = $40,000 × 2/5 = $16,000 Macki's capital will decrease by $16,000. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 145. Partners Ken and Macki each have a $40,000 capital balance and share income and losses in the ratio of 3:2. Cash equals $20,000, noncash assets equal $120,000, and liabilities equal $60,000. If the noncash assets are sold for $50,000, and each partner is personally insolvent, Partner Macki will eventually receive cash of a. $0 b. $10,000 c. $12,000 d. $20,000 ANSWER: b RATIONALE: Cash + Other Assets = Liabilities + Capital Ken Macki (3/5) (2/5) Balance before realization $20,000 $120,000 $60,000 $40,000 $40,000 Add: Sale of noncash assets 50,000 (120,000) (42,000) (28,000) Balance after realization $70,000 $ 0 $60,000 $(2,000) $12,000 Less: Payment of liabilities (60,000) (60,000) Balance after liabilities $10,000 $ 0 $ 0 $(2,000) $12,000 Less: Ken’s deficiency allocated to Macki Cash distributed

$(10,000)

(2,000) $10,000

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 146. Partners Ken and Macki each have a $40,000 capital balance and share income and losses in the ratio of 3:2. Cash equals $20,000, noncash assets equal $120,000, and liabilities equal $60,000. If the noncash assets are sold for $60,000, and both partners agree to make up any capital deficits with personal cash contributions, Partner Macki will eventually receive cash of a. $0 b. $4,000 c. $16,000 d. $24,000 ANSWER: c RATIONALE: Cash + Other Assets = Liabilities + Capital Ken Macki (3/5) (2/5) Balance before realization $20,000 $120,000 $60,000 $40,000 $40,000 Add: Sale of noncash (24,000) 60,000 (120,000) (36,000) assets Balance after realization $80,000 $ 0 $60,000 $4,000 $16,000 Less: Payment of liabilities (60,000) (60,000) Balance after liabilities $20,000 $ 0 $ 0 $4,000 $16,000 Cash distributed (20,000) 4,000 16,000 DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic Use the information below to answer the questions that follow. The capital accounts of Harrison and Marti have balances of $160,000 and $110,000, respectively, on January 1, the beginning of the current fiscal year. On April 10, Harrison invested an additional $20,000. During the year, Harrison and Marti withdrew $96,000 and $78,000, respectively, and net income for the year was $264,000. The articles of partnership make no reference to the division of net income.

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 147. Based on this information, the statement of partners’ equity would show what amount in the capital account for Marti on December 31? a. $216,000 b. $164,000 c. $380,000 d. $52,000 ANSWER: b RATIONALE:

Beginning capital balance Add: Additional capital Less: Withdrawals Add: Division of net income* Closing capital account

Harrison $160,000 20,000 96,000 132,000 $216,000

Marti $110,000 78,000 132,000 $164,000

*If the partnership agreement is silent concerning the division of net income, income and losses are divided equally among partners. Therefore, net income is divided equally between Harrison and Marti. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-05 - 12-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 148. Based on this information, the statement of partners’ equity would show what amount in the capital account for Harrison on December 31? a. $216,000 b. $164,000 c. $380,000 d. $52,000 ANSWER: a RATIONALE:

Harrison $160,000 20,000 96,000 132,000 $216,000

Marti $110,000

Beginning capital balance Add: Additional capital Less: Withdrawals 78,000 Add: Division of net income* 132,000 Closing capital account $164,000 *If the partnership agreement is silent concerning the division of net income, income and losses are divided equally among the partners. Therefore, net income is divided equally between Harrison and Marti.

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-05 - 12-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 149. Based on this information, the statement of partners’ equity would show what amount as total capital for the partnership on December 31? a. $216,000 b. $164,000 c. $380,000 d. $52,000 ANSWER: c RATIONALE:

Beginning capital balance Add: Additional capital Less: Withdrawals Add: Division of net income* Closing capital account

Harrison Marti $160,000 $110,000 20,000 96,000 78,000 132,000 132,000 $216,000 $164,000

The statement of partners’ equity would show total capital for the partnership of $216,000 + $164,000 = $380,000 on December 31. *If the partnership agreement is silent concerning the division of net income, income and losses are divided equally among partners. Therefore, net income is divided equally between Harrison and Marti. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-05 - 12-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic Use the information below to answer the questions that follow. The capital accounts of Hawk and Martin have balances of $160,000 and $140,000, respectively, on January 1, the beginning of the current fiscal year. On April 10, Hawk invested an additional $10,000. During the year, Hawk and Martin withdrew $86,000 and $68,000, respectively, and net income for the year was $258,000. The articles of partnership make no reference to the division of net income.

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 150. Based on this information, the statement of partners’ equity would show what amount in the capital account for Martin on December 31? a. $173,000 b. $211,000 c. $201,000 d. $232,000 ANSWER: c RATIONALE:

Hawk $160,000 10,000 86,000 129,000 $213,000

Martin $140,000

Beginning capital balance Add: Additional capital Less: Withdrawals 68,000 Add: Division of net income* 129,000 Closing capital account $201,000 *If the partnership agreement is silent concerning the division of net income, income and losses are divided equally among partners. Therefore, net income is divided equally between Hawk and Martin. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-05 - 12-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 151. Based on this information, the statement of partners’ equity would show what amount in the capital account for Hawk on December 31? a. $211,600 b. $213,000 c. $201,000 d. $203,000 ANSWER: b RATIONALE:

Hawk $160,000 10,000 86,000 129,000 $213,000

Martin $140,000

Page 62

Chapter 12 - Accounting for Partnerships and Limited Liability Companies DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-05 - 12-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 152. Based on this information, the statement of partners’ equity would show what amount as total capital for the partnership on December 31? a. $384,600 b. $412,600 c. $404,000 d. $414,000 ANSWER: d RATIONALE:

Beginning capital balance Add: Additional capital Less: Withdrawals Add: Division of net income* Closing capital account

Hawk Martin $160,000 $140,000 10,000 86,000 68,000 129,000 129,000 $213,000 $201,000

The statement of partners’ equity would show total capital for the partnership of $213,000 + $201,000 = $414,000 on December 31. *If the partnership agreement is silent concerning the division of net income, income and losses are divided equally among partners. Therefore, net income is divided equally between Hawk and Martin. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-05 - 12-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies Matching Match each statement to the appropriate term (a-h): a. Deficiency b. Realization c. Proprietorship d. Partnership e. Mutual agency f. Liquidation g. Income-sharing ratio h. Statement of partnership equity DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCT.WARD.18.12-04 - 12-04 ACCT.WARD.18.12-05 - 12-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 153. Where changes in partner capital accounts for a period of time are reported ANSWER: h 154. The share of loss on realization is greater than the balance in partner capital ANSWER: a 155. Each partner may act on behalf of the entire partnership so that the liabilities created by one partner become the liabilities of all partners ANSWER: e 156. An association of two or more persons to own and manage a business for profit ANSWER: d 157. Business owned by a single individual ANSWER: c 158. A step during liquidation when partnership assets are sold ANSWER: b 159. Used to divide the excess of allowances over loss when net losses occur ANSWER: g 160. The winding-up process of a partnership ANSWER: f

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies Match each statement to the appropriate term (a–h). a. Partnership b. Partnership agreement c. Distribution of remaining cash to partners d. Mutual agency e. Equally f. Death of a partner g. Liquidation h. Unlimited liability DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 161. When a partnership cannot pay its debts with business assets, the partners must use personal assets to meet the debt ANSWER: h 162. Agreement that is the contract between partners ANSWER: b 163. A voluntary association of two or more persons who co-own a business for profit ANSWER: a 164. Every partner can bind the business to a contract within the scope of the partnership’s regular business operations ANSWER: d 165. The process of going out of business by selling the entity’s assets and paying its liabilities ANSWER: g 166. Without an agreement, the law will stipulate this method of sharing profits and losses ANSWER: e 167. The final step in the liquidation of a partnership ANSWER: c 168. Causes the closing of accounts and settling with a partner's estate ANSWER: f

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies Subjective Short Answer 169. What is a partnership? List three advantages and three disadvantages of the partnership form of business organization. ANSWER: A partnership is a voluntary association of two or more persons who co-own a business for profit. Advantages: Unlike a corporation, a partnership is easy to form, involves no legal procedures, and is less expensive to form. A partnership brings together capital and expertise of two or more individuals. Finally, partnerships pay no income taxes as corporations do. Disadvantages: Some disadvantages of a partnership are mutual agency, which allows each partner to sign contracts in the name of the partnership, and unlimited liability, which makes each partner individually liable for all the debts of the partnership. Additionally, the limited life of a partnership requires a new agreement whenever there is a change to the existing partnership. DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.12-01 - 12-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 170. Jesse and Tim form a partnership by combining the assets of their separate businesses. Jesse contributes accounts receivable with a face amount of $50,000 and equipment with a cost of $180,000 and accumulated depreciation of $100,000. The partners agree that the equipment is to be valued at $58,000, that $3,500 of the accounts receivable are completely worthless and are not to be accepted by the partnership, and that $2,000 is a reasonable allowance for the uncollectibility of the remaining accounts receivable. Tim contributes cash of $21,000 and merchandise inventory of $44,500. The partners agree that the merchandise inventory is to be valued at $48,000. Journalize the entries to record in the partnership accounts (a) Jesse’s investment and (b) Tim’s investment. ANSWER: (a) Accounts Receivable 46,500 Equipment 58,000 Allowance for Doubtful Accounts 2,000 Jesse, Capital 102,500 (b) Cash 21,000 Merchandise Inventory 48,000 Tim, Capital DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

69,000

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 171. Barton and Fallows form a partnership by combining the assets of their separate businesses. Barton contributes accounts receivable with a face amount of $50,000 and equipment with a cost of $190,000 and accumulated depreciation of $100,000. The partners agree that the equipment is to be valued at $85,000, that $3,500 of the accounts receivable are completely worthless and are not to be accepted by the partnership, and that $1,500 is a reasonable allowance for the uncollectibility of the remaining accounts receivable. Fallows contributes cash of $28,500 and merchandise inventory of $55,500. The partners agree that the merchandise inventory is to be valued at $60,000. Journalize the entries to record in the partnership accounts (a) Barton’s investment and (b) Fallows’s investment. ANSWER: (a) Accounts Receivable 46,500 Equipment 85,000 Allowance for Doubtful Accounts 1,500 Barton, Capital 130,000 (b) Cash Merchandise Inventory Fallows, Capital DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

28,500 60,000 88,500

172. Trevor Smith contributed equipment, inventory, and $54,000 cash to a partnership. The equipment had a book value of $30,000 and a market value of $36,000. The inventory had a book value of $60,000, but only had a market value of $20,000, due to obsolescence. The partnership also assumed a $17,000 note payable owed by Smith that was used originally to purchase the equipment. Provide the journal entry for Smith’s contribution to the partnership. ANSWER: Cash 54,000 Inventory 20,000 Equipment 36,000 Notes Payable Trevor Smith, Capital DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

17,000 93,000

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 173. Emmett and Sierra formed a partnership dividing income as follows: 1. Annual salary allowance to Emmett of $48,000 2. Interest of 8% on each partner’s capital balance on January 1 3. Any remaining net income divided equally Emmett and Sierra had $25,000 and $140,000, respectively, in their January 1 capital balances. Net income for the year was $200,000. How much net income should be distributed to Emmett? ANSWER: Salary Interest (8% × $25,000) Remaining income Total distribution to Emerson

$ 48,000 2,000 69,400* $119,400

*($200,000 – $48,000 – $2,000 – $11,200) × 50% = $69,400 DIFFICULTY: Moderate Bloom's: Challenging LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 174. Emerson and Dakota formed a partnership dividing income as follows: 1. Annual salary allowance to Emerson of $58,000 2. Interest of 8% on each partner’s capital balance on January 1 3. Any remaining net income divided equally Emerson and Dakota had $25,000 and $140,000, respectively, in their January 1 capital balances. Net income for the year was $220,000. How much net income should be distributed to Dakota? ANSWER: Salary Interest (8% × $140,000) Remaining income Total distribution to Emerson

$ 0 11,200 74,400* $85,600

*($220,000 – $58,000 – $2,000 – $11,200) × 50% = $74,400 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 175. Gavin invested $45,000 in the Jason and Kelly Partnership for ownership equity of $45,000. Prior to the investment, land was revalued to a market value of $320,000 from a book value of $200,000. Jason and Kelly share net income in a 1:2 ratio. (a) Provide the journal entry for the revaluation of land. (b) Provide the journal entry to admit Gavin. ANSWER: (a) Land 120,000 Jason, Capital 40,000 Kelly, Capital 80,000 (b) Cash Gavin, Capital DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

45,000 45,000

176. The capital accounts of Heidi and Moss have balances of $90,000 and $65,000, respectively, on January 1, the beginning of the current fiscal year. On April 10, Heidi invested an additional $8,000. During the year, Heidi and Moss withdrew $40,000 and $32,000, respectively. Revenues were $540,000 and expenses were $420,000 for the year. The articles of partnership make no reference to the division of net income. Required Prepare a statement of partners’ equity for the (1) partnership of Heidi and Moss. (2)

Journalize the entries to: (a)

Close the revenue and expenses account.

(b)

Close the drawing accounts.

ANSWER:

(1) Heidi and Moss Statement of Partners’ Equity For the Year Ended December 31 Heidi Moss Total Capital, January 1 $90,000 $65,000 $155,000 Additional investment during the year 8,000 0 8,000 $98,000 $65,000 $163,000 Net income for the year 60,000 60,000 120,000 $158,000 $125,000 $283,000 Withdrawals during the year 40,000 32,000 72,000 Capital, December 31 $118,000 $93,000 $211,000

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies (2) (a) Revenues Heidi, Capital Moss, Capital Heidi, Capital Moss, Capital Expenses

540,000 270,000 270,000 240,000 240,000 420,000

Heidi, Capital 40,000 Moss, Capital 32,000 Heidi, Drawing 40,000 Moss, Drawing 32,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 177. The partnership of Miner Company began operations on January 1, with contributions as follows: Waverley Marquez

$35,000 40,000

The following additional partner transactions took place during the year: (1)

In early January, Houston is admitted to the partnership by contributing $25,000 cash for a 25% interest.

(2)

Net income of $160,000 was earned. In addition, Waverley received a salary allowance of $30,000 for the year. The three partners agree to an income-sharing ratio equal to their capital balances after admitting Houston.

(3)

The partners’ withdrawals are equal to half of their respective distributions of income after salary (i.e., half their respective portions of the $130,000).

Required Prepare a statement of partnership equity for the year ended December 31.

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies ANSWER: Miner Company Statement of Partnership Equity For the Year Ended December 31 Total Waverley, Marquez, Houston, Partnership Capital Capital Capital Capital Partnership capital, January 1 Admission of Houston

$35,000 $40,000

$ 75,000

0 30,000 45,500

Salary allowance Remaining income Less: Partner withdrawals

0 $25,000 0 0 52,000 32,500

25,000 30,000 130,000

(22,750) (26,000) (16,250)

(65,000)

Partnership capital, December 31

$87,750 $66,000 $41,250

$195,000

Admission of Houston: Equity of initial partners prior to admission Contribution by Houston Total Houston’s equity interest after admission Houston’s equity after admission Contribution by Houston No bonus

$ 75,000 25,000 $100,000 × 25% $ 25,000 25,000 $ 0

Net income distribution: The income-sharing ratio is equal to the proportion of the capital balances after admitting Houston according to the partnership agreement: Waverley: $35,000/$100,000 = 35% Marquez: $40,000/$100,000 = 40% Houston: $25,000/$100,000 = 25% These ratios can be multiplied by the $130,000 remaining income ($160,000 – $30,000 salary allowance to Waverley) to distribute the earnings to the respective partner capital accounts. Withdrawals: The remaining income is distributed to the three partners. Waverley need not take the salary allowance as a withdrawal but may allow it to accumulate in the member equity account. DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCT.WARD.18.12-05 - 12-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 178. Holly and Luke formed a partnership, investing $240,000 and $80,000, respectively. Determine their participation in the year’s net income of $200,000 under each of the following independent assumptions: (a) (b) (c)

No agreement concerning division of net income Divided in the ratio of original capital investment Interest at the rate of 15% allowed on original investments and the remainder divided in the ratio of 2:3 (d) Salary allowances of $50,000 and $70,000, respectively, and the balance divided equally (e) Allowance of interest at the rate of 15% on original investments, salary allowances of $50,000 and $70,000, respectively, and the remainder divided equally ANSWER: Holly Luke $100,000 $100,000 (a) Net income (1:1) $150,000 $50,000 (b) Net income (3:1)

Total $200,000 $200,000

$36,000 + $60,800 = $96,800

$12,000 + $48,000 + $91,200 = $152,000 = $103,200 $200,000

(d) Salary allowance + Remaining income (1:1) = Net income

$50,000 + $40,000 = $90,000

$70,000 + $120,000 + $40,000 = $80,000 = $110,000 $200,000

(e) Interest allowance + Salary allowance + Remaining income (1:1) = Net income

$36,000 + $50,000 + $16,000 = $102,000

$12,000 + $48,000 + $70,000 + $120,000 + $16,000 = $32,000 = $98,000 $200,000

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 179. Holly and Luke formed a partnership, investing $240,000 and $80,000, respectively. Determine their participation in the year’s net income of $380,000 under each of the following independent assumptions: (a) (b) (c) (d) (e)

No agreement concerning division of net income Divided in the ratio of original capital investment Interest at the rate of 15% allowed on original investments and the remainder divided in the ratio of 2:3 Salary allowances of $50,000 and $70,000, respectively, and the balance divided equally Allowance of interest at the rate of 15% on original investments, salary allowances of $50,000 and $70,000, respectively, and the remainder divided equally

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies ANSWER: (a) Net income (1:1)

Holly $190,000

Luke $190,000

Total $380,000

(b) Net income (3:1)

$285,000

$95,000

$380,000

(c) Interest allowance + Remaining income (2:3) = Net income (d) Salary allowance + Remaining income (1:1) = Net income (e) Interest allowance + Salary allowance + Remaining income (1:1) = Net income

$36,000 + $12,000 + $48,000 + $132,800 = $199,200 = $332,000 = $168,800 $211,200 $380,000 $50,000 + $70,000 + $120,000 + $130,000 = $130,000 = $260,000 = $180,000 $200,000 $380,000 $36,000 + $12,000 + $48,000 + $50,000 + $70,000 + $120,000 + $106,000 = $106,000 = $212,000 = $192,000 $188,000 $380,000

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 180. Gleason invested $90,000 in the James and Kirk Partnership for ownership equity of $90,000. Prior to the investment, land was revalued to a market value of $425,000 from a book value of $200,000. James and Kirk share net income in a 1:2 ratio. (a) Provide the journal entry for the revaluation of land. (b) Provide the journal entry to admit Gleason. ANSWER: (a) Land James, Capital Kirk, Capital

225,000

(b) Cash 90,000 Gleason, Capital DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

75,000 150,000 90,000

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 181. Gentry, sole proprietor of a hardware business, decides to form a partnership with Noel. Gentry’s accounts are as follows: Cash Accounts Receivable (net) Inventory Land Building (net) Accounts Payable Mortgage Payable

Book Value $ 25,000 52,000 112,000 40,000 300,000 25,000 145,000

Market Value $ 25,000 45,000 125,000 100,000 340,000 25,000 145,000

Noel agrees to contribute $80,000 for a 20% interest. Journalize the entries to record (a) Gentry’s investment and (b) Noel’s investment. ANSWER:

(a) Cash Accounts Receivable Inventory Land Building Accounts Payable Mortgage Payable Gentry, Capital

25,000 45,000 125,000 100,000 340,000 25,000 145,000 465,000

(b) Cash 80,000 Gentry, Capital 29,000 Noel, Capital DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

109,000

182. Brad Simmons, sole proprietor of a hardware business, decides to form a partnership with Rich Winter. Brad’s accounts are as follows: Cash Accounts Receivable (net) Inventory Land Building (net) Accounts Payable Mortgage Payable

Book Value $ 30,000 55,000 112,000 40,000 500,000 25,000 125,000

Market Value $ 30,000 45,000 135,000 100,000 540,000 25,000 125,000

Rich agrees to contribute $170,000 for a 20% interest. Journalize the entries to record (a) Brad’s investment and (b) Rich’s investment.

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies ANSWER:

(a) Cash Accounts Receivable Inventory Land Building Accounts Payable Mortgage Payable Brad Simmons, Capital

30,000 45,000 135,000 100,000 540,000 25,000 125,000 700,000

(b) Cash 170,000 Brad Simmons, Capital 4,000 Rich Winter, Capital DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

174,000

183. Rodgers and Winter had capital balances of $60,000 and $90,000, respectively, at the beginning of the current fiscal year. The articles of partnership provide for salary allowances of $25,000 and $30,000, respectively; an allowance of interest at 12% on the capital balances at the beginning of the year; and the remaining net income divided equally. Net income for the current year was $110,000. (a) Present the Division of net income section of the income statement for the current year. (b) Assuming that the net income had been $65,000 instead of $110,000, present the Division of net income section of the income statement for the current year. ANSWER: (a) Net income $110,000 Division of net income: Salary allowance Interest allowance Remaining income Net income (b) Net income

Rodgers

Winter

Total

$25,000 7,200 18,500 $50,700

$30,000 10,800 18,500 $59,300

$ 55,000 18,000 37,000 $110,000

Division of net income: Salary allowance $25,000 $30,000 Interest allowance 7,200 10,800 Total $32,200 $40,800 Excess of allowances (4,000) (4,000) over net income Net income $28,200 $36,800 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

$65,000 $55,000 18,000 $73,000 (8,000) $65,000

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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 184. Sharp and Townson had capital balances of $60,000 and $120,000, respectively, on January 1 of the current year. On May 8, Sharp invested an additional $10,000 in the partnership. During the year, Sharp and Townson withdrew $25,000 and $45,000, respectively. The revenue account at the end of the year had a balance of $600,000, and the expense account had a balance of $510,000. Sharp and Townson have agreed to split net income on a 2:1 basis. (a) Prepare the statement of partnership equity for the current year. (b) Journalize the entries to close the revenue and expense accounts and the drawing accounts. ANSWER:

(b) Revenue Sharp, Capital Townson, Capital

600,000 400,000 200,000

Sharp, Capital Townson, Capital Townson, Capital

340,000 170,000

Sharp, Capital Townson, Capital Sharp, Drawing Townson, Drawing (a)

25,000 45,000

510,000

Sharp and Townson Statement of Partnership Equity For the Year Ended December 31 Sharp Townson Capital, January 1 $ 60,000 $120,000 Additional investment 10,000 0 during the year $ 70,000 $120,000 Net income for the 60,000 30,000 year $130,000 $150,000 Withdrawals during 25,000 45,000 the year Capital, December 31 $105,000 $105,000

25,000 45,000

Total $180,000 10,000 $190,000 90,000 $280,000 70,000 $210,000

DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCT.WARD.18.12-05 - 12-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 76

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 185. Reardon and Reese had capital balances of $140,000 and $160,000, respectively, at the beginning of the current fiscal year. The partnership agreement provides for salary allowances of $25,000 and $35,000, respectively; an allowance of interest at 12% on the capital balances at the beginning of the year; and the remaining net income divided equally. Net income for the current year was $120,000. (a) Present the Division of net income statement for the current year. (b) Assuming that the net income had been $76,000 instead of $120,000, present the Division of net income section of the income statement for the current year. ANSWER:

(a) Net income Division of net income: Salary allowance Interest allowance Remaining income Net income

$120,000 Reardon

Reese

Total

$25,000 16,800 12,000 $53,800

$35,000 19,200 12,000 $66,200

$ 60,000 36,000 24,000 $120,000

(b) Net income Division of net income: Salary allowance $25,000 $35,000 Interest allowance 16,800 19,200 Total $41,800 $54,200 Excess of allowances over net (10,000) (10,000) income Net income $31,800 $44,200 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

$76,000

$60,000 36,000 $96,000 (20,000) $76,000

Page 77

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 186. Jackson and Campbell have capital balances of $100,000 and $300,000 respectively. Jackson devotes full time and Campbell one-half time to the business. Determine the division of $150,000 of net income under each of the following assumptions: (a) No agreement as to division of net income (b) In ratio of capital balances (c) In ratio of time devoted to business ANSWER: Jackson Campbell Computations (a) $75,000 $75,000 Jackson: 50% × $150,000 Campbell: 50% × $150,000 (b) $37,500 $112,500 Jackson: 1/4 × $150,000 Campbell: 3/4 × $150,000 (c) $100,000 $50,000 Jackson: 2/3 × $150,000 Campbell: 1/3 × $150,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 187. Jackson and Campbell have capital balances of $100,000 and $300,000 respectively. Jackson devotes full time and Campbell one-half time to the business. Determine the division of $120,000 of net income under each of the following assumptions: (a) No agreement as to division of net income (b) In ratio of capital balances (c) In ratio of time devoted to business (d) Interest of 10% on capital balances and the remainder divided equally (e) Interest of 10% on capital balances, salaries of $40,000 to Jackson and $20,000 to Campbell, and the remainder divided equally ANSWER: Jackson Campbell Computations (a) $60,000 $60,000 Jackson: 50% × $120,000 Campbell: 50% × $120,000 (b) $30,000 $90,000 Jackson: 1/4 × $120,000 Campbell: 3/4 × $120,000 (c) $80,000 $40,000 Jackson: 2/3 × $120,000 Campbell: 1/3 × $120,000 (d) $50,000 $70,000 Jackson: [(10% × $100,000) + (1/2 × $80,000)] Campbell: [(10% × $300,000) + (1/2 × $80,000)] (e) $60,000 $60,000 Jackson: [(10% × $100,000) + $40,000 + (1/2 × $20,000] Campbell: [(10% × $300,000) + $20,000 + (1/2 × $20,000] DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 78

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 188. Derek and Hailey, partners sharing net income in the ratio of 2:1, admit Ben to the partnership in accordance with the following agreement: (1) (2)

(3)

Merchandise inventory recorded in the partnership accounts at $62,500 is to be revalued at its current replacement price of $68,500. Ben invested $48,000 in cash for a 30% interest in the partnership, which has total net assets (assets minus liabilities) of $130,000 that includes the inventory revaluation and the cash invested by Ben. The income-sharing ratio of Derek, Hailey, and Ben is to be 2:1:1.

Required (a) Journalize the entries to record the revaluation of merchandise inventory and the admission of Ben to the partnership. (b) A few years later, the capital balances of Derek, Hailey, and Ben were $150,000, $90,000, and $55,000, respectively. At this time, Kacy is admitted to the partnership by the purchase of one-half of Derek’s interest for $80,000. Journalize the entry to record the admission of Kacy to the partnership. ANSWER:

(a) Merchandise Inventory Derek, Capital Hailey, Capital

6,000

Cash Derek, Capital Hailey, Capital Ben, Capital

48,000

4,000 2,000

(b) Derek, Capital 75,000 Kacy, Capital DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-02 - 12-02 ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

6,000 3,000 39,000

75,000

Page 79

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 189. Malcolm has a capital balance of $90,000 after adjusting to fair market value. Celeste contributes $45,000 to receive a 25% interest in a new partnership with Malcolm. Determine the amount and recipient of the partner bonus. ANSWER:

Equity of Malcom Celeste’s contribution Total equity after admitting Celeste Celeste’s equity interest Celeste’s equity after admission

Celeste’s contribution Celeste’s equity after admission Bonus paid to Malcolm DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

$ 90,000 45,000 $135,000 × 25% $ 33,750 $45,000 33,750 $11,250

190. After the tangible assets have been adjusted to current market prices, the capital accounts of Harper and Kahlil have balances of $60,000 and $90,000, respectively. Fay is to be admitted to the partnership, contributing $45,000 cash, for which she is to receive an ownership equity of $60,000. All partners share equally in income. Required (a) Journalize the entry to record the admission of Fay, who is to receive a bonus of $15,000. (b) What are the capital balances of each partner after the admission of the new partner? ANSWER:

(a)

Cash Harper, Capital Kahlil, Capital Fay, Capital

45,000 7,500 7,500 60,000

(b)

Harper $52,500 Kahlil 82,500 Fay 60,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 80

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 191. The capital accounts of Hope and Indiana have balances of $115,000 and $95,000, respectively. Clint and Casey are to be admitted to the partnership. Clint buys one-fifth of Hope’s interest for $30,000 and one-fourth of Indiana’s interest for $20,000. Casey contributes $45,000 cash to the partnership, for which he is to receive an ownership equity of $45,000. Required (1) Journalize the entries to record the admission of (a) Clint and (b) Casey. (2) What are the capital balances of each partner after the admission of the new partners? ANSWER:

(1)(a)

(b)

Hope, Capital (20% × $115,000) Indiana, Capital (25% × $95,000) Clint, Capital

23,000 23,750

Cash

45,000

46,750

Casey, Capital (2)

Hope Indiana Clint Casey

45,000 $92,000 71,250 46,750 45,000

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 192. Benson contributed land, inventory, and $22,000 cash to a partnership. The land had a book value of $65,000 and a market value of $111,000. The inventory had a book value of $60,000 and a market value of $58,000. The partnership also assumed a $52,000 note payable owned by Benson that was used originally to purchase the land. Required Provide the journal entry for Benson’s contribution to the partnership. ANSWER:

Cash 22,000 Inventory 58,000 Land 111,000 Notes Payable Benson, Capital DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

52,000 139,000

Page 81

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 193. Kala and Leah, partners in Best Designs, have capital balances of $40,000 and $60,000, respectively. Adam joins the partnership by buying one-half of Kala’s interest for $30,000. In addition, because of Adam’s outstanding sales skills, the partners agree to increase his interest to 40% if he invests another $10,000. The income-sharing ratio of Kala, Leah, and Adam is 4:3:1. (a)

Journalize the entries to record the admission of Adam to the partnership. Immediately after Adam’s admission to the partnership, Leah sells one-fourth of her (b) interest to Denton for $35,000. Journalize the entry to record this transaction. ANSWER: (a) Kala, Capital 20,000 Adam, Capital

20,000

Cash Kala, Capital Leah, Capital Adam, Capital

24,000

10,000 8,000 6,000

(b) Leah, Capital 13,500 Denton, Capital DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

13,500

194. Amazon invested $128,000 in the Jungle and River Partnership for ownership equity of $128,000. Prior to the investment, equipment was revalued to a market value of $90,000 from a book value of $72,000. Jungle and River share net income in a 2:1 ratio. Required (a) Provide the journal entry for the revaluation of equipment. (b) Provide the journal entry to admit Amazon. ANSWER: (a) Equipment Jungle, Capital River, Capital

18,000

128,000 Amazon, Capital DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

12,000 6,000

(b) Cash

128,000

Page 82

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 195. Watson purchased one-half of Dalton’s interest in the Patton and Dalton Partnership for $45,000. Prior to the investment, land was revalued to a market value of $135,000 from a book value of $93,000. Patton and Dalton share net income equally. Dalton had a capital balance of $35,000 prior to these transactions. Required (a) Provide the journal entry for the revaluation of land. (b) Provide the journal entry to admit Watson. ANSWER: (a) Land Patton, Capital Dalton, Capital (b) Dalton, Capital Watson, Capital

42,000 21,000 21,000 28,000 28,000*

*($35,000 + $21,000) × 50% DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 196. Wonder purchased one-half of Darwin’s interest in the Todd and Darwin Partnership for $50,000. Prior to the investment, land was revalued to a market value of $175,000 from a book value of $100,000. Todd and Darwin share net income equally. Darwin had a capital balance of $40,000 prior to these transactions. Required (a) Provide the journal entry for the revaluation of land. (b) Provide the journal entry to admit Wonder. ANSWER: (a) Land Todd, Capital Darwin, Capital (b) Darwin, Capital Wonder, Capital

75,000 37,500 37,500 38,750 38,750*

*($40,000 + $37,500) × 50% DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 83

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 197. S. Stephens and J. Perez are partners in Space Designs. Stephens and Perez share income equally. D. Fredericks will be admitted to the partnership. Prior to the admission, equipment was revalued downward by $8,000. The capital balances of each partner are $100,000 and $139,000, respectively, prior to the revaluation. Required (1) Provide the journal entry for the asset revaluation. (2)

Provide the journal entry for Fredericks’ admission under the following independent situations: (a) Fredericks purchased a 20% interest for $50,000. (b) Fredericks purchased a 30% interest for $125,000.

ANSWER:

(1)

(2)

(a)

S. Stephens, Capital J. Perez, Capital Equipment

4,000 4,000

Cash S. Stephens, Capital J. Perez, Capital D. Fredericks, Capital

50,000 3,100 3,100

8,000

56,200

Supporting calculations for the bonus: Equity of S. Stephens Equity of J. Perez Contribution by D. Fredericks Total equity after admitting D. Fredericks D. Fredericks’ equity interest after admission D. Fredericks’ equity after admission Contribution by D. Fredericks Bonus paid to D. Fredericks

$ 96,000 135,000 50,000 $281,000 × 20% $ 56,200 50,000 $ 6,200

The bonus to Fredericks is debited equally between Stephens' and Perez’s capital accounts. (b)

Cash S. Stephens, Capital J. Perez, Capital D. Fredericks, Capital

125,000 9,100 9,100 106,800

Supporting calculations for the bonus: Equity of S. Stephens Equity of J. Perez Contribution by D. Fredericks Total equity after admitting D. Fredericks D. Fredericks' equity interest after admission D. Fredericks' equity after admission Contribution by D. Fredericks D. Fredericks' equity after admission Bonus paid to S. Stephens and J. Perez

$ 96,000 135,000 125,000 $356,000 ×

30%

$106,800 $125,000 106,800 $ 18,200

Page 84

Chapter 12 - Accounting for Partnerships and Limited Liability Companies The bonus to Stephens and Perez is credited equally between Stephens’ and Perez’s capital accounts. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-03 - 12-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 198. Prior to liquidating their partnership, Samuel and Brian had capital accounts of $60,000 and $240,000, respectively. The partnership assets were sold for $120,000. The partnership had no liabilities. Samuel and Brian share income and losses equally. Required (a) Determine the amount of Samuel’s deficiency. (b) Determine the amount distributed to Brian, assuming Samuel is unable to satisfy the deficiency. ANSWER: (a) Samuel’s equity prior to liquidation $ 60,000 Realization of asset sale $ 120,000 Book value of assets ($60,000 + $240,000) 300,000 Loss on liquidation $(180,000) Samuel’s share of loss (50% × $180,000) (90,000) Samuel’s deficiency $ (30,000) $120,000 = $240,000 – $90,000 share of loss – $30,000 Samuel’s deficiency, also equals the amount of cash realized from sale of the partnership assets. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic (b)

199. Prior to liquidating their partnership, Craig and Jenny had capital accounts of $70,000 and $110,000, respectively. The partnership assets were sold for $285,000. The partnership had $25,000 of liabilities. Craig and Jenny share income and losses equally. Determine the amount received by Jenny as a final distribution from liquidation of the partnership. ANSWER: Jenny’s equity prior to liquidation $110,000 Realization of asset sales Book value of assets ($180,000 + $25,000) Gain on liquidation Jenny’s share of gain (50% × $80,000) Jenny’s cash distribution

$285,000 205,000 $80,000 40,000 $150,000

Page 85

Chapter 12 - Accounting for Partnerships and Limited Liability Companies DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 200. Prior to liquidating their partnership, Porter and Robert had capital account balances of $160,000 and $100,000, respectively. Prior to liquidation, the partnership had no cash assets other than what was realized from the sale of the partnership assets. These partnership assets were sold for $250,000. The partnership had $10,000 of liabilities. Porter and Robert share income and losses equally. Required Determine the amount received by Porter as a final distribution from liquidation of the partnership. ANSWER: Porter’s equity prior to liquidation Realization of asset sales Book value of assets ($160,000 + $100,000 + $10,000) Loss on liquidation Porter’s share of loss (50% × $20,000) Porter’s cash distribution DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

$160,000 $250,000 270,000 $(20,000) $(10,000) $150,000

201. Immediately prior to the process of liquidation, partners Micco, Niccum, and Orwell have capital balances of $70,000, $20,000, and $30,000, respectively. There is a cash balance of $10,000, noncash assets total $160,000, and liabilities total $50,000. The partners share net income and losses in the ratio of 2:2:1. Journalize the entries to record the liquidation outlined below, using Assets as the account title for the noncash assets and Liabilities as the account title for all creditors' claims. (a) Sold the noncash assets for $80,000 in cash. (b) Divided the loss on realization. (c) Paid the liabilities. (d) Received cash from the partner with the deficiency. (e) Distributed the cash to the partners. ANSWER: (a) Cash 80,000 Loss on Realization 80,000 Assets 160,000 (b) Micco, Capital Niccum, Capital Orwell, Capital Loss on Realization

32,000 32,000 16,000

50,000

80,000

50,000

Page 86

Chapter 12 - Accounting for Partnerships and Limited Liability Companies (d) Cash Niccum, Capital

12,000 12,000

(e) Micco, Capital 38,000 Orwell, Capital 14,000 Cash DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

52,000

202. Hamir, Darci, and Pete are partners sharing income in the ratio of 3:2:1. After the firm’s loss from liquidation is distributed, the capital account balances were Hamir, $45,000 Dr.; Darci, $90,000 Cr., and Pete, $64,000 Cr. If Hamir is personally bankrupt and unable to pay any of the $45,000, what will be the amount of cash received by Darci and Pete upon liquidation? Show your work. ANSWER: Hamir Darci Pete Capital balances after realization $(45,000) $90,000 $64,000 1 2 Distribution of partner deficiency 45,000 (30,000) (15,000) Capital balances after deficiency distribution

0 $60,000 $49,000

$45,000 × 2/3 $45,000 × 1/3 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 2

Page 87

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 203. After discontinuing the ordinary business operations and closing the accounts on May 7, the ledger of the partnership of Anna, Brian, and Cole indicated the following: Cash Noncash Assets Liabilities Anna, Capital Brian, Capital Cole, Capital

7,500 105,000

$112,500

$ 27,500 45,000 15,000 25,000 $112,500

The partners share net income and losses in the ratio of 3:2:1. Between May 7 and May 30, the noncash assets were sold for $150,000, the liabilities were paid, and the remaining cash was distributed to the partners. (a) (b)

Prepare a statement of partnership liquidation. Assume the same facts as in (a), except that the noncash assets were sold for $45,000 and any partner with a capital deficiency pays the amount of the deficiency to the partnership. Prepare a statement of partnership liquidation. ANSWER: (a) Statement of Partnership Liquidation For Period May 7–30 Capital Noncash Anna Brian Cole Cash + Assets = Liabilities + (3/6) + (2/6) + (1/6) Balances before realization $ 7,500 $105,000 $27,500 $45,000 $15,000 $25,000 Sale of assets and division of gain +150,000 –105,000 + 22,500 +15,000 + 7,500 Balances after realization $157,500 $ 0 $27,500 $67,500 $30,000 $32,500 Payment of liabilities –27,500 – 27,500 Balances after payment of liabilities $130,000 $ 0 $ 0 $67,500 $30,000 $32,500 Distribution of cash to partners –130,000 – 67,500 –30,000 –32,500 Final balances $ 0 $ 0 $ 0 $ 0 $ 0 $ 0

Page 88

Chapter 12 - Accounting for Partnerships and Limited Liability Companies (b) Anna, Brian, and Cole Statement of Partnership Liquidation For Period May 7–30 Capital Noncash Anna Brian Cash + Assets = Liabilities + (3/6) + (2/6) + Balances before realization $ 7,500 $105,000 $27,500 Sale of assets and division of loss +45,000 –105,000 Balances after realization $52,500 $ 0 $27,500 Payment of liabilities –27,500 – 27,500 Balances after payment of liabilities $25,000 $ 0 $ 0 Receipt of deficiency + 5,000 Balances $30,000 $ 0 $ 0 Distribution of cash to partners –30,000 Final balances $ 0 $ 0 $ 0 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-04 - 12-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Cole (1/6)

$45,000

$15,000

$25,000

–30,000

–20,000

–10,000

$15,000

$(5,000)

$15,000

$(5,000)

$15,000

+ 5,000 $ 0

$15,000

–15,000 $

Page 89

Chapter 12 - Accounting for Partnerships and Limited Liability Companies 204. Top Dog, LLC provides repair services for oil rigs. The firm has five members in the LLC, which did not change between the first year and the second year. During Year 2, the business expanded into three new regions of the country. The following revenue and employee information is provided: Year 1 Year 2 Revenues (in thousands) $60,525 $58,500 Number of employees 120 160 Required (a) For Year 1 and Year 2, determine the revenue per employee (excluding members). (b) Interpret the trend between the two years. ANSWER: (a) Revenue per employee, Year 1: $60,525,000/120 = $504,375 Revenue per employee, Year 2: $58,500,000/160 = $365,625 (b)

Revenues increased between the two years; however, the number of employees has increased at a faster rate. Thus, the revenue per employee declined from $504,375 in Year 1 to $365,625 in Year 2. This indicates that the efficiency of the firm has declined in the two years. This is likely the result of the expansion. That is, the large increase in the employment base is the likely result of the expansion into the three new regions. These new employees may need to be trained and thus are not as efficient in their jobs as the more experienced employees in the existing regions. Often, a business will suffer productivity losses in the midst of significant expansion because of the inexperience of the new employees. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-06 - 12-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 205. Easy Sailing, LLC provides repair services for commercially owned boats and yachts. The firm has five members in the LLC, which did not change between the first year and the second year. During Year 2, the business expanded into three new regions of the country. The following revenue and employee information is provided: Year 1 $50,625 125

Revenues (in thousands) Number of employees

Year 2 $57,750 175

Required (a) For Year 1 and Year 2, determine the revenue per employee (excluding members). (b) Interpret the trend between the two years. ANSWER: (a) Revenue per employee, Year 1: $50,625,000/125 = $405,000 Revenue per employee, Year 2: $57,750,000/175 = $330,000 (b)

Revenues increased between the two years; however, the number of employees has increased at a faster rate. Thus, the revenue per employee declined from $405,000 in the first year to $330,000 in the second year. This indicates that the efficiency of the firm has declined in the two years. This is likely the result of the expansion. That is, the large increase in the employment base is the likely result of the expansion into the three new regions. These new employees may need to be trained and thus are not as efficient in their jobs as the more experienced employees in the existing regions. Often, a business will suffer productivity losses in the midst of significant expansion because of the inexperience of the new employees.

Page 90

Chapter 12 - Accounting for Partnerships and Limited Liability Companies DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.12-06 - 12-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.19 - Partnership Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 91

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends True / False 1. Twenty percent of all businesses in the United States are corporations, and they account for 80% of the total business dollars generated. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-01 - 13-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 2. A corporation is a separate entity for accounting purposes but not for legal purposes. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-01 - 13-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 3. The financial loss that each stockholder in a corporation can incur is usually limited to the amount invested by the stockholder. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-01 - 13-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 4. Under the Internal Revenue Code, corporations are required to pay federal income taxes. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-01 - 13-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 5. Double taxation is a disadvantage of a corporation because the corporation has to pay income taxes at twice the rate applied to partnerships. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-01 - 13-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 6. The initial owners of stock of a newly formed corporation are called directors. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-01 - 13-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 7. While some businesses have been granted charters under state laws, most businesses receive their charters under federal laws. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-01 - 13-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 8. Organizational expenses are classified as intangible assets on the balance sheet. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-01 - 13-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic TOPICS: Bloom's: Remembering 9. The two main sources of stockholders' equity are investments contributed by stockholders and net income retained in the business. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-02 - 13-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 10. Retained Earnings represents past net income less past dividends; therefore, any balance in this account would be listed on the income statement. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-02 - 13-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 11. The net increase or decrease in Retained Earnings for a period is recorded by closing entries. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-02 - 13-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 12. The balance in Retained Earnings should be interpreted as representing surplus cash left over for dividends. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-02 - 13-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 13. A deficit in Retained Earnings is reported in the Stockholders' equity section of the balance sheet. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-02 - 13-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 14. When no-par common stock with a stated value is issued for cash, the common stock account is credited for an amount equal to the cash proceeds. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 15. The par value of common stock must always be equal to its market value on the date the stock is issued. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 16. For accounting purposes, stated value is treated the same way as par value. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 17. The issuance of common stock affects both paid-in capital and retained earnings. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 18. The main source of paid-in capital is from issuing stock. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 19. The number of shares of outstanding stock is equal to the number of shares authorized minus the number of shares issued. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 20. The amount of capital paid in by the stockholders of the corporation is called legal capital. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 21. If the dividend amount of preferred stock, $50 par value, is quoted as 8%, then the dividends per share would be $4. a. True b. False ANSWER: True RATIONALE: Dividends per Share = $50 × 8% = $4 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 22. If 50,000 shares are authorized, 41,000 shares are issued, and 2,000 shares are reacquired, the number of outstanding shares is 43,000. a. True b. False ANSWER: False RATIONALE: Number of Outstanding Shares = Number of Shares Issued – Number of Shares Reacquired = 41,000 – 2,000 = 39,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 23. Preferred stockholders must receive their current-year dividends before the common stockholders can receive any dividends. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 24. If a corporation is liquidated, preferred stockholders are paid before the creditors and before the common stockholders. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 25. Paid-in capital may originate from real estate transactions. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 26. The par value of stock is an assigned per-share amount defined in many states as legal capital. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 27. A large public corporation normally uses registrars and transfer agents to maintain the records of stockholders. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 28. When common stock is issued in exchange for land, the land should be recorded in the accounts at the par value of the stock issued. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 29. When a corporation issues stock at a premium, it reports the premium as an Other income item on the income statement. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 30. When no-par stock is issued, Common Stock is credited for the selling price of the stock issued. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 31. A large retained earnings account means that there is cash available to pay dividends. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 32. When the board of directors declares a cash or stock dividend, this action decreases retained earnings. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 33. If 20,000 shares are authorized, 15,000 shares are issued, and 500 shares are held as treasury stock, a cash dividend of $1 per share would amount to $15,000. a. True b. False ANSWER: False RATIONALE: Number of Outstanding Shares = Number of Shares Issued – Number of Shares Held as Treasury Stock = 15,000 – 500 = 14,500 Amount of Cash Dividend = Number of Outstanding Shares × Dividends per Share = 14,500 × $1 = $14,500 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 34. The declaration of a cash dividend decreases a corporation's stockholders equity and decreases its assets. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 35. One of the prerequisites to paying a cash dividend is sufficient retained earnings. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 36. Cash dividends become a liability to a corporation on the date of record. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 37. The declaration and issuance of a stock dividend do not affect the total amount of a corporation's assets, liabilities, or stockholders' equity. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 38. The declaration of a stock dividend decreases a corporation's stockholders' equity and increases its liabilities. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 39. Before a stock dividend can be declared or paid, there must be sufficient cash. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 40. The day on which the board of directors of the corporation distributes a dividend is called the declaration date. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 41. A 10% stock dividend will increase the number of shares outstanding, but the book value per share will decrease. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 42. The stock dividends distributable account is listed in the Current liabilities section of the balance sheet. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 43. A corporation has 10,000 shares of $100 par stock outstanding. If the corporation issues a 5-for-1 stock split, the number of shares outstanding after the split will be 40,000. a. True b. False ANSWER: False RATIONALE: Number of Shares Outstanding after Split = 10,000 shares × 5 = 50,000 shares DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-05 - 13-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 44. The primary purpose of a stock split is to reduce the number of shares outstanding in order to encourage more investors to enter the market for the company's shares. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-05 - 13-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 45. The reduction in the par or stated value of common stock, accompanies by the issuance of a proportionate number of additional shares, is called a stock split. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-05 - 13-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 46. A corporation has 12,000 shares of $20 par stock outstanding that has a current market value of $150. If the corporation issues a 4-for-1 stock split, the market value of the stock will fall to approximately $50. a. True b. False ANSWER: False RATIONALE: Market Value of Stock after Split = $150/4 = $37.50 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-05 - 13-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 47. A stock split results in a transfer at market value from retained earnings to paid-in capital. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-05 - 13-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 48. Cash dividends are normally paid on shares of treasury stock. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 49. The cost method of accounting for the purchase and sale of treasury stock is a commonly used method. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 50. Under the cost method, when treasury stock is purchased by the corporation, the par value and the price at which the stock was originally issued are important. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 51. If 100 shares of treasury stock were purchased for $50 per share and then sold at $60 per share, $1,000 of income is reported on the income statement. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 52. A sale of treasury stock may result in a decrease in paid-in capital. All decreases should be charged to Paid-In Capital from Sale of Treasury Stock. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 53. Treasury Stock is listed in the Stockholders' equity section on the balance sheet. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 54. A restriction/appropriation of retained earnings establishes cash assets that are set aside for a specific purpose. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 55. A prior period adjustment should be reported as an adjustment to the retained earnings balance at the beginning of the period in which the adjustment was made. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 56. The amount of a corporation's retained earnings that has been restricted/appropriated should be reported in the notes to the financial statements. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic 57. The cost of treasury stock is deducted from total paid-in capital and retained earnings in determining total stockholders’ equity. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 58. The retained earnings statement may be combined with the income statement. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 59. If paid-in capital in excess of par/preferred stock is $30,000, preferred stock is $200,000, paid-in capital in excess of par/common stock is $20,000, common stock is $525,000, and retained earnings is $105,000 (deficit), total stockholders' equity is $880,000. a. True b. False ANSWER: False RATIONALE: Total Stockholders' Equity = Preferred Stock + Paid-In Capital in Excess of Par/Preferred Stock + Common Stock + Paid-In Capital in Excess of Par/Common Stock + Retained Earnings = $200,000 + $30,000 + $525,000 + $20,000 + (–$105,000) = $670,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 60. If a company has preferred stock, the preferred stock dividend is added to net income when computing earnings per common share. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-08 - 13-08 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic Multiple Choice 61. Which of the following is not a characteristic of a corporation? a. The financial loss that a stockholder may suffer from owning stock in a public company is limited. b. Cash dividends paid by a corporation are deductible as expenses by the corporation. c. A corporation can own property in its name. d. Corporations are required to file federal income tax returns. ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-01 - 13-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 62. Characteristics of a corporation include a. shareholders who are mutual agents b. direct management by the shareholders (owners) c. its inability to own property d. shareholders who have limited liability ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-01 - 13-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 63. One of the main disadvantages of the corporate form is the a. professional management b. double taxation of dividends c. charter d. requirement to stock ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-01 - 13-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 64. A disadvantage of the corporate form of business entity is a. mutual agency for stockholders b. unlimited liability for stockholders c. corporations are subject to more governmental regulations d. the ease of transfer of ownership ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-01 - 13-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 65. Under the corporate form of business organization, a. ownership rights are easily transferred b. a stockholder is personally liable for the debts of the corporation c. stockholders’ acts can bind the corporation even though the stockholders have not been appointed as agents of the corporation d. stockholders wishing to sell their corporate shares must get the approval of other stockholders ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-01 - 13-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 66. Those most responsible for the major policy decisions of a corporation are the a. management b. board of directors c. employees d. stockholders ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-01 - 13-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 67. Which of the following would not be considered an advantage of the corporate form of organization? a. government regulation b. separate legal existence c. continuous life d. limited liability of stockholders ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-01 - 13-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 68. Which of the following is not true of a corporation? a. It may enter into binding legal contracts in its own name. b. It may sue and be sued. c. The acts of its owners bind the corporation. d. It may buy, own, and sell property. ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-01 - 13-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 69. The ability of a corporation to obtain capital is a. less than the ability of a partnership b. about the same as the ability of a partnership c. restricted because of the limited life of the corporation d. enhanced because of limited liability and ease of share transferability ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-01 - 13-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 70. Which of the following statements concerning taxation is accurate? a. Corporations pay federal income taxes but not state income taxes. b. Corporations pay federal and state income taxes. c. Only the owners must pay taxes on corporate income. d. Corporations pay income taxes but their owners do not. ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-01 - 13-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 71. The term deficit is used to refer to a debit balance in which of the following accounts of a corporation? a. Retained Earnings b. Treasury Stock c. Organizational Expenses d. Common Stock ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-02 - 13-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 72. Stockholders' equity a. is usually equal to cash on hand b. includes paid-in capital and liabilities c. includes retained earnings and paid-in capital d. is shown on the income statement ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-02 - 13-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 73. The state charter allows a corporation to issue only a certain number of shares of each class of stock. This amount of stock is called a. treasury stock b. issued stock c. outstanding stock d. authorized stock ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 74. Which of the following is not a right possessed by common stockholders of a corporation? a. the right to vote in the election of the board of directors b. the right to receive a minimum amount of dividends c. the right to sell their stock to anyone they choose d. the right to share in assets upon liquidation ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 75. The charter of a corporation provides for the issuance of 100,000 shares of common stock. Assume that 40,000 shares were originally issued and 10,000 were subsequently reacquired. What is the number of shares outstanding? a. 10,000 b. 40,000 c. 30,000 d. 50,000 ANSWER: c RATIONALE: Number of Shares Outstanding = Number of Shares Originally Issued – Number of Shares Reacquired = 40,000 – 10,000 = 30,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 76. The par value per share of common stock represents the a. minimum selling price of the stock established by the articles of incorporation b. minimum amount the stockholder will receive when the corporation is liquidated c. dollar amount assigned to each share d. amount of dividends per share to be received each year ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 77. Nebraska Inc. issues 3,000 shares of common stock for $45,000. The stock has a stated value of $10 per share. The journal entry to record the stock issuance would include a credit to Common Stock for a. $30,000 b. $45,000 c. $15,000 d. $3,000 ANSWER: a RATIONALE: Amount of Common Stock Issued = Number of Shares Issued × Par Value of Each Share = 3,000 × $10 = $30,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 78. The excess of issue price over par of common stock is termed a(n) a. discount b. income c. deficit d. premium ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 79. The entry to record the issuance of 150 shares of $5 par common stock at par to an attorney in payment of legal fees for organizing the corporation includes a credit to a. Organizational Expenses b. Goodwill c. Common Stock d. Cash ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 80. The price at which a stock can be sold depends on a number of factors. Which of the following is not one of those factors? a. the financial condition, earnings record, and dividend record of the corporation b. investor expectations of the corporation's earning power c. how high the par value is d. general business and economic conditions and prospects ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 81. The entry to record the issuance of common stock at a price above par includes a debit to a. Organizational Expenses b. Common Stock c. Cash d. Paid-In Capital in Excess of Par—Common Stock ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 82. Kansas Company acquired a building valued at $210,000 for property tax purposes in exchange for 12,000 shares of its $5 par common stock. The stock is widely traded and selling for $15 per share. At what amount should the building be recorded by Kansas Company? a. $60,000 b. $180,000 c. $210,000 d. $120,000 ANSWER: b RATIONALE: Value of Building = Market Price of Shares × Number of Shares Exchanged = $15 × 12,000 = $180,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 83. The charter of a corporation provides for the issuance of 100,000 shares of common stock. Assume that 30,000 shares were originally issued and 5,000 were subsequently reacquired. What is the number of shares outstanding? a. 35,000 b. 70,000 c. 25,000 d. 30,000 ANSWER: c RATIONALE: Number of Shares Outstanding = Number of Shares Originally Issued – Number of Shares Reacquired = 30,000 – 5,000 = 25,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 84. Par value a. is the monetary value assigned per share in the corporate charter b. represents what a share of stock is worth c. represents the original selling price for a share of stock d. is established for a share of stock after it is issued ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 85. The authorized stock of a corporation a. must be recorded in a formal accounting entry b. only reflects the initial capital needs of the company c. is indicated in its bylaws d. is indicated in its charter ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 86. If Dakota Company issues 1,500 shares of $6 par common stock for $75,000, a. Common Stock will be credited for $75,000 b. Paid-In Capital in Excess of Par will be credited for $9,000 c. Paid-In Capital in Excess of Par will be credited for $66,000 d. Cash will be debited for $66,000 ANSWER: c RATIONALE: Total Cash Raised through Issue of Shares = $75,000 Par Value of Common Stock Issued = 1,500 shares × $6 = $9,000 Paid-In Capital in Excess of Par = $75,000 – $9,000 = $66,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 87. If common stock is issued for an amount greater than par value, the excess should be credited to a. Retained Earnings b. Cash c. Legal Capital d. Paid-In Capital in Excess of Par ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 88. Sneed Corporation issues 10,000 shares of $50 par preferred stock for cash at $75 per share. The entry to record the transaction will consist of a debit to Cash for $750,000 and a credit or credits to a. Preferred Stock for $750,000 b. Preferred Stock for $500,000 and Paid-In Capital in Excess of Par—Preferred Stock for $250,000 c. Preferred Stock for $500,000 and Retained Earnings for $250,000 d. Paid-In Capital from Preferred Stock for $750,000 ANSWER: b RATIONALE: Total Cash Raised through Issue of Shares = 10,000 × $75 = $750,000 Par Value of Preferred Stock Issued = Number of Shares Issued × Par Value of Each Share = 10,000 × $50 = $500,000 Paid-In Capital in Excess of Par—Preferred Stock = $750,000 – $500,000 = $250,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 89. Alma Corp. issues 1,000 shares of $10 par common stock at $14 per share. When the transaction is recorded, credits are made to a. Common Stock, $14,000 b. Common Stock, $10,000, and Paid-In Capital in Excess of Par—Common Stock, $4,000 c. Common Stock, $4,000, and Paid-In Capital in Excess of Stated Value, $10,000 d. Common Stock, $10,000, and Retained Earnings, $4,000 ANSWER: b RATIONALE: Total Cash Raised through Issue of Shares = 1,000 × $14 = $14,000 Par Value of Common Stock Issued = Number of Shares Issued × Par Value of Each Share = 1,000 × $10 = $10,000 Paid-In Capital in Excess of Par—Common Stock = $14,000 – $10,000 = $4,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 90. Nexis Corp. issues 1,000 shares of $15 par value common stock at $22 per share. When the transaction is recorded, credits are made to a. Common Stock, $15,000, and Paid-In Capital in Excess of Par—Common Stock, $7,000 b. Common Stock, $22,000, and Retained Earnings, $15,000 c. Common Stock, $7,000, and Paid-In Capital in Excess of Stated Value, $15,000 d. Common Stock, $22,000 ANSWER: a RATIONALE: Total Cash Raised through Issue of Shares = 1,000 shares × $22 = $22,000 Par Value of Common Stock Issued = Number of Shares Issued × Par Value of Share = 1,000 × $15 = $15,000 Paid-In Capital in Excess of Par—Common Stock = $22,000 – $15,000 = $7,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 91. When Wisconsin Corporation was formed on January 1, the corporate charter provided for 100,000 shares of $10 par value common stock. During its first month of operation, the corporation issued 8,500 shares of stock at a price of $16 per share. The entry to record the above transaction would include a a. debit to Cash for $85,000 b. credit to Common Stock for $136,000 c. credit to Paid-In Capital in Excess of Par—Common Stock for $51,000 d. debit to Common Stock for $85,000 ANSWER: c RATIONALE: Total Cash Raised through Issue of Shares = 8,500 × $16 = $136,000 Par Value of Shares = 8,500 × $10 = $85,000 Paid-In Capital in Excess of Par—Common Stock = $136,000 – $85,000 = $51,000 Cash Common Stock Paid-In Capital in Excess of Par—Common Stock

Debit 136,000

Credit 85,000 51,000

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS ACCT.ACBSP.APC.20 - Accounting for Corporations : ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 92. Sabas Company has 20,000 shares of $100 par, 2% cumulative preferred stock and 100,000 shares of $50 par common stock. The following amounts were distributed as dividends: Year 1: Year 2: Year 3:

$10,000 45,000 90,000

Determine the dividends per share for preferred and common stock for the first year. a. $0.50 and $0.10 b. $0 and $0.10 c. $0.50 and $0 d. $2.00 and $0 ANSWER: c RATIONALE: Total Dividends for Preferred Stock for Year 1 = 20,000 × $100 × 2% = $40,000 The total dividend distributed in Year 1 is given as $10,000. Dividends per Share for Preferred Stock = Total Dividends Distributed in Year 1/Number of Shares of Preferred Stock = $10,000/20,000 = $0.50 Dividends per Share for Common Stock for Year 1 = $0 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 93. The charter of a corporation provides for the issuance of 100,000 shares of common stock. Assume that 60,000 shares were originally issued and 10,000 were subsequently reacquired. What is the amount of cash dividends to be paid if a $2per-share dividend is declared? a. $60,000 b. $20,000 c. $120,000 d. $100,000 ANSWER: d RATIONALE: Amount of Cash Dividends to Be Paid = Number of Shares Outstanding × Dividends per Share = (60,000 – 10,000) × $2 = 50,000 × $2 = $100,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 94. The charter of a corporation provides for the issuance of 100,000 shares of common stock. Assume that 45,000 shares were originally issued and 5,000 were subsequently reacquired. What is the amount of cash dividends to be paid if a $2per-share dividend is declared? a. $80,000 b. $10,000 c. $90,000 d. $100,00 ANSWER: a RATIONALE: Amount of Cash Dividends to Be Paid = Number of Shares Outstanding × Dividends per Share = (45,000 – 5,000) × $2 = 40,000 × $2 = $80,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 95. The date on which a cash dividend becomes a binding legal obligation is the a. declaration date b. date of record c. payment date d. last day of the fiscal year ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 96. The cumulative effect of the declaration and payment of a cash dividend on a company’s financial statements is to a. decrease total liabilities and stockholders' equity b. increase total expenses and total liabilities c. increase total assets and stockholders' equity d. decrease total assets and stockholders' equity ANSWER: a DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 97. Which of the following is the appropriate general journal entry to record the declaration of cash dividends? a. Retained Earnings Cash b. Cash Dividends Payable Cash c. Paid-In Capital Cash Dividends Payable d. Cash Dividends Cash Dividends Payable ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 98. Texas Inc. has 10,000 shares of 6%, $125 par value cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31. What is the annual dividend on the preferred stock? a. $60 per share b. $75,000 in total c. $10,000 in total d. $0.75 per share ANSWER: b RATIONALE: Annual Dividend on Preferred Stock = $125 × 6% × 10,000 = $75,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 99. Which of the following is not a prerequisite to paying a cash dividend? a. formal action by the board of directors b. market value in excess of par value per share c. sufficient cash d. sufficient retained earnings ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 100. The liability for a dividend is recorded on which of the following dates? a. date of record b. date of payment c. last day of the fiscal year d. date of declaration ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 101. A company with 100,000 authorized shares of $4 par common stock issued 40,000 shares at $8. Subsequently, the company declared a 2% stock dividend on a date when the market price was $11 per share. What is the amount transferred from the retained earnings account to paid-in capital accounts as a result of the stock dividend? a. $3,200 b. $6,400 c. $4,800 d. $8,800 ANSWER: d RATIONALE: Amount Transferred from Retained Earnings Account to Paid-In Capital Accounts = Number of Shares Issued as Stock Dividends × Market Price of Each Share at Time of Issue = 2% × 40,000 shares × $11 = $8,800 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 102. A company with 100,000 authorized shares of $4 par common stock issued 50,000 shares at $9. Subsequently, the company declared a 2% stock dividend on a date when the market price was $10 per share. The effect of the declaration and issuance of the stock dividend is to a. decrease retained earnings, increase common stock, and increase paid-in capital b. increase retained earnings, decrease common stock, and decrease paid-in capital c. increase retained earnings, decrease common stock, and increase paid-in capital d. decrease retained earnings, increase common stock, and decrease paid-in capital ANSWER: a DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 103. A company with 100,000 authorized shares of $4 par common stock issued 40,000 shares at $8. Subsequently, the company declared a 4% stock dividend on a date when the market price was $12 per share. What is the amount transferred from the retained earnings account to paid-in capital accounts as a result of the stock dividend? a. $12,800 b. $19,200 c. $32,000 d. $48,800 ANSWER: b RATIONALE: Amount Transferred from Retained Earnings Account to Paid-In Capital Accounts = Number of Shares Issued as Stock Dividends × Market Price of Each Share at Time of Issue = 4% × 40,000 shares × $12 = $19,200 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 104. Sabas Company has 20,000 shares of $100 par, 2% cumulative preferred stock and 100,000 shares of $50 par common stock. The following amounts were distributed as dividends: Year 1 Year 2 Year 3

$10,000 45,000 90,000

Determine the dividends per share for preferred and common stock for the second year. a. $2.25 and $0 b. $2.25 and $0.45 c. $0 and $0.45 d. $2.00 and $0.45 ANSWER: a RATIONALE: Preferred Stock Dividend to Be Paid = 20,000 × $100 × 2% = $40,000 Year 1 Year 2 Preferred stock dividend to be paid $ 40,000 $ 70,000 ($40,000 + $30,000) Preferred stock dividend paid (10,000) (45,000) Arrears $ 30,000 $ 25,000 Dividends per share: Preferred Stock = $45,000/20,000 = $2.25 Common Stock = $0 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 105. Sabas Company has 20,000 shares of $100 par, 2% cumulative preferred stock and 100,000 shares of $50 par common stock. The following amounts were distributed as dividends: Year 1 Year 2 Year 3

$10,000 45,000 90,000

Determine the dividends per share for preferred and common stock for the third year. a. $4.50 and $0.25 b. $3.25 and $0.25 c. $4.50 and $0.90 d. $2.00 and $0.25 ANSWER: a RATIONALE: Preferred Stock Dividend to Be Paid = 20,000 × $100 × 2% = $40,000 Year 1 Year 2 Preferred stock dividend to be paid $ 40,000 $ 70,000 ($40,000 + $30,000) Preferred stock dividend paid (10,000) (45,000) Arrears $ 30,000 $ 25,000

Year 3 $ 65,000 ($40,000 + $25,000) (65,000) $ 0

Common stock dividend to be paid in Year 3 = $90,000 – $65,000 = $25,000 Dividends per share: Preferred Stock = $65,000/20,000 = $3.25 Common Stock = $25,000/100,000 = $0.25 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDSACCT.ACBSP.APC.20 - Accounting for Corporations : ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 106. Sabas Company has 20,000 shares of $100 par, 2% cumulative preferred stock and 100,000 shares of $50 par common stock. The following amounts were distributed as dividends: Year 1 Year 2 Year 3

$10,000 45,000 90,000

Determine the dividends per share for preferred and common stock for the second year. a. $25,000 b. $10,000 c. $0 d. $30,000 ANSWER: a RATIONALE: Year 1 Preferred stock dividend to be paid $ 40,000 Preferred stock dividend paid Arrears

(10,000) $ 30,000

Year 2 $ 70,000 ($40,000 + $30,000) (45,000) $ 25,000

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 107. When a stock dividend is declared, which of the following accounts is credited? a. Common Stock b. Dividends Payable c. Stock Dividends Distributable d. Retained Earnings ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 108. A reduction of par or stated value of stock results from a a. liquidating dividend b. stock split c. stock option d. preferred dividend ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-05 - 13-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 109. A corporation has 50,000 shares of $25 par stock outstanding. If the corporation issues a 3-for-1 stock split, the number of shares outstanding after the split will be a. 150,000 shares b. 50,000 shares c. 100,000 shares d. 16,666 shares ANSWER: a RATIONALE: Number of Shares Outstanding after Split = Current Number of Shares Outstanding × Ratio of Stock Split = 50,000 × 3 = 150,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-05 - 13-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 110. When a corporation completes a 3-for-1 stock split, a. the ownership interest of current stockholders is decreased b. the market price per share of the stock is decreased c. the par value per share is decreased d. the market price per share of the stock and the par value per share are decreased ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-05 - 13-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 111. A corporation has 50,000 shares of $28 par stock outstanding that has a current market value of $150 per share. If the corporation issues a 4-for-1 stock split, the market value of the stock will fall to approximately a. $7.00 b. $112.00 c. $37.50 d. $600.00 ANSWER: c RATIONALE: New Market Value of Stock = Current Market Price of Stock/Ratio of Stock Split = $150/4 = $37.50 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-05 - 13-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 112. The primary purpose of a stock split is to a. increase paid-in capital b. reduce the market price of the stock per share c. increase the market price of the stock per share d. increase retained earnings ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-05 - 13-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 113. Which of the following statements is not true about a 2-for-1 split? a. Par value per share is reduced to half of what it was before the split. b. Total contributed capital increases. c. The market price will probably decrease. d. A stockholder with 10 shares before the split owns 20 shares after the split. ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-05 - 13-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 114. A corporation has 50,000 shares of $25 par stock outstanding that has a current market value of $150 per share. If the corporation issues a 5-for-1 stock split, the market value of the stock after the split will be approximately a. $25 b. $150 c. $5 d. $30 ANSWER: d RATIONALE: New Market Value of Stock = Current Market Price of Stock/Ratio of Stock Split = $150/5 = $30 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-05 - 13-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 115. A corporation has 50,000 shares of $25 par stock outstanding that has a current market value of $120. If the corporation issues a 5-for-1 stock split, the par value of the stock after the split will be a. $5 b. $60 c. $25 d. $24 ANSWER: a RATIONALE: New Par Value of Stock = Current Par Value of Stock/Ratio of Stock Split = $25/5 = $5 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-05 - 13-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 116. Nevada Corporation has 30,000 shares of $25 par stock outstanding that has a current market value of $120. If the corporation issues a 5-for-1 stock split, the number of shares outstanding will be a. 60,000 b. 6,000 c. 150,000 d. 15,000 ANSWER: c RATIONALE: Number of Shares Outstanding after Stock Split = Current Number of Shares Outstanding × Ratio of Stock Split = 30,000 × 5 = 150,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-05 - 13-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 117. Treasury stock shares are a. shares held by the U.S. Treasury Department b. part of the total outstanding shares but not part of the total issued shares of a corporation c. unissued shares that are held by the treasurer of the corporation d. issued shares that have been reacquired by a corporation ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 118. On January 1, Vermont Corporation had 40,000 shares of $10 par value common stock issued and outstanding. All 40,000 shares had been issued in a prior period at $20 per share. On February 1, Vermont purchased 3,750 shares of treasury stock for $24 per share and later sold the treasury shares for $21 per share on March 1. The journal entry to record the purchase of the treasury shares on February 1 would include a a. credit to Treasury Stock for $90,000 b. debit to Treasury Stock for $90,000 c. debit to a loss account for $112,500 d. credit to a gain account for $112,500 ANSWER: b RATIONALE: Value of Shares Purchased = Purchase Price of Each Share × Number of Shares Purchased = $24 × 3,750 = $90,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 119. Which of the following is not a reason for a corporation to buy back its own stock? a. resale to employees b. bonus to employees c. support the market price of the stock d. increase the shares outstanding ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 120. How is treasury stock shown on the balance sheet? a. as an asset b. as a decrease in stockholders' equity c. as an increase in stockholders' equity d. Treasury stock is not shown on the balance sheet. ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 121. The excess of sales price of treasury stock over its cost should be credited to a. Treasury Stock Receivable b. Premium on Capital Stock c. Paid-In Capital from Sale of Treasury Stock d. Income from Sale of Treasury Stock ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 122. Treasury stock that was purchased for $3,000 is sold for $3,500. As a result of these two transactions combined a. income will be increased by $500 b. stockholders' equity will be increased by $3,500 c. stockholders' equity will be increased by $500 d. stockholders' equity will not change ANSWER: c RATIONALE: Effect on Stockholders' Equity = Sale Price of Treasury Stock – Purchase Price of Treasury Stock = $3,500 – $3,000 = $500 Increase in Stockholders' Equity = $500 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 123. Treasury stock that had been purchased for $5,600 last month was reissued this month for $8,500. The journal entry to record the reissuance would include a credit to a. Treasury Stock for $8,500 b. Paid-In Capital from Sale of Treasury Stock for $8,500 c. Paid-In Capital in Excess of Par—Common Stock for $2,900 d. Paid-In Capital from Sale of Treasury Stock for $2,900 ANSWER: d RATIONALE: Effect of Reissuance of Treasury Stock = $8,500 – $5,600 = $2,900 $2,900 will be credited to Paid-In Capital from Sale of Treasury Stock. DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 124. A corporation purchased 1,000 shares of its own $5 par common stock at $10 and subsequently sold 500 of the shares at $20. What amount of revenue is realized from the sale? a. $0 b. $5,000 c. $2,500 d. $10,000 ANSWER: a DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 125. A corporation purchases 10,000 shares of its own $10 par common stock for $35 per share, recording it at cost. What will be the effect on total stockholders' equity? a. increase by $100,000 b. increase by $350,000 c. decrease by $100,000 d. decrease by $350,000 ANSWER: d RATIONALE: Effect on Total Stockholders' Equity = 10,000 × $35 = $350,000 Stockholders' equity will decrease by $350,000. DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 126. What is the total stockholders' equity based on the following account balances? Common Stock Paid-In Capital in Excess of Par Retained Earnings Treasury Stock

$375,000 90,000 190,000 15,000

a. $670,000 b. $655,000 c. $640,000 d. $565,000 ANSWER: RATIONALE:

c Total Stockholders' Equity = Common Stock + Paid-In Capital in Excess of Par + Retained Earnings – Treasury Stock = $375,000 + $90,000 + $190,000 – $15,000 = $640,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 127. In which section of the financial statements would Paid-In Capital from Sale of Treasury Stock be reported? a. Other expense on income statement b. Intangible asset on the balance sheet c. Stockholders' equity on balance sheet d. Other income on income statement ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 128. Which of the following is not classified as paid-in capital on the balance sheet? a. common stock b. common stock distributable c. excess of issue price over par d. treasury stock ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 129. All of the following are normally found in a corporation's Stockholders' equity section except a. Common Stock b. Paid-In Capital in Excess of Par c. Dividends in Arrears d. Retained Earnings ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 130. Which of the following amounts should be disclosed in the Stockholders' equity section of the balance sheet? a. the number of shares of common stock outstanding b. the number of shares of common stock issued c. the number of shares of common stock authorized d. All of these choices ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 131. Significant changes in stockholders' equity are reported on the a. income statement b. retained earnings statement c. statement of stockholders' equity d. statement of cash flows ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 132. Retained earnings a. is the same as contributed capital b. cannot have a debit balance c. changes are summarized in the retained earnings statement d. is equal to cash on hand ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 133. Which of the following would appear as a prior period adjustment? a. loss resulting from the sale of fixed assets b. difference between the actual and estimated uncollectible accounts receivable c. error in the computation of depreciation expense in the preceding year d. loss from the restructuring of assets ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 134. A restriction/appropriation of retained earnings a. decreases total assets b. increases total retained earnings c. decreases total retained earnings d. has no effect on total retained earnings ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 135. Dayton Corporation began the current year with a retained earnings balance of $32,000. During the year, the company corrected an error made in the prior year, which was a failure to record a depreciation expense of $3,000 on equipment. Also, during the current year, the company earned net income of $12,000 and declared cash dividends of $7,000. Compute the year-end retained earnings balance. a. $34,000 b. $37,000 c. $41,000 d. $44,000 ANSWER: a RATIONALE: Year-End Retained Earnings Balance = Beginning Retained Earnings Balance – Depreciation Expense + Net Income – Cash Dividends = $32,000 – $3,000 + $12,000 – $7,000 = $34,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 136. What is the total stockholders' equity based on the following data? Common Stock Excess of Issue Price over Par Retained Earnings (deficit)

$360,000 735,000 (56,000)

a. $1,095,000 b. $1,151,000 c. $1,039,000 d. $679,000 ANSWER: RATIONALE:

c Total Stockholders' Equity = Common Stock + Excess of Issue Price over Par – Retained Earnings (deficit) = $360,000 + $735,000 – $56,000 = $1,039,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 137. The two main sources of stockholders' equity are a. investments by stockholders and net income retained in the business b. investments by stockholders and dividends paid c. net income retained in the business and dividends paid d. investments by stockholders and purchases of assets ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 138. Treasury stock should be reported in the financial statements of a corporation as a(n) a. investment b. liability c. current asset d. deduction from stockholders' equity ANSWER: d DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 139. Earnings per share a. is the net income per common share b. must be reported by a public company c. helps compare companies of different sizes d. All of these choices ANSWER: d DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-08 - 13-08 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 140. Oregon, Inc. reported net income of $105,000. During the current year, the company had 5,000 shares of $100 par, 5% preferred stock and 10,000 shares of $5 par common stock outstanding. Oregon's earnings per share is a. $8.00 b. $18.00 c. $5.08 d. $5.00 ANSWER: a RATIONALE: Earnings per Share = (Net Income – Preferred Dividends)/Average Number of Common Shares Outstanding = [$105,000 – (5,000 × $100 × 5% )]/10,000 = ($105,000 – $25,000)/10,000 = $80,000/10,000 = $8.00 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-08 - 13-08 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic Matching Match each of the following stockholders' equity concepts to the appropriate term (a–h). a. Articles of incorporation b. Limited liability c. Bylaws d. Corporation e. Public corporation f. Board of directors g. Private corporation h. Dividends DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-01 - 13-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic 141. A legal entity, separate from the people who create and operate it ANSWER: d 142. A company whose shares can be bought and sold in public markets ANSWER: e 143. The rules and procedures for conducting a corporation's affairs ANSWER: c 144. A company whose shares are not bought or sold in public markets ANSWER: g © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 145. Document that formally creates a corporation ANSWER: a 146. Creditors cannot pursue stockholders' personal assets to satisfy claims ANSWER: b 147. Group that meets periodically to establish corporate policies ANSWER: f 148. Corporate income distributed to stockholders ANSWER: h Match each of the following stockholders' equity concepts to the most appropriate term (a–h). a. Authorized shares b. Issued shares c. Outstanding shares d. Par value e. Common stock f. Preferred stock g. Paid-In Capital in Excess of Par h. Transfer agent DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 149. The account used to record the difference when issue price exceeds par value of stock ANSWER: g 150. The dollar amount assigned to each share of stock ANSWER: d 151. The number of shares currently held by stockholders ANSWER: c 152. A class of stock having first rights to dividends of a corporation ANSWER: f 153. The maximum number of shares a company can issue to shareholders ANSWER: a 154. The number of shares sold to stockholders ANSWER: b 155. A class of stock that provides no preference rights to shareholders ANSWER: e © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Page 48

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 156. A financial institution that records and maintains records of another company's stockholders ANSWER: h Match each of the following stockholders' equity concepts to the appropriate term (a–h). a. Cash dividend b. Date of record c. Stock Dividends Distributable d. Date of declaration e. Treasury stock f. Preferred stock g. Date of payment h. Paid-In Capital in Excess of Par DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCT.WARD.18.13-04 - 13-04 ACCT.WARD.18.13-05 - 13-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic 157. Equity account reflecting shares “owed” to stockholders ANSWER: c 158. Shares of common stock that were issued and then reacquired by a company ANSWER: e 159. Owners of this class of stock are entitled to receive dividends first ANSWER: f 160. Cash distribution of a company’s earnings to stockholders ANSWER: a 161. Account used when shares are issued for an amount greater than par value ANSWER: h 162. The day of the event that creates a liability to company ANSWER: d 163. The date that is used to determine the owners of stock who will receive the current dividend ANSWER: b 164. The date when dividends are actually distributed to stockholders ANSWER: g

Page 49

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends For the current year ended, ABC had the following transactions: Issued 10,000 shares of $2 par common stock for $12 per share. Issued 3,000 shares of $50 par, 6% preferred stock for $70 per share. Purchased 1,000 shares of previously issued common stock for $15 per share. Reported net income of $200,000. Declared and paid a total dividend of $40,000. Assume that retained earnings had a beginning balance of $75,000. Match the following amounts to the appropriate term (a–h). a. Treasury stock b. Retained earnings c. Preferred stock d. Excess of issue price over par (preferred) e. Common stock f. Total paid-in capital g. Excess of issue price over par (common) h. Total stockholders' equity RATIONALE: 165. Preferred Stock = Number of Shares of Preferred Stock Issued × Par Value of Preferred Stock = 3,000 × $50 = $150,000 166. Excess of Issue Price over Par (Common) = Excess Price of Common Stock × Number of Shares of Common Stock Issued = ($12 – $2) × 10,000 = $100,000 167. Excess of Issue Price over Par (Preferred) = Excess Price of Preferred Stock × Number of Shares of Preferred Stock Issued = ($70 – $50) × 3,000 = $20 × 3,000 = $60,000 168. Common Stock = Par Value of Common Stock × Number of Shares of Common Stock Issued = $2 × 10,000 = $20,000 169. Retained Earnings = Beginning Retained Earnings + Net Income + Ending Retained Earnings – Cash Dividends = $75,000 + $200,000 – $40,000 = $235,000 170. Total Paid-In Capital = Preferred Stock + Excess of Issue Price over Par (Preferred) + Common Stock + Excess of Issue Price over Par (Common) = $150,000 + $60,000 + $20,000 + $100,000 = $330,000 171. Total Stockholders’ Equity = Total Paid-In Capital + Retained Earnings – Treasury Stock = $330,000 + $235,000 – $15,000 = $550,000 172. Treasury Stock = Number of Common Stock Purchased × Purchase Price of Common Stock = 1,000 × $15 = $15,000 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic 165. $150,000 ANSWER: c 166. $100,000 ANSWER: g © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 167. $60,000 ANSWER: d 168. $20,000 ANSWER: e 169. $235,000 ANSWER: b 170. $330,000 ANSWER: f 171. $550,000 ANSWER: h 172. $15,000 ANSWER: a Subjective Short Answer 173. On April 1, 10,000 shares of $5 par common stock were issued at $22, and on April 7, 5,000 shares of $50 par preferred stock were issued at $104. Journalize the entries for April 1 and 7. ANSWER: Apr. 1 Cash 220,000 Common Stock 50,000 Paid-In Capital in Excess of Par— 170,000 Common Stock 7 Cash Preferred Stock Paid-In Capital in Excess of Par— Preferred Stock

520,000 250,000 270,000

DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 174. On May 10, a company issued for cash 1,500 shares of no-par common stock (with a stated value of $2) at $14, and on May 15, it issued for cash 2,000 shares of $15 par preferred stock at $58. Journalize the entries for May 10 and 15, assuming that the common stock is to be credited with the stated value. ANSWER: May 10 Cash 21,000 Common Stock 3,000 Paid-In Capital in Excess of Stated 18,000 Value—Common Stock 15 Cash 116,000 Preferred Stock 30,000 Paid-In Capital in Excess of Par— 86,000 Preferred Stock DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 175. On February 1 of the current year, Motor, Inc. issued 700 shares of $2 par common stock to an attorney in return for preparing and filing the articles of incorporation. The value of the services is $9,600. Journalize this transaction. ANSWER: Feb. 1 Organizational Expenses 9,600 Common Stock 1,400 Paid-In Capital in Excess of Par— 8,200 Common Stock DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 176. On April 10, a company acquired land in exchange for 1,000 shares of $20 par common stock with a current market price of $73. Journalize this transaction. ANSWER: Apr. 10 Land 73,000 Common Stock 20,000 Paid-In Capital in Excess of Par— 53,000 Common Stock DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 177. On May 1, 10,000 shares of $10 par common stock were issued at $30, and on May 7, 5,000 shares of $50 par preferred stock were issued at $111. Journalize the entries for May 1 and May 7. ANSWER: May 1 Cash 300,000 Common Stock 100,000 Paid-In Capital in Excess of 200,000 Par—Common Stock 7

Cash Preferred Stock Paid-In Capital in Excess of Par—Preferred Stock

555,000 250,000 305,000

DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 178. On February 13, Epperson Company issued for cash 75,000 shares of no-par common stock (with a stated value of $125) at $140. On September 9, Epperson issued at par 15,000 shares of 1%, $60 par preferred stock at par for cash. On November 23, Epperson issued for cash 8,000 shares of 1%, $60 par preferred stock at $70. Journalize the entries to record the February 13, September 9, and November 23 transactions. ANSWER: Feb. 13 Cash (75,000 shares × $140) 10,500,000 Common Stock 9,375,000 Paid-In Capital in Excess of Stated Value 1,125,000 [75,000 shares × ($140 – $125)]. Sept. 9 Cash Preferred Stock (15,000 shares × $60).

900,000 900,000

Nov. 23 Cash 560,000 Preferred Stock 480,000 Paid-In Capital in Excess of Par 80,000 [8,000 shares × ($70 – $60)]. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 179. A corporation was organized on January 1 of the current year, with an authorization of 20,000 shares of 4%, $12 par preferred stock, and 100,000 shares of $3 par common stock. The following selected transactions were completed during the first year of operations: Jan.

3 31

Feb. 24 Mar. 15

Issued 15,000 shares of common stock at $23 per share for cash. Issued 200 shares of common stock to an attorney in payment of legal fees for organizing the corporation. The value of the stock at the time of payment was $25 per share. Issued 20,000 shares of common stock in exchange for land, buildings, and equipment with fair market prices of $65,000, $120,000, and $45,000, respectively. Issued 2,000 shares of preferred stock at $56 for cash.

Journalize the transactions. ANSWER:

Jan.

3 Cash Common Stock Paid-In Capital in Excess of Par— Common Stock 31

Feb. 24

Mar. 15

345,000 45,000 300,000

Organizational Expenses Common Stock Paid-In Capital in Excess of Par— Common Stock

5,000

Land Buildings Equipment Common Stock Paid-In Capital in Excess of Par— Common Stock

65,000 120,000 45,000

Cash Preferred Stock Paid-In Capital in Excess of Par— Preferred Stock

112,000

600 4,400

60,000 170,000

24,000 88,000

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 180. On April 10, Maranda Corporation issued for cash 11,000 shares of no-par common stock at $25. On May 5, Maranda issued at par 1,000 shares of 4%, $50 par preferred stock for cash. On May 25, Maranda issued for cash 15,000 shares of 4%, $50 par preferred stock at $55. Journalize the entries to record the April 10, May 5, and May 25 transactions. ANSWER: Apr. 10 Cash Common Stock (11,000 × $25) May 5 Cash Preferred Stock (1,000 × $50)

275,000 275,000

50,000 50,000

25 Cash 825,000 Preferred Stock 750,000 Paid-In Capital in Excess of Par 75,000 [15,000 × ($55 – $50)] DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 181. Wonder Sales is authorized to issue 100,000 shares of 2%, $100 par preferred stock and 1,000,000 shares of $10 par common stock. Journalize the following transactions: (a) On January 2, Wonder Sales issues 5,000 shares of preferred stock for $110 per share and 65,000 shares of common stock at $10 per share. (b) On January 25, Wonder Sales issues 250 shares of preferred stock to Morton Law Firm for settlement of a $36,000 invoice for incorporation services. (c) On January 31, Wonder Sales issues 500 shares of common stock to Setup Inc. for fixtures that have a fair market value of $8,500. ANSWER: (a) Jan. 2 Cash 1,200,000 Preferred Stock 500,000 Paid-In Capital in Excess of 50,000 Par—Preferred Stock Common Stock 650,000 (b) Jan. 25

Organizational Expense Preferred Stock Paid-In Capital in Excess of Par—Preferred Stock

36,000

Fixtures Common Stock Paid-In Capital in Excess of Par—Common Stock

8,500

25,000 11,000

5,000 3,500

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 182. Prepare entries to record the following: (a) (b) (c) (d)

Issued 1,000 shares of $10 par common stock at $56 for cash. Issued 1,400 shares of $10 par common stock in exchange for equipment with a fair market price of $21,000. Purchased 100 shares of treasury stock at $25. Sold the 100 shares of treasury stock purchased in (c) at $30.

ANSWER:

(a) Cash Common Stock Paid-In Capital in Excess of Par—Common Stock (b) Equipment Common Stock Paid-In Capital in Excess of Par—Common Stock (c) Treasury Stock Cash (d) Cash Treasury Stock Paid-In Capital from Sale of Treasury Stock DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

56,000 10,000 46,000 21,000 14,000 7,000 2,500 2,500 3,000

2,500 500

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 183. Prepare entries to record the following: (a) Issued 1,000 shares of $10 par common stock at $59 for cash. (b) Issued 1,400 shares of $10 par common stock in exchange for equipment with a fair market price of $60,000. (c) Purchased 100 shares of treasury stock at $32. (d) Sold the 100 shares of treasury stock purchased in (c) at $42. ANSWER: (a) Cash 59,000 Common Stock 10,000 Paid-In Capital in Excess of Par—Common Stock 49,000 (b) Equipment 60,000 Common Stock 14,000 Paid-In Capital in Excess of Par—Common Stock 46,000 (c) Treasury Stock 3,200 Cash 3,200 (d) Cash 4,200 Treasury Stock 3,200 Paid-In Capital from Sale of Treasury Stock 1,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 184. Prepare entries to record the following: (a) Issued 1,000 shares of $15 par common stock at $54 for cash. (b) Issued 1,400 shares of no-par common stock in exchange for equipment with a fair market price of $24,000. (c) Purchased 100 shares of treasury stock at $26. (d) Sold 100 shares of treasury stock purchased in (c) at $29. ANSWER: (a) Cash 54,000 Common Stock 15,000 Paid-In Capital in Excess of Par—Common Stock 39,000 (b) Equipment 24,000 Common Stock 24,000 (c) Treasury Stock 2,600 Cash 2,600 (d) Cash 2,900 Treasury Stock 2,600 Paid-In Capital from Sale of Treasury Stock 300

Page 57

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 185. Carmen Company is a corporation that has issued both preferred and common stock. As of January 1, it had 50,000 shares of 2.75%, $100 par, preferred stock outstanding and 250,000 shares of $10 par common stock outstanding. Journalize the following transactions: (a) On January 31, the board of directors issues a requirement to purchase 5,000 shares of its common stock at market price. The shares are purchased at a market price of $22 per share. (b) On March 15, Carmen declares a dividend on preferred stock of $2.75 per share. The date of record is March 25 and the date of payment is March 31. (c) On December 1, Carmen declares a cash dividend on common stock of $0.12 per share. The date of record is December 15 and the date of payment is December 21. (d) On December 27, the board orders that 2,500 shares of the treasury stock purchased in (a) be sold. The sale price is $25 per share. ANSWER: (a) Jan. 31 Treasury Stock—Common Stock 110,000 Cash 110,000 (b) Mar. 15 Cash Dividends—Preferred Stock Cash Dividends Payable 25

No entry required

Cash Dividends Payable Cash

137,500 137,500

137,500 137,500 29,400 29,400

Note: While there are 250,000 shares of common stock issued, only 245,000 are outstanding due to the 5,000 shares held in treasury. Dec. 15 No entry required Dec. 21 Cash Dividends Payable Cash (d) Dec. 27 Cash Treasury Stock—Common Stock (2,500 × $22) Paid-In Capital—Treasury Stock (2,500 × $3) DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCT.WARD.18.13-04 - 13-04 ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

29,400 29,400 62,500

55,000 7,500

Page 58

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 186. A company has 10,000 shares of $10 par common stock outstanding. Prepare entries to record the following: (a)

Purchased 1,000 shares of treasury stock at $12. The treasury stock is accounted for by the cost method. There were no previous purchases of treasury shares. (b) Sold 500 shares of treasury stock at $15. (c) Purchased equipment for $75,000, paying $25,000 in cash and issuing 4,000 shares of common stock for the remaining. (d) Sold 500 shares of treasury stock at $11. ANSWER: (a) Treasury Stock 12,000 Cash 12,000 (b) Cash 7,500 Paid-In Capital from Sale of Treasury 1,500 Stock [500 shares × ($15 –12)] Treasury Stock (500 shares × $12) 6,000 (c) Equipment 75,000 Cash 25,000 Common Stock 40,000 Paid-In Capital in Excess of Par—Common 10,000 Stock (d) Cash 5,500 Paid-In Capital from Sale of Treasury Stock 500 Treasury Stock 6,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 59

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 187. Prepare entries to record the following transactions for Maine Corp.: (a) Issued 2,000 shares of $10 par common stock at $72 for cash. (b) Issued 2,500 shares of common stock in exchange for land with a fair market price of $130,000. (c) Purchased 400 shares of treasury stock at $70. (d) Sold the 400 shares of treasury stock purchased in (c) at $76. ANSWER: (a) Cash 144,000 Common Stock 20,000 Paid-In Capital in Excess of Par—Common Stock 124,000 (b) Land Common Stock Paid-In Capital in Excess of Par—Common Stock (c) Treasury Stock Cash

130,000 25,000 105,000 28,000 28,000

(d) Cash 30,400 Treasury Stock 28,000 Paid-In Capital from Sale of Treasury Stock 2,400 DIFFICULTY: Bloom's: Applying Challenging LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 188. A company has 10,000 shares of $10 par common stock outstanding. Prepare entries to record the following: (a)

Purchased 1,500 shares of treasury stock at $16. The treasury stock is accounted for by the cost method. There were no previous purchases of treasury shares. (b) Sold 1,000 shares of treasury stock at $19. (c) Purchased equipment for $80,000, paying $25,000 in cash and issuing 4,000 shares of common stock. (d) Sold 500 shares of treasury stock at $14. ANSWER: (a) Treasury Stock 24,000 Cash 24,000 (b) Cash 19,000 Paid-In Capital from Sale of Treasury Stock 3,000 Treasury Stock 16,000 (c) Equipment 80,000 Cash 25,000 Common Stock 40,000 Paid-In Capital in Excess of Par—Common 15,000 Stock © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Page 60

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends (d) Cash 7,000 Paid-In Capital from Sale of Treasury Stock 1,000 Treasury Stock DIFFICULTY: Bloom's: Applying Moderate LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

8,000

189. A company had stock outstanding as follows during each of its first three years of operations: 2,500 shares of 10%, $100 par, cumulative preferred stock and 50,000 shares of $10 par common stock. The amounts distributed as dividends are presented below. Determine the total and per-share dividends for each class of stock for each year by completing the schedule. Preferred Common Year Dividends Total Per Share Total Per Share 1 $10,000 _________ _________ _________ _________ 2 25,000 _________ _________ _________ _________ 3 60,000 _________ _________ _________ _________ ANSWER: Preferred Common Year Dividends Total Per Share Total Per Share 1 $10,000 $10,000 $ 4.00 None None 2 25,000 25,000 10.00 None None 3 60,000 40,000 16.00 $20,000 $0.40 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 61

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 190. Sabas Company has 20,000 shares of $100 par, 2% cumulative preferred stock and 100,000 shares of $50 par common stock. The following amounts were distributed as dividends: Year 1 Year 2 Year 3

$10,000 45,000 90,000

Year 2 $45,000 45,000 $ 0

Year 3 $90,000 65,000 $25,000

Dividends per share: Preferred stock Common stock

$2.25 $0

$3.25 $0.25

$25,000

$0.50 $0

Current year preferred dividend in arrears $30,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

191. The dates of importance in connection with a cash dividend of $50,000 on a corporation’s common stock are January 15, February 15, and March 15. Journalize the entries required on each date. ANSWER: Jan. 15 Cash Dividends 50,000 Cash Dividends Payable 50,000 Feb. 15 No entry required Mar. 15 Cash Dividends Payable 50,000 Cash 50,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 62

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 192. Vincent Corporation has 100,000 shares of $100 par common stock outstanding. On June 30, Vincent Corporation declared a 5% stock dividend to be issued on July 30 to stockholders of record July 15. The market price of the stock was $132 a share on June 30. Journalize the entries required on June 30, July 15, and July 30. ANSWER: June 30 Stock Dividends (100,000 × 5% × $132) 660,000 Stock Dividends Distributable 500,000 (5,000 × $100) Paid-In Capital in Excess of 160,000 Par—Common Stock July 15 No entry required July 30 Stock Dividends Distributable 500,000 Common Stock 500,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 193. Sabas Company has 40,000 shares of $100 par, 1% preferred stock and 100,000 shares of $50 par common stock. The following amounts were distributed as dividends: Year 1 Year 2 Year 3

$50,000 90,000 130,000

Determine the dividends per share for preferred and common stock for each year. ANSWER: Year 1 Amount distributed $50,000 Preferred dividend (40,000 shares) 40,000 Common dividend (100,000 shares) $10,000 Dividends per share: Preferred stock $1.00 Common stock $0.10 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Year 2 $90,000 40,000 $50,000

Year 3 $130,000 40,000 $ 90,000

$1.00 $0.50

$1.00 $0.90

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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 194. Indicate whether the following actions would (+) increase, (–) decrease, or (0) not affect a company's total assets, liabilities, and stockholders' equity.

(a) (b) (c) (d)

Declaring a cash dividend Paying the cash dividend declared in (a) Declaring a stock dividend Issuing stock certificates for the stock dividend declared in (c) ANSWER:

Assets _______ _______ _______

Liabilities _______ _______ _______

Stockholders' Equity _______ _______ _______

_______

(a) Declaring a cash dividend (b) Paying the cash dividend declared in (a) (c) Declaring a stock dividend (d) Issuing stock certificates for the stock dividend declared in (c)

Assets Liabilities 0 + – – 0 0 0

Stockholders' Equity – 0 0

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 195. The following account balances appear on the balance sheet of Osgood Industries: Common Stock (300,000 shares authorized, $100 par) Paid-In Capital in Excess of Par—Common Stock Retained Earnings

$10,000,000 2,000,000 45,000,000

The board of directors declared a 2% stock dividend when the market price of the stock was $135 per share. Required (1) Journalize the entries to record (a) Declaration of the dividend, capitalizing an amount equal to market value (b) Issuance of the stock certificates (2) Determine the following amounts before the stock dividend was declared: (a) Total paid-in capital (b) Total retained earnings (c) Total stockholders’ equity (3) Determine the following amounts after the stock dividend was declared and closing entries were recorded at the end of the year: (a) Total paid-in capital (b) Total retained earnings (c) Total stockholders’ equity

Page 64

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends ANSWER:

(1) (a) Stock Dividends Stock Dividends Distributable (2,000 × $100) Paid-In Capital in Excess of Par— Common Stock *[($10,000,000/$100) × $135] × 2% (b) Stock Dividends Distributable Common Stock

270,000* 200,000 70,000

200,000 200,000

(2) (a) $12,000,000 ($10,000,000 + $2,000,000) (b) $45,000,000 (c) $57,000,000 ($12,000,000 + $45,000,000) (3) (a) $12,270,000 ($12,000,000 + $270,000) (b) $44,730,000 ($45,000,000 – $270,000) (c) $57,000,000 ($12,270,000 + $44,730,000) DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 196. Macy Company has 10,000 shares of 2% cumulative preferred stock of $50 par and 25,000 shares of $75 par common stock. The following amounts were distributed as dividends: Year 1 Year 2 Year 3

$30,000 6,000 80,000

Determine the dividends per share for preferred and common stock for each year. ANSWER: Year 1 Amount distributed $30,000 Preferred dividend (40,000 shares) 10,000 Common dividend (100,000 shares) $20,000 *($4,000 + $10,000) Dividends per share: Preferred stock $1.00 Common stock $0.80 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Year 2 $6,000 6,000 $ 0

Year 3 $80,000 14,000* $66,000

$0.60 None

$1.40 $2.64

Page 65

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 197. Solar Company has 600,000 shares of $75 par common stock outstanding. On February 13, Solar declared a 3% stock dividend to be issued on April 30 to stockholders of record on March 14. The market price of the stock was $90 per share on February 13. Journalize the entries required on February 13, March 14, and April 30. ANSWER: Feb. 13 Stock Dividends 1,620,000 (600,000 × 3% × $90) Stock Dividends Distributable (18,000 × $75) Paid-In Capital in Excess of Par— Common Stock ($1,620,000 – $1,350,000)

1,350,000 270,000

Mar. 14 No entry required Apr. 30 Stock Dividends 1,350,000 Distributable Common Stock DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

1,350,000

198. The following transaction took place for XYZ Corporation: Nov. 12 Declared a total cash dividend of $45,000 for stockholders of record November 20 payable on December 1. Required (a) Record the journal entries required by these events. (b) Briefly describe the significance of November 20. ANSWER: (a) Nov. 12 Cash Dividends Cash Dividends Payable 20 Dec. 1

45,000 45,000

No entry required Cash Dividends Payable Cash

45,000 45,000

(b) The stock must be owned on or before November 20 in order to receive this dividend. Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic DIFFICULTY:

Page 66

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 199. Sabas Company has 20,000 shares of $100 par, 1% noncumulative preferred stock and 100,000 shares of $50 par common stock. The following amounts were distributed as dividends: Year 1 Year 2 Year 3

$10,000 15,000 90,000

Determine the dividends per share for preferred and common stock for each year. ANSWER: Year 1 Amount distributed $10,000 Preferred dividend (20,000 shares) 10,000 Common dividend (100,000 shares) $ 0 Dividends per share: Preferred stock $0.50 Common stock $0 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Year 2 $15,000 15,000 $ 0

Year 3 $90,000 20,000 $70,000

$0.75 $0

$1.00 $0.70

200. On January 1, Year 1, a company had the following transactions: Issued 10,000 shares of $2 par common stock for $12 per share. Issued 3,000 shares of $50 par, 6% cumulative preferred stock for $70 per share. Purchased 1,000 shares of previously issued common stock for $15 per share. The company had the following dividend information available: Year 1 Year 2 Year 3 Year 4

No dividend paid Paid $2,000 total dividends Paid $20,000 total dividends Paid $25,000 total dividends

Using the following format, fill in the correct values for each year: Common stock dividend Preferred stock dividend Dividends in arrears ANSWER:

Year 1 ______ ______ ______

Year 2 ______ ______ ______

Year 3 ______ ______ ______

Year 4 ______ ______ ______

Year 1 Year 2 Year 3 Common stock dividend None None None Preferred stock dividend None $2,000 $20,000 Dividends in arrears $9,000 $16,000 $5,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Year 4 $11,000 $14,000 None

Page 67

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 201. Journalize the following selected transactions completed during the current fiscal year: Mar. 24 26

The board of directors of New Town, Inc. declared a stock split that reduced the par of common shares from $100 to $20. This action increased the number of outstanding shares to 500,000. Declared a dividend of $1.75 per share on the outstanding shares of common stock.

Apr. 5

Paid the dividend declared on March 26.

Nov. 1

Declared a 5% stock dividend on the common stock outstanding (the fair market value of the stock to be issued is $25).

Dec. 1 Issued the certificates for the common stock dividend declared on November 1. ANSWER: Mar. 4 No entry required 26

Cash Dividends Cash Dividends Payable

875,000 875,000

Apr. 5 Cash Dividends Payable Cash

875,000

Nov. 1 Stock Dividends Stock Dividends Distributable Paid-In Capital in Excess of Par—Common Stock

625,000

875,000

Dec. 1 Stock Dividends Distributable 500,000 Common Stock DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

500,000 125,000 500,000

202. Prepare entries to record the following selected transactions completed during the current fiscal year: Feb.

May

The board of directors declared a stock split that reduced the par of common shares from $100 to $20. This action increased the number of outstanding shares to 500,000.

Purchased 25,000 shares of the company's own stock at $44, recording the treasury stock at cost.

Declared a dividend of $2.50 per share on the outstanding shares of common stock.

Paid the dividend declared on May 1.

Oct. 19

Declared a 2% stock dividend on the common stock outstanding (the fair market value of the stock to be issued is $55.)

Nov. 12

Issued the certificates for the common stock dividend declared on October 19.

Page 68

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends ANSWER:

Feb. 1 No entry required 11 Treasury Stock Cash May 1 Cash Dividends Cash Dividends Payable 15

1,100,000 1,100,000 1,187,500 1,187,500

Cash Dividends Payable Cash

1,187,500

Oct. 19 Stock Dividends Stock Dividends Distributable Paid-In Capital in Excess of Par—Common Stock

522,500

1,187,500

190,000 332,500

Nov. 12 Stock Dividends Distributable 190,000 Common Stock DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

190,000

203. Journalize the following selected transactions completed during the current fiscal year. Jan.

Feb.

The board of directors declared a stock split that reduced the par of common shares from $100 to $20. This action increased the number of outstanding shares to 400,000.

Declared a dividend of $1.75 per share on the outstanding shares of common stock.

Paid the dividend declared on January 22.

Sept. 1

Declared a 5% stock dividend on the common stock outstanding (the fair market value of the stock to be issued is $30.)

Oct. 1 Issued the certificates for the common stock dividend declared on September 1. ANSWER: Jan. 3 No entry required 22 Feb. 8

Sept. 1

Oct. 1

Cash Dividends Cash Dividends Payable

700,000

Cash Dividends Payable Cash

700,000

Stock Dividends Stock Dividends Distributable Paid-In Capital in Excess of Par—Common Stock

600,000

Stock Dividends Distributable Common Stock

400,000

700,000 700,000

400,000 200,000 400,000

Page 69

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 204. Selected transactions completed by Breezeway Construction during the current fiscal year are as follows: Feb.

3 Split the common stock 2-for-1 and reduced the par from $40 to $20 per share. After the split, there were 250,000 common shares outstanding.

Apr. 10 Declared semiannual dividends of $1.50 on 18,000 shares of preferred stock and $0.08 on the common stock to stockholders of record on May 10, payable on June 9. June 9

Paid the cash dividends.

Oct. 10

Declared semiannual dividends of $1.50 on the preferred stock and $0.04 on the common stock (before the stock dividend). In addition, a 2% common stock dividend was declared on the common stock outstanding. The fair market value of the common stock is estimated at $36.

Dec. 9

Paid the cash dividends and issued the certificates for the common stock dividend.

Required Journalize these transactions. ANSWER:

Feb. 3 No entry required Apr. 10 Cash Dividends Cash Dividends Payable *[(18,000 shares × $1.50) + (250,000 shares × $0.08)] = $27,000 + $20,000 = $47,000

47,000*

June 9 Cash Dividends Payable Cash

47,000

Oct. 10 Cash Dividends Cash Dividends Payable *[(18,000 shares × $1.50) + (250,000 shares × $0.04)] = $27,000 + $10,000 = $37,000 10 Stock Dividends Stock Dividends Distributable (5,000 × $20) Paid-In Capital in Excess of Par—Common Stock **(250,000 shares × 2% × $36) = $180,000

47,000

47,000 37,000* 37,000

180,000** 100,000 80,000

Page 70

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends Dec. 9 Cash Dividends Payable Cash

37,000

9 Stock Dividends Distributable 100,000 Common Stock DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-04 - 13-04 ACCT.WARD.18.13-05 - 13-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

37,000

100,000

205. Marcos Company, which had 35,000 shares of common stock outstanding, declared a 4-for-1 stock split. Required (a) What will be the number of shares outstanding after the split? (b) If the common stock had a market price of $280 per share before the stock split, what would be an approximate market price per share after the split? ANSWER: (a) 140,000 shares (35,000 × 4) (b) $70 per share ($280/4) DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-05 - 13-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 206. A corporation, which had 18,000 shares of common stock outstanding, declared a 3-for-1 stock split. (a) What will be the number of shares outstanding after the split? (b) If the common stock had a market price of $240 per share before the stock split, what would be an approximate market price per share after the split? (c) Journalize the entry to record the stock split. ANSWER: (a) 54,000 shares Number of Shares Outstanding after Split= Current Number of Shares Outstanding × Ratio of Stock Split =18,000 shares × 3 = 54,000 (b) $80 per share Approximate Market Price per Share after Split = Current Market Price/Ratio of Stock Split = $240/3 = $80 (c) No entry required DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-05 - 13-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 71

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 207. On February 1, Marine Company reacquired 7,500 shares of its common stock at $30 per share. On March 15, Marine sold 4,500 of the reacquired shares at $34 per share. On June 2, Marine sold the remaining shares at $28 per share. Required Journalize the transactions of February 1, March 15, and June 2. ANSWER: Feb. 1 Treasury Stock (7,500 × $30) 225,000 Cash 225,000 Mar. 15

June

Cash (4,500 × $34) Treasury Stock (4,500 × $30) Paid-In Capital from Sale of Treasury Stock [4,500 × ($34 – $30)]

153,000 135,000 18,000

Cash (3,000 × $28) 84,000 Paid-In Capital from Sale of Treasury Stock 6,000 [3,000 × ($30 – $28)] Treasury Stock (3,000 × $30)

90,000

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 208. On April 2 a corporation purchased for cash 5,000 shares of its own $10 par common stock at $16 per share. It sold 3,000 of the treasury shares at $19 per share on June 10. The remaining 2,000 shares were sold on November 10 for $12 per share. (a) Journalize the entries to record the purchase (treasury stock is recorded at cost). (b) Journalize the entries to record the sale of the stock. ANSWER: (a) Apr. 2 Treasury Stock (5,000 × $16) 80,000 Cash (b) June 15 Cash (3,000 × $19) Treasury Stock (3,000 × $16) Paid-In Capital from Sale of Treasury Stock [3,000 × ($16 – $19)]

80,000

57,000

Nov. 10 Cash (2,000 × $12) 24,000 Paid-In Capital from Sale of Treasury 8,000 Stock [2,000 × ($16 – $12)] Treasury Stock (2,000 × $16) DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

48,000 9,000

32,000

Page 72

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 209. On June 5, Belen Corporation reacquired 3,300 shares of its own common stock at $45 per share. On July 15, Belen sold 2,000 of the reacquired shares at $48 per share. On August 30, Belen sold the remaining shares at $42 per share. Journalize the transactions of June 5, July 15, and August 30. ANSWER: June 5 Treasury Stock (3,300 × $45) 148,500 Cash 148,500 July 15 Cash (2,000 × $48) Treasury Stock (2,000 × $45) Paid-In Capital from Sale of Treasury Stock [2,000 × ($48 – 45)]

96,000

Cash (1,300 × $42) Paid-in Capital from Sale of Treasury Stock [1,300 × ($45 – $42)] Treasury Stock (1,300 × $45)

54,600

Aug. 30

90,000 6,000

3,900 58,500

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 210. On March 4 of the current year, Barefoot Bay, Inc. reacquired 5,000 shares of its common stock at $89 per share. On August 7, Barefoot Bay sold 3,500 of the reacquired shares at $100 per share. The remaining 1,500 shares were sold at $88 per share on November 29. Required (a) Journalize the transactions of March 4, August 7, and November 29. (b) What is the balance in Paid-In Capital from Sale of Treasury Stock on December 31 of the current year? (c) Why might Barefoot Bay, Inc. have purchased the treasury stock? ANSWER: (a) Mar. 4 Treasury Stock 445,000 Cash 445,000 Aug. 7

Cash 350,000 Treasury Stock (3,500 × $89) 311,500 Paid-In Capital from Sale of 38,500 Treasury Stock

Nov. 29

Cash 132,000 Paid-In Capital from Sale of 1,500 Treasury Stock Treasury Stock (1,500 × $89) 133,500

(b) $37,000 credit (c) Barefoot Bay may have purchased the stock to support the market price of the stock, to provide shares for resale to employees, or for reissuance to employees as a bonus according to stock purchase agreements. DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-06 - 13-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Page 73

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 211. At December 31, Idaho Company had the following ending account balances: Retained Earnings Preferred Stock ($100 par, 7% cumulative, 10,000 authorized, 5,000 issued and outstanding) Treasury Stock Paid-In Capital in Excess of Par—Common Stock Paid-In Capital in Excess of Par—Preferred Stock Common Stock ($5 par value, 500,000 shares authorized, 105,000 issued)

$250,000 500,000 40,000 625,000 50,000 525,000

Prepare the Stockholders' equity section of the balance sheet in good form with all of the required disclosures. ANSWER: Stockholders' Equity Paid-in capital: Preferred 7% stock, $100 par (10,000 shares authorized, 5,000 issued) Excess of issue price over par Common stock, $5 par (500,000 shares authorized, 105,000 shares issued) Excess of issue price over par Total paid-in capital Retained earnings Treasury stock Total stockholders' equity DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic

$ 500,000 50,000 525,000 625,000 $1,700,000 250,000 (40,000) $1,910,000

Page 74

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 212. Using the following accounts and balances, prepare the Stockholders’ equity section of the balance sheet. Fifty thousand shares of common stock are authorized, and 5,000 shares have been reacquired. Common Stock, $50 par Paid-In Capital in Excess of Par Paid-In Capital from Sale of Treasury Stock Retained Earnings Treasury Stock ANSWER:

$1,250,000 800,000 42,000 4,350,000 155,000 Stockholders’ Equity

Paid-in capital: Common stock, $50 par (50,000 $1,250,000 shares authorized, 25,000 issued) Excess of issue price over par 800,000 From sale of treasury stock Total paid-in capital Retained earnings Total Treasury stock (5,000 shares at cost) Total stockholders’ equity DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

$2,050,000 42,000 $2,092,000 4,350,000 $6,442,000 (155,000) $6,287,000

213. Big Bluestem Inc. reported the following results for the year ending April 30: Retained earnings, May 1 Net income Cash dividends declared Stock dividends declared

$3,750,000 720,000 80,000 220,000

Prepare a retained earnings statement for the fiscal year ended April 30. ANSWER: Big Bluestem Inc. Retained Earnings Statement For the Year Ended April 30 Retained earnings, May 1 Net income $ 720,000 Dividends declared (300,000) Increase in retained earnings Retained earnings, April 30 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

$3,750,000

420,000 $4,170,000

Page 75

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 214. Using the following information, prepare the Stockholders’ equity section of the balance sheet. Seventy thousand shares of common stock are authorized and 7,000 shares have been reacquired. Common Stock, $75 par $4,725,000 Paid-In Capital in Excess of Par 679,000 Paid-In Capital from Sale of Treasury Stock 25,200 Retained Earnings 2,032,800 Treasury Stock 600,000 ANSWER: Stockholders’ Equity Paid-in capital: Common stock, $75 par (70,000 shares authorized, $4,725,000 63,000 shares issued) Paid-in capital in excess of 679,000 $5,404,000 par Paid-in capital from sale of 25,200 treasury stock Total paid-in capital $5,429,200 Retained earnings 2,032,800 Total $7,462,000 Treasury stock (7,000 shares at (600,000) cost) Total stockholders’ equity $6,862,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 215. Firefly, Inc. reported the following results for the year ending July 31: Retained earnings, August 1 $875,000 Net income 450,000 Cash dividends declared 140,000 Stock dividends declared 60,000 Prepare a retained earnings statement for the fiscal year ended July 31. ANSWER: Firefly, Inc. Retained Earnings Statement For the Year Ended July 31 Retained earnings, August 1 $ 875,000 Net income $ 450,000 Dividends declared (200,000) Increase in retained earnings 250,000 Retained earnings, July 31 $1,125,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Page 76

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 216. Torre Company has the following stockholders' equity account balances in stockholders' equity on December 31. Common Stock, $5 par (60,000 shares issued) Paid-In Capital in Excess of Par—Common Stock Preferred Stock, $100 par (5,000 shares issued) Paid-In Capital in Excess of Par—Preferred Stock Retained Earnings Treasury Stock (cost, $12 per share)

$300,000 600,000 500,000 100,000 200,000 60,000

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

How many shares of treasury stock are owned? What was the average market price per share at which common stock was issued? What was the average market price per share at which preferred stock was issued? What is the total value of the paid-in capital portion of stockholders' equity? What is the total value of stockholders' equity? How many shares of common stock are outstanding? If net income for the year was $75,000 and a preferred stock dividend of $20,000 was paid, what (g) was the beginning value of retained earnings? How much is earnings per share for the year? ANSWER: (a) 5,000 shares ($60,000/12) (b) $15 per share ($900,000/60,000) (c) $120 per share ($600,000/5,000) (d) $1,500,000 paid-in capital ($300,000 + $600,000 + $500,000 + $100,000) (e) $1,640,000 total stockholders' equity ($1,500,000 + $200,000 – $60,000) 55,000 shares of common stock outstanding (60,000 – 5,000 shares of treasury (f) stock) (g) $145,000 beginning retained earnings ($200,000 + $20,000 – $75,000) $1 earnings per share [($75,000 – $20,000)/55,000] DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-03 - 13-03 ACCT.WARD.18.13-06 - 13-06 ACCT.WARD.18.13-07 - 13-07 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 77

Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 217. A company had the following stockholders' equity information available at year-end: Issued 11,000 shares of $2 par common stock for $12 per share. Issued 5,000 shares of $50 par, 6% preferred stock for $70 per share. Purchased 1,000 shares of previously issued common stock for $15 per share. Reported net income of $200,000. Declared and paid the preferred stock dividend. Calculate the earnings per share for the current year. ANSWER: ($200,000 – $15,000)/10,000 common shares = $18.50 EPS DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.13-08 - 13-08 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 14 - Long-Term Liabilities: Bonds and Notes True / False 1. A bond is simply a form of an interest-bearing note. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-01 - 14-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 2. Bondholders are creditors of the issuing corporation. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-01 - 14-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 3. Bondholders' claims on the assets of the corporation rank ahead of stockholders' claims. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-01 - 14-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 4. A bond is usually divided into a number of individual bonds of $500 each. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 5. If the bondholder has the right to exchange a bond for shares of common stock, the bond is called a convertible bond. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 6. The prices of bonds are quoted as a percentage of the bonds' market value. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 7. The face value of a term bond is payable at a single specific date in the future. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 8. When a corporation issues bonds, it executes a contract with the bondholders, known as a bond debenture. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 9. The market rate of interest is affected by a variety of factors, including investors' assessment of current economic conditions. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 10. When the market rate of interest is less than the contract rate for a bond, the bond will sell for a premium. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 11. Bonds are sold at face value when the contract rate is equal to the market rate of interest. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 12. The price of a bond is equal to the sum of the interest payments and the face amount of the bonds. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 13. If the market rate of interest is 8% and a corporation's bonds bear interest at 7%, the bonds will sell at a premium. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 14. The total interest expense over the entire life of a bond is equal to the sum of the interest payments plus the total discount or minus the total premium related to the bond. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 15. Premium on bonds payable may be amortized by the straight-line method if the results obtained by its use do not materially differ from the results obtained by use of the interest method. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 16. If the straight-line method of amortization is used, the amount of unamortized premium on bonds payable will decrease as the bonds approach maturity. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 17. If the straight-line method of amortization of discount on bonds payable is used, the amount of yearly interest expense will increase as the bonds approach maturity. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 18. There are two methods of amortizing a bond discount or premium: the straight-line method and the double-decliningbalance method. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 19. The effective interest rate method of amortizing a bond discount or premium is the preferred method. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 20. The amount of interest expense reported on the income statement will be more than the interest paid to bondholders if the bonds were originally sold at a discount. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 21. The amortization of a premium on bonds payable decreases bond interest expense. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 22. If the amount of a bond premium on an issued 11%, four-year, $100,000 bond is $12,928, the semiannual straight-line amortization of the premium is $1,416. a. True b. False ANSWER: False RATIONALE: Semiannual Straight-Line Amortization of Premium = $12,928 ÷ (4 × 2) = $12,928 ÷ 8 = $1,616 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 23. If the amount of a bond premium on an issued 11%, four-year, $100,000 bond is $12,928, the annual interest expense is $5,500. a. True b. False ANSWER: False RATIONALE: Amount of Interest Payment = $100,000 × 11% = $11,000 Annual Premium Amortization = $12,928 ÷ 4 = $3,232 Annual Interest Expense = $11,000 – $3,232 = $7,768 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 24. To determine the six-month interest payment amount on a bond, you would take one-half of the market rate times the face value of the bond. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 25. Interest payments on 12% bonds with a face value of $20,000 and interest paid semiannually would be $2,400 every six months. a. True b. False ANSWER: False RATIONALE: Interest Payment Every 6 Months = $20,000 × 12% × 1/2 year = $1,200 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 26. Amortization is the allocation process of writing off bond premiums and discounts to interest expense over the life of the bond issue. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 27. If bonds are sold for a discount, the carrying value of the bonds is equal to the face value less the unamortized discount. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 28. Both callable and noncallable bonds can be purchased by the issuing corporation in the open market. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 29. There is a loss on redemption of bonds when bonds are redeemed above carrying value. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 30. When a portion of a bond issue is redeemed, a related proportion of the unamortized premium or discount must be written off. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 31. A corporation often issues callable bonds to protect itself against significant declines in future interest rates. a. True b. False ANSWER: True DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 32. Callable bonds can be redeemed by the issuing corporation at the fair market price of the bonds. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 33. Only callable bonds can be purchased by the issuing corporation before maturity. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 34. Callable bonds are redeemable by the issuing corporation within the period of time and at the price stated in the bond indenture. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 35. The carrying amount of the bonds is defined as the face value of the bonds plus any unamortized discount or less any unamortized premium. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 36. If bonds of $1,000,000 with unamortized discount of $10,000 are redeemed at 98, the gain on redemption of bonds is $10,000. a. True b. False ANSWER: True RATIONALE: Gain on Redemption of Bonds = Balance of Bonds Payable – Redemption Value of Bonds – Unamortized Discount = $1,000,000 – ($1,000,000 × 98%) – $10,000 = $1,000,000 – $980,000 – $10,000 = $10,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 37. Gains and losses on the redemption of bonds are reported as Other income or Other expense on the income statement. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 38. Discount on Bonds Payable is a contra liability account. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 39. When there are material differences between the results of using the straight-line method and using the effective interest rate method of amortization, the effective interest rate method should be used. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 40. An installment note is a debt that requires the borrower to make equal periodic payments to the lender for the term of the note. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-04 - 14-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 41. The interest portion of an installment note payment is computed by multiplying the interest rate by the carrying amount of the note at the end of the period. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-04 - 14-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 42. Bonds payable should be reported on the balance sheet at face value plus or minus any unamortized premium or discount. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-05 - 14-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 43. The balance in a bond discount account should be reported on the balance sheet as a deduction from the related bonds payable. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-05 - 14-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 44. The balance in Premium on Bonds Payable should be reported as a deduction from Bonds Payable on the balance sheet. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-05 - 14-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 45. The higher the times interest earned ratio, the better the creditors’ protection. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-06 - 14-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 46. The times interest earned ratio is calculated by dividing Bonds Payable by Interest Expense. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-06 - 14-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 47. The concept of present value is that an amount of cash to be received at some date in the future is the equivalent of the same amount of cash held at an earlier date. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-APP1 - 14-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 48. An equal stream of periodic payments is called an annuity. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-APP1 - 14-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 49. The buyer determines how much to pay for bonds by computing the present value of future cash receipts using the contract rate of interest. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-APP1 - 14-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 50. The present value of the periodic bond interest payments is the value today of the amount of interest to be received at the end of each interest period. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-APP1 - 14-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 51. The present value of an annuity is the sum of the present values of each cash flow. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-APP1 - 14-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 52. The present value of $5,000 to be received in four years at a market rate of interest of 6% compounded annually is $3,636.30. a. True b. False ANSWER: False RATIONALE: Present Value = $5,000 × Present Value Factor for $1 Discounted at 6% for 4 Periods = $5,000 × 0.79209 = $3,960.45 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-APP1 - 14-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.13 - Long-term Assets Reporting ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 53. One reason a dollar today is worth more than a dollar one year from today is the time value of money. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-APP1 - 14-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 54. If $500,000 of 10-year bonds with interest payable semiannually are sold for $494,040 based on (1) the present value of $500,000 due in 20 periods at 5% plus (2) the present value of twenty $25,000 payments at 5%, the nominal or contract rate and the market rate of interest for the bonds are both 10%. a. True b. False ANSWER: False RATIONALE: When the market rate is greater than the contract rate, bonds sell for less than their face value. Since the bonds are sold for less than face value of $500,000, the market rate will be greater than contract rate. DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-APP1 - 14-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 55. When the effective interest rate method of amortization is used, the amount of interest expense for a given period is calculated by multiplying the face rate of interest by the bond’s carrying value at the beginning of the given period. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-APP2 - 14-APP2 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 56. The effective interest rate method produces a constant dollar amount of interest expense to be reported each interest period. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-APP2 - 14-APP2 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic Multiple Choice 57. One potential advantage of financing corporations through the use of bonds rather than common stock is a. the interest on bonds must be paid when due b. the corporation must pay the bonds at maturity c. the interest expense is deductible for tax purposes by the corporation d. a higher earnings per share is guaranteed for existing common shareholders ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-01 - 14-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 58. Which of the following is not an advantage of issuing bonds instead of common stock? a. Tax savings result. b. Income to common shareholders may increase. c. Earnings per share on common stock may be lower. d. Stockholder control is not affected. ANSWER: c DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-01 - 14-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 59. A bond indenture is a. a contract between the corporation issuing the bonds and the underwriters selling the bonds b. the amount due at the maturity date of the bonds c. a contract between the corporation issuing the bonds and the bondholders d. the amount for which the corporation can buy back the bonds prior to the maturity date ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 60. When the corporation issuing the bonds has the right to redeem the bonds prior to maturity, the bonds are a. convertible bonds b. unsecured bonds c. debenture bonds d. callable bonds ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 61. When the maturities of a bond issue are spread over several dates, the bonds are called a. serial bonds b. bearer bonds c. debenture bonds d. term bonds ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 62. The market interest rate related to a bond is also called the a. stated interest rate b. effective interest rate c. contract interest rate d. straight-line rate ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 63. If the market rate of interest is 7%, the price of 6% bonds paying interest semiannually with a face value of $500,000 will be a. equal to $500,000 b. greater than $500,000 c. less than $500,000 d. greater than or less than $500,000, depending on the maturity date of the bonds ANSWER: c RATIONALE: If the market rate is greater than the contract rate, the bonds will sell for less than their face value. Thus, the price of the bond will be less than $500,000. DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 64. When the market rate of interest on bonds is higher than the contract rate, the bonds will sell at a. a premium b. their face value c. their maturity value d. a discount ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 65. The interest rate specified in the bond indenture is called the a. discount rate b. contract rate c. market rate d. effective rate ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 66. A legal document that indicates the name of the issuer, the face value of the bond and such other data is called a. trading on the equity b. a convertible bond c. a bond debenture d. a bond indenture ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.BB.03 - Legal ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 67. Bonds that are subject to retirement prior to maturity at the option of the issuer are called a. debentures b. callable bonds c. early retirement bonds d. options ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 68. On January 1 of the current year, Barton Corporation issued 10% bonds with a face value of $200,000. The bonds are sold for $191,000. The bonds pay interest semiannually on June 30 and December 31, and the maturity date is December 31, five years from now. Barton records straight-line amortization of the bond discount. The bond interest expense for the year ended December 31 is a. $10,900 b. $18,200 c. $21,800 d. $29,000 ANSWER: c RATIONALE: Bond Interest Expense = {(Face Value of Bonds × 10% × 1/2 year) + [Discount on Issue ÷ (5 years × 2)]} × 2 = {($200,000 × 10% × 1/2 year) + [($200,000 – $191,000)/(5 × 2)]} × 2 = ($10,000 + $900) × 2 = $21,800 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 69. If $1,000,000 of 8% bonds are issued at 102 3/4, the amount of cash received from the sale is a. $1,080,000 b. $972,500 c. $1,000,000 d. $1,027,500 ANSWER: d RATIONALE: Amount of Cash Received from Sale of Bonds = Face Value of Bond × Bond Quote = $1,000,000 × 102.75/100 = $1,027,500 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 70. If $2,000,000 of 10% bonds are issued at 97, the amount of cash received from the sale is a. $2,060,000 b. $2,000,000 c. $2,100,000 d. $1,940,000 ANSWER: d RATIONALE: Amount of Cash Received from Sale of Bonds = Face Value of Bonds × Bond Quote = $2,000,000 × 0.97 = $1,940,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 71. Selling the bonds at a premium has the effect of a. raising the effective interest rate above the stated interest rate b. attracting investors that are willing to pay a lower rate of interest than on similar bonds c. causing the interest expense to be higher than the bond interest paid d. causing the interest expense to be lower than the bond interest paid ANSWER: d DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 72. If bonds are issued at a discount, it means that the a. bondholder will receive effectively less interest than the contractual rate of interest b. market interest rate is lower than the contractual interest rate c. market interest rate is higher than the contractual interest rate d. financial strength of the issuer is suspect ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 73. Levi Company issued $200,000 of 12% bonds on January 1 at face value. The bonds pay interest semiannually on January 1 and July 1. The bonds are dated January 1 and mature in five years on January 1. The total interest expense related to these bonds for the current year ending on December 31 is a. $2,000 b. $6,000 c. $18,000 d. $24,000 ANSWER: d RATIONALE: Total Interest Expense = (Face Value of Bonds × 12% × 1/2 year) × 2 = ($200,000 × 12% × 1/2 year) × 2 = $24,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 74. A corporation issues for cash $1,000,000 of 10%, 20-year bonds, interest payable annually, at a time when the market rate of interest is 12%. The straight-line method is adopted for the amortization of bond discount or premium. Which of the following statements is true? a. The amount of annual interest expense is computed at 10% of the bond carrying amount at the beginning of the year. b. The amount of annual interest expense gradually decreases over the life of the bonds. c. The amount of unamortized discount decreases from its balance at issuance date to a zero balance at maturity. d. The bonds will be issued at a premium. ANSWER: c DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 75. If the straight-line method of amortization of bond premium or discount is used, which of the following statements is true? a. Annual interest expense will increase over the life of the bonds with the amortization of bond premium. b. Annual interest expense will remain the same over the life of the bonds with the amortization of bond discount. c. Annual interest expense will decrease over the life of the bonds with the amortization of bond discount. d. Annual interest expense will increase over the life of the bonds with the amortization of bond discount. ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 76. Basil Corporation issues for cash $1,000,000 of 8%, 10-year bonds, interest payable annually, at a time when the market rate of interest is 7%. The straight-line method is adopted for the amortization of bond discount or premium. Which of the following statements is true? a. The carrying amount increases from its amount at issuance date to $1,000,000 at maturity. b. The carrying amount decreases from its amount at issuance date to $1,000,000 at maturity. c. The amount of annual interest paid to bondholders increases over the 10-year life of the bonds. d. The amount of annual interest expense decreases as the bonds approach maturity. ANSWER: b DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 77. Dylan Corporation issues for cash $2,000,000 of 8%, 15-year bonds, interest payable annually, at a time when the market rate of interest is 9%. The straight-line method is adopted for the amortization of bond discount or premium. Which of the following statements is true? a. The amount of annual interest paid to bondholders remains the same over the life of the bonds. b. The amount of annual interest expense decreases as the bonds approach maturity. c. The amount of annual interest paid to bondholders increases over the 15-year life of the bonds. d. The carrying amount decreases from its amount at issuance date to $2,000,000 at maturity. ANSWER: a DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 78. The entry to record the amortization of a premium on bonds payable on an interest payment date would be a. a debit to Premium on Bonds Payable and a credit to Interest Revenue b. a debit to Interest Expense and a credit to Premium on Bond Payable c. a debit to Interest Expense and Premium on Bonds Payable and a credit to Cash d. a debit to Bonds Payable and a credit to Interest Expense ANSWER: c DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 79. The adjusting entry to record the amortization of a discount on bonds payable is a. debit Discount on Bonds Payable, credit Interest Expense b. debit Interest Expense, credit Discount on Bonds Payable c. debit Interest Expense, credit Cash d. debit Bonds Payable, credit Interest Expense ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 80. The journal entry a company records for the issuance of bonds when the contract rate and the market rate are the same is to a. debit Bonds Payable, credit Cash b. debit Cash and Discount on Bonds Payable, credit Bonds Payable c. debit Cash, credit Premium on Bonds Payable and Bonds Payable d. debit Cash, credit Bonds Payable ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 81. The journal entry a company records for the issuance of bonds when the contract rate is greater than the market rate would be a. debit Bonds Payable, credit Cash b. debit Cash and Discount on Bonds Payable, credit Bonds Payable c. debit Cash, credit Premium on Bonds Payable and Bonds Payable d. debit Cash, credit Bonds Payable ANSWER: c DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 82. The journal entry a company records for the issuance of bonds when the contract rate is less than the market rate would be a. debit Bonds Payable, credit Cash b. debit Cash and Discount on Bonds Payable, credit Bonds Payable c. debit Cash, credit Premium on Bonds Payable and Bonds Payable d. debit Cash, credit Bonds Payable ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 83. The journal entry a company records for the payment of interest, interest expense, and amortization of bond discount is a. debit Interest Expense, credit Cash and Discount on Bonds Payable b. debit Interest Expense, credit Cash c. debit Interest Expense and Discount on Bonds Payable, credit Cash d. debit Interest Expense, credit Interest Payable and Discount on Bonds Payable ANSWER: a DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 84. The journal entry a company records for the payment of interest, interest expense, and amortization of bond premium is a. debit Interest Expense, credit Cash and Premium on Bonds Payable b. debit Interest Expense, credit Cash c. debit Interest Expense and Premium on Bonds Payable, credit Cash d. debit Interest Expense, credit Interest Payable and Premium on Bonds Payable ANSWER: c DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 85. On January 1, Elias Corporation issued 10% bonds with a face value of $50,000. The bonds are sold for $46,000. The bonds pay interest semiannually on June 30 and December 31 and the maturity date is December 31, 10 years from now. Elias records straight-line amortization of the bond discount. The bond interest expense for the year ended December 31 of the first year is a. $5,000 b. $5,200 c. $5,800 d. $5,400 ANSWER: d RATIONALE: Bond Interest Expense = {(Face Value of Bonds × 10% × 1/2 year) + [Discount on Issue ÷ (10 years × 2)]} × 2 = {($50,000 × 10% × 1/2 year) + [($50,000 – $46,000)/(10 years × 2)]} × 2 = $5,400 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 86. If Eddie Industries issues $1,500,000 of 8% bonds at 105, the amount of cash received from the sale is a. $1,425,000 b. $1,080,000 c. $1,000,000 d. $1,575,000 ANSWER: d RATIONALE: Amount of Cash Received from Sale of Bonds = Face Value of Bonds × Bond Quote = $1,500,000 × 1.05 = $1,575,000 DIFFICULTY: Bloom's: Applying Easy LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 87. If the market rate of interest is greater than the contractual rate of interest, bonds will sell a. at a premium b. at face value c. at a discount d. only after the stated rate of interest is increased ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 88. The interest expense recorded on an interest payment date is increased a. only if the market rate of interest is less than the stated rate of interest on that date b. by the amortization of premium on bonds payable c. by the amortization of discount on bonds payable d. only if the bonds were sold at face value ANSWER: c DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 89. On January 1, $2,000,000, five-year, 10% bonds, were issued for $1,960,000. Interest is paid semiannually on January 1 and July 1. If the issuing corporation uses the straight-line method to amortize the discount on bonds payable, the semiannual amortization amount is a. $8,000 b. $2,000 c. $4,000 d. $10,000 ANSWER: c RATIONALE: Semiannual Discount Amortization Amount = (Face Value – Issue Price)/(5 × 2) = ($2,000,000 – $1,960,000)/10 = $4,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 90. If the market rate of interest is 10%, a $10,000, 12%, 10-year bond that pays interest semiannually would sell at an amount a. less than face value b. equal to the face value c. greater than face value d. The answer cannot be determined from the information given. ANSWER: c DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 91. Franklin Corporation issues $50,000, 10%, five-year bonds on January 1 for $52,100. Interest is paid semiannually on January 1 and July 1. If Franklin uses the straight-line method of amortization of bond premium, the amount of bond interest expense to be recognized on July 1 is a. $10,290 b. $2,710 c. $2,500 d. $2,290 ANSWER: d RATIONALE: Bond Interest Expense to Be Recognized on July 1 = {(Face Value of Bonds × 10% × 1/2 year) – [(Bond Realization – Face Value) ÷ (5 years × 2)]} × 2 = {($50,000 × 10% × 1/2 year) – [($52,100 – $50,000)/(5 years × 2)]} = $2,500 – $210 = $2,290 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 92. If bonds are issued at a premium, the stated interest rate is a. higher than the market rate of interest b. lower than the market rate of interest c. too low to attract investors d. adjusted to a higher rate of interest ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 93. Freeman Corporation issues 2,000, 10-year, 8%, $1,000 bonds dated January 1 at 96. The journal entry to record the issuance will show a a. debit to Cash for $2,000,000 b. credit to Discount on Bonds Payable for $80,000 c. credit to Bonds Payable for $1,920,000 d. debit to Cash for $1,920,000 ANSWER: d RATIONALE: Cash Received on Issue of Bonds by Freeman Corporation = Face Value of Each Bond × Number of Bonds × Bond Quote = $1,000 × 2,000 × 0.96 = $1,920,000 The journal entry to record the issuance will show a debit to Cash for $1,920,000. DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 94. Glenn Corporation issues 1,000, 10-year, 8%, $2,000 bonds dated January 1 at 96. The journal entry to record the issuance will show a a. debit to Discount on Bonds Payable for $80,000 b. debit to Cash for $2,000,000 c. credit to Bonds Payable for $1,920,000 d. credit to Cash for $1,920,000 ANSWER: a RATIONALE: Discount on Bonds Payable = Face Value of Bond – Cash Received from Issuance of Bonds = ($2,000 × 1,000) – ($2,000 × 1,000 × 0.96) = $2,000,000 – $1,920,000 = $80,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 95. Hayden Corporation issues 1,000, 10-year, 8%, $2,000 bonds dated January 1 at 92. The journal entry to record the issuance will show a a. credit to Discount on Bonds Payable for $160,000 b. debit to Cash for $2,000,000 c. credit to Bonds Payable for $2,000,000 d. credit to Cash for $1,840,000 ANSWER: c RATIONALE: Credit to Bonds Payable = Face Value of Bond × Number of Bonds = $2,000 × 1,000 = $2,000,000 The journal entry to record the issuance will show a credit to Bonds Payable for $2,000,000. DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 96. Bonds with a face amount of $1,000,000 are sold at 106. The journal entry to record the issuance is a. Cash 1,000,000 Premium on Bonds Payable 60,000 Bonds Payable 1,060,000 b. Cash 1,060,000 Premium on Bonds Payable 60,000 Bonds Payable 1,000,000 c. Cash 1,060,000 Discount on Bonds Payable 60,000 Bonds Payable 1,000,000 d. Cash 1,060,000 Bonds Payable 1,060,000 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 14 - Long-Term Liabilities: Bonds and Notes ANSWER: RATIONALE:

b Premium on Issue of Bonds = Cash Received from Issuance of Bonds – Face Value of Bonds = ($1,000,000 × 1.06) – $1,000,000 = $60,000 The journal entry to record the issuance is Cash 1,060,000 Premium on Bonds Payable 60,000 Bonds Payable 1,000,000

DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 97. Bonds with a face amount of $1,000,000 are sold at 98. The entry to record the issuance is a. Cash 1,000,000 Premium on Bonds Payable 20,000 Bonds Payable 980,000 b. Cash 980,000 Premium on Bonds Payable 20,000 Bonds Payable 1,000,000 c. Cash 980,000 Discount on Bonds Payable 20,000 Bonds Payable 1,000,000 d. Cash 980,000 Bonds Payable 980,000 ANSWER: c RATIONALE: Discount on Bonds Payable = Face Value of Bonds – Cash Received from Issuance of Bonds = $1,000,000 – ($1,000,000 × 0.98) = $20,000 The journal entry to record the issuance is Cash 980,000 Discount on Bonds Payable 20,000 Bonds Payable 1,000,000 DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 29

Chapter 14 - Long-Term Liabilities: Bonds and Notes 98. If bonds payable are not callable, the issuing corporation a. can exchange them for common stock b. can repurchase them in the open market c. must get special permission from the SEC to repurchase them d. is more likely to repurchase them if the interest rates increase ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 99. When callable bonds are redeemed below carrying value, a. Gain on Redemption of Bonds is credited b. Loss on Redemption of Bonds is debited c. Retained Earnings is credited d. Retained Earnings is debited ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 100. Bonds Payable has a balance of $1,000,000 and Discount on Bonds Payable has a balance of $10,000. If the issuing corporation redeems the bonds at 97.5, what is the amount of gain or loss on redemption? a. $10,000 loss b. $25,000 loss c. $25,000 gain d. $15,000 gain ANSWER: d RATIONALE: Gain on Redemption of Bonds = Balance of Bonds Payable – Redemption Value of Bonds – Balance of Discount on Bonds Payable = $1,000,000 – ($1,000,000 × 0.975) – $10,000 = $1,000,000 – $975,000 – $10,000 = $15,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 30

Chapter 14 - Long-Term Liabilities: Bonds and Notes 101. Bonds Payable has a balance of $900,000, and Premium on Bonds Payable has a balance of $10,000. If the issuing corporation redeems the bonds at 103, what is the amount of gain or loss on redemption? a. $1,200 loss b. $1,200 gain c. $17,000 loss d. $17,000 gain ANSWER: c RATIONALE: Loss on Redemption = Redemption Value of Bonds – Balance of Bonds Payable – Balance of Premium on Bonds Payable = ($900,000 × 1.03) – $900,000 – $10,000 = $927,000 – $900,000 – $10,000 = $17,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 102. A $300,000 bond was redeemed at 98 when the carrying value of the bond was $292,000. The entry to record the redemption would include a a. loss on bond redemption of $4,000 b. gain on bond redemption of $4,000 c. gain on bond redemption of $2,000 d. loss on bond redemption of $2,000 ANSWER: d RATIONALE: Loss on Bond Redemption = Redemption Value of Bonds – Carrying Value of Bond = ($300,000 × 0.98) – $292,000 = $2,000 The entry to record the redemption would include a loss on bond redemption of $2,000. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 103. A $300,000 bond was redeemed at 104 when the carrying value of the bond was $316,000. The entry to record the redemption would include a a. loss on bond redemption of $3,000 b. gain on bond redemption of $3,000 c. gain on bond redemption of $4,000 d. loss on bond redemption of $4,000 ANSWER: c RATIONALE: Gain on Bond Redemption = Carrying Value of Bond – Redemption Value of Bonds = $316,000 – ($300,000 × 1.04) = $4,000 The entry to record the redemption would include a gain on bond redemption of $4,000.

Page 31

Chapter 14 - Long-Term Liabilities: Bonds and Notes DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 104. Bonds Payable has a balance of $1,000,000, and Discount on Bonds Payable has a balance of $15,500. If the issuing corporation redeems the bonds at 98.5, what is the amount of gain or loss on redemption? a. $500 loss b. $15,500 loss c. $15,500 gain d. $500 gain ANSWER: a RATIONALE: Loss on Redemption = Redemption Value of Bonds + Balance of Discount on Bonds Payable – Balance of Bonds Payable = ($1,000,000 × 0.985) + $15,500 – $1,000,000 = $985,000 + $15,500 – $1,000,000 = $500 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 105. On the first day of the fiscal year, Lisbon Co. issued $1,000,000 of 10-year, 7% bonds for $1,050,000, with interest payable semiannually. Orange Inc. purchased the bonds on the issue date for the issue price. The journal entry to record the amortization of the premium (by the straight-line method) for the year by Lisbon Co. includes a debit to a. Interest Expense for $2,500 b. Premium on Bonds Payable for $2,500 c. Interest Expense for $5,000 d. Premium on Bonds Payable for $5,000 ANSWER: d RATIONALE: Amortization of Premium by Straight-Line Method for Year = [Premium Amount/(10 years × 2)] × 2 = [($1,050,000 – $1,000,000)/20] × 2 = ($50,000/20) × 2 = $5,000 The journal entry to record the amortization of the premium (by the straight-line method) for the year by Lisbon Co. includes a debit to Premium on Bonds Payable for $5,000. DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 106. On the first day of the fiscal year, Lisbon Co. issued $1,000,000 of 10-year, 7% bonds for $1,050,000, with interest payable semiannually. Orange Inc. purchased the bonds on the issue date for the issue price. If Lisbon uses the straightline method for amortizing the premium, the journal entry to record the first semiannual interest payment by Lisbon Co. would include a debit to a. Interest Payable for $30,000 b. Interest Expense for $32,500 c. Cash for $70,000 d. Premium on Bonds Payable for $5,500 ANSWER: b RATIONALE: Interest Expense = Interest – Amortization of Premium on Bonds Payable = [$1,000,000 × (7% ÷ 2)] – [($1,050,000 – $1,000,000)/(10 × 2)] = $35,000 – $2,500 = $32,500 The journal entry to record the first semiannual interest payment by Lisbon Co. would include a debit to Interest Expense for $32,500. DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 107. Bonds Payable has a balance of $1,000,000 and Premium on Bonds Payable has a balance of $7,000. If the issuing corporation redeems the bonds at 101, what is the amount of gain or loss on redemption? a. $3,000 loss b. $3,000 gain c. $7,000 loss d. $7,000 gain ANSWER: a RATIONALE: Loss on Redemption of Bonds = Redemption Value of Bonds – Balance of Bonds Payable – Balance of Premium on Bonds Payable = ($1,000,000 × 1.01) – $1,000,000 – $7,000 = $3,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 33

Chapter 14 - Long-Term Liabilities: Bonds and Notes 108. When the bonds are sold for more than their face value, the carrying value of the bonds is equal to a. face value b. face value plus the unamortized discount c. face value minus the unamortized premium d. face value plus the unamortized premium ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCT.WARD.18.14-05 - 14-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 109. The balance in Discount on Bonds Payable a. should be reported on the balance sheet as an asset because it has a debit balance b. should be allocated to the remaining periods for the life of the bonds by the straight-line method, if the results obtained by that method materially differ from the results that would be obtained by the effective interest rate method c. would be added to the related bonds payable to determine the carrying amount of the bonds d. would be subtracted from the related bonds payable on the balance sheet ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCT.WARD.18.14-05 - 14-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic 110. The balance in Premium on Bonds Payable a. should be reported on the balance sheet as a deduction from the related bonds payable b. should be allocated to the remaining periods for the life of the bonds by the straight-line method, if the results obtained by that method materially differ from the results that would be obtained by the effective interest rate method c. would be added to the related bonds payable on the balance sheet d. should be reported in the Paid-in capital section of the balance sheet ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCT.WARD.18.14-05 - 14-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Page 34

Chapter 14 - Long-Term Liabilities: Bonds and Notes 111. If a company borrows money from a bank as an installment note, the interest portion of each annual payment will a. equal the interest rate on the note times the carrying amount of the note at the beginning of the period b. remain constant over the term of the note c. equal the interest rate on the note times the face amount d. increase over the term of the note ANSWER: a DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.14-04 - 14-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 112. On the first day of the fiscal year, Hawthorne Company obtained an $88,000, seven-year, 5% installment note from Sea Side Bank. The note requires annual payments of $15,208, with the first payment occurring on the last day of the fiscal year. The first payment consists of interest of $4,400 and principal repayment of $10,808. The journal entry Hawthorne would record to make the first annual payment due on the note would include a a. debit to Cash for $15,208 b. credit to Notes Payable for $10,808 c. debit to Interest Expense for $4,400 d. debit to Notes Payable for $15,208 ANSWER: c RATIONALE: The journal entry Hawthorne would record to make the first annual payment due on the note would include a debit to Interest Expense for $4,400. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-04 - 14-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 113. On January 1, Gemstone Company obtained a $165,000, 10-year, 7% installment note from Guarantee Bank. The note requires annual payments of $23,492, with the first payment occurring on the last day of the fiscal year. The first payment consists of interest of $11,550 and principal repayment of $11,942. The journal entry to record the payment of the first annual amount due on the note would include a a. debit to Cash for $11,942 b. credit to Interest Payable for $11,550 c. debit to Notes Payable for $11,942 d. debit to Interest Expense for $23,492 ANSWER: c RATIONALE: The journal entry to record the payment of the first annual amount due on the note would include a debit to Notes Payable for $11,942 for the principal portion of the repayment.

Page 35

Chapter 14 - Long-Term Liabilities: Bonds and Notes DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-04 - 14-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 114. On January 1, Gemstone Company obtained a $165,000, 10-year, 7% installment note from Guarantee Bank. The note requires annual payments of $23,492, with the first payment occurring on the last day of the fiscal year. The first payment consists of interest of $11,550 and principal repayment of $11,942. The journal entry to record the issuance of the installment note for cash on January 1 would include a a. debit to Interest Expense for $11,550 b. credit to Interest Payable for $11,550 c. credit to Notes Payable for $165,000 d. debit to Notes Payable for $165,000 ANSWER: c RATIONALE: The journal entry to record the issuance of the installment note for cash on January 1 would include a credit to Notes Payable for $165,000 for the principal amount of the note. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-04 - 14-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.06 - Recording Transactions ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 115. On January 1, Zero Company obtained a $52,000, four-year, 6.5% installment note from Regional Bank. The note requires annual payments consisting of principal and interest of $15,179, beginning on December 31 of the current year. The December 31, Year 1, carrying amount in the amortization table for this installment note will be equal to a. $27,635 b. $40,201 c. $36,821 d. $48,620 ANSWER: b RATIONALE: A B C D E Interest Expense Decrease in December 31 For the January 1 Note (6.50% of January 1 Notes Carrying Year Carrying Payment Note Carrying Payable Amount (A – Ending Amount (cash paid) Amount) (B – C) D) December 31, Year 1

$52,000

$15,179

$3,380 (6.5% × $52,000)

$11,799

$40,201

Page 36

Chapter 14 - Long-Term Liabilities: Bonds and Notes DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-04 - 14-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 116. On January 1, Year 1, Zero Company obtained a $52,000, four-year, 6.5% installment note from Regional Bank. The note requires annual payments of $15,179, beginning on December 31, Year 1. The December 31, Year 2 carrying amount in the amortization table for this installment note will be equal to a. $26,000 b. $27,635 c. $21,642 d. $28,402 ANSWER: b RATIONALE: A B C D E Interest Expense Decrease in December 31 For the January 1 Note (6.5% of January 1 Notes Carrying Year Carrying Payment Note Carrying Payable Amount (A – Ending Amount (cash paid) Amount) (B – C) D) December 31, Year 1

$52,000

$15,179

$3,380 (6.5% × $52,000)

$11,799

$40,201

December 31, Year 2

40,201

15,179

2,613 (6.5% × $40,201)

12,566

27,635

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-04 - 14-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 37

Chapter 14 - Long-Term Liabilities: Bonds and Notes 117. On January 1, Year 1, Zero Company obtained a $52,000, four-year, 6.5% installment note from Regional Bank. The note requires annual payments of $15,179, beginning on December 31, Year 1. The December 31, Year 3 carrying amount in the amortization table for this installment note will be equal to a. $0 b. $13,000 c. $14,252 d. $16,603 ANSWER: c RATIONALE: A B C D E Interest Expense Decrease in December 31 For the January 1 Note (6.5% of January 1 Notes Carrying Year Carrying Payment Note Carrying Payable Amount (A – Ending Amount (cash paid) Amount) (B – C) D) December 31, Year 1

$52,000

$15,179

$3,380 (6.5% × $52,000)

$11,799

$40,201

December 31, Year 2

40,201

15,179

2,613 (6.5% × $40,201)

12,566

27,635

December 31, Year 3

27,635

15,179

1,796 (6.5% × $27,635)

13,383

14,252

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-04 - 14-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 118. An installment note payable for a principal amount of $94,000 at 6% interest requires Lawson Company to repay the principal and interest in equal annual payments of $22,315 beginning December 31, of the first year, for each of the next five years. After the final payment, the carrying amount on the note will be a. $1,263 b. $21,053 c. $22,315 d. $0

Page 38

Chapter 14 - Long-Term Liabilities: Bonds and Notes ANSWER: RATIONALE:

For the Year Ending

A B C D E January Note Interest Expense Decrease in December 31 1 Payment (6% of January 1 Notes Carrying Carrying (cash Note Carrying Payable Amount (A – Amount paid) Amount) (B – C) D)

December $94,000 31, Year 1

$22,315

$5,640 (6% × $94,000)

$16,675

$77,325

December 31, Year 2

77,325

22,315

4,640 (6% × $77,325)

17,676*

59,650

December 31, Year 3

59,650

22,315

3,579 (6% × $59,650)

18,736

40,913*

December 31, Year 4

40,913

22,315

2,455 (6% × $40,913)

19,860

21,053

December 31, Year 5

21,053

22,315

1,262 (6% × $21,053)

21,053

*Differences due to rounding DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-04 - 14-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 119. Any unamortized premium should be reported on the balance sheet of the issuing corporation as a. a direct deduction from the face amount of the bonds in the Liabilities section b. paid-in capital c. a direct deduction from retained earnings d. an addition to the face amount of the bonds in the Liabilities section ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.14-05 - 14-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 120. The balance in Discount on Bonds Payable that is applicable to bonds due in three years would be reported on the balance sheet in the section entitled a. Investments b. Long-term liabilities c. Current assets d. Intangible assets ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.14-05 - 14-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic 121. Balance sheet and income statement data indicate the following: Bonds payable, 6% (due in 15 years) Preferred 8% stock, $100 par (no change during the year) Common stock, $50 par (no change during the year) Income before income tax for year Income tax for year Common dividends paid Preferred dividends paid

$1,200,000 200,000 1,000,000 320,000 80,000 60,000 16,000

Based on the data presented above, what is the times interest earned ratio (round to two decimal places)? a. 5.00 b. 5.44 c. 4.00 d. 4.33 ANSWER: b RATIONALE: Times Interest Earned = (Income Before Income Tax + Interest Expense)/Interest Expense = [$320,000 + ($1,200,000 × 6%)]/($1,200,000 × 6%) = 5.44 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-06 - 14-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 122. Debtors are interested in the times interest earned ratio because they want to a. know what rate of interest the corporation is paying b. have adequate protection against a potential drop in earnings jeopardizing their interest payments c. be sure their debt is backed by collateral d. know the tax effect of lending to a corporation ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.14-06 - 14-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 123. The times interest earned ratio is computed as a. (Income Before Income Taxes + Interest Expense) ÷ Interest Expense b. (Income Before Income Taxes – Interest Expense) ÷ Interest Expense c. Income Before Income Taxes ÷ Interest Expense d. (Income Before Income Taxes + Interest Expense) ÷ Interest Revenue ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-06 - 14-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 124. Balance sheet and income statement data indicate the following: Bonds payable, 6% (this is Year 4 of 20 years) Preferred 8% stock, $100 par (no change during the year) Common stock, $50 par (no change during the year) Income before income tax for year Income tax for year Common dividends paid Preferred dividends paid

$1,200,000 200,000 1,000,000 340,000 80,000 60,000 16,000

Based on the data presented above, what is the times interest earned ratio (round to two decimal places)? a. 5.72 b. 6.83 c. 4.72 d. 4.83 ANSWER: a RATIONALE: Times Interest Earned = (Income Before Income Tax + Interest Expense)/Interest Expense = [$340,000 + ($1,200,000 × 6%)]/($1,200,000 × 6%) = 5.72 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Page 41

Chapter 14 - Long-Term Liabilities: Bonds and Notes DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-06 - 14-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 125. The present value of $40,000 to be received in two years, at 12% compounded annually, is (rounded to nearest dollar) a. $31,888 b. $48,112 c. $8,112 d. $40,000 ANSWER: a RATIONALE: Present Value = $40,000 × Present Value Factor (of $1 to be received in two years, at 12% compounded annually) = $40,000 × 0.79719 = $31,888 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-APP1 - 14-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 126. A corporation issues for cash $9,000,000 of 8%, 30-year bonds, interest payable semiannually. The amount received for the bonds will be a. present value of 60 semiannual interest payments of $360,000, plus present value of $9,000,000 to be repaid in 30 years b. present value of 30 annual interest payments of $720,000 c. present value of 30 annual interest payments of $360,000, plus present value of $9,000,000 to be repaid in 30 years d. present value of $9,000,000 to be repaid in 30 years, less present value of 60 semiannual interest payments of $360,000 ANSWER: a RATIONALE: Semiannual Interest Payment = $9,000,000 × (8% ÷ 2) = $360,000 The amount received for the bonds will be present value of 60 semiannual interest payments of $360,000, plus present value of $9,000,000 to be repaid in 30 years DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-APP1 - 14-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 127. The present value of $60,000 to be received in one year, at 6% compounded annually, is (rounded to nearest dollar) a. $56,604 b. $63,396 c. $60,000 d. $3,396 ANSWER: a RATIONALE: Present Value = $60,000 × Present Value Factor (of $1 to be received in one year, at 6% compounded annually) = $60,000 × 0.94340 = $56,604 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-APP1 - 14-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.15 - Current Assets Reporting ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 128. When the market rate of interest was 12%, Halprin Corporation issued $1,000,000, 11%, 10-year bonds that pay interest annually. The selling price of this bond issue was a. $321,970 b. $1,000,000 c. $943,494 d. $621,524 ANSWER: c RATIONALE: Selling Price of Bonds = Present Value of Face Amount of $1,000,000 (due in 10 years, at 12% compounded annually) + Present Value of 10 Annual Interest Payments of $110,000 (at 12% compounded annually) Present Value of Face Amount of $1,000,000 (due in 10 years, at 12% compounded annually) = $1,000,000 × 0.32197 = $321,970 Present Value of 10 Annual Interest Payments of $110,000 (at 12% compounded annually) = $110,000 × 5.65022 = $621,524 Selling Price of Bonds = $321,970 + $621,524 = $943,494 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-APP1 - 14-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 129. Designer Company issued 10-year bonds on January 1. The 6% bonds have a face value of $800,000 and pay interest every January 1 and July 1. The bonds were sold for $690,960 based on the market interest rate of 8%. Designer uses the effective interest method to amortize bond discounts and premiums. On July 1 of the first year, Designer should record an interest expense (round to the nearest dollar) of a. $27,638 b. $24,000 c. $48,000 d. $55,277 ANSWER: a RATIONALE: Interest Expense on July 1, Year 1 = Bond Carrying Amount × (Market Interest Rate ÷ 2) = $690,960 × (8% ÷ 2) = $690,960 × 4% = $27,638 As Designer uses the effective interest method to amortize bond discounts and premiums, the interest expense on July 1, Year 1, is $27,638. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-APP2 - 14-APP2 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 130. Merchant Company issued 10-year bonds on January 1. The 15% bonds have a face value of $100,000 and pay interest every January 1 and July 1. The bonds were sold for $117,205 based on the market interest rate of 12%. Merchant uses the effective interest method to amortize bond discounts and premiums. On July 1 of the first year, Merchant should record interest expense (round to the nearest dollar) of a. $7,032 b. $7,500 c. $8,790 d. $14,065 ANSWER: a RATIONALE: Interest Expense on July 1, Year 1 = Bond Carrying Amount × (Market Interest Rate ÷ 2) = $117,205 × (12% ÷ 2) = $117,205 × 6% = $7,032 As Merchant uses the effective interest method to amortize bond discounts and premiums, the interest expense on July 1, Year 1, is $7,032. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-APP2 - 14-APP2 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 131. When the effective interest method is used, the amortization of the bond premium a. increases interest expense each period b. decreases interest expense each period c. increases interest expense in some periods and decreases interest expense in other periods d. has no effect on the interest expense in any period ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.14-APP2 - 14-APP2 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic Matching Match each description below to the appropriate term (a–g). a. Contract rate b. Effective rate c. Bond discount d. Bond premium e. Bond f. Bond indenture g. Principal DIFFICULTY:

Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-01 - 14-01 ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Reflective Thinking 132. The face amount of each bond ANSWER: g 133. A form of an interest-bearing note ANSWER: e 134. The return required by the market on the day of issuance ANSWER: b 135. If the contract rate exceeds the effective rate ANSWER: d 136. The rate printed on the bond certificate ANSWER: a © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 137. If the contract rate is less than the effective rate ANSWER: c 138. The contract between bond issuer and bond purchaser ANSWER: f Match each description below to the appropriate term (a–g). a. EPS b. Face value c. Callable bond d. Indenture e. Term bond f. Convertible bond g. Serial bond DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.14-01 - 14-01 ACCT.WARD.18.14-02 - 14-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Reflective Thinking 139. A measure of income earned by each share of common stock ANSWER: a 140. The entire principal of the bond is paid back on maturity date ANSWER: e 141. The value of a bond stated on the bond certificate ANSWER: b 142. The legal contract between issuer and bondholder ANSWER: d 143. Allows the issuer to redeem bonds before maturity date ANSWER: c 144. The principal of the bond issue is paid back in installments ANSWER: g 145. Allows the bondholder to exchange bond for shares of stock ANSWER: f

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Chapter 14 - Long-Term Liabilities: Bonds and Notes Subjective Short Answer 146. Two companies are financed as follows: Bonds payable, 9% issued at face Common stock, $25 par Income tax is estimated at 40% of income for both companies.

X Co. $5,000,000 3,000,000

Y Co. $3,000,000 3,000,000

Determine for each company the earnings per share of common stock, assuming that the income before bond interest and income taxes is $2,280,000 each. ANSWER:

X Co. Y Co. Earnings before interest and taxes $2,280,000 $2,280,000 Deduct interest on bonds 450,000 270,000 Income before income tax $1,830,000 $2,010,000 Deduct income tax 732,000 804,000 Net income $1,098,000 $1,206,000 Number of common shares ÷ 120,000 ÷ 120,000 Earnings per share on common stock $9.15 $10.05 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-01 - 14-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 147. Ulmer Company is considering the following alternative financing plans: Plan 1 $2,000,000 — 2,000,000

Issue 8% bonds at face value Issue preferred stock, $15 par Issue common stock, $10 par

Plan 2 $1,000,000 1,500,000 1,500,000

Income tax is estimated at 35% of income. Dividends of $1 per share were declared and paid on the preferred stock. Determine the earnings per share of common stock, assuming income before bond interest and income tax is $600,000. ANSWER: Plan 1 Plan 2 Earnings before bond interest and income tax Bond interest Balance Income tax Net income Dividends on preferred stock Earnings available for common stock Number of common shares Earnings per share on common stock

$600,000 160,0001 $440,000 154,0002 $286,000 0 $286,000 200,000 $ 1.43

$600,000 80,0003 $520,000 182,0004 $338,000 100,000 $238,000 150,000 $ 1.59

$2,000,000 × 8% $440,000 × 35% 3 $1,000,000 × 8% 4 $520,000 × 35% 2

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Chapter 14 - Long-Term Liabilities: Bonds and Notes DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-01 - 14-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 148. Sorenson Co. is considering the following alternative plans for financing the company: Plan 1 Issue 10% bonds (at face) Issue $10 par common stock

— $4,000,000

Plan 2 $3,000,000 1,000,000

Income tax is estimated at 40% of income. Determine the earnings per share of common stock under the two alternative financing plans, assuming income before bond interest and income tax is $1,000,000. ANSWER: Plan 1 Plan 2 Earnings before bond interest and income tax $1,000,000 $1,000,000 Bond interest expense 0 300,000* Income before taxes $1,000,000 $700,000 Income tax 400,000** 280,000*** Net income $ 600,000 $420,000 Dividends on preferred stock 0 0 Earnings available for common stock $600,000 $420,000 Number of common shares ÷400,000 ÷100,000 Earnings per share $1.50 $4.20 *$3,000,000 × 10% **$1,000,000 × 40% ***$700,000 × 40% DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-01 - 14-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 149. Jenson Co. is considering the following alternative plans for financing the company: Plan 1 Issue 10% bonds (at face) Issue $10 common stock

— $3,000,000

Plan 2 $2,000,000 1,000,000

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Chapter 14 - Long-Term Liabilities: Bonds and Notes ANSWER:

Plan 1 Plan 2 Earnings before bond interest and income tax $1,000,000 $1,000,000 Bond interest expense 0 200,000* Balance $1,000,000 $800,000 Income tax 400,000** 320,000*** Net income $600,000 $480,000 Dividends on preferred stock 0 0 Earnings available for common stock $600,000 $ 480,000 Number of common shares ÷300,000 ÷100,000 Earnings per share $2.00 $4.80 *$2,000,000 × 10% **$1,000,000 × 40% ***$800,000 × 40%

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-01 - 14-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 150. On the first day of the fiscal year, a company issues a $1,000,000, 7%, five-year bond that pays semiannual interest of $35,000 ($1,000,000 × 7% × 1/2), receiving cash of $884,171. Journalize the entry to record the issuance of the bonds. ANSWER: Cash 884,171 Discount on Bonds Payable 115,829 Bonds Payable 1,000,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 151. On the first day of the fiscal year, a company issues a $500,000, 8%, 10-year bond that pays semiannual interest of $20,000 ($500,000 × 8% × 1/2), receiving cash of $437,740. Journalize the entry to record the issuance of the bonds. ANSWER: Cash 437,740 Discount on Bonds Payable 62,260 Bonds Payable 500,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 152. On the first day of the fiscal year, a company issues a $1,000,000, 7%, five-year bond that pays semiannual interest of $35,000 ($1,000,000 × 7% × 1/2), receiving cash of $884,171. Journalize the first interest payment and the amortization of the related bond discount using the straight-line method. Round answers to the nearest dollar. ANSWER: Interest Expense 46,583 Discount on Bonds Payable 11,583 Cash 35,000 DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 153. On the first day of the fiscal year, a company issues an $800,000, 6%, five-year bond that pays semiannual interest of $24,000 ($800,000 × 6% × 1/2), receiving cash of $690,960. Journalize the entry to record the first interest payment and the amortization of the related bond discount using the straight-line method. ANSWER: Interest Expense 34,904 Discount on Bonds Payable 10,904 Cash 24,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 154. On the first day of the fiscal year, a company issues a $500,000, 8%, 10-year bond that pays semiannual interest of $20,000 ($500,000 × 8% × 1/2), receiving cash of $530,000. Journalize the entry to record the issuance of the bonds. ANSWER: Cash 530,000 Premium on Bonds Payable 30,000 Bonds Payable 500,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 155. On the first day of the fiscal year, a company issues a $500,000, 8%, 10-year bond that pays semiannual interest of $20,000 ($500,000 × 8% × 1/2), receiving cash of $520,000. Journalize the entry to record the first interest payment and amortization of premium using the straight-line method. ANSWER: Interest Expense 19,000 Premium on Bonds Payable 1,000 Cash 20,000 DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 156. A $375,000 bond issue on which there is an unamortized discount of $40,000 is redeemed for $320,000. Journalize the redemption of the bonds. ANSWER: Bonds Payable 375,000 Discount on Bonds Payable 40,000 Gain on Redemption of Bonds 15,000 Cash 320,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 157. A $500,000 bond issue on which there is an unamortized discount of $35,000 is redeemed for $475,000. Journalize the redemption of the bonds. ANSWER: Bonds Payable 500,000 Loss on Redemption of Bonds 10,000 Discount on Bonds Payable 35,000 Cash 475,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 158. A $500,000 bond issue on which there is an unamortized discount of $20,000 is redeemed for $475,000. Journalize the redemption of the bonds. ANSWER: Bonds Payable 500,000 Gain on Redemption of Bonds 5,000 Discount on Bonds Payable 20,000 Cash 475,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 159. (a) Prepare the journal entry to issue $500,000 bonds that sold for $490,000. (b) Prepare the journal entry to issue $500,000 bonds that sold for $515,000. ANSWER: (a) Cash 490,000 Discount on Bonds Payable 10,000 Bonds Payable 500,000 (b) Cash 515,000 Premium on Bonds Payable 15,000 Bonds Payable 500,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 160. Brubeck Co. issued $10,000,000 of 30-year, 8% bonds on May 1 of the current year, with interest payable on May 1 and November 1. The fiscal year of the company is the calendar year. Journalize the entries to record the following selected transactions for the current year: May 1 Issued the bonds for cash at their face amount. Nov. 1 Paid the interest on the bonds. Dec. 31 Recorded accrued interest for two months. ANSWER: May 1 Cash Bonds Payable Nov. 1

Dec. 31

10,000,000 10,000,000

Interest Expense Cash

400,000

Interest Expense Interest Payable

133,333

400,000

133,333

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 161. On the first day of the current fiscal year, $1,500,000 of 10-year, 8% bonds, with interest payable semiannually, were sold for $1,225,000. Present entries to record the following transactions for the current fiscal year: (a) Issuance of the bonds. (b) First semiannual interest payment (record as separate entry from discount amortization). (c) Amortization of bond discount for the year, using the straight-line method of amortization. ANSWER: (a) Cash 1,225,000 Discount on Bonds Payable 275,000 Bonds Payable 1,500,000 (b) Interest Expense 60,000 Cash 60,000 (c) Interest Expense 27,500 Discount on Bonds Payable 27,500 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 162. On the first day of the current fiscal year, $2,000,000 of 10-year, 7% bonds, with interest payable annually, were sold for $2,125,000. Present entries to record the following transactions for the current fiscal year: (a) Issuance of the bonds. (b) First annual interest payment (record as separate entry from premium amortization). (c) Amortization of bond premium for the year, using the straight-line method of amortization. ANSWER: (a) Cash 2,125,000 Premium on Bonds Payable 125,000 Bond Payable 2,000,000 (b) Interest Expense 140,000 Cash 140,000 (c) Premium on Bonds Payable 12,500 Interest Expense 12,500 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 163. On August 1, Clayton Co. issued $1,300,000 of 20-year, 9% bonds, dated August 1, for $1,225,000. Interest is payable semiannually on February 1 and August 1. Present the entries to record the following transactions for the current year: (a) (b)

Issuance of the bonds. Accrual of interest and amortization of bond discount for the first year, on December 31, using the straight-line method. Round to the nearest dollar when necessary. ANSWER: (a) Cash 1,225,000 Discount on Bonds Payable 75,000 Bonds Payable 1,300,000 (b) Interest Expense 48,750 Interest Payable 48,750 Interest Expense 1,563 Discount on Bonds Payable DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

1,563

164. On the first day of the fiscal year, Lisbon Co. issued $1,000,000 of 10-year, 7% bonds for $1,050,000, with interest payable semiannually. Orange Inc. purchased the bonds on the issue date for the issue price. Prepare entries to record the following transactions for the current fiscal year: (a) (b)

Issuance of the bonds. Second semiannual interest payment. Amortization of bond premium for the first year, using the straight-line method of (c) amortization. ANSWER: (a) Cash 1,050,000 Premium on Bonds Payable Bonds Payable (b) Interest Expense 35,000 Cash (c) Premium on Bonds Payable 5,000 Interest Expense

50,000 1,000,000

35,000

5,000

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 165. Present entries to record the selected transactions described below. (a) (b)

Issued $2,750,000 of 10-year, 8% bonds at 97. Amortized bond discount for a full year, using the straight-line method. At the end of the third year, called bonds at 98. The bonds were carried at $2,692,250 at the (c) time of the redemption. ANSWER: (a) Cash 2,667,500 Discount on Bonds Payable 82,500 Bonds Payable 2,750,000 (b) Interest Expense 8,250 Discount on Bonds Payable 8,250 (c) Bonds Payable 2,750,000 Loss on Redemption of Bonds 2,750 Discount on Bonds Payable 57,750 Cash 2,695,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 166. A company issued $1,000,000 of 30-year, 8% callable bonds on April 1, with interest payable on April 1 and October 1. The fiscal year of the company is the calendar year. Journalize the entries to record the following selected transactions: Year 1 Apr. 1 Oct. 1

Issued the bonds for cash at their face amount. Paid the interest on the bonds.

Year 3 Oct. 1 Called the bond issue at 104, the rate provided in the bond indenture. (Omit entry for payment of interest.) ANSWER: Year 1 Apr. 1 Cash 1,000,000 Bonds Payable 1,000,000 Oct. 1 Interest Expense Cash

40,000 40,000

Year 3 Oct. 1 Bonds Payable 1,000,000 Loss on Redemption of Bonds 40,000 Cash 1,040,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 167. Luke Corp. issued $2,000,000 of 20-year, 9% callable bonds on July 1, Year 1, with interest payable on June 30 and December 31. The fiscal year of the company is the calendar year. Journalize the entries to record the following selected transactions: Year 1 July 1 Dec. 31

Issued the bonds for cash at their face amount. Paid the interest on the bonds.

Year 5 Dec. 31

Called the bond issue at 97, the rate provided in the bond indenture. (Omit entry for payment of interest.) ANSWER: Year 1 July 1 Cash 2,000,000 Bonds Payable Dec. 31 Interest Expense Cash

2,000,000

90,000 90,000

Year 5 Dec. 31 Bonds Payable 2,000,000 Gain on Redemption of Bonds Cash DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

60,000 1,940,000

168. On June 30, Jamison Company issued $2,500,000 of 10-year, 8% bonds, dated June 30, for $2,580,000. Present entries to record the following transactions: (a)

Issuance of bonds. Payment of first semiannual interest on December 31 (record separate entry from premium (b) amortization). (c) Amortization by straight-line method of bond premium on December 31. ANSWER: (a) Cash 2,580,000 Premium on Bonds Payable 80,000 Bonds Payable 2,500,000 (b) Interest Expense Cash

100,000

(c) Premium on Bonds Payable 4,000 Interest Expense DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

100,000

4,000

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 169. Calculate the total amount of interest expense over the life of the bonds for the following independent situations. (a) $100,000 face value, 10%, 10-year bonds issued at 101 (b) $240,000 face value, 5%, five-year bonds issued at 100 (c) $300,000 face value, 9%, six-year bonds issued at 98 ANSWER: (a) $100,000 × 0.01 = $1,000 premium $100,000 × 0.10 = $10,000 annual cash payment $10,000 × 10 years = $100,000 $100,000 – $1,000 = $99,000 total interest expense (b) $240,000 × 0.05 = $12,000 annual cash payment $12,000 × 5 years = $60,000 total interest expense (c) $300,000 × 0.02 = $6,000 discount $300,000 × 0.09 = $27,000 annual cash payment $27,000 × 6 years = $162,000 $162,000 + $6,000 = $168,000 total interest expense DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 170. (a) Prepare the journal entry to issue $100,000 bonds that sold for $94,000. (b) Prepare the journal entry to issue $100,000 bonds that sold for $104,000. ANSWER: (a) Cash 94,000 Discount on Bonds Payable 6,000 Bonds Payable 100,000 (b) Cash 104,000 Premium on Bonds Payable 4,000 Bonds Payable 100,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 171. Glover Corporation issued $2,000,000 of 7.5%, six-year bonds dated March 1, with semiannual interest payments on September 1 and March 1. The bonds were issued on March 1 at 97. Glover’s year-end is December 31. If required, round answers to the nearest whole amount. (a) Were the bonds issued at a premium, at a discount, or at par? (b) Was the market rate of interest higher, lower, or the same as the contract rate of interest? (c) If the company uses the straight-line method of amortization, what is the amount of interest expense Glover Corporation will show for the year ended December 31? (d) What is the carrying value of the bonds on December 31?

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Chapter 14 - Long-Term Liabilities: Bonds and Notes ANSWER:

(a) The bonds were issued at a discount. (b) The market rate of interest was higher than 7.5% since the bonds were issued at a discount. (c) $2,000,000 × 0.075 × 10/12 = $125,000 interest expense prior to amortization $2,000,000 – $1,940,000 = $60,000 discount on bonds payable $60,000/6 = $10,000 annual amortization of discount $10,000 × 10/12 = $8,333 current year’s amortization of discount $125,000 + $8,333 = $133,333 (d) $2,000,000 – $60,000 + $8,333 = $1,948,333 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-03 - 14-03 ACCT.WARD.18.14-05 - 14-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 172. On January 1, Yeargan Company obtained a $125,000, seven-year 5% installment note from Farmers Bank. The note requires annual payments of $21,602, with the first payment occurring on the last day of the fiscal year. The first payment consists of $6,250 interest and principal repayment of $15,352. Journalize the following entries: (a) Issued the installment notes for cash on January 1. (b) Paid the first annual payment on the note. ANSWER: (a) Cash Notes Payable

125,000 125,000

(b) Interest Expense 6,250 Notes Payable 15,352 Cash 21,602 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-04 - 14-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 173. On January 1, Luther Co. issued a $1,000,000, five-year, 8% installment note payable with payments of $250,456 principal plus interest due on January 1 of each year for the next five years. (a) Prepare the adjusting journal entry at December 31 to accrue interest for the year. (b) Show the account(s) and amount(s) and where it(they) will appear on a multi-step income statement prepared on December 31. (c) Show the account(s) and amount(s) and where it(they) will appear on a classified balance sheet prepared on December 31.

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Chapter 14 - Long-Term Liabilities: Bonds and Notes ANSWER:

(a)

Interest Expense 80,000 Interest Payable

80,000

(b) Interest Expense = $80,000 reported as “Other expense” (c) Current liabilities: Interest Payable, $80,000 Notes Payable—Current Portion, $170,456 Long-term liabilities: Notes Payable, $829,544 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-04 - 14-04 ACCT.WARD.18.14-05 - 14-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic 174. On January 1, Marshall Co. issued a $360,000, three-year, 6% installment note payable with payments of $134,680 principal and interest due on January 1 for each of the next three years. (a) Prepare the adjusting journal entry to accrue interest at December 31, Year 2. If required, round answers to the nearest whole amount. (b) Show the account(s) and amount(s) and where it(they) will appear on a classified balance sheet prepared on December 31, Year 2. ANSWER: (a) Interest Expense 14,815 Interest Payable 14,815 (b) Current liabilities: Interest Payable, $14,815 Notes Payable—Current Portion, $119,865 Long-term liabilities: Notes Payable, $127,056 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-04 - 14-04 ACCT.WARD.18.14-05 - 14-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 175. On January 1, Year 1, Kennard Co. issued $2,000,000, 5%, 10-year bonds, with interest payable on June 30 and December 31 to yield 6%. Use the following format and round figures to nearest dollar. The bonds were issued for $1,851,234. (a) Prepare an amortization schedule for Year 1 and Year 2 using the effective interest rate method. Date Cash Paid Interest Expense Amortization Bond Carrying Value (b) Show how this bond would be reported on the balance sheet at December 31, Year 2. ANSWER: (a)

Date 1/1/Year 1 6/30/Year 1 12/31/Year 1 6/30/Year 2 12/31/Year 2

Cash Paid $50,000 50,000 50,000 50,000

Interest Expense

Amortization

$55,537 55,703 55,874 56,050

$5,537 5,703 5,874 6,050

Bond Carrying Value $1,851,234 1,856,771 1,862,474 1,868,348 1,874,398

(b) Bond payable $2,000,000 Unamortized bond discount (125,602) $1,874,398 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-05 - 14-05 ACCT.WARD.18.14-APP2 - 14-APP2 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 176. Given the following data, determine the times interest earned ratio. Net income, $70,000 Bonds payable, issued at face value, 8%, $5,000,000 Preferred stock, $50 par value, 6%, 10,000 shares issued and outstanding Tax rate is 30% ANSWER: Times Interest Earned = (Income Before Income Tax + Interest Expense) ÷ Interest Expense = [($70,000 ÷ 70%) + (8% × $5,000,000)] ÷ (8% × $5,000,000) = ($100,000 + $400,000) ÷ $400,000 = $500,000 ÷ $400,000 = 1.25 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-06 - 14-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 14 - Long-Term Liabilities: Bonds and Notes 177. Balance sheet and income statement data indicate the following: Bonds payable, 8% (issued 2000, due 2024) Preferred 5% stock, $100 par (no change during year) Common stock, $50 par (no change during year) Income before income tax for year Income tax for year Common dividends paid Preferred dividends paid (a) (b)

Company A $1,200,000 300,000 1,000,000 495,000 75,000 50,000 15,000

Company B $900,000 400,000 1,000,000 130,000 12,000 0 20,000

For each company, what is the times interest earned ratio (round to one decimal place)? Which company gives potential creditors the most protection?

ANSWER:

(a) Company A 6.2 Company B 2.8 (b) Company A offers potential creditors the most protection. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-06 - 14-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 178. Use the following tables to calculate the present value of a $25,000, 7%, five-year bond that pays $1,750 ($25,000 × 7%) interest annually, if the market rate of interest is 7% Present Value of $1 at Compound Interest Periods 5% 6% 1 0.95238 0.94340 2 0.90703 0.89000 3 0.86384 0.83962 4 0.82270 0.79209 5 0.78353 0.74726 6 0.74622 0.70496 7 0.71068 0.66506 8 0.67684 0.62741 9 0.64461 0.59190 10 0.61391 0.55840

7% 0.93458 0.87344 0.81630 0.76290 0.71299 0.66634 0.62275 0.58201 0.54393 0.50835

10% 0.90909 0.82645 0.75132 0.68301 0.62092 0.56447 0.51316 0.46651 0.42410 0.38554

Present Value of Annuity of $1 at Compound Interest Periods 5% 6% 7% 1 0.95238 0.94340 0.93458 2 1.85941 1.83339 1.80802 3 2.72325 2.67301 2.62432 4 3.54595 3.46511 3.38721 5 4.32948 4.21236 4.10020 6 5.07569 4.91732 4.76654 7 5.78637 5.58238 5.38929 8 6.46321 6.20979 5.97130 9 7.10782 6.80169 6.51523 10 7.72174 7.36009 7.02358

10% 0.90909 1.73554 2.48685 3.16987 3.79079 4.35526 4.86842 5.33493 5.75902 6.14457

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Chapter 14 - Long-Term Liabilities: Bonds and Notes ANSWER:

Present value of face value of $25,000 due in 5 years at 7% compounded annually $25,000 × 0.71299 (present value factor of $1 for 5 periods at 7%) Present value of 5 annual interest payments of $1,750 at 7% interest compounded annually $1,750 × 4.10020 (present value of annuity of $1 for 5 periods at 7%) Total present value of bonds *Rounded DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-APP1 - 14-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

$17,825*

7,175* $25,000*

179. Using the following table, what is the present value of $15,000 to be received in 10 years, if the market rate is 5% compounded annually? Periods 1 2 3 4 5 6 7 8 9 10 ANSWER: DIFFICULTY:

5% 0.95238 0.90703 0.86384 0.82270 0.78353 0.74622 0.71068 0.67684 0.64461 0.61391

6% 7% 10% 0.94340 0.93458 0.90909 0.89000 0.87344 0.82645 0.83962 0.81630 0.75132 0.79209 0.76290 0.68301 0.74726 0.71299 0.62092 0.70496 0.66634 0.56447 0.66506 0.62275 0.51316 0.62741 0.58201 0.46651 0.59190 0.54393 0.42410 0.55840 0.50835 0.38554 $15,000 × 0.61391= $9,208.65 Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-APP1 - 14-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 180. Using the following table, what is the present value of $40,000 to be received in five years, if the market rate is 7% compounded annually? Periods 1 2 3 4 5 6 7 8 9 10

5% 0.95238 0.90703 0.86384 0.82270 0.78353 0.74622 0.71068 0.67684 0.64461 0.61391

6% 0.94340 0.89000 0.83962 0.79209 0.74726 0.70496 0.66506 0.62741 0.59190 0.55840

7% 0.93458 0.87344 0.81630 0.76290 0.71299 0.66634 0.62275 0.58201 0.54393 0.50835

10% 0.90909 0.82645 0.75132 0.68301 0.62092 0.56447 0.51316 0.46651 0.42410 0.38554

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Chapter 14 - Long-Term Liabilities: Bonds and Notes $40,000 × 0.71299 = $28,519.60 Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-APP1 - 14-APP1 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic ANSWER: DIFFICULTY:

181. Given the following data, prepare the journal entry to record interest expense and any related amortization on December 31 of the first year using the effective interest rate method. Assume interest is paid annually on January 1. The bonds were issued on January 1 for $7,411,233. Bonds payable, maturing in 10 years = $8,000,000 Contract interest rate = 5% Market (effective) interest rate = 6% Round answers to nearest dollar. ANSWER: Interest Expense 444,674 Discount on Bonds Payable 44,674 Interest Payable 400,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.14-APP2 - 14-APP2 ACCREDITING STANDARDS: ACCT.ACBSP.APC.22 - Long-Term Liabilities Reporting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 15 - Investments and Fair Value Accounting True / False 1. Most companies invest excess cash in bonds as investments in order to profit long-term from the growth of the investment. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-01 - 15-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 2. Investments that do not normally change in value are disclosed on the balance sheet as cash and cash equivalents. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-01 - 15-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 3. As with other assets, the cost of a bond investment includes all costs related to the purchase. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 4. If the bonds are purchased between interest dates, the purchase price includes accrued interest since the last interest payment. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 15 - Investments and Fair Value Accounting 5. When a bond is purchased for an investment, the purchase price, minus the brokerage commission, plus any accrued interest is recorded. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 6. The amount of interest paid when buying a bond as an investment should be credited to Interest Revenue. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 7. To record a bond investment made between interest payment dates, Investment in Bonds would be debited and Cash and Interest Revenue would be credited. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 8. When long-term investments in bonds are sold before their maturity date, the seller deducts any accrued interest since the last interest payment date from the selling price. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 15 - Investments and Fair Value Accounting 9. If the proceeds from the sale of bond investments exceed the carrying amount of the bonds, a gain is realized. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 10. Any gains or losses on the sale of bonds normally would be reported in the Other income (loss) section of the income statement. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic 11. An equity investment in less than 20% of another company’s stock is accounted for using the cost method. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 12. Ordinarily, a corporation owning a significant portion of the voting stock of another corporation accounts for the investment using the equity method. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 15 - Investments and Fair Value Accounting 13. The investor carrying an investment by the equity method records cash dividends received as an increase in the amount of the investment. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 14. Under the equity method, a stock purchase is recorded at its original cost and is not adjusted to fair market value each accounting period. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 15. The equity method causes the investment account to mirror the proportional changes in book value of the investee. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 16. Accounting for the sale of stock is the same for both the cost and the equity methods of accounting for investments. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 15 - Investments and Fair Value Accounting 17. The corporation owning all or a majority of the voting stock of another corporation is known as the parent company. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 18. When a corporation owns less than 20% of the stock of another company, dividends received are not treated as income. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 19. The financial statements resulting from combining parent and subsidiary statements are called consolidated statements. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 20. It is not possible for one company to influence the operating policies of another company unless it owns more than 50% interest in that company. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 15 - Investments and Fair Value Accounting 21. The equity method is usually more appropriate for accounting for investments where the purchaser does not have significant influence over the investee. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 22. When bonds held as long-term investments are purchased at a price other than the face value, the premium or discount should be amortized over the remaining life of the bonds. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 23. Held-to-maturity securities are reported on the balance sheet at fair market value. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 24. Held-to-maturity securities maturing beyond a year are reported as noncurrent assets. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 15 - Investments and Fair Value Accounting 25. Trading securities should be reported on the financial statements at fair market value. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 26. Investments in bonds that management intends to hold to maturity are called trading securities. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 27. Investment in Bonds is reported on the balance sheet at lower of cost or market. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic 28. Investment in Bonds is listed on the balance sheet after Bonds Payable. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 15 - Investments and Fair Value Accounting 29. Held-to-maturity investments are recorded at their cost, which would include broker’s commissions. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 30. Available-for-sale securities are securities that management expects to sell in the future, but are not actively traded for profit. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 31. Trading securities are reported on the balance sheet at cost. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic 32. Any difference between the fair market values of the securities and their cost is a realized gain or loss. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 15 - Investments and Fair Value Accounting 33. Unrealized gains and losses on trading securities are not included in the calculation of income from operations. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 34. Investments in stocks that are expected to be held for the long term are listed in the Stockholders' equity section of the balance sheet. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic 35. In order to maintain a record of the original cost of a trading security, the fair value adjustments are debited or credited to the account Valuation Allowance for Trading Investments. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 36. Generally accepted accounting principles (GAAP) require the use of fair value accounting for all assets and liabilities. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-05 - 15-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 15 - Investments and Fair Value Accounting 37. A disadvantage of fair value use is that the comparability between companies may be impacted by different fair value measurements. a. True b. False ANSWER: True DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-05 - 15-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic 38. Growth firms generally pay regular dividends to stockholders. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-06 - 15-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 39. Comprehensive income is all changes in stockholders' equity during the period except those resulting from dividends and stockholders' investments. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-APP - 15-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 15 - Investments and Fair Value Accounting 40. Comprehensive income must be reported on the income statement. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-APP - 15-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic 41. The cumulative effects of other comprehensive income items may be reported separately from retained earnings and paid-in capital, on the balance sheet, as accumulated other comprehensive income. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-APP - 15-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 42. Comprehensive income does not affect net income or retained earnings. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-APP - 15-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 43. The cumulative effects of other comprehensive income items are included in retained earnings on the balance sheet. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-APP - 15-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 15 - Investments and Fair Value Accounting 44. Foreign currency translation adjustment is an example of an item that would be included in other comprehensive income. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-APP - 15-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic Multiple Choice 45. Temporary investments a. are reported as current assets b. include cash equivalents c. do not include equity securities d. All of these choices ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-01 - 15-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 46. Which of the following is not a reason to invest excess cash in temporary investments? a. earn interest revenue b. influence the operations of another company c. receive dividends d. realize gains from the increase in market value of the securities ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-01 - 15-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 15 - Investments and Fair Value Accounting 47. Investment in certificates of deposit and other securities that do not change in value are reported on the balance sheet as a. equity investments b. available-for-sale securities c. cash and cash equivalents d. held-to-maturity securities ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-01 - 15-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 48. Which of the following is part of the primary objective of investing in temporary investments? a. All of these choices b. realize gains from increases in market price of the securities c. receive dividends d. earn interest revenue ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-01 - 15-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 49. A company uses cash to pay all of the following except a. All of these choices b. interest to creditors c. current expenses d. dividends to stockholders ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-01 - 15-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 15 - Investments and Fair Value Accounting 50. Cash is used for all of the following activities except a. supporting current operating activities b. replacing worn-out machinery c. expanding current operations d. bribing government officials ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-01 - 15-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 51. Long-term investments are held for all of the following reasons except to a. reduce expenses b. stabilize the supply of resources c. improve operations by making changes to management d. meet current cash needs ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-01 - 15-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 52. Temporary investments such as in trading securities are a. recorded at cost but reported at fair market value b. recorded at cost and reported at cost c. recorded at cost but reported at lower of cost or fair market value d. recorded at fair market value and reported at fair market value ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 15 - Investments and Fair Value Accounting 53. On June 1, $50,000 of treasury bonds were purchased between interest dates. The brokerage commission was $500. The bonds pay interest at 12%, which is paid semiannually on January 1 and July 1. What is the total cost to be debited to Investments—Treasury Bonds? a. $50,000 b. $50,500 c. $49,500 d. $53,000 ANSWER: b RATIONALE: Total Cost of Treasury Bonds = Cost of Treasury Bonds + Brokerage Commission = $50,000 + $500 = $50,500 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 54. On June 1, $40,000 of treasury bonds were purchased between interest dates. The brokerage commission was $600. The bonds pay interest at 12%, which is paid semiannually on January 1 and July 1. How much interest revenue will be recorded on July 1? a. $400 b. $406 c. $2,000 d. $2,400 ANSWER: a RATIONALE: Interest Revenue Recorded on July 1 = Semiannual Interest Received on July 1 – Accrued Interest Till June 1 = [$40,000 × (12%/2)] – [$40,000 × (12%/2) × (150/180)] = $2,400 – $2,000 = $400 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 15 - Investments and Fair Value Accounting 55. Ruben Company purchased $100,000 of Evans Company bonds at 100 plus $1,500 in accrued interest. The bond interest rate is 8% and interest is paid semiannually. The journal entry to record the purchase would be a. debit Investments—Evans Company Bonds, $101,500; credit Cash, $101,500 b. debit Investments—Evans Company Bonds, $100,000; credit Interest Revenue, $1,500, and Cash, $98,500 c. debit Investments—Evans Company Bonds, $100,000, and Interest Receivable $1,500; credit Cash, $101,500 d. debit Investments—Evans Company Bonds, $100,000; credit Cash, $100,000 ANSWER: c RATIONALE: Investments—Evans Company Bonds 100,000 Interest Receivable 1,500 Cash 101,500 DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 56. Ruben Company purchased $100,000 of Evans Company bonds at 100 plus $1,500 in accrued interest. The bond interest rate is 8%, and interest is paid semiannually. The journal entry to record the receipt of interest on the next interest payment date would be a. debit Cash, $4,000; credit Interest Revenue, $4,000 b. debit Cash, $4,000; credit Interest Receivable, $4,000 c. debit Cash, $4,000; credit Interest Receivable, $1,500, and Interest Revenue, $2,500 d. debit Cash, $2,500; credit Interest Revenue, $2,500 ANSWER: c RATIONALE: Interest Revenue Recorded = Semiannual Interest to Be Received – Accrued Interest = [$100,000 × (8%/2)] – $1,500 = $4,000 – $1,500 = $2,500 Cash 4,000 Interest Receivable 1,500 Interest Revenue 2,500 DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 15 - Investments and Fair Value Accounting 57. Ruben Company purchased $100,000 of Evans Company bonds at 100. Ruben later sold the bonds at $104,500 plus $500 in accrued interest. The journal entry to record the sale of the bonds would be a. debit Cash, $105,000; credit Investments—Evans Company Bonds, $104,500, and Interest Revenue, $500 b. debit Cash, $105,000; credit Investments—Evans Company Bonds, $100,000, and Gain on Sale of Investments, $5,000 c. debit Cash, $104,500, and Interest Receivable, $500; credit Investments—Evans Company Bonds, $100,000, Gain on Sale of Investments, $4,500, and Interest Revenue, $500 d. debit Cash, $105,000; credit Investments—Evans Company Bonds, $100,000, Gain on Sale of Investments, $4,500, and Interest Revenue, $500 ANSWER: d RATIONALE: Gain on Sale of Investments = Sale Price of Bonds – Purchase Price of Bonds = $104,500 – $100,000 = $4,500 Cash 105,000 Investments—Evans Company Bonds 100,000 Gain on Sale of Investments 4,500 Interest Revenue 500 DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 58. Jacks Corporation purchases $200,000 bonds plus accrued interest for two months of $2,000 from Kennedy Company on March 1. The bonds have an annual interest rate of 6% payable on June 30 and December 31. The entry to record the purchase of the bonds would include a a. debit to Interest Receivable for $2,000 b. debit to Investment in Bonds for $202,000 c. debit to Cash for $200,000 d. credit to Interest Revenue for $2,000 ANSWER: a RATIONALE: Investments—Kennedy Company Bonds 200,000 Interest Receivable 2,000 Cash 202,000 DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 15 - Investments and Fair Value Accounting 59. On April 1, Alliance Company purchased $50,000 of Tetter Company’s 12% bonds at 100 plus accrued interest of $2,000. On June 30, Alliance received its first semiannual interest. On February 1, Alliance sold $40,000 of the bonds at 103 plus accrued interest. The journal entry Alliance will record on April 1 for the purchase of the bonds will include a a. credit to Interest Payable for $2,000 b. debit to Investments—Tetter Company Bonds for $52,000 c. debit to Cash for $50,000 d. debit to Investments—Tetter Company Bonds for $50,000 ANSWER: d RATIONALE: Investments—Tetter Company Bonds 50,000 Interest Receivable 2,000 Cash 52,000 DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic Use this information for Pierce Company to answer the following questions. On May 1, Pierce Company purchased $60,000 of Stanton Company’s 12% bonds at 100 plus accrued interest of $2,400. On June 30, Pierce received its first semiannual interest. On February 1, Pierce sold $50,000 of the bonds at 103 plus accrued interest. 60. The journal entry Pierce will record on June 30 will include a a. credit to Interest Revenue for $2,400 b. debit to Cash for $3,600 c. credit to Cash for $2,400 d. credit to Interest Receivable for $1,200 ANSWER: b RATIONALE: Semiannual Interest Payment = $60,000 × 12% × 1/2 = $3,600 Interest Revenue = Semiannual Interest Payment – Accrued Interest = $3,600 – $2,400 = $1,200 Cash 3,600 Interest Receivable 2,400 Interest Revenue 1,200 DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 15 - Investments and Fair Value Accounting 61. The journal entry Pierce will record on February 1 will include a a. credit to Interest Revenue for $1,500 b. credit to Gain on Sale of Investments for $1,500 c. credit to Cash for $52,500 d. credit to Interest Receivable for $600 ANSWER: b RATIONALE: The journal entry Pierce will record on February 1 will include a credit to Gain on Sale of Investments for $1,500. Proceeds from Sale of Investment – Book Value of Investment = ($50,000 × 103%) – $50,000 = $51,500 – $50,000 = $1,500 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 62. What are the total proceeds from the February 1 sale? a. $52,400 b. $51,500 c. $50,000 d. $52,000 ANSWER: d RATIONALE: Sale Proceeds = $50,000 × 103% = $51,500 Accrued Interest = $50,000 × 12% × 1/12 = $500 Total Proceeds from Sale = $51,500 + $500 = $52,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 63. Alan Company purchased $400,000 of ABC Co. 5% bonds at 100 plus accrued interest of $4,500. Alan later sold $250,000 of the bonds at 97. The journal entry for the purchase would include a a. credit to Interest Receivable for $4,500 b. credit to Interest Revenue for $4,500 c. debit to Interest Receivable for $4,500 d. debit to Interest Revenue for $4,500 ANSWER: c RATIONALE: Investments—ABC Co. Bonds 400,000 Interest Receivable 4,500 Cash 404,500

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Chapter 15 - Investments and Fair Value Accounting DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 64. Interest revenue on bonds is reported as a. an addition to the investment in bonds account b. part of comprehensive income but not as part of net income c. part of other income d. part of operating income ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 65. Which of the following stock investments should be accounted for using the cost method? a. investments of less than 20% b. investments between 20% and 50% c. investments of less than 20% and investments between 20% and 50% d. All stock investments should be accounted for using the cost method ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 66. Jarvis Corporation makes an investment in 100 shares of Saxton Company's common stock. The stock is purchased for $45 a share plus brokerage fees of $280. The entry for the purchase is a. Cash 4,500 Investments—Saxton Company Stock

4,500

b. Investments—Saxton Company Stock Cash

4,780 4,780

c. Investments—Saxton Company Stock Brokerage Fee Expense Cash

4,500 280

d. Investments—Saxton Company Stock Cash

4,500

4,780

4,500

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Chapter 15 - Investments and Fair Value Accounting ANSWER: RATIONALE:

b Total Investment = Purchase Price of Stock+ Brokerage Fees = ($45 × 100) + $280 = $4,500 + $280 = $4,780 Investments—Saxton Company Stock 4,780 Cash 4,780

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 67. Which of the following statements is not a reason a company may purchase another company's stock? a. earning a return on excess cash b. sustaining the other company's stock price c. gaining control of another company's operations d. developing or maintaining business relationships ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 68. The cost method of accounting for stock a. recognizes dividends as income b. is only appropriate as part of a consolidation c. requires the investment to be increased by the reported net income of the investee d. requires the investment to be decreased by the reported net income of the investee ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 15 - Investments and Fair Value Accounting 69. An investor purchased 500 shares of common stock, $25 par, for $21,750. Subsequently, 100 shares were sold for $49.50 per share. What is the amount of gain or loss on the sale? a. $12,750 gain b. $600 gain c. $600 loss d. $9,250 loss ANSWER: b RATIONALE: Gain on Sale = Proceeds from Sale – Purchase Price = ($49.50 × 100) – [($21,750/500) × 100] = $4,950 – $4,350 = $600 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 70. The equity method of accounting for investments requires a. a year-end adjustment to revalue the stock to lower of cost or market b. the investment to be reported at its original cost c. the investment to be increased by the reported net income of the investee d. the investment to be increased by the dividends paid by the investee ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 71. Armando Company owns 17,000 of the 70,000 shares of common stock outstanding of Tito Company and exercises a significant influence over its operating and financial policies. The investment should be accounted for by the a. equity method b. market method c. cost or market method d. cost method ANSWER: a DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 15 - Investments and Fair Value Accounting 72. Under the equity method, the receipt of cash dividends on an investment in common stock of Vallerio Corporation is accounted for as a debit to Cash and a credit to a. Investment in Vallerio b. Retained Earnings c. Dividend Revenue d. Dividend Receivables ANSWER: a DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 73. The method of accounting for investments in equity securities in which the investor records its share of periodic net income of the investee is the a. cost method b. market method c. income method d. equity method ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 74. When shares of stock held as an investment are sold, the difference between the proceeds and the carrying amount of the investment is recorded as a(n) a. prior period adjustment b. operating income and loss c. paid-in capital addition d. gain or loss ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 15 - Investments and Fair Value Accounting 75. Which of the following items would not affect the investor's income for the period? a. interest received on a temporary investment in bonds b. dividends received on a long-term investment in stock where the investor owns 10% of the investee's stock c. dividends received on a long-term investment in stock where the investor owns 30% of the investee's stock d. interest received on a long-term investment in bonds ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 76. Wendell Company owns 28% of the common stock of Porter Company and accounts for the investment using the equity method. Assuming that Wendell Company purchased the stock several years ago, the balance in the investment account would be equal to the cost of the a. investment only b. investment plus Wendell’s share of Porter’s net income earned since the investment was purchased c. investment plus the total amount of dividends Wendell has received from Porter since the investment was purchased d. investment plus Wendell’s share of Porter’s net income earned since the investment was purchased minus the total amount of dividends Wendell has received from Porter since the investment was purchased ANSWER: d DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 77. Blanton Corporation purchased 15% of the outstanding shares of common stock of Worton Corporation as a long-term investment. Subsequently, Worton Corporation reported net income and declared and paid cash dividends. What journal entry would Blanton Corporation use to record the dividends it receives? a. debit Investments—Worton Corporation; credit Cash b. debit Cash; credit Dividend Revenue c. debit Investments—Worton Corporation; credit Income of Worton Corporation d. debit Cash; credit Investments—Worton Corporation ANSWER: b DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 15 - Investments and Fair Value Accounting 78. Blanton Corporation purchased 35% of the outstanding shares of common stock of Worton Corporation as a long-term investment. Subsequently, Worton Corporation reported net income and declared and paid cash dividends. What journal entry would Blanton Corporation use to record the dividends it receives from Worton Corporation? a. debit Investments—Worton Corporation Stock; credit Cash b. debit Cash; credit Dividend Revenue c. debit Investments—Worton Corporation Stock; credit Income of Worton Corporation d. debit Cash; credit Investments—Worton Corporation Stock ANSWER: d DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 79. Zach Company owns 45% of the voting stock of Tomas Corporation and uses the equity method in recording this investment. Tomas Corporation reported a $20,000 net loss. Zach Company's entry would include a a. credit to cash for $9,000 b. debit to the investment account for $9,000 c. credit to the investment account for $9,000 d. credit to a loss account for $9,000 ANSWER: c RATIONALE: Loss on Investment in Tomas Corporation = $20,000 × 45% = $9,000 Cash 9,000 Investments—Tomas Corporation Stock 9,000 DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 80. Parker Company owns 83% of the outstanding stock of Tadeo Company. Parker Company is referred to as the a. parent b. minority interest c. affiliate d. subsidiary ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 15 - Investments and Fair Value Accounting 81. Gale Company owns 87% of the outstanding stock of Leonardo Company. Leonardo Company is referred to as the a. parent b. minority interest c. affiliate d. subsidiary ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 82. Financial statements in which financial data for two or more companies are combined as a single entity are called a. conventional statements b. consolidated statements c. audited statements d. constitutional statements ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 83. In general, consolidated financial statements should be prepared a. when a corporation owns more than 20% and less than 40% of the common stock of another company b. when a corporation owns more than 50% of the common stock of another company c. only when a corporation owns 100% of the common stock of another company d. whenever the market value of the stock investment is significantly lower than its cost ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic

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Chapter 15 - Investments and Fair Value Accounting 84. For accounting purposes, the method used to account for investments in common stock is determined by a. the amount paid for the stock by the investor b. whether the acquisition of the stock by the investor was "friendly" or "hostile" c. the extent of an investor's influence over the operating and financial affairs of the investee d. whether the stock has paid dividends in past years ANSWER: c DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 85. An investor purchased 500 shares of common stock, $25 par, for $19,250. Subsequently, 100 shares were sold for $35 per share. What is the amount of gain or loss on the sale? a. $3,500 gain b. $350 gain c. $350 loss d. $500 gain ANSWER: c RATIONALE: Gain or Loss on Sale = Sale Proceeds of 100 Shares – Purchase Price of 100 Shares = $35 × 100 – ($19,250/500) × 100 = $3,500 – $3,850 = ($350) DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 86. When the cost method is used to account for an investment, the carrying value of the investment is affected by a. the dividend distributions of the investee b. the periodic net income of the investee c. the earnings and dividend distributions of the investee d. neither the earnings nor the dividends of the investee ANSWER: d DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 15 - Investments and Fair Value Accounting 87. On February 12, Addison, Inc. purchased 6,000 shares of Lucas Company at $22 per share plus a $240 brokerage fee. On August 22, Lucas paid a dividend per share of $0.42. On November 10, 4,000 shares of Lucas stock were sold for $28 per share less a $160 brokerage fee. The journal entry to record the purchase would include a a. debit to Investments—Lucas Company Stock for $132,000 b. credit to Cash for $132,000 c. debit to Investments—Lucas Company Stock for $132,240 d. credit to Investments—Lucas Company Stock for $240 ANSWER: c RATIONALE: Cost of Investment in Shares of Lucas Company = Purchase Price + Brokerage Fees = ($22 × 6,000 shares) + $240 = $132,240 Investments—Lucas Company Stock 132,240 Cash 132,240 DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARD ACCT.ACBSP.APC.21 - Corporate Investments Accounting S: ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 88. The company whose stock is more than 50% owned by another company is called the a. controlling company b. investee company c. subsidiary company d. sibling company ANSWER: c DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 89. On February 12, Addison, Inc. purchased 6,000 shares of Lucas Company at $22 per share plus a $240 brokerage fee. On August 22, Lucas paid a dividend per share of $0.42. On November 10, 4,000 shares of Lucas stock were sold for $28 per share less a $160 brokerage fee. The journal entry for the sale would include a a. debit to Cash, $111,840 b. credit to Investments—Lucas Company Stock, $112,000 c. credit to Loss on Sale, $23,680 d. debit to Cash, $112,000 ANSWER: a RATIONALE: Proceeds on Sale of Lucas Stock = ($28 × 4,000) – $160 = $111,840 Cash 111,840 Investments—Lucas Company Stock 111,840

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Chapter 15 - Investments and Fair Value Accounting DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 90. If one company owns more than 50% of the common stock of another company, a. a partnership exists b. a parent-subsidiary relationship exists c. the company whose stock is owned must be liquidated d. the cost method should be used to account for the investment ANSWER: b DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.BB.01 - Industry ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 91. Held-to-maturity securities a. are reported at fair market value b. include stocks as well as bonds c. may be reported as current or noncurrent assets d. All of these choices ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 92. Yankton Company began the year without an investment portfolio. During the year, it purchased investments classified as trading securities at a cost of $13,000. At the end of the year, the market value of the securities was $11,000. Yankton Company's financial statements for the current year should show a. a loss of $2,000 on the income statement and net trading securities of $13,000 on the balance sheet b. no loss on the income statement and net trading securities of $13,000 on the balance sheet c. no loss on the income statement, net trading securities of $11,000, and an unrealized loss of $2,000 as a stockholders’ equity adjustment on the balance sheet d. a loss of $2,000 on the income statement and temporary investments of $11,000 on the balance sheet ANSWER: d RATIONALE: Loss Recorded on Income Statement = Fair Value of Investment – Original Cost of Investment = $11,000 – $13,000 = ($2,000)

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Chapter 15 - Investments and Fair Value Accounting DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 93. Yankton Company began the year without an investment portfolio. During the year, it purchased investments classified as available-for-sale securities at a cost of $13,000. At the end of the year, the market value of the securities was $11,000. Yankton Company's financial statements for the current year should show a. a loss of $2,000 on the income statement and available-for-sale investments of $13,000 on the balance sheet b. no loss on the income statement and available-for-sale investments of $13,000 on the balance sheet c. no loss on the income statement, available-for-sale investments of $11,000, and an unrealized loss of $2,000 as a stockholders’ equity adjustment on the balance sheet d. a loss of $2,000 on the income statement and temporary investments of $11,000 on the balance sheet ANSWER: c RATIONALE: Loss Recorded as Part of Stockholders’ Equity = Fair Value of Investment – Original Cost of Investment = $11,000 – $13,000 = ($2,000) DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 94. The price that would be received to sell an asset or pay off a liability is the a. fair value b. market value c. investing value d. historical value ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 15 - Investments and Fair Value Accounting 95. The account Unrealized Gain (Loss) on Available-for-Sale Investments should be included on the a. income statement as other revenue (expense) b. balance sheet as an adjustment to the asset account c. balance sheet as an adjustment to stockholders' equity d. statement of retained earnings ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic 96. The account Unrealized Gain (Loss) on Trading Investments should be included on the a. income statement as other revenue (expense) b. balance sheet as an adjustment to the asset account c. balance sheet as an adjustment to stockholders' equity d. statement of retained earnings ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic 97. The valuation allowance for trading investments account is found on the a. income statement as other revenue (expense) b. balance sheet as an adjustment to the asset account c. balance sheet as an adjustment to stockholders' equity d. statement of retained earnings ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 15 - Investments and Fair Value Accounting 98. Held-to-maturity securities a. are reported at their fair market value on the balance sheet date b. include both stocks and bonds c. are primarily purchased to earn interest revenue d. All of these choices ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 99. On January 1, Butte Company’s valuation allowance for trading investments account has a debit balance of $23,200. On December 31, the cost of the trading securities portfolio was $80,000. The fair value was $98,000. Which of the following would Butte report on the income statement for the current year? a. an unrealized loss on trading investments, $5,200 b. an unrealized gain on trading investments, $5,200 c. an unrealized gain on trading investments, $18,000 d. an unrealized loss on trading investments, $18,000 ANSWER: a RATIONALE: Gain on Trading Securities Portfolio = Fair Value of Investment – Original Cost of Investment = $98,000 – $80,000 = $18,000 Unrealized Gain/(Loss) on Trading Investments = $18,000 – $23,200 = ($5,200) DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic 100. Trading securities are a. reported at fair value on the balance sheet and as unrealized gains or losses on the income statement b. not reported on the balance sheet c. reported as unrealized gains or losses on the income statement d. reported at fair value in the balance sheet ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 15 - Investments and Fair Value Accounting 101. GAAP requires trading and available-for-sale investments to be reported at their a. fair value b. historical cost c. market value d. net realizable value ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 102. Changes in the value of available-for-sale securities are a. reported as part of stockholders' equity b. recognized on the income statement c. not recognized d. recognized on the income statement and as part of stockholders' equity ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 103. All of the following are true of fair value accounting except a. GAAP requires trading and available-for-sale investments to be recorded at fair value b. fair value measurements have become more reliable c. the differences between original cost and fair value are reported in valuation allowance accounts d. fair values only affect balance sheet accounts ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-05 - 15-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic

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Chapter 15 - Investments and Fair Value Accounting 104. Financial statements include assets listed at a. All of these choices b. their fair value c. their historical cost d. their market value ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-05 - 15-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic 105. All of the following are true of the effect of fair value accounting on the financial statements except a. any difference between the original cost or the prior period’s fair value must be recorded b. changes in the fair value of trading securities are recognized on the income statement c. valuation allowance accounts are reported on the balance sheet d. changes in the fair value of available-for-sale securities are recognized on the income statement ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-05 - 15-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic 106. Edison Corporation paid a dividend of $10 per share on its $100 par preferred stock and $4 per share on its $20 par common stock. The market value of the common stock is $80 per share. Edison’s dividend yield is a. 5% b. 10% c. 25% d. 20% ANSWER: a RATIONALE: Dividend Yield = Dividends per Share of Common Stock/Market Price per Share of Common Stock = $4/$80 = 5% DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-06 - 15-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 15 - Investments and Fair Value Accounting 107. A company that has 25,000 shares of $5.00 par value common stock issued and outstanding paid a dividend of $0.40 per share. The market value of the stock is $16 per share. The company’s dividend yield is a. 2.5% b. 400% c. 16% d. 40% ANSWER: a RATIONALE: Dividend Yield = Dividends per Share of Common Stock/Market Price per Share of Common Stock = $0.40/$16 = 2.5% DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-06 - 15-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 108. The dividend yield is measured as a. Dividends per Share of Common Stock/Market Price per Share of Common Stock b. Dividends per Share of Preferred Stock/Market Price per Share of Common Stock c. Dividends per Share of Common Stock × Market Price per Share of Preferred Stock d. Dividends per Share of Preferred Stock × Market Price per Share of Preferred Stock ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-06 - 15-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 109. On July 5, Winter Company had a market price of $58 per share of common stock. For the prior year, Winter Company had paid an annual dividend of $3.48 per share. What is the dividend yield for Winter Company? a. 6.0% b. 0.6% c. 16.67% d. 1.67% ANSWER: a RATIONALE: Dividend Yield = Dividends per Share of Common Stock/Market Price per Share of Common Stock = $3.48/$58 = 6.0% DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-06 - 15-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 15 - Investments and Fair Value Accounting 110. Which of the following is not a part of comprehensive income? a. foreign currency items b. cash flows from stock investments c. unrealized gains and losses on available-for-sale securities d. pension liability adjustments ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-APP - 15-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 111. Which of the following would be considered an "other comprehensive income" item? a. net income b. extraordinary loss related to flood c. gain on disposal of discontinued operations d. unrealized loss on available-for-sale securities ANSWER: d DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-APP - 15-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 112. Companies may report comprehensive income on each of the following statements except a. the income statement b. a separate statement of comprehensive income c. the statement of cash flows d. the retained earnings statement ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-APP - 15-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic

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Chapter 15 - Investments and Fair Value Accounting Matching Match each of the definitions that follow with the appropriate investment term (a–j). a. Debt securities b. Equity securities c. Investor d. Investee e. Cost method f. Trading securities g. Available-for-sale securities h. Held-to-maturity securities i. Equity method j. Business combination DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-01 - 15-01 ACCT.WARD.18.15-03 - 15-03 ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 113. Debt and equity securities purchased and sold to earn short-term profits from changes in the market price ANSWER: f 114. Preferred and common stocks that represent ownership in a company and do not have a fixed maturity date ANSWER: b 115. The method of reporting an investment that represents less than 20% of the voting stock of another company ANSWER: e 116. When using this, dividends are treated as a reduction of the investment ANSWER: i 117. Notes and bonds that pay interest and have a fixed maturity ANSWER: a 118. Debt investments that a company intends to keep until their maturity date ANSWER: h 119. Securities not held for trading or to maturity or other strategic reasons ANSWER: g 120. The company investing in another company’s stock ANSWER: c 121. What occurs when a company purchases 50% or more of another company’s stock ANSWER: j © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 15 - Investments and Fair Value Accounting 122. The company whose stock is purchased by another entity ANSWER: d Match each of the definitions that follow with the appropriate investment term (a–j). a. Equity method b. Parent company c. Subsidiary company d. Consolidated financial statements e. Fair value f. Unrealized gain or loss on investments. g. Valuation allowance for investments h. Dividend yield i. Amortized cost j. Cost method DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCT.WARD.18.15-04 - 15-04 ACCT.WARD.18.15-06 - 15-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic 123. A corporation owning all or the majority of the voting stock of another corporation ANSWER: b 124. A balance sheet account where the fair value adjustment for investments is reported ANSWER: g 125. A corporation controlled by another corporation that owns all or the majority of its voting stock ANSWER: c 126. The method of accounting for investments of 20% to 50% in another company’s stock ANSWER: a 127. The market price that would be received if an investment were sold ANSWER: e 128. Measurement of the rate of return to stockholders based on cash dividends ANSWER: h 129. Combined reporting of a corporation and other corporations it controls ANSWER: d 130. Recognition of changes in the fair value of short-term investments ANSWER: f © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 15 - Investments and Fair Value Accounting 131. The value assigned to held-to-maturity securities ANSWER: i 132. Appropriate method for accounting for small stock investments ANSWER: j Subjective Short Answer 133. Discuss why companies invest cash in short-term temporary investments vs. long-term investments. ANSWER: When companies temporarily have excess cash not needed for current operations, they often invest it in debt or equity securities. These investments can be short or long term in nature. The primary reason companies invest short term is to earn interest or dividends and to realize gains from the increase in the market price of the securities. When companies make temporary investments, they are listed as current assets on the balance sheet. Long-term investments may be made for the same reasons. However, many long-term investments involve the purchase of stock of another company. This type of purchase may be made for strategic reasons such as an attempt to reduce operating costs, replace management, expand, or integrate. DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-01 - 15-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 134. Define debt securities and equity securities. Include their similarities and differences in your discussion. ANSWER: Debt securities are notes and bonds that pay interest and have a fixed maturity date. Equity securities are shares of preferred and common stock that represent ownership in a company and do not have a fixed maturity date. Investments in both types of securities may be for the short term with the objectives to earn interest or dividends and realize gains from increases in the price of the securities. Investments in both types of securities may also be for the long term. DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.15-01 - 15-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 39

Chapter 15 - Investments and Fair Value Accounting 135. On May 1, Knox Inc. purchases $100,000 of 10-year, 6% Madison Corporation bonds dated March 1 at 100 plus accrued interest. Journalize the entry to record the bond purchase. ANSWER: Investments—Madison Corporation Bonds 100,000 Interest Receivable ($100,000 × 6% × 2/12) 1,000 Cash 101,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 136. On May 1, Cedar Inc. purchases $100,000 of 10-year, Madison Corporation 6% bonds dated March 1 at 100 plus accrued interest. Journalize the entry to record the semiannual receipt of interest on September 1. ANSWER: Cash 3,000 Interest Receivable ($100,000 × 6% × 2/12) 1,000 Interest Revenue ($100,000 × 6% × 4/12) 2,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 137. On May 1, Cedar Inc. purchases $150,000 of 10-year, Knox Corporation 8% bonds dated March 1 at 100 plus accrued interest. Journalize the entry to record the semiannual receipt of interest on March 1, Year 2. ANSWER: Cash 6,000 Interest Revenue 6,000 ($150,000 × 8% × 6/12) DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 138. On October 1, Marcus Corporation purchased $20,000 of 6% bonds of Roberts Corporation, due in 8½ years. The bonds were purchased at their face amount plus interest of $400 accrued from July 1, the date of the last semiannual interest payments. Journalize the purchase. ANSWER: Investments—Roberts Corporation 20,000 Oct. 1 Bonds Interest Receivable 400 Cash 20,400 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 15 - Investments and Fair Value Accounting 139. On September 1, Parsons Company purchased $84,000, 10-year, 7% government bonds at 100 plus accrued interest. The semiannual interest payment dates are June 30 and December 31. Interest calculations are done by the month. (a) Journalize the entry to record the bond purchase. (b) Journalize the receipt of interest on December 31 of the first year. (c) Journalize the sale of the bonds on February 1 of the second year for $82,000 plus accrued interest. ANSWER: (a) Year 1 Sept. 1 Investments—Government Bonds 84,000 Interest Receivable 980* Cash 84,980 * $84,000 × 7% × 2/12 (b)

(c)

Dec. 31

Year 2 Feb. 1

Cash Interest Receivable Interest Revenue $84,000 × 7% × 6/12

2,940*

Cash Loss on Sale of Investments Investments—Government Bonds Interest Revenue *$82,000 + ($84,000 × 7% × 1/12)

82,490* 2,000

980 1,960

84,000 490

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 140. Journalize the entries to record the following selected bond investment transactions for Southwest Bank: Apr. 1 Purchased $400,000 of Daytona Beach 4.5% bonds at 100 plus accrued interest of $4,500. July 1 Received the first semiannual interest. Sept. 1 Sold $250,000 of the bonds at 97, plus accrued interest of $1,875. ANSWER:

(a) Investments—Daytona Beach Bonds Interest Receivable Cash

400,000 4,500

(b) Cash Interest Receivable Interest Revenue *$400,000 × 4.5% × ½

9,000*

244,375 7,500

Sale proceeds ($250,000 × 97%) Accrued interest Total proceeds from sale

$242,500 1,875 $244,375

404,500

4,500 4,500

1,875 250,000

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Chapter 15 - Investments and Fair Value Accounting DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 141. On August 1, Year 1, Ant Company sold Bee Company $1,500,000 of 10-year, 6% bonds, dated July 1 at 100 plus accrued interest. On March 1, Year 2, Bee sold half of the bonds for $782,500 plus accrued interest. Present entries to record the following transactions: Bee Company: (a) Purchase of bonds on August 1, Year 1. (b) Receipt of first semiannual interest amount on December 31, Year 1. (c) The sale of the bonds on March 1, Year 2. ANSWER: (a) Investments—Ant Company Bonds Interest Receivable ($1,500,000 × 6% × 1/12) Cash

1,500,000 7,500 1,507,500

(b) Cash Interest Revenue Interest Receivable

45,000 37,500 7,500

(c) Cash 790,000 Interest Revenue ($750,000 × 6% × 2/12) Gain on Sale of Investments Investments—Ant Company Bonds DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

7,500 32,500 750,000

142. Journalize the entries to record the following selected transactions of Oliver Co.: May 1 Purchased $100,000 of Kruse Co. 6% bonds at their face amount plus accrued interest of $2,000. July 1 Received first semiannual interest payment. Sept. 1 Sold the bonds at 97 plus accrued interest of $1,000. ANSWER:

(a) Investments—Kruse Co. Bonds Interest Receivable Cash (b) Cash Interest Receivable Interest Revenue

100,000 2,000 102,000 3,000 2,000 1,000

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Chapter 15 - Investments and Fair Value Accounting (c) Cash 98,000 Loss on Sale of Investments 3,000 Investments—Kruse Co. Bonds 100,000 Interest Revenue 1,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 143. Albright Company purchased as a long-term investment $500,000 of Benton Corporation 10-year, 9% bonds. Present entries to record the following selected transactions:

Mar. 1 Purchased bonds at their face amount for $500,000. May 1 Sold half the bonds at 98 plus accrued interest of $3,750. The broker deducted $200 for brokerage fees and taxes, remittin balance. ANSWER: Mar. 1 Investments—Benton Corporation Bonds 500,000 Cash 500,000 May 1 Cash 248,550 Loss on Sale of Investment 5,200 Investments—Benton Corporation Bonds 250,000 Interest Revenue 3,750 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-02 - 15-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 144. On February 12, Addison, Inc. purchased 6,000 shares of Lucas Company at $22 per share plus a $240 brokerage fee. This purchase represents less than 20% ownership of Lucas Company. On August 22, Lucas paid a dividend per share of $0.42. On November 10, 4,000 shares of Lucas stock were sold for $28 per share less a $160 brokerage fee. Prepare the journal entries for the original purchase, dividend, and sale. ANSWER: Feb. 12 Investments—Lucas Company Stock 132,240* Cash 132,240 *(6,000 shares × $22 per share) + $240 Aug. 22 Cash Dividend Revenue *$0.42 per share × 6,000 shares

2,520*

Nov. 10 Cash 111,840* Gain on Sale of Investments Investments—Lucas Company Stock *(4,000 shares × $28) – $160 **4,000 shares × $132,240/6,000 shares

2,520

23,680 88,160**

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Chapter 15 - Investments and Fair Value Accounting DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 145. On January 2, Todd Company acquired 40% of the outstanding stock of McGuire Company for $205,000. For the year ending December 31, McGuire earned income of $48,000 and paid dividends of $14,000. Prepare the entries for Todd Company for the purchase of the stock, share of McGuire income, and dividends received from McGuire. ANSWER: Jan. 2 Investments—McGuire Company Stock 205,000 Cash 205,000 Dec. 31 Investments—McGuire Company Stock

19,200

Income of McGuire Company 40% × $48,000

19,200

Dec. 31 Cash 5,600 Investments—McGuire Company Stock 40% × $14,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

5,600

146. Journalize the entries to record the following selected equity investment transactions completed by Perry Company during the current year. Perry accounts for this investment using the cost method. Feb. 2

Apr. 16 June 17 Aug. 19 Nov. 14 ANSWER:

Purchased for cash 900 shares of Dexter Co. stock for $54 per share plus a $450 brokerage commission. This represents a less than 10% ownership interest in the company. Received dividends of $0.25 per share on Dexter Co. stock. Sold 200 shares of Dexter Co. stock for $70 per share less a $500 brokerage commission. Purchased 600 shares of Dexter Co. stock for $65 per share plus a $300 brokerage commission. Received dividends of $0.30 per share on Dexter Co. stock. Feb. 2

Investments—Dexter Co. Stock Cash (900 shares × $54) + $450

Apr. 16 Cash Dividend Revenue 900 shares × $0.25

49,050 49,050

225

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Chapter 15 - Investments and Fair Value Accounting June 17 Cash Investments—Dexter Co. Stock Gain on Sale of Investments (200 shares × $70) – $500 $49,050/900 = $54.50 share price $54.50 × 200 = $10,900

13,500

Aug. 19 Investments—Dexter Co. Stock Cash (600 shares × $65) + $300

39,300

10,900 2,600

Nov. 14 Cash 390 Dividend Revenue 900 – 200 + 600 = 1,300 shares × $0.30 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

39,300

390

147. Ramiro Company purchased 40% of the outstanding stock of Marco Company on January 1. Marco reported net income of $95,000 and declared dividends of $35,000 during the year. How much would Ramiro adjust its investment in Marco Company under the equity method? ANSWER: Ramiro’s share of Marco’s reported net income (40% × $95,000) $38,000 Less: Ramiro’s share of the Marco’s dividend (40% × $35,000) 14,000 Increase in Investments—Marco Company Stock $24,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 148. Pepito Company purchased 40% of the outstanding stock of Reyes Company on January 1. Reyes reported net income of $75,000 and declared dividends of $15,000 during the current year. How much would Pepito adjust its investment in Reyes Company under the equity method? ANSWER: Pepito’s share of Reyes' reported net income (40% × $75,000) $30,000 Less: Pepito’s share of the Reyes dividend (40% × $15,000) 6,000 Increase in Investments—Reyes Company Stock $24,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 15 - Investments and Fair Value Accounting 149. Sutton Company purchased 10% of the outstanding stock of Roberts Company on January 1. Roberts reported net income of $155,000 and declared dividends of $40,000 during the year. How would these events be reported by Sutton using the cost method? ANSWER: When using the cost method, there is no adjustment to the investment for the investor’s share of income or dividends. As the owner of 10% of the stock, Sutton would receive $4,000 of the declared dividend, which would be reported as other income. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 150. Journalize the entries to record the following selected equity investment transactions completed by Flurry Company during the current year. Flurry’s purchase represents less than 20% of the total outstanding Braxter Co. stock. Feb. 2 Apr. 16 June 17 ANSWER:

Purchased for cash 500 shares of Braxter Co. stock for $34 per share plus a $250 brokerage commission. Received dividends of $0.35 per share on Braxter Co. stock. Sold 100 shares of Braxter Co. stock for $40 per share less a $100 brokerage commission. Feb. 2

Investments—Braxter Co. Stock Cash (500 × $34) + $250

Apr. 16 Cash Dividend Revenue 500 × $0.35

17,250 17,250

175

June 17 Cash 3,900 Investments—Braxter Co. Stock Gain on Sale of Investments (100 × $40) – $100 $17,250/500 = $34.50 × 100 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

175

3,450 450

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Chapter 15 - Investments and Fair Value Accounting 151. On March 1, Year 1, Chase Inc. purchases 35% of the outstanding shares of Glory Corporation stock for $325,000. On December 31, Year 1, Glory reports net income of $162,000. On January 15, Year 2, Glory pays total dividends to stockholders of $33,000. Journalize the three transactions. ANSWER: Mar. 1 Investments—Glory Corporation Stock 325,000 Cash 325,000 Dec. 31

Jan. 15

Investments—Glory Corporation Stock Income of Glory Corporation

56,700

Cash Investments—Glory Corporation Stock

11,550

56,700

11,550

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 152. Prepare the journal entries for the following transactions for Batson Co. Sept. 1 Batson Co. purchased 1,200 shares of the total of 100,000 outstanding shares of Michael Corp. stock for $20.75 per share plus a $70 commission. Dec. 31 Michael Corp.’s total earnings for the period are $84,000. 31 Michael Corp.’s paid a total of $40,000 in cash dividends to shareholders of record. ANSWER:

Sept. 1 Investments—Michael Corp. Stock Cash (1,200 × $20.75) + $70

24,970 24,970

Dec. 31 No entry Dec. 31 Cash 480 Dividend Revenue ($40,000/100,000 × 1,200) DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

480

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Chapter 15 - Investments and Fair Value Accounting 153. Prepare the journal entries for the following transactions for Morgan Co. July

1 Morgan Co. purchased 32,000 shares of the total of 100,000 outstanding shares of Gordon Corp. stock for $10 per share plus a $400 commission. Dec. 31 Gordon Corp.'s total earnings for the period are $80,000. 31 Gordon Corp. paid a total of $45,000 in cash dividends. ANSWER:

July 1 Investments—Gordon Corp. Stock Cash

320,400 320,400

Dec. 31 Investments—Gordon Corp. Stock Income of Gordon Corp. $80,000 × 32%

25,600 25,600

Dec. 31 Cash 14,400 Investments—Gordon Corp. Stock $45,000 × 32% DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

14,400

154. Present entries to record the following selected transactions of Masterson Co. Aug. 1 Purchased 600 shares of the 100,000 shares outstanding $10 par common shares of Dankin Corporation for $5,100. 1 Purchased 3,500 shares of the 10,000 shares no par common shares of Ramon Co. for $45,700. The investment was accounted for by the equity method. Sept. 1 Received a cash dividend of $1 per share on the Dankin Corporation stock acquired on August 1. 1 Received a cash dividend of $2 per share on the Ramon Co. stock acquired on August 1. Dec. 31 Sold 100 shares of the Dankin Corporation shares acquired on August 1 for $2,100. Dankin Corporation reported net income of $30,000 and Ramon Company’s reported net income was 31 $50,000. ANSWER:

Aug. 1 Investments—Dankin Corporation Stock Cash

5,100

Aug. 1 Investments—Ramon Co. Stock Cash

45,700

Sept. 1 Cash Dividend Revenue

5,100

45,700

600 600

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Chapter 15 - Investments and Fair Value Accounting Sept. 1 Cash Investments—Ramon Co. Stock Dec. 31 Cash Investments—Dankin Corporation Stock ($5,100/6) Gain on Sale of Investments

7,000 7,000 2,100 850 1,250

Dec. 31 Investments—Ramon Co. Stock 17,500 Income of Ramon Co. 17,500 ($50,000 × 35%) DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 155. Discuss the appropriate financial treatment when an investor has a greater than 50% ownership in another company. ANSWER: If an investor purchases more than 50% of another company, the investor is considered to have control over the investee. The purchase is deemed a business combination. The corporation that owns the majority interest is called the parent company; the controlled company is called the subsidiary. Parent and subsidiary corporations may continue to maintain separate accounting records throughout the year and prepare their own financial statements. If that is the case, at the end of the year, the financial statements of the parent and subsidiary(ies) are combined into consolidated financial statements. DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-03 - 15-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 156. On January 1, the valuation allowance for trading investments account has a zero balance. On December 31, the cost of trading securities portfolio was $64,200, and the fair value was $67,000. Prepare the December 31 adjusting journal entry to record the unrealized gain or loss on trading investments. ANSWER: Dec. 31 Valuation Allowance for Trading Investments 2,800 Unrealized Gain on Trading Investments 2,800 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 15 - Investments and Fair Value Accounting 157. Skyline, Inc. purchased a portfolio of trading securities during the current fiscal year. The cost and fair value of this portfolio on December 31 were as follows: Name Alcon, Inc. Easton Company Panther Company Total

Number of Shares 1,200 700 300

Total Cost Total Fair Value $16,000 $15,000 23,000 21,500 9,000 9,200 $48,000 $45,700

(a) Provide the journal entry to record the adjustment of the trading security portfolio to fair value on December 31. (b) Where will the information from the journal entry be reported on the financial statements? ANSWER:

(a) Unrealized Loss on Trading Investments 2,300 Valuation Allowance for Trading Investments 2,300 $45,700 – $48,000 (b) The unrealized loss will be reported on the income statement as part of other income or loss. The valuation allowance will reduce the value of the portfolio on the balance sheet. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 158. Skyline, Inc. purchased a portfolio of available-for-sale securities during the current fiscal year. The cost and fair value of this portfolio on December 31 were as follows: Name Blackstone, Inc. Flagler Company Patterson Corporation Total

Number of Shares 400 200 600

Total Cost Total Fair Value $ 4,000 $ 5,200 3,000 2,700 7,500 9,800 $14,500 $17,700

(a) Provide the journal entry to record the adjustment of the available-for-sale security portfolio to fair value on December 31. (b) Where will the information from the journal entry be reported on the financial statements? ANSWER: (a) Valuation Allowance for Available-for-Sale Investments 3,200 Unrealized Gain (Loss) on Available-for-Sale Investments 3,200 $17,700 – $14,500 (b) The unrealized gain will be reported on the balance sheet as part of stockholders’ equity. The valuation allowance will increase the value of the portfolio in the Assets section on the balance sheet. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 15 - Investments and Fair Value Accounting 159. The income statement for Hudson Company reported net income of $345,000 for the year ended December 31 before considering the following:    

During the year, the company purchased trading securities. At year-end, the fair value of the investment portfolio was $23,000 less than cost. The balance of Retained Earnings was $823,000 on January 1. Hudson Company paid $43,000 in cash dividends during the year.

Calculate the balance of Retained Earnings on December 31. ANSWER: Retained earnings, January 1 Plus net income* Less dividends

$ 823,000 322,000 $1,145,000 43,000 $1,102,000

Retained earnings, December 31 *Because these are trading securities, the decrease in fair market value is part of the net income calculation ($345,000 – $23,000). DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 160. The income statement for Dobson Corporation reported net income of $22,400 for the year ended December 31 before considering the following:    

During the year, the company purchased available-for-sale securities. At year-end, the fair value of the investment portfolio was $2,100 more than cost. The balance of Retained Earnings was $83,000 on January 1. Dobson Corporation paid $9,000 in cash dividends during the year.

Calculate the balance of Retained Earnings on December 31. ANSWER: Retained earnings, January 1 Plus net income* Less dividends

$ 83,000 22,400 $105,400 9,000 $ 96,400

Retained earnings, December 31 *Because these are available-for-sale securities, the increase in fair market value is part of stockholders’ equity, not net income. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.09 - Financial Statements ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 15 - Investments and Fair Value Accounting 161. During the first year of operations, Makala Company purchased two available-for-sale investments as follows: Security Oceanna Company Rockledge, Inc.

Shares Purchased 700 1,900

Cost $29,000 41,000

Assume that as of December 31, Oceanna Company's stock had a market value of $49 per share and Rockledge, Inc.'s stock had a market value of $20 per share. Makala had 10,000 shares of no par stock outstanding that was issued for $150,000. For the year ending December 31, Makala had a net income of $105,000. No dividends were paid. (a) (b)

Prepare the Current assets section of the balance sheet for the available-for sale securities as of December 31. Prepare the Stockholders’ equity section of the balance sheet as of December 31.

ANSWER:

(a) Makala Company Balance Sheet (selected items) December 31 Assets Current assets: Available-for-sale investments, at cost Plus valuation allowance for available-for-sale investments

$70,000 2,300*

*Computation: Market: Oceanna Company: 700 shares × $49 Rockledge, Inc.: 1,900 shares × $20 Subtotal Cost ($29,000 + $41,000) Unrealized gain

$72,300

$34,300 38,000 $72,300 70,000 $ 2,300

(b) Makala Company Balance Sheet (selected items) December 31 Stockholders’ Equity Common stock Retained earnings Unrealized gain (loss) on available-for-sale investments Total stockholders’ equity DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

$150,000 105,000 2,300 $257,300

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Chapter 15 - Investments and Fair Value Accounting 162. Discuss the similarities and differences in reporting trading securities, available-for-sale securities, and held-tomaturity securities. ANSWER: Both trading securities and available-for-sale securities are reported at fair value on the balance sheet date. Held-to-maturity securities are reported at amortized cost. Unrealized gains and losses on trading securities are reported on the income statement as part of other income or loss. Unrealized gains and losses on available-for-sale securities are reported in the Stockholders' equity section of the balance sheet. Unrealized gains and losses are not calculated or reported on held-to-maturity securities. Trading securities are always reported as current assets. Available-for-sale and held-tomaturity securities may be reported as current or noncurrent assets. The classification for available-for-sale securities depends on management intent. The classification for heldto-maturity securities depends on the remaining time to maturity. DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 163. On January 1, the valuation allowance for available-for-sale investments account had a zero balance. On December 31, the cost of the available-for-sale securities was $48,700, and the fair value was $39,200. Prepare the adjusting entry to record the unrealized gain or loss for available-for-sale investments on December 31. ANSWER: Dec. Unrealized Gain (Loss) on Available-for-Sale 9,500* 31 Investments Valuation Allowance for Available-for-Sale 9,500 Investments *Available-for-sale investments at fair value, $39,200 December 31 Available-for-sale investments at cost, December 31 48,700 Unrealized gain (loss) on available-for$(9,500) sale investments, December 31 DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.07 - Adjusting Entries ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 15 - Investments and Fair Value Accounting 164. The cost and fair value of the trading securities held by Lindy Company as of December 31 are as follows: Fair Number Cost Value Total of per per Cost Shares Share Share 1,200 $10.50 $11.05 600 9.00 9.85 900 4.10 4.00 1,400 7.35 6.82

Name Laurie, Inc. Scott Corp. Stephanie Company Timmer Company Total

Total Fair Value

(a) Complete the table above to find the total cost and fair value for the company’s trading securities portfolio. (b) Calculate and record the required December 31 adjustment. (c) Explain how the adjustment from part (b) is reported on Lindy’s financial statements. ANSWER:

(a)

Name Laurie, Inc. Scott Corp. Stephanie Company Timmer Company Total

Fair Total Number Cost Value Total Fair of per per Shares Share Share Cost Value 1,200 $10.50 $11.05 $12,600 $13,260 600 9.00 9.85 5,400 5,910 900 4.10 4.00 3,690 3,600 1,400 7.35 6.82 10,290 9,548 $31,980 $32,318

(b) Valuation Allowance for Trading Investments Unrealized Gain on Trading Investments $32,318 – $31,980 = $338 unrealized gain

338 338

(c) The unrealized gain will be reported on the income statement as other income. The valuation allowance will be added to the cost of investments and be reported under current assets. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 15 - Investments and Fair Value Accounting 165. Following are data for the available-for-sale securities held by Lindy Company as of December 31: Name Laurie, Inc. Scott Corp. Stephanie Company Timmer Company Total

Number of Cost Fair Value Total Shares per Share per Share Total Cost Fair Value 1,200 $15.00 $15.40 800 8.00 8.25 700 14.40 13.50 900 12.35 10.77

(a) Complete the table above to find the total cost and fair value for the company’s available-for-sale securities portfolio. (b) Calculate and record the required December 31 adjustment. (c) Explain how the adjustment from part (b) is reported on Lindy’s financial statements. ANSWER:

(a)

Name Laurie, Inc. Scott Corp. Stephanie Company Timmer Company Total

Fair Total Number Cost Value Total Fair of per per Shares Share Share Cost Value 1,200 $15.00 $15.40 $18,000 $18,480 800 8.00 8.25 6,400 6,600 700 14.40 13.50 10,080 9,450 900 12.35 10.77 11,115 9,693 $45,595 $44,223

(b) Unrealized Gain (Loss) on Available-for-Sale Investments Valuation Allowance for Available-for-Sale Investments $45,595 – $44,223 = $1,372 unrealized loss

1,372 1,372

(c) The unrealized loss will be shown as a reduction in stockholders’ equity and the valuation allowance will be shown as a reduction of the value of the available-for-sale investment portfolio (at cost). DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-04 - 15-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 15 - Investments and Fair Value Accounting 166. On April 1, ValueTime, Inc. had a market price per common share of $24. For the previous year, ValueTime paid a dividend of $1.50 per share. Compute the dividend yield for ValueTime, Inc. ANSWER: Dividend Yield = Dividends per Share of Common Stock = $1.50 = 6.25% Market Price per Share of Common Stock $24 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-06 - 15-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.21 - Corporate Investments Accounting ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 167. Nicer Corporation reported net income of $50,000 in the current year. There are 10,000 shares of $100 par, 6% preferred stock and 50,000 shares of $2 par common stock outstanding. During the year, Nicer paid the preferred stockholders a $6-per-share dividend and also paid $30,000 to common shareholders. The market value of Nicer’s stock is preferred stock, $95, and common stock, $5. (a) Calculate Nicer’s dividend yield common stock. (b) Why does the dividend yield vary widely across firms? ANSWER: (a) Dividend Yield = $0.60*/$5.00 = 12% * $30,000/50,000 = $0.60 per share common stock dividend (b) Growth firms tend to retain their earnings to fund future growth, resulting in a small dividend yield. Other companies regularly pay dividends to stockholders resulting in larger dividend yields. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-06 - 15-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 168. Gerardo Company had a net income of $75,000 and other comprehensive income of $12,500 for the year. On January 1, the retained earnings balance was $525,000 and the accumulated other comprehensive income balance was $55,000. Determine the (a) comprehensive income for the year, (b) retained earnings balance on December 31, and (c) the accumulated other comprehensive income on December 31. ANSWER: (a) $87,500 ($75,000 + $12,500) (b) $600,000 ($525,000 + $75,000) (c) $67,500 ($55,000 + $12,500) DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-APP - 15-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 15 - Investments and Fair Value Accounting 169. Herberto Company had a net income of $74,000 and other comprehensive loss of $8,500 for the year. On January 1, the retained earnings balance was $425,000, and the accumulated other comprehensive income balance was $52,000. Determine the (a) comprehensive income for the year, (b) retained earnings balance on December 31, and (c) the accumulated other comprehensive income on December 31. ANSWER: (a) $65,500 ($74,000 – $8,500) (b) $499,000 ($425,000 + $74,000) (c) $43,500 ($52,000 – $8,500) DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-APP - 15-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 170. LM, Inc. reported net income for the year ending December 31 of $483,500. Dividends paid during the year totaled $52,900. The company holds available-for-sale securities with an original cost of $162,000 and a fair value of $181,000 at the end of the year. It also holds trading securities with an original cost of $150,000 and a fair value of $147,000. Retained earnings on January 1 was $736,400, and accumulated other comprehensive income on January 1 was $16,200. Calculate the following balances to be reported in the financial statements dated December 31: (a) Valuation allowance for available-for-sale securities (b) Comprehensive income (c) Retained earnings (d) Accumulated other comprehensive income ANSWER: (a) Valuation adjustment for available-for-sale securities: $181,000 – $162,000 = $19,000 (b) Comprehensive income: $483,500 + $19,000 = $502,500 (c) Retained earnings: $736,400 + $483,500 – $52,900 = $1,167,000 (d) Accumulated other comprehensive income: $16,200 + $19,000 = $35,200 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.15-APP - 15-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 15 - Investments and Fair Value Accounting 171. (a) What is comprehensive income? (b) How is it calculated? (c) What are some examples of items included in other comprehensive income? (d) Where is comprehensive income reported? ANSWER: (a) Comprehensive income is all changes in stockholders’ equity during a period except those resulting from dividends and stockholders’ investments. (b) It is calculated by adding other comprehensive income to net income. (c) Other comprehensive income items include unrealized gains and losses on availablefor-sale-securities and foreign currency and pension liability adjustments. (d) Comprehensive income is reported in the financial statements in one of the following ways: 1. On the income statement 2. In a separate statement of comprehensive income DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.15-APP - 15-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.09 - Financial Statements ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic

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Chapter 16 - Statement of Cash Flows True / False 1. The statement of cash flows is not one of the basic financial statements. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 2. Cash, as the term is used for the statement of cash flows, could indicate either cash or cash equivalents. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 3. The statement of cash flows is an optional financial statement. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic 4. The statement of cash flows shows the effects on cash of a company's operating, investing, and financing activities. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 16 - Statement of Cash Flows 5. The statement of cash flows reports a firm's major sources of cash receipts and major uses of cash for a period of time. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 6. Cash flows from operating activities, as part of the statement of cash flows, include cash transactions that enter into the determination of net income. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 7. To arrive at cash flows from operations, it is necessary to convert the income statement from an accrual basis to the cash basis of accounting. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 8. Cash flows from investing activities, as part of the statement of cash flows, would include any receipts from the sale of land. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 16 - Statement of Cash Flows 9. Cash flows from financing activities, as part of the statement of cash flows, would include any payments for dividends. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 10. Cash flows from investing activities, as part of the statement of cash flows, would include any payments for the purchase of treasury stock. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 11. Cash flows from investing activities, as part of the statement of cash flows, would include any receipts from the issuance of bonds payable. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 12. There are two alternatives to reporting cash flows from operating activities in the statement of cash flows: (1) the direct method and (2) the indirect method. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 16 - Statement of Cash Flows 13. The direct method of preparing the operating activities section of the statement of cash flows reports major classes of cash receipts and cash payments related to the day-to-day operations of the business. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 14. Under the direct method of reporting cash flows from operations, the primary source of cash is cash received from customers. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 15. The main disadvantage of the direct method of reporting cash flows from operating activities is that the necessary data are often costly to accumulate. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 16. A major disadvantage of the indirect method of reporting cash flows from operating activities is that the difference between the net amount of cash flows from operating activities and net income is emphasized. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 16 - Statement of Cash Flows 17. Cash outflows from financing activities include the payment of cash dividends, the acquisition of treasury stock, and the repayment of amounts borrowed. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 18. Cash flows from investing activities, as part of the statement of cash flows, include payments for the acquisition of fixed assets. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 19. The acquisition of land in exchange for common stock is an example of a noncash investing and financing activity. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 20. If a business issued bonds payable in exchange for land, the transaction would be reported in a separate schedule on the statement of cash flows. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 16 - Statement of Cash Flows 21. In preparing the statement of cash flows, the correct order of reporting cash activities is financing, operating, and investing. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 22. A cash flow per share amount should be reported on the statement of cash flows. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 23. Rarely will the cash flows from operating activities, as reported on the statement of cash flows, be the same as the net income reported on the income statement. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 24. Using the indirect method, if land costing $85,000 was sold for $145,000, the amount reported in the financing activities section of the statement of cash flows would be $85,000. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 16 - Statement of Cash Flows 25. If land costing $145,000 was sold for $205,000, the $60,000 gain on the sale would be added to net income in the operating activities section of the statement of cash flows (prepared by the indirect method). a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 26. In preparing the Cash flows from operating activities section of the statement of cash flows by the indirect method, the net decrease in inventories from the beginning to the end of the period is added to net income for the period. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 27. In determining the cash flows from operating activities for the statement of cash flows by the indirect method, the depreciation expense for the period is added to the net income for the period. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 28. In preparing the Cash flows from operating activities section of the statement of cash flows by the indirect method, the amortization of bond discount for the period is deducted from the net income for the period. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 16 - Statement of Cash Flows 29. If cash dividends of $135,000 were paid during the year and the company sold 1,000 shares of common stock at $30 per share, the statement of cash flows would report net cash flow from financing activities as $165,000. a. True b. False ANSWER: False RATIONALE: Net Cash Flow from Financing Activities = Cash Received from Sale of Common Stock – Cash Paid for Dividends = (1,000 × $30) – $135,000 = ($105,000) DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 30. The declaration and issuance of a stock dividend would be reported on the statement of cash flows. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 31. If 800 shares of $40 par common stock are sold for $43,000, the $43,000 would be reported in the Cash flows from financing activities section of the statement of cash flows. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 16 - Statement of Cash Flows 32. If $475,000 of bonds payable are sold at 101, $475,000 would be reported in the Cash flows from financing activities section of the statement of cash flows. a. True b. False ANSWER: False RATIONALE: Net Cash Flows from Financing Activities = Par Value of Bonds × (101/100) = $475,000 × (101/100) = $479,750 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 33. Net income was $51,000 for the year. The accumulated depreciation balance increased by $14,000 over the year. There were no sales of fixed assets or changes in noncash current assets or liabilities. Under the indirect method, the cash flow from operations is $37,000. a. True b. False ANSWER: False RATIONALE: Cash Flow from Operations = Net Income + Depreciation Expense = $51,000 + $14,000 = $65,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 34. Net income for the year was $29,500. Accounts receivable increased $2,500, and accounts payable increased $5,400. There were no other changes in noncash current assets and liabilities. Under the indirect method, the cash flow from operations is $32,400. a. True b. False ANSWER: True RATIONALE: Cash Flow from Operations = Net Income – Increase in Accounts Receivable + Increase in Accounts Payable = $29,500 – $2,500 + $5,400 = $32,400 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 16 - Statement of Cash Flows 35. A building with a cost of $153,000 and accumulated depreciation of $42,000 was sold for an $11,000 gain. When using the indirect method, the cash generated from this investing activity is $121,000. a. True b. False ANSWER: False RATIONALE: Cash Generated from Investing Activity = Book Value of Building + Gain on Sale of Building = ($153,000 – $42,000) + $11,000 = $122,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 36. Under the indirect method, expenses that do not affect cash are added to net income in the operating activities section of the statement of cash flows. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 37. Cash paid to acquire treasury stock should be shown on the statement of cash flows under investing activities. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 38. Repayments of bonds would be shown as a cash outflow in the investing section of the statement of cash flows. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 16 - Statement of Cash Flows 39. Purchasing equipment by issuing a six-month note should be shown on the statement of cash flows under the investing activities section. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 40. Cash inflows and outflows are not netted in the investing or financing sections of the statement of cash flows but are separately disclosed to give the reader full information. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 41. There is no difference in the investing and financing sections of the statement of cash flows using the indirect and direct methods. a. True b. False ANSWER: True DIFFICULTY: Bloom's: Remembering Easy LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 42. Under the direct method of preparing a statement of cash flows, the gain on the sale of land is not adjusted or reported as part of cash flows from operating activities. a. True b. False ANSWER: True DIFFICULTY: Bloom's: Remembering Easy LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 16 - Statement of Cash Flows 43. The manner of reporting cash flows from investing and financing activities will be different under the direct method as compared to the indirect method. a. True b. False ANSWER: False DIFFICULTY: Bloom's: Remembering Easy LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 44. Sales reported on the income statement were $372,000. The accounts receivable balance declined $4,500 over the year. The amount of cash received from customers was $367,500. a. True b. False ANSWER: False RATIONALE: Cash Received from Customers = Sales + Decrease in Accounts Receivable = $372,000 + $4,500 = $376,500 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 45. To determine cash payments for merchandise for the statement of cash flows using the direct method, a decrease in accounts payable is added to the cost of merchandise sold. a. True b. False ANSWER: True DIFFICULTY: Bloom's: Understanding Easy LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 16 - Statement of Cash Flows 46. To determine cash payments for operating expenses for the statement of cash flows using the direct method, a decrease in prepaid expenses is added to operating expenses other than depreciation. a. True b. False ANSWER: False DIFFICULTY: Bloom's: Understanding Easy LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 47. To determine cash payments for operating expenses for the statement of cash flows using the direct method, a decrease in accrued expenses is added to operating expenses payable other than depreciation. a. True b. False ANSWER: True DIFFICULTY: Bloom's: Understanding Easy LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 48. To determine cash payments for income taxes for the statement of cash flows using the direct method, an increase in income taxes payable is added to the income tax expense. a. True b. False ANSWER: False DIFFICULTY: Bloom's: Understanding Easy LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 49. Free cash flow is cash flow from operations less cash used to purchase fixed assets to maintain productive capacity. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-04 - 16-04 ACCREDITING STANDARDS: ACBSP-APC-23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 16 - Statement of Cash Flows 50. Free cash flow is the measure of operating cash flow available for corporate purposes after providing sufficient fixed asset additions to maintain current productive capacity. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-04 - 16-04 ACCREDITING STANDARDS: ACBSP-APC-23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 51. When using the spreadsheet (work sheet) method to analyzing noncash accounts, no order of analysis is required, but it is more efficient to start with Retained Earnings and proceed upward in the account listing. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-APP - 16-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic Multiple Choice 52. Which of the following is not one of the four basic financial statements? a. balance sheet b. statement of cash flows c. statement of changes in financial position d. income statement ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic

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Chapter 16 - Statement of Cash Flows 53. Which of the following can be found on the statement of cash flows? a. cash flows from operating activities b. total assets c. total changes in stockholders' equity d. changes in retained earnings ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 54. On the statement of cash flows, the Cash flows from operating activities section would include a. receipts from the issuance of capital stock b. receipts from the sale of investments c. payments for the acquisition of investments d. cash receipts from sales activities ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 55. Preferred stock issued in exchange for land would be reported on the statement of cash flows in a. the Cash flows from financing activities section b. the Cash flows from investing activities section c. a separate schedule d. the Cash flows from operating activities section ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 16 - Statement of Cash Flows 56. Cash paid to purchase long-term investments would be reported on the statement of cash flows in a. the Cash flows from operating activities section b. the Cash flows from financing activities section c. the Cash flows from investing activities section d. a separate schedule ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 57. Which of the following would not be found in a schedule of noncash investing and financing activities, reported at the end of a statement of cash flows? a. equipment acquired in exchange for a note payable b. bonds payable exchanged for capital stock c. purchase of treasury stock d. capital stock issued to acquire fixed assets ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 58. Which of the following does not represent an outflow of cash and therefore would not be reported on the statement of cash flows as a use of cash? a. purchase of noncurrent assets b. purchase of treasury stock c. discarding an asset that had been fully depreciated d. payment of cash dividends ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 16 - Statement of Cash Flows 59. Which of the following represents an inflow of cash and therefore would be reported on the statement of cash flows? a. retirement of bond payable b. acquisition of treasury stock c. declaration of stock dividends d. issuance of long-term debt ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 60. A 10-year bond was issued at par for $250,000 cash. This transaction should be shown on a statement of cash flows under a. investing activities b. financing activities c. noncash investing and financing activities d. operating activities ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 61. Cash paid for preferred stock dividends should be shown on the statement of cash flows under a. investing activities b. financing activities c. noncash investing and financing activities d. operating activities ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 16 - Statement of Cash Flows 62. The last item on the statement of cash flows prior to the schedule of noncash investing and financing activities reports a. the increase or decrease in cash b. cash at the end of the year c. net cash flow from investing activities d. net cash flow from financing activities ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 63. Which of the following is a noncash investing and financing activity? a. payment of a cash dividend b. payment of a six-month note payable c. purchase of merchandise inventory on account d. issuance of common stock to acquire land ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 64. Which of the following should be shown on a statement of cash flows under the financing activities section? a. the purchase of a long-term investment in the common stock of another company b. the payment of cash to retire a long-term note c. the proceeds from the sale of a building d. the issuance of a long-term note to acquire land ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 16 - Statement of Cash Flows 65. A company purchases equipment for $32,000 cash. This transaction should be shown on the statement of cash flows under a. investing activities b. financing activities c. noncash investing and financing activities d. operating activities ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 66. Cash flow per share is a. required to be reported on the balance sheet b. required to be reported on the income statement c. required to be reported on the statement of cash flows d. not required to be reported on any statement ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic 67. On the statement of cash flows prepared by the indirect method, the Cash flows from operating activities section would include a. receipts from the sale of investments b. gains or losses on fixed assets c. payments for cash dividends d. receipts from the issuance of capital stock ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 16 - Statement of Cash Flows 68. The statement of cash flows is not useful for a. planning future investing and financing activities b. determining a company’s ability to pay its debts c. determining a company’s ability to pay dividends d. calculating the net worth of a company ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 69. Cash receipts received from the issuance of a mortgage notes payable would be classified as a(n) a. investing activity b. operating activity c. noncash investing and financing activity d. financing activity ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 70. Which of the following would not be on the statement of cash flows? a. cash flows from investing activities b. cash flows from financing activities c. cash flows from operating activities d. cash flows from contingent activities ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 16 - Statement of Cash Flows 71. The order of presentation of activities on the statement of cash flows is a. operating, investing, and financing b. operating, financing, and investing c. financing, operating, and investing d. financing, investing, and operating ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 72. Financing activities include a. lending money b. acquiring investments c. issuing debt d. acquiring long-lived assets ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 73. Depreciation on factory equipment would be reported in the statement of cash flows prepared by the indirect method in a. the Cash flows from financing activities section b. the Cash flows from investing activities section c. a separate schedule d. the Cash flows from operating activities section ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 16 - Statement of Cash Flows 74. Which of the following should be added to net income in calculating net cash flow from operating activities using the indirect method? a. an increase in inventory b. a decrease in accounts payable c. preferred dividends declared and paid d. a decrease in accounts receivable ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 75. Which of the following should be deducted from net income in calculating net cash flow from operating activities using the indirect method? a. depreciation expense b. gain on sale of land c. a loss on the sale of equipment d. dividends declared and paid ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 76. Which of the following increases cash? a. depreciation expense b. acquisition of treasury stock c. borrowing money by issuing a six-month note d. the declaration of a cash dividend ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 16 - Statement of Cash Flows 77. Which of the following would not be classified as an operating activity? a. interest expense b. income taxes c. payment of dividends d. selling expenses ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 78. Which of the following should be added to net income in calculating net cash flow from operating activities using the indirect method? a. a gain on the sale of land b. a decrease in accounts payable c. an increase in accrued liabilities d. dividends paid on common stock ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 79. On the statement of cash flows prepared by the indirect method, a $50,000 gain on the sale of investments would be a. deducted from net income in converting the net income reported on the income statement to cash flows from operating activities b. added to net income in converting the net income reported on the income statement to cash flows from operating activities c. added to dividends declared in converting the dividends declared to the cash flows from financing activities related to dividends d. deducted from dividends declared in converting the dividends declared to the cash flows from financing activities related to dividends ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 16 - Statement of Cash Flows 80. Accounts receivable from sales transactions were $51,000 at the beginning of the year and $64,000 at the end of the year. Net income reported on the income statement for the year was $105,000. Exclusive of the effect of other adjustments, the cash flows from operating activities to be reported on the statement of cash flows prepared by the indirect method would be a. $105,000 b. $118,000 c. $92,000 d. $169,000 ANSWER: c RATIONALE: Cash Flows from Operating Activities = Net Income – Increase in Accounts Receivable = $105,000 – ($64,000 – $51,000) = $92,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 81. The net income reported on the income statement for the current year was $275,000. Depreciation recorded on fixed assets and amortization of patents for the year were $40,000 and $9,000, respectively. Balances of current asset and current liability accounts at the end and at the beginning of the year are as follows: End Beginning Cash $50,000 $60,000 Accounts Receivable 112,000 108,000 Inventories 105,000 93,000 Prepaid Expenses 4,500 6,500 Accounts Payable (merchandise creditors) 75,000 89,000 What is the amount of cash flows from operating activities reported on the statement of cash flows prepared by the indirect method? a. $198,000 b. $324,000 c. $352,000 d. $296,000 ANSWER: d RATIONALE: Cash flows from operating activities: Net income $275,000 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation 40,000 Amortization of patents 9,000 Changes in current operating assets and liabilities: Increase in accounts receivable (4,000) Increase in inventories (12,000) Decrease in prepaid expenses 2,000 Decrease in accounts payable (14,000) Net cash flow from operating activities $296,000 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 16 - Statement of Cash Flows DIFFICULTY:

Moderate Bloom’s: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 82. The following information is available from the current period financial statements: Net income Depreciation expense Increase in accounts receivable Decrease in accounts payable

$175,000 28,000 16,000 21,000

The net cash flow from operating activities using the indirect method is a. $166,000 b. $184,000 c. $110,000 d. $240,000 ANSWER: a RATIONALE: Cash flows from operating activities: Net income $175,000 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation expense 28,000 Changes in current operating assets and liabilities: Increase in accounts receivable (16,000) Decrease in accounts payable (21,000) Net cash flow from operating activities $166,000 DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 16 - Statement of Cash Flows 83. On the statement of cash flows, the Cash flows from investing activities section would include a. receipts from the issuance of capital stock b. payments for dividends c. payments for retirement of bonds payable d. receipts from the sale of investments ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 84. A building with a book value of $54,000 is sold for $63,000 cash. Using the indirect method, this transaction should be shown on the statement of cash flows as an increase of a. $54,000 from investing activities b. $63,000 from investing activities and a deduction from net income of $9,000 c. $9,000 from investing activities d. $54,000 from investing activities and an addition to net income of $9,000 ANSWER: b RATIONALE: Gain on Sale of Building = $63,000 – $54,000 = $9,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 85. Cash paid for equipment would be reported on the statement of cash flows in a. the Cash flows from operating activities section b. the Cash flows from financing activities section c. the Cash flows from investing activities section d. a separate schedule ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 16 - Statement of Cash Flows 86. If a gain of $11,000 is realized in selling (for cash) office equipment having a book value of $55,000, the total amount reported in the Cash flows from investing activities section of the statement of cash flows is a. $44,000 b. $11,000 c. $55,000 d. $66,000 ANSWER: d RATIONALE: Cash Flow from Sale of Office Equipment (to be reported as an investing activity) = Book Value of Office Equipment + Gain on Sale of Office Equipment = $55,000 + $11,000 = $66,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 87. Which of the following types of transactions would be reported as a cash flow from investing activity on the statement of cash flows? a. issuance of bonds payable b. issuance of capital stock c. purchase of treasury stock d. purchase of noncurrent assets ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 88. Land costing $140,000 was sold for $173,000 cash. The gain on the sale was reported on the income statement as other income. On the statement of cash flows, what amount should be reported as an investing activity from the sale of land? a. $173,000 b. $140,000 c. $313,000 d. $33,000 ANSWER: a DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 16 - Statement of Cash Flows 89. Equipment with an original cost of $75,000 and accumulated depreciation of $20,000 was sold at a loss of $7,000. As a result of this transaction, cash would a. increase by $48,000 b. decrease by $7,000 c. increase by $55,000 d. decrease by $27,000 ANSWER: a RATIONALE: Increase in Cash = Book Value of Equipment + Loss on Sale of Equipment = ($75,000 – $20,000) – $7,000 = $48,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 90. On the statement of cash flows, the Cash flows from financing activities section would include a. receipts from the sale of investments b. payments for the acquisition of investments c. receipts from a note receivable d. receipts from the issuance of capital stock ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 91. Cash dividends paid on capital stock would be reported in the statement of cash flows in a. the Cash flows from financing activities section b. the Cash flows from investing activities section c. a separate schedule d. the Cash flows from operating activities section ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 16 - Statement of Cash Flows 92. Cash dividends of $45,000 were declared during the year. Cash dividends payable were $10,000 at the beginning of the year and $15,000 at the end of the year. The amount of cash for the payment of dividends during the year is a. $50,000 b. $40,000 c. $55,000 d. $35,000 ANSWER: b RATIONALE: Cash Payment of Dividends = Dividends Payable at Beginning of Year + Dividends Declared during Year – Dividends Payable at End of Year = $10,000 + $45,000 – $15,000 = $40,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 93. On the statement of cash flows prepared using the indirect method, a $7,500 gain on the sale of fixed assets would be a. added to net income in converting the net income reported on the income statement to cash flows from operating activities b. deducted from net income in converting the net income reported on the income statement to cash flows from operating activities c. added to dividends declared in converting the dividends declared to the cash flows from financing activities related to dividends d. deducted from dividends declared in converting the dividends declared to the cash flows from financing activities related to dividends ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 94. A business issues 20-year bonds payable in exchange for preferred stock. This transaction would be reported on the statement of cash flows in a. a separate schedule b. the Cash flows from financing activities section c. the Cash flows from investing activities section d. the Cash flows from operating activities section ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 16 - Statement of Cash Flows 95. Land costing $71,000 was sold for $50,000 cash. The loss on the sale was reported on the income statement as other expense. On the statement of cash flows, what amount should be reported as an investing activity from the sale of land? a. $50,000 b. $71,000 c. $121,000 d. $21,000 ANSWER: a DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 96. The current period statement of cash flows includes the following: Cash balance at the beginning of the period Net cash flow from operating activities Net cash flow used for investing activities Net cash flow used for financing activities

$310,000 185,000 43,000 97,000

The cash balance at the end of the period is a. $45,000 b. $635,000 c. $355,000 d. $125,000 ANSWER: c RATIONALE: Cash Balance at End of Period = $310,000 + $185,000 – $43,000 – $97,000 = $355,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 97. Which of the following should be deducted from net income in calculating net cash flow from operating activities using the indirect method? a. a decrease in inventory b. a decrease in accounts payable c. preferred dividends declared and paid d. a decrease in accounts receivable ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 16 - Statement of Cash Flows 98. Which of the following should be added to net income in calculating net cash flow from operating activities using the indirect method? a. depreciation expense b. an increase in inventory c. a gain on the sale of equipment d. dividends declared and paid ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 99. The net income reported on the income statement for the current year was $250,000. Depreciation recorded on fixed assets and amortization of patents for the year were $40,000, and $9,000, respectively. Balances of current asset and current liability accounts at the end and at the beginning of the year are as follows: Cash Accounts Receivable Inventories Prepaid Expenses Accounts Payable (merchandise creditors)

End $ 50,000 112,000 105,000 4,500 75,000

Beginning $ 60,000 108,000 93,000 6,500 89,000

What is the amount of cash flows from operating activities reported on the statement of cash flows prepared by the indirect method? a. $271,000 b. $279,000 c. $327,000 d. $256,000 ANSWER: a RATIONALE: Cash flows from operating activities: Net income $250,000 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation 40,000 Amortization of patents 9,000 Changes in current operating assets and liabilities: Increase in accounts receivable (4,000) Increase in inventories (12,000) Decrease in prepaid expenses 2,000 Decrease in accounts payable (14,000) Net cash flow from operating activities $271,000

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Chapter 16 - Statement of Cash Flows DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 100. The following information is available from the current period financial statements: Net income Depreciation expense Increase in accounts receivable Decrease in accounts payable The net cash flow from operating activities using the indirect method is a. $230,000 b. $188,000 c. $198,000 d. $156,000 ANSWER: d RATIONALE: Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash flow from operating activities: Depreciation expense Changes in current operating assets and liabilities: Increase in accounts receivable Decrease in accounts payable Net cash flow from operating activities

$165,000 28,000 16,000 21,000

$165,000

28,000

(16,000) (21,000) $156,000

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 16 - Statement of Cash Flows 101. Cash dividends of $50,000 were declared during the year. Cash dividends payable were $10,000 and $5,000 at the beginning and end of the year, respectively. The amount of cash for the payment of dividends during the year is a. $55,000 b. $50,000 c. $65,000 d. $60,000 ANSWER: a RATIONALE: Cash Payment of Dividends = Dividends Payable at Beginning of Year + Dividends Declared during Year – Dividends Payable at End of Year = $10,000 + $50,000 – $5,000 = $55,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 102. Accounts receivable from sales to customers amounted to $40,000 and $32,000 at the beginning and end of the year, respectively. Income reported on the income statement for the year was $110,000. Exclusive of the effect of other adjustments, the net cash flows from operating activities to be reported on the statement of cash flows using the indirect method is a. $118,000 b. $110,000 c. $102,000 d. $150,000 ANSWER: a RATIONALE: Cash Flows from Operations = Net Income + Decrease in Accounts Receivable = $110,000 + ($40,000 – $32,000) = $118,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 16 - Statement of Cash Flows 103. Baxter Company reported a net loss of $13,000 for the year ended December 31. During the year, accounts receivable decreased by $5,000, merchandise inventory increased by $8,000, accounts payable increased by $10,000, and depreciation expense of $4,000 was recorded. During the year, operating activities under the indirect method a. provided net cash of $8,000 b. provided net cash of $2,000 c. used net cash of $8,000 d. used net cash of $2,000 ANSWER: d RATIONALE: Net income $(13,000) Adjustments to reconcile net income to net cash flow from operating activities: Depreciation expense 4,000 Changes in current operating assets and liabilities: Decrease in accounts receivable 5,000 Increase in merchandise inventory (8,000) Increase in accounts payable 10,000 Net cash flow used in operating activities $(2,000) DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 104. A company had net income of $252,000. Depreciation expense was $26,000. During the year, accounts receivable and inventory increased by $15,000 and $40,000, respectively. Prepaid expenses and accounts payable decreased by $2,000 and $4,000, respectively. There was also a loss on the sale of equipment of $3,000. How much was the net cash flow from operating activities on the statement of cash flows using the indirect method? a. $217,000 b. $224,000 c. $284,000 d. $305,000 ANSWER: b RATIONALE: Net income $252,000 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation expense 26,000 Loss on sale of equipment 3,000 Changes in current operating assets and liabilities: Increase in accounts receivable (15,000) Increase in inventory (40,000) Decrease in prepaid expenses 2,000 Decrease in accounts payable (4,000) Net cash flow used in operating activities $224,000 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 16 - Statement of Cash Flows DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 105. Zenith Corporation sells some of its used store fixtures. The acquisition cost of the fixtures is $12,500, and the accumulated depreciation on these fixtures is $9,750 at the time of sale. The fixtures are sold for $5,300. The value of this transaction in the investing section of the statement of cash flows is a. $12,500 b. $5,300 c. $2,750 d. $2,550 ANSWER: b DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 106. Norris Company declared cash dividends of $60,000 during the year. Cash dividends payable were $20,000 at the beginning of the year and $25,000 at the end of the year. The amount of cash Norris Company used for payment of dividends during the year was a. $55,000 b. $80,000 c. $105,000 d. $65,000 ANSWER: a RATIONALE: Cash Used for Payment of Dividends = Dividends Payable at Beginning of Year + Dividends Declared during Year – Dividends Payable at End of Year = $20,000 + $60,000 – $25,000 = $55,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 16 - Statement of Cash Flows 107. A corporation uses the indirect method for preparing the statement of cash flows. A fixed asset has been sold for $25,000 representing a gain of $4,500. The value in the operating activities section regarding this event would be a. $25,000 b. $(4,500) c. $29,500 d. $4,500 ANSWER: b DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 108. Accounts receivable resulting from sales to customers amounted to $40,000 and $31,000 at the beginning and end of the year, respectively. Income reported on the income statement for the year was $120,000. Exclusive of the effect of other adjustments, the net cash flows from operating activities to be reported on the statement of cash flows using the indirect method is a. $120,000 b. $129,000 c. $151,000 d. $111,000 ANSWER: b RATIONALE: Cash Flows from Operations = Net Income + Decrease in Accounts Receivable = $120,000 + ($40,000 – $31,000) = $129,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 109. If accounts payable have increased during a period, a. revenues on an accrual basis are less than revenues on a cash basis b. expenses on an accrual basis are less than expenses on a cash basis c. expenses on an accrual basis are the same as expenses on a cash basis d. expenses on an accrual basis are greater than expenses on a cash basis ANSWER: d DIFFICULTY: Challenging Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 16 - Statement of Cash Flows 110. Changes in current assets and current liabilities are reported on the statement of cash flows, using the indirect method, in the a. operating activities b. financing activities c. investing activities d. separate schedule of noncash activities ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 111. In calculating cash flows from operating activities using the indirect method, a gain on the sale of equipment is a. added to net income b. deducted from net income c. ignored because it does not affect cash d. reported supplementally as a noncash investing and financing activity ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 112. Net income for the year was $45,500. Accounts receivable increased by $5,500, and accounts payable increased by $11,200. Under the indirect method, the cash flow from operations is a. $51,200 b. $45,500 c. $62,200 d. $28,800 ANSWER: a RATIONALE: Cash Flows from Operations = Net Income – Increase in Accounts Receivable + Increase in Accounts Payable = $45,500 – $5,500 + $11,200 = $51,200 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 16 - Statement of Cash Flows 113. Rogers Company reported net income of $35,000 for the year. During the year, accounts receivable increased by $7,000, accounts payable decreased by $3,000, and depreciation expense of $8,000 was recorded. Net cash provided by operating activities under the indirect method for the year is a. $53,000 b. $47,000 c. $33,000 d. $37,000 ANSWER: c RATIONALE: Cash flows from operating activities: Net income $35,000 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation expense 8,000 Changes in current operating assets and liabilities: Increase in accounts receivable (7,000) Decrease in accounts payable (3,000) Net cash flow from operating activities $33,000 DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 114. On the statement of cash flows, the Cash flows from financing activities section would include all of the following except a. receipts from the sale of bonds payable b. payments for dividends c. payments for purchase of treasury stock d. payments of interest on bonds payable ANSWER: d DIFFICULTY: Bloom's: Understanding Easy LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 16 - Statement of Cash Flows 115. On the statement of cash flows, the Cash flows from operating activities section would include a. receipts from the issuance of capital stock b. payment for interest on short-term notes payable c. payments for the purchase of investments d. payments for cash dividends ANSWER: b DIFFICULTY: Bloom's: Understanding Easy LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 116. Firefly Inc. sold land for $225,000 cash. The land had been purchased five years earlier for $275,000. The loss on the sale was reported on the income statement. On the statement of cash flows, what amount should Firefly report as an investing activity from the sale of the land? a. $225,000 b. $275,000 c. $50,000 d. $500,000 ANSWER: a DIFFICULTY: Bloom's: Applying Easy LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 117. The cost of merchandise sold during the year was $50,000. Merchandise inventories were $12,500 and $10,500 at the beginning and end of the year, respectively. Accounts payable were $6,000 and $5,000 at the beginning and end of the year, respectively. Using the direct method of reporting cash flows from operating activities, cash payments for merchandise total a. $49,000 b. $47,000 c. $51,000 d. $53,000 ANSWER: a RATIONALE: Purchases during Year = Ending Inventory + Cost of Merchandise Sold during Year – Beginning Inventory = $10,500 + $50,000 – $12,500 = $48,000 Cash Payments for Merchandise = Beginning Accounts Payable + Purchases during Year – Ending Accounts Payable = $6,000 + $48,000 – $5,000 = $49,000 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 16 - Statement of Cash Flows 118. Sales for the year were $600,000. Accounts receivable were $100,000 and $80,000 at the beginning and end of the year, respectively. Cash received from customers to be reported on the statement of cash flows using the direct method is a. $700,000 b. $600,000 c. $580,000 d. $620,000 ANSWER: d RATIONALE: Cash Received from Customers = Beginning Accounts Receivable + Sales – Ending Accounts Receivable = $100,000 + $600,000 – $80,000 = $620,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic Use the information below for Washington Company to answer the following questions. The following selected account balances appeared on the financial statements of Washington Company: Accounts Receivable, January 1 Accounts Receivable, December 31 Accounts Payable, January 1 Accounts Payable, December 31 Merchandise Inventory, January 1 Merchandise Inventory, December 31 Sales Cost of Merchandise Sold

$13,000 9,000 4,000 7,000 10,000 15,000 56,000 31,000

Washington Company uses the direct method to calculate net cash flow from operating activities. 119. Cash collections from customers were a. $56,000 b. $52,000 c. $60,000 d. $45,000 ANSWER: c RATIONALE: Cash Collection from Customers = Accounts Receivable on January 1 + Sales – Accounts Receivable on December 31 = $13,000 + $56,000 – $9,000 = $60,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 16 - Statement of Cash Flows 120. Cash payments for merchandise were a. $39,000 b. $33,000 c. $29,000 d. $23,000 ANSWER: b RATIONALE: Purchases during Year = Inventory on December 31 + Cost of Merchandise Sold during Year – Inventory on January 1 = $15,000 + $31,000 – $10,000 = $36,000 Cash Payments for Merchandise = Accounts Payable on January 1 + Purchases – Accounts Payable on December 31 = $4,000 + $36,000 – $7,000 = $33,000 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 121. Income tax was $175,000 for the year. Income tax payable was $30,000 and $40,000 at the beginning and end of the year, respectively. Cash payments for income tax reported on the statement of cash flows using the direct method is a. $175,000 b. $165,000 c. $205,000 d. $215,000 ANSWER: b RATIONALE: Cash Payments for Income Tax = Beginning Income Tax Payable + Income Tax Expense for Year – Ending Income Tax Payable = $30,000 + $175,000 – $40,000 = $165,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 122. The cost of merchandise sold during the year was $45,000. Merchandise inventories were $13,500 and $10,500 at the beginning and end of the year, respectively. Accounts payable were $7,000 and $5,000 at the beginning and end of the year, respectively. Using the direct method of reporting cash flows from operating activities, cash payments for merchandise total a. $46,000 b. $44,000 c. $50,000 d. $40,000 ANSWER: b RATIONALE: Purchases during Year = Ending Inventory + Cost of Merchandise Sold during Year – Beginning Inventory = $10,500 + $45,000 – $13,500 = $42,000 Cash Payments for Merchandise = Beginning Accounts Payable + Purchases during Year – Ending Accounts Payable = $7,000 + $42,000 – $5,000 = $44,000 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 16 - Statement of Cash Flows DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 123. Free cash flow is a. all cash in the bank b. cash from operations c. cash from financing less cash used to purchase fixed assets to maintain productive capacity and cash used for dividends d. cash flow from operations less cash used to purchase fixed assets to maintain productive capacity ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-04 - 16-04 ACCREDITING STANDARDS: ACBSP-APC-23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 124. Free cash flow is cash flow from operations less cash used for a. investments in PP&E needed to maintain current production b. dividends and cash to redeem bonds payable c. investments in PP&E needed to achieve desired future production d. fixed assets needed to maintain productivity and cash to redeem bonds payable ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-04 - 16-04 ACCREDITING STANDARDS: ACBSP-APC-23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 125. The operating cash flow available for company use after purchasing the fixed assets that are necessary to maintain current productive capacity is called the a. free cash flow b. modified cash flow c. PPE cash flow d. restricted cash flow ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-04 - 16-04 ACCREDITING STANDARDS: ACBSP-APC-23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 16 - Statement of Cash Flows 126. When using the spreadsheet (work sheet) method to analyze noncash accounts, it is best to start with a. cash b. net income c. retained earnings d. revenue ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-APP - 16-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 127. When using the spreadsheet (work sheet) for the statement of cash flows, under the indirect method, entries made on the spreadsheet are a. not recorded in the journal or posted to the ledger b. recorded in the journal and posted to the ledger c. recorded in the journal but not posted to the ledger d. not recorded in to the journal but are posted to the ledger ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.16-APP - 16-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic Matching For each of the following activities that may take place during the accounting period, indicate the effect (a–g) on the statement of cash flows prepared using the indirect method. Choices may be selected as the answer for more than one question. a. Increase cash from operating activities b. Decrease cash from operating activities c. Increase cash from investing activities d. Decrease cash from investing activities e. Increase cash from financing activities f. Decrease cash from financing activities g. Noncash investing and financing supplement DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 16 - Statement of Cash Flows 128. Purchase of equipment ANSWER: d 129. Repayment of long-term note payable ANSWER: f 130. Amortization of intangible assets ANSWER: a 131. Exchange of land for common stock ANSWER: g 132. Payment of dividends ANSWER: f 133. Sale of land ANSWER: c 134. Gain on sale of investments ANSWER: b 135. Acquisition of treasury stock ANSWER: f 136. Increase in accounts receivable balance ANSWER: b 137. Decrease in accounts payable balance ANSWER: b Identify the section of the statement of cash flows (a–d) where each of the following items would be reported. a. Operating activities b. Financing activities c. Investing activities d. Schedule of noncash financing and investing DIFFICULTY: Bloom's: Remembering Easy LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 138. Increase in income taxes payable ANSWER: a 139. Amortization of patent ANSWER: a © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 16 - Statement of Cash Flows 140. Sale of machinery held for use by the company ANSWER: c 141. Issuance of bond payable ANSWER: b 142. Purchase of the stock of another company as investment ANSWER: c 143. Decrease in inventory ANSWER: a 144. Exchange of land for note payable ANSWER: d 145. Payment of dividends to stockholders ANSWER: b 146. Increase in accounts receivable ANSWER: a 147. Loss on sale of equipment ANSWER: a Subjective Short Answer 148. For each of the following, identify whether it would be disclosed as an operating (O), financing (F), or investing (I) activity on the statement of cash flows under the indirect method. a. b. c. d. e. f.

Purchased buildings Sold patents Net income Issued common stock Paid cash dividends Depreciation expense

ANSWER:

a. I b. I c. O d. F e. F f. O DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 16 - Statement of Cash Flows 149. State the section(s) of the statement of cash flows prepared by the indirect method (operating activities, investing activities, financing activities, or not reported) and the amount that would be reported for each of the following transactions: (a) (b)

Received $120,000 from the sale of land costing $70,000. Purchased investments for $75,000. Declared $35,000 cash dividends on stock. $5,000 dividends were payable at the beginning of the year, and (c) $6,000 were payable at the end of the year. (d) Acquired equipment for $64,000 cash. Declared and issued 100 shares of $20 par common stock as a stock dividend, when the market price of the (e) stock was $32 a share. (f) Recognized depreciation for the year, $37,000. (g) Issued 85,000 shares of $10 par common stock for $25 a share, receiving cash. (h) Issued $500,000 of 20-year, 10% bonds payable at 99. (i) Borrowed $43,000 from Regional Bank, issuing a five-year, 8% note for that amount. ANSWER: (a) Investing activities, $120,000 (the $50,000 gain on the sale would be deducted from net income in determining the cash flows from operating activities) (b) Investing activities, ($75,000) (c) Financing activities, ($34,000) Cash Payment of Dividends = Dividends Payable at Beginning of Year + Dividends Declared during Year – Dividends Payable at End of Year = $5,000 + $35,000 – $6,000 = $34,000 (d) Investing activities, ($64,000) (e) Not reported (f) Operating activities, $37,000 (addition to net income in determining cash flows from operating activities) (g) Financing activities, $2,125,000 Cash from Financing Activity = Number of Shares Issued × Issue Price per Share = 85,000 × $25 = $2,125,000 (h) Financing activities, $495,000 Cash from Financing Activities = $500,000 × (99 / 100) = $495,000 (i) Financing activities, $43,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 16 - Statement of Cash Flows 150. Identify which section of the statement of cash flows (using the indirect method) would present information regarding the following activities. (Use O for operating, I for investing, or F for financing.) a. Issued common stock b. Redeemed bonds c. Issued preferred stock d. Purchased patents e. Net income f. Paid cash dividends g. Purchased treasury stock h. Sold long-term investment i. Sold equipment j. Purchased buildings k. Issued bonds ANSWER:

a. F b. F c. F d. I e. O f. F g. F h. I i. I j. I k. F DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 151. For each of the following, identify whether it would be disclosed as an operating (O), financing (F), or investing (I) activity on the statement of cash flows under the indirect method. a. Purchased treasury stock b. Sold equipment at book value c. Net income d. Sold long-term investments e. Issued common stock f. Depreciation expense ANSWER: a. F b. I c. O d. I e. F f. O DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 16 - Statement of Cash Flows 152. The net income reported on the income statement for the current year was $210,000. Depreciation recorded on equipment and a building amount to $62,500 for the year. Balances of the current assets and current liabilities accounts at the beginning and end of the year are as follows: Cash Accounts Receivable (net) Inventories Prepaid Expenses Accounts Payable (merchandise creditors) Salaries Payable (a) (b)

End of Year Beginning of Year $ 56,000 $ 59,500 71,000 73,400 140,000 126,500 7,800 8,400 62,600 66,400 9,000 8,250

Prepare the Cash flows from operating activities section of the statement of cash flows, using the indirect method. If the direct method had been used, would the net cash flow from operating activities have been the same? Explain.

ANSWER:

(a) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash flow from operating activities: Depreciation Changes in current operating assets and liabilities: Decrease in accounts receivable Increase in inventories Decrease in prepaid expenses Decrease in accounts payable Increase in salaries payable Net cash flow from operating activities

$210,000

62,500

2,400 (13,500) 600 (3,800) 750 $258,950

(b) Yes. The amount of cash flows from operating activities reported on the statement of cash flows is not affected by the method of reporting such flows. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 16 - Statement of Cash Flows 153. The income statement disclosed the following items for the current year: Depreciation expense Gain on disposal of equipment Net income

$ 36,000 21,000 317,500

Balances of the current assets and current liabilities accounts changed between December 31, last year, and December 31, this year, as follows: Increase in accounts receivable Decrease in inventory Decrease in prepaid insurance Decrease in accounts payable Increase in income taxes payable Increase in dividends payable

$5,600 3,200 1,200 3,800 1,200 850

Prepare the Cash flows from operating activities section of the statement of cash flows using the indirect method. ANSWER: Cash flows from operating activities: Net income $317,500 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation 36,000 Gain on disposal of equipment (21,000) Changes in current operating assets and liabilities: Increase in accounts receivable (5,600) Decrease in inventory 3,200 Decrease in prepaid insurance 1,200 Decrease in accounts payable (3,800) Increase in income taxes payable 1,200 Net cash flow from operating activities $328,700 Note: The change in dividends payable would be used to adjust the dividends declared in obtaining the cash paid for dividends in the financing activities section of the statement of cash flows. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 16 - Statement of Cash Flows 154. Indicate whether each of the following would be added to or deducted from net income in determining net cash flow from operating activities by the indirect method: (a) Increase in prepaid expenses (b) Amortization of patents (c) Increase in salaries payable (d) Gain on sale of fixed assets (e) Decrease in accounts receivable (f) Increase in notes receivable due in 60 days (g) Amortization of discount on bonds payable (h) Decrease in merchandise inventory (i) Depreciation of fixed assets (j) Loss on retirement of long-term debt (k) Decrease in accounts payable (l) Increase in notes payable due in 30 days (m) Increase in income taxes payable ANSWER: (a) deducted (b) added (c) added (d) deducted (e) added (f) deducted (g) added (h) added (i) added (j) added (k) deducted (l) added (m) added DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 155. For each of the following, identify whether it would be disclosed as an operating (O), financing (F), or investing (I) activity on the statement of cash flows under the indirect method. a. Gain from sale of land b. Paid dividends c. Purchased equipment d. Net income e. Issued company’s common stock f. Amortization expense ANSWER: a. O b. F c. I d. O e. F f. O © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 16 - Statement of Cash Flows DIFFICULTY:

Bloom's: Understanding Easy LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 156. Each of the events below may have an effect on the statement of cash flows. Designate how the event should be reported within the statement of cash flows using the codes provided. Codes may be used more than once, or not at all. Codes: I + Investing activity; cash inflow I – Investing activity; cash outflow F + Financing activity; cash inflow F – Financing activity; cash outflow O + Operating activity; cash inflow O – Operating activity; cash outflow NC Noncash investing and financing activity Events: 1. Paid the weekly payroll 2. Paid an account payable 3. Issued bonds payable for cash 4. Declared and paid a cash dividend 5. Paid cash for a new piece of equipment 6. Purchased treasury stock for cash 7. Paid cash for stock in another company 8. Recorded depreciation 9. Received cash for sales 10. Sold a long-term stock investment for cash at book value 1. O– 2. O– 3. F+ 4. F– 5. I– 6. F– 7. I– 8. O+ 9. O+ 10. I+ DIFFICULTY: Bloom's: Understanding Moderate LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic ANSWER:

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Chapter 16 - Statement of Cash Flows 157. Indicate the section (operating activities, investing activities, financing activities, or none) in which each of the following would be reported on the statement of cash flows prepared by the indirect method. (a) Gain on sale of fixed assets (b) Net income (c) Retirement of long-term debt (d) Sale of capital stock (e) Distribution of stock dividends (f) Payment of cash dividends (g) Purchase of fixed assets (h) Sale of fixed assets (i) Increase in inventory (j) Payment of interest expense ANSWER: (a) Operating activities (b) Operating activities (c) Financing activities (d) Financing activities (e) None (f) Financing activities (g) Investing activities (h) Investing activities (i) Operating activities (j) Operating activities DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.16-01 - 16-01 ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 158. Durrand Corporation’s accumulated depreciation increased by $12,000, while patents decreased by $2,200 between consecutive balance sheet dates. There were no purchases or sales of depreciable or intangible assets during the year. In addition, the income statement showed a gain of $4,300 from sale of land. The company earned a net income of $65,000. Determine net cash flow from operating activities under the indirect method. ANSWER: Net income $65,000 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation 12,000 Amortization 2,200 Gain from sale of land (4,300) Net cash flow from operating activities $74,900 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 16 - Statement of Cash Flows 159. Fortune Corporation’s comparative balance sheet for current assets and liabilities was as follows: Accounts receivable Inventory Accounts payable Dividends payable

Dec. 31, Year 2 $ 7,500 11,500 4,300 4,000

Dec. 31, Year 1 $ 5,200 16,000 5,200 3,000

Adjust Year 2 net income of $65,000 for changes in operating assets and liabilities to arrive at cash flows from operating activities using the indirect method. ANSWER: Net income $65,000 Adjustments to reconcile net income to net cash flow from operating activities: Changes in current operating assets and liabilities: Increase in accounts receivable (2,300) Decrease in inventory 4,500 Decrease in accounts payable (900) Net cash flow from operating activities $66,300 DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 160. Kennedy, Inc. reported the following data: Net income Depreciation expense Loss on disposal of equipment Gain on sale of building Increase in accounts receivable Decrease in accounts payable

$118,000 15,000 (10,000) 20,000 7,000 (2,000)

Prepare the Cash flows from operating activities section of the statement of cash flows using the indirect method. ANSWER: Cash flows from operating activities: Net income $118,000 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation 15,000 Loss on disposal of equipment 10,000 Gain on sale of building (20,000) Changes in current operating assets and liabilities: Increase in accounts receivable (7,000) Decrease in accounts payable (2,000) Net cash flow from operating activities $114,000

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Chapter 16 - Statement of Cash Flows DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 161. Lamar Corporation purchased land for $150,000. Later in the year, the company sold land with a book value of $190,000 for $200,000. Show how the effects of these transactions are reported on the statement of cash flows using the indirect method. ANSWER: Adjustments to reconcile net income to net cash flow from operating activities: Gain on sale of land* $(10,000) Cash flows from investing activities: Cash received for sale of land Cash paid for purchase of land

$200,000 (150,000)

*Gain on Sale of Land = Selling Price – Book Value = $200,000 – $190,000 = $10,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 162. Samuel Company’s accumulated depreciation—equipment account increased by $6,000, while patents decreased by $2,200 between balance sheet dates. There were no purchases or sales of depreciable or intangible assets during the year. In addition, the income statement showed a loss of $3,200 from the sale of investments. Assume no changes in noncash current assets and liabilities. Samuel Company reported a net income of $92,000. Determine net cash flow from operating activities using the indirect method. ANSWER: Net income $ 92,000 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation 6,000 Amortization 2,200 Loss from sale of investments 3,200 Net cash flow from operating activities $103,400 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 16 - Statement of Cash Flows 163. Dorman Company reported the following data: Net income Depreciation expense Gain on disposal of equipment Decrease in accounts receivable Decrease in accounts payable

$225,000 25,000 20,500 14,000 3,600

Prepare the Cash flows from operating activities section of the statement of cash flows using the indirect method. ANSWER: Cash flows from operating activities: Net income $225,000 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation 25,000 Gain on disposal of equipment (20,500) Changes in current operating assets and liabilities: Decrease in accounts receivable 14,000 Decrease in accounts payable (3,600) Net cash flow from operating activities $239,900 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 164. The board of directors declared cash dividends totaling $168,000 during the year. The comparative balance sheet indicated dividends payable of $46,000 at the beginning of the year and $42,000 at the end of the year. What was the amount of cash payments to stockholders during the year? ANSWER: Dividends declared $168,000 Add: Decrease in dividends payable 4,000 Dividends paid to stockholders during the year $172,000 The company probably had four quarterly payments—the first one being $46,000 declared in the preceding year and three payments of $42,000 each—of dividends declared and paid during the current year. Thus, $172,000 [$46,000 + (3 × $42,000)] is the amount of cash payments to stockholders. The $42,000 of dividends payable at the end of the year will be paid in the first quarter of the next year. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 16 - Statement of Cash Flows 165. The following two scenarios are independent of one another. (a) An analysis of the general ledger accounts indicates that office equipment was sold for $39,600 during the year. The equipment originally cost $68,000 and had accumulated depreciation of $22,500 on the date of sale. Indicate how the elements of this transaction would be reported on the statement of cash flows using the indirect method. (b) An analysis of the general ledger accounts indicates that delivery equipment, which cost $97,000 and on which accumulated depreciation totaled $42,100 on the date of sale, was sold for $57,500 during the year. Using this information, indicate the items to be reported on the statement of cash flows. ANSWER: (a) Cash flows from operating activities: Loss on sale of equipment* $5,900 *Loss on Sale of Equipment = Selling Price – Book Value = $39,600 – ($68,000 – $22,500) = $5,900 Cash flows from investing activities: Cash received from sale of equipment (b) Cash flows from operating activities: Gain on sale of equipment* *Gain on Sale of Equipment = Selling Price – Book Value of Equipment = $57,500 – ($97,000 – $42,100) = $2,600 Cash flows from investing activities: Cash received from sale of equipment DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

$39,600

$(2,600)

$57,500

166. On the basis of the details of the common stock account presented below, calculate the total amount to be recorded in the financing section of the statement of cash flows. Assume any stock issues were at par. Indicate whether the amount results in an increase or decrease in cash. Common Stock, $10 Par Balance Date Item Debit Credit Debit Credit Jan. 1 Balance, 50,000 shares — — — $500,000 5,000 shares issued at Mar. 7 — — par for cash $50,000 550,000 2,500-share stock Sept. 20 — — dividend 25,000 575,000 2,000 shares issued at Dec. 10 — — $20 for cash 40,000 615,000 ANSWER: Cash flows from financing activities: Cash received from sale of common stock

$90,000

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Chapter 16 - Statement of Cash Flows DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 167. The net income reported on an income statement for the current year was $63,000. Depreciation recorded on fixed assets for the year was $24,000. Balances of the current asset and current liability accounts at the end and beginning of the year are listed below. Prepare the Cash flows from operating activities section of the statement of cash flows using the indirect method. Cash Accounts Receivable (net) Inventories Prepaid Expenses Accounts Payable (merchandise creditors) Cash Dividends Payable Salaries Payable

End $65,000 70,000 86,000 4,000 51,000 4,500 6,000

Beginning $ 70,000 57,000 102,000 4,500 58,000 6,500 7,500

ANSWER:

Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash flow from operating activities: Depreciation Changes in current operating assets and liabilities: Decrease in inventories Decrease in prepaid expenses Increase in accounts receivable (net) Decrease in accounts payable Decrease in salaries payable Net cash flow from operating activities DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

$63,000

24,000

16,000 500 (13,000) (7,000) (1,500) $82,000

Page 57

Chapter 16 - Statement of Cash Flows 168. The board of directors of Kendall Co. declared cash dividends totaling $390,000 during the current year. The comparative balance sheet indicates dividends payable of $58,000 at the beginning of the year and $73,000 at the end of the year. What was the amount of cash payments Kendall Co. made to stockholders during the year? ANSWER: Dividends declared $390,000 Less increase in dividends payable 15,000 Dividends paid to stockholders during the year $375,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 169. An analysis of the general ledger accounts indicates that equipment, with an original cost of $200,000 and accumulated depreciation of $170,000 on the date of sale, was sold for $20,000 during the year. Using this information, indicate the items to be reported on the statement of cash flows using the indirect method. ANSWER: Cash flows from operating activities: Loss on sale of equipment* $10,000 *Loss on Sale of Equipment = Selling Price – Book Value = $20,000 – ($200,000 – $170,000) = $10,000 Cash flows from investing activities: Cash received from sale of equipment DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

$20,000

170. On the basis of the following data for Larson Co. for the year ending December 31 Year 2, and the preceding year ended December 31, Year 1, prepare a statement of cash flows. Use the indirect method of reporting cash flows from operating activities. In addition to the balance sheet data, assume that: Equipment costing $125,000 was purchased for cash. Equipment costing $85,000 with accumulated depreciation of $65,000 was sold for $15,000. The stock was issued for cash. The only entries in the retained earnings account were net income of $51,000 and cash dividends declared of $13,000. Cash Accounts receivable (net) Inventories Equipment Accumulated depreciation

Accounts payable (merchandise creditors) Cash dividends payable Common stock, $10 par Paid-in capital in excess of par—common stock Retained earnings

Year 2 $100,000 78,000 101,500 410,000 (150,000) $539,500

Year 1 $ 78,000 85,000 90,000 370,000 (158,000) $465,000

$ 58,500 5,000 200,000 62,000 214,000 $539,500

$ 55,000 4,000 170,000 60,000 176,000 $465,000

Page 58

Chapter 16 - Statement of Cash Flows ANSWER:

Larson Co. Statement of Cash Flows For Year Ended December 31, Year 2 Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash flow from operating activities: Depreciation Loss on sale of equipment Changes in current operating assets and liabilities: Decrease in accounts receivable Increase in inventories Increase in accounts payable Net cash flow from operating activities Cash flows from investing activities: Cash received from sale of equipment Cash paid for purchase of equipment Net cash flow used for investing activities Cash flows from financing activities: Cash received from issuance of common stock Cash paid for dividends Net cash flow from financing activities Increase in cash Cash at the beginning of the year Cash at the end of the year

$ 51,000

57,000* 5,000

7,000 (11,500) 3,500 $112,000 $ 15,000 (125,000) (110,000) $ 32,000 (12,000)** 20,000 $ 22,000 78,000 $100,000

*$150,000 – ($158,000 – $65,000) = $57,000 **$13,000 + $4,000 – $5,000 = $12,000 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 59

Chapter 16 - Statement of Cash Flows 171. The comparative balance sheets of Posner Company, for Years 1 and 2 ended December 31, appear below in condensed form. Cash Accounts Receivable (net) Inventories Investments Equipment Accumulated Depreciation—Equipment

Accounts Payable Bonds Payable, Due Year 2 Common Stock, $10 par Paid-In Capital in Excess of Par—Common Stock Retained Earnings

Year 2 $ 53,000 37,000 108,500 — 573,200 (142,000) $629,700

Year 1 $ 50,000 48,000 100,000 70,000 450,000 (176,000) $542,000

$ 62,500 — 325,000 80,000 162,200 $629,700

$ 43,800 100,000 285,000 55,000 58,200 $542,000

The income statement for the current year is as follows: Sales Cost of merchandise sold Gross profit Operating expenses: Depreciation expense Other operating expenses Income from operations Other revenue and expense: Gain on sale of investment Interest expense Income before income tax Income tax Net income

$625,700 340,000 $285,700 $26,000 68,000

$4,000 (6,000)

94,000 $191,700

(2,000) $189,700 60,700 $129,000

Additional data for the current year are as follows: (a) (b) (c) (d)

Fully depreciated equipment costing $60,000 was scrapped, no salvage, and new equipment was purchased for $183,200. Bonds payable for $100,000 were retired by payment at their face amount. 5,000 shares of common stock were issued at $13 for cash. Cash dividends declared and paid, $25,000.

Prepare a statement of cash flows using the indirect method of reporting cash flows from operating activities.

Page 60

Chapter 16 - Statement of Cash Flows ANSWER:

Posner Company Statement of Cash Flows For the Year Ended December 31, Year 2 Cash flows from operating activities: Net income $129,000 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation 26,000 Gain on sale of investment (4,000) Changes in current operating assets and liabilities: Decrease in accounts 11,000 receivable Increase in accounts 18,700 payable Increase in inventories (8,500) Net cash flow from operating $172,200 activities Cash flows from investing activities: Cash from sale of investments $ 74,000 Cash paid for purchase (183,200) of equipment Net cash flow used for investing (109,200) activities Cash flows from financing activities: Cash from sale of common $ 65,000 stock Cash paid to retire bonds payable (100,000) Cash paid for dividends (25,000) Net cash flow used for (60,000) financing activities Increase in cash $ 3,000 Cash at the beginning of the year 50,000 Cash at the end of the year $ 53,000

DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 61

Chapter 16 - Statement of Cash Flows 172. The comparative balance sheets of Barry Company, for Years 1 and 2 ended December 31, appear below in condensed form. Cash Accounts Receivable (net) Inventories Investments Equipment Accumulated Depreciation—Equipment

Accounts Payable Bonds Payable Common Stock, $20 par Premium on Common Stock Retained Earnings

Year 2 $ 72,000 61,000 121,000 — 515,000 (153,000) $616,000

Year 1 $ 42,500 70,200 105,000 100,000 425,000 (175,000) $567,700

$ 59,750 — 375,000 50,000 131,250 $616,000

$ 47,250 75,000 325,000 25,000 95,450 $567,700

Additional data for the current year are as follows: (a) (b) (c) (d) (e) (f) (g)

Net income, $75,800. Depreciation reported on income statement, $38,000. Fully depreciated equipment costing $60,000 was scrapped, no salvage, and equipment was purchased for $150,000. Bonds payable for $75,000 were retired by payment at their face amount. 2,500 shares of common stock were issued at $30 for cash. Cash dividends declared and paid, $40,000. Investments of $100,000 were sold for $125,000.

Prepare a statement of cash flows using the indirect method.

Page 62

Chapter 16 - Statement of Cash Flows ANSWER:

Barry Company Statement of Cash Flows For the Year Ended December 31, Year 2

Cash flows from operating activities: Net income $ 75,800 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation 38,000 Gain on sale of investments (25,000) Changes in current operating assets and liabilities: Decrease in accounts 9,200 receivable Increase in accounts payable 12,500 Increase in inventories (16,000) Net cash flow from operating activities Cash flows from investing activities: Cash from sale of investments $125,000 Cash paid for purchase of (150,000) equipment Net cash flow used for investing activities Cash flows from financing activities: Cash from sale of common stock $75,000 Cash paid to retire bonds payable (75,000) Cash paid for dividends (40,000) Net cash flow used for financing activities Increase in cash Cash at the beginning of the year Cash at the end of the year DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

$94,500

(25,000)

(40,000) $29,500 42,500 $72,000

Page 63

Chapter 16 - Statement of Cash Flows 173. Dickinson Company reported net income of $155,000 for the current year. Depreciation recorded on buildings and equipment amounted to $65,000 for the year. In addition, a building with an original cost of $250,000 and accumulated depreciation of $190,000 on the date of the sale was sold for $75,000. Balances of the current asset and current liability accounts at the beginning and end of the year are as follows: End of Year Beginning of Year Cash $20,000 $15,000 Accounts Receivable 19,000 32,000 Inventories 50,000 65,000 Accounts Payable 12,000 18,000 Prepare the Cash flows from operating activities section of the statement of cash flows using the indirect method. ANSWER: Net income $155,000 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation expense 65,000 Gain on sale of building (15,000) Changes in current operating assets and liabilities: Decrease in accounts receivable 13,000 Decrease in inventories 15,000 Decrease in accounts payable (6,000) $227,000 Net cash from operating activities DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 174. The net income reported on the income statement for the current year was $58,000. Depreciation recorded on fixed assets for the year was $24,000. In addition, equipment with an original cost of $130,000 and accumulated depreciation of $115,000 on the date of the sale was sold for $20,000. Balances of the current asset and current liability accounts at the end and beginning of the year are listed below. Prepare the Cash flows from operating activities section of a statement of cash flows using the indirect method. Cash Accounts Receivable (net) Inventories Prepaid Expenses Accounts Payable (merchandise creditors) Cash Dividends Payable Salaries Payable

End $65,000 70,000 85,000 4,000 50,000 4,500 6,000

Beginning $ 70,000 63,000 102,000 4,500 58,000 6,500 7,500

Page 64

Chapter 16 - Statement of Cash Flows ANSWER:

Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash flow from operating activities: Depreciation Gain on sale of equipment Changes in current operating assets and liabilities: Decrease in inventories Decrease in prepaid expenses Increase in accounts receivable (net) Decrease in accounts payable Decrease in salaries payable Net cash flow from operating activities DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

$58,000

24,000 (5,000)

17,000 500 (7,000) (8,000) (1,500) $78,000

175. On the basis of the following data for Garrett Co. for Years 1 and 2 ended December 31, prepare a statement of cash flows using the indirect method of reporting cash flows from operating activities. Assume that equipment costing $125,000 was purchased for cash and equipment costing $85,000 with accumulated depreciation of $65,000 was sold for $15,000; that the stock was issued for cash; and that the only entries in the retained earnings account were for net income of $56,000 and cash dividends declared of $18,000. Cash Accounts Receivable (net) Inventories Equipment Accumulated Depreciation

Accounts Payable (merchandise creditors) Cash Dividends Payable Common Stock, $10 par Paid-In Capital in Excess of Par—Common Stock Retained Earnings

Year 2 $ 90,000 78,000 106,500 410,000 (150,000) $534,500

Year 1 $ 78,000 85,000 90,000 370,000 (158,000) $465,000

$ 53,500 5,000 200,000 62,000 214,000 $534,500

$ 55,000 4,000 170,000 60,000 176,000 $465,000

Page 65

Chapter 16 - Statement of Cash Flows ANSWER:

Garrett Co. Statement of Cash Flows For Year Ended December 31, Year 2 Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash flow from operating activities: Depreciation Loss on sale of equipment Changes in current operating assets and liabilities: Decrease in accounts receivable Increase in inventories Decrease in accounts payable Net cash flow from operating activities Cash flows from investing activities: Cash from sale of equipment Cash paid for purchase of equipment Net cash flow used for investing activities Cash flows from financing activities: Cash received from issuance of common stock Cash paid for dividends Net cash flow used for financing activities Increase in cash Cash at the beginning of the year Cash at the end of the year * $150,000 – ($158,000 – $65,000) = $57,000 **$18,000 + $4,000 – $5,000 = $17,000

$ 56,000

57,000* 5,000

7,000 (16,500) (1,500) $107,000 $ 15,000 (125,000) (110,000)

$ 32,000 (17,000)** 15,000 $ 12,000 78,000 $ 90,000

DIFFICULTY:

Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 66

Chapter 16 - Statement of Cash Flows 176. On the basis of the following data for Branch Co. for the current and preceding years ended December 31, prepare a statement of cash flows using the indirect method. Assume that equipment costing $125,000 was purchased for cash and the land was sold for $15,000. The stock was issued for cash and the only entries in the retained earnings account were for net income of $56,000 and cash dividends declared and paid of $18,000. Cash Accounts Receivable (net) Inventories Land Equipment Accumulated Depreciation

Accounts Payable (merchandise creditors) Common Stock, $10 par Paid-In Capital in Excess of Par—Common Stock Retained Earnings ANSWER:

Current Year $ 65,000 78,000 106,500 — 495,000 (215,000) $529,500

Prior Year $ 54,000 85,000 90,000 20,000 370,000 (158,000) $461,000

$ 53,500 200,000 62,000 214,000 $529,500

$ 55,000 170,000 60,000 176,000 $461,000

Branch Co. Statement of Cash Flows For Year Ended December 31 Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash flow from operating activities: Depreciation Loss on sale of land Changes in current operating assets and liabilities: Decrease in accounts receivable Increase in inventories Decrease in accounts payable Net cash flow from operating activities Cash flows from investing activities: Cash received from sale of land Cash paid for purchase of equipment Net cash flow used for investing activities Cash flows from financing activities: Cash received from sale of common stock Cash paid for dividends Net cash flow used for financing activities Increase in cash Cash at the beginning of the year Cash at the end of the year

$ 56,000

57,000 5,000

7,000 (16,500) (1,500) $107,000 $ 15,000 (125,000) (110,000) $32,000 (18,000) 14,000 $ 11,000 54,000 $ 65,000

Page 67

Chapter 16 - Statement of Cash Flows DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 177. On the basis of the following data for Breach Co. for the current and preceding years ended December 31, prepare a statement of cash flows using the indirect method. Assume that equipment costing $25,000 was purchased for cash and no long-term assets were sold during the period. Stock was issued for cash—3,200 shares at par. Net income for the current year was $76,000. Cash dividends declared and paid were $13,000. Cash Accounts Receivable (net) Inventories Equipment Accumulated Depreciation

Accounts Payable (merchandise creditors) Taxes Payable Common Stock, $10 par Retained Earnings

Current Year $170,000 78,000 106,500 395,000 (195,000) $554,500

Prior Year $ 74,000 85,000 90,000 370,000 (158,000) $461,000

$ 51,000 2,500 262,000 239,000 $554,500

$ 50,000 5,000 230,000 176,000 $461,000

Page 68

Chapter 16 - Statement of Cash Flows ANSWER:

Breach Co. Statement of Cash Flows For Year Ended December 31

Cash flows from operating activities: Net income $ 76,000 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation 37,000 Changes in current operating assets and liabilities: Decrease in accounts receivable 7,000 Increase in accounts payable 1,000 Increase in inventories (16,500) Decrease in taxes payable (2,500) Net cash flow from operating activities Cash flows from investing activities: Cash paid for purchase of $ (25,000) equipment Net cash flow used for investing activities Cash flows from financing activities: Cash received from sale of common $ 32,000 stock Cash paid for dividends (13,000) Net cash flow from financing activities Increase in cash Cash at the beginning of the year Cash at the end of the year DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

$102,000

(25,000)

19,000 $ 96,000 74,000 $170,000

Page 69

Chapter 16 - Statement of Cash Flows 178. Complete each of the columns in the table below, indicating in which section each item would be reported on the statement of cash flows (operating, investing, or financing), the amount that would be reported, and whether the item would create an increase or decrease in cash. For items that affect more than one section of the statement, indicate all affected. Assume the indirect method of reporting cash flows from operating activities. The first item has been completed as an example. Statement Item Section Depreciation of $15,000 for the Operating period Issuance of common stock for $35,000 Increase in accounts payable of $7,000 Retirement of $100,000 bonds payable at 97 Purchase of long-term investments for $94,500 Dividends declared and paid of $8,300 Increase in prepaid rent of $4,500 Decrease in inventory of $5,300 Purchase of equipment for $17,600 cash Sale of land originally costing $134,000 for $130,000 Decrease in taxes payable of $2,100 ANSWER:

Amount to Report

+/– Effect on Cash

$15,000

Increase

Item

Amount +/– Statement to Effect Section Report on Cash

Depreciation of $15,000 for the period Operating $15,000 Increase Issuance of common stock for $35,000 Financing 35,000 Increase Increase in accounts payable of $7,000 Operating

7,000 Increase Retirement of $100,000 bonds payable Operating 3,000 Increase at 97 Financing 97,000 Decrease Purchase of long-term investments for Investing 94,500 Decrease $94,500 Dividends declared and paid of $8,300 Financing Increase in prepaid rent of $4,500 Decrease in inventory of $5,300 Purchase of equipment for $17,600 cash Sale of land originally costing $134,000 for $130,000 Decrease in taxes payable of $2,100

Operating Operating

8,300 Decrease 4,500 Decrease 5,300 Increase

Investing 17,600 Decrease Operating 4,000 Increase Investing 130,000 Increase Operating 2,100 Decrease

Page 70

Chapter 16 - Statement of Cash Flows DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-02 - 16-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 179. Balances of the current asset and current liability accounts at the end and beginning of the year are as follows: Cash Accounts Receivable (net) Inventories Accounts Payable (merchandise creditors) Salaries Payable Sales (on account) Cost of Merchandise Sold Operating Expenses Other Than Depreciation

End $ 62,000 75,000 54,000

Beginning $73,000 60,000 47,000

43,000 2,800 210,000 70,000 67,000

37,000 3,800

Page 71

Chapter 16 - Statement of Cash Flows 180. The comparative balance sheets of ConnieJo Company, for Years 1 and 2 ended December 31, appear below in condensed form. Year 2

Year 1

Cash Accounts Receivable (net) Inventories Investments Equipment Accumulated Depreciation—Equipment

$ 45,000 51,300 147,200 0 493,000 (113,700) $622,800

$ 53,500 58,000 135,000 60,000 375,000 (128,000) $553,500

Accounts Payable Bonds Payable, Due Year 4 Common Stock, $10 par Paid-In Capital in Excess of Par—Common Stock Retained Earnings

$61,500 0 250,000 75,000 236,300 $622,800

$42,600 100,000 200,000 50,000 160,900 $553,500

$623,000 348,500 $274,500 $24,700 75,300

$ 5,000 (12,000)

100,000 $174,500

(7,000) $167,500 64,100 $103,400

Additional data for the current year are as follows: (a) Fully depreciated equipment costing $39,000 was scrapped, no salvage, and equipment was purchased for $157,000. (b) Bonds payable for $100,000 were retired by payment at their face amount. (c) 5,000 shares of common stock were issued at $15 for cash. (d) Cash dividends declared were paid, $28,000. (e) All sales are on account. Prepare a statement of cash flows using the direct method of reporting cash flows from operating activities.

Page 72

Chapter 16 - Statement of Cash Flows ANSWER:

ConnieJo Company Statement of Cash Flows For the Year Ended December 31, Year 2

Cash flows from operating activities: Cash received from customers $629,700 Cash payments for merchandise (341,800) Cash payments for operating expenses (75,300) Cash payments for interest (12,000) Cash payments for income taxes (64,100) Net cash flow from operating activities $136,500 Cash flows from investing activities: Cash received from sale of $ 65,000 investments Cash paid for purchase of equipment (157,000) Net cash flow used for investing (92,000) activities Cash flows from financing activities: Cash received from sale of $ 75,000 common stock Cash paid for dividends (28,000) Cash paid to retire bonds payable (100,000) Net cash flow used for financing (53,000) activities Decrease in cash $ (8,500) Cash at the beginning of the year 53,500 Cash at the end of the year $ 45,000 DIFFICULTY: Challenging Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 181. The cash flows from operating activities are reported by the direct method on the statement of cash flows. Determine the following: (a)

If sales for the current year were $375,000 and accounts receivable increased by $29,000 during the year, what was the amount of cash received from customers? (b) If income tax for the current year was $39,000 and income tax payable decreased by $21,000 during the year, what was the amount of cash payments for income tax? ANSWER: (a) Sales $375,000 Less increase in accounts receivable 29,000 Cash received from customers $346,000 (b) Income tax Add decrease in income taxes payable Cash payments for income tax

$39,000 21,000 $60,000

Page 73

Chapter 16 - Statement of Cash Flows DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 182. Selected data for the current year ended December 31 are as follows:

Accrued Expenses (operating expenses) Accounts Payable (merchandise creditors) Inventories Prepaid Expenses

Balance December 31 $29,500 90,000 42,500 23,000

Balance January 1 $ 22,000 135,000 68,000 20,000

During the current year, the cost of merchandise sold was $620,000 and the operating expenses other than depreciation were $142,000. The direct method is used for presenting the cash flows from operating activities on the statement of cash flows. Determine the amount reported on the statement of cash flows for (a) cash payments for merchandise and (b) cash payments for operating expenses. ANSWER:

(a) Cost of merchandise sold Decrease in accounts payable Decrease in inventories Cash payments for merchandise (b) Operating expenses other than depreciation Increase in accrued expenses

Increase in prepaid expenses Cash payments for operating expenses DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

$620,000 45,000 $665,000 (25,500) $639,500 $142,000 (7,500) $134,500 3,000 $137,500

Page 74

Chapter 16 - Statement of Cash Flows 183. Balances of the current asset and current liability accounts at the end and beginning of the year are as follows: Cash Accounts Receivable (net) Inventories Accounts Payable (merchandise creditors) Salaries Payable Sales (on account) Cost of Merchandise Sold Operating Expenses Other Than Depreciation

End $ 67,000 73,000 54,000

Beginning $73,000 60,000 47,000

43,000 2,800 210,000 70,000

37,000 3,800

67,000

Use the direct method to prepare the Cash flows from operating activities section of a statement of cash flows. ANSWER: Cash flows from operating activities: Cash received from customers $197,000 Cash payments for merchandise (71,000) Cash payments for operating expenses (68,000) Net cash flow from operating activities $ 58,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 184. Cost of merchandise sold reported on the income statement was $155,000. The accounts payable balance increased $8,000, and the inventory balance increased by $21,000 over the year. Determine the amount of cash paid for merchandise. ANSWER: Cost of merchandise sold $155,000 Increase in inventories 21,000 Increase in accounts payable (8,000) Cash payments for merchandise $168,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

Page 75

Chapter 16 - Statement of Cash Flows 185. Sales reported on the income statement were $690,000. The accounts receivable balance declined $39,000 over the year. Determine the amount of cash received from customers. ANSWER: Sales $690,000 Decrease in accounts receivable 39,000 Cash received from customers $729,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 186. Selected data taken from the accounting records of Laser Inc. for the current year ended December 31 are as follows: Balance, Balance, December 31 January 1 Accrued expenses payable $ 5,590 $ 6,110 Accounts payable (merchandise creditors) 41,730 46,020 Inventories 77,350 84,110 Prepaid expenses 3,250 3,900 During the current year, the cost of merchandise sold was $448,500, and the operating expenses other than depreciation were $78,000. The direct method is used for presenting the cash flows from operating activities on the statement of cash flows. Required Determine the amount reported on the statement of cash flows for: (a) Cash payments for merchandise (b) Cash payments for operating expenses ANSWER: (a) Cost of merchandise sold Decrease in accounts payable Decrease in inventories Cash payments for merchandise (b) Operating expenses other than depreciation Decrease in accrued expenses payable Decrease in prepaid expenses Cash payments for operating expenses DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

$448,500 4,290 $452,790 (6,760) $446,030 $78,000 520 $78,520 (650) $77,870

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Chapter 16 - Statement of Cash Flows 187. The cash flows from operating activities are reported by the direct method on the statement of cash flows. Determine the following: (a) If sales for the current year were $695,000 and accounts receivable decreased by $43,500 during the year, what was the amount of cash received from customers? (b) If income tax expense for the current year was $56,000 and income tax payable decreased by $5,200 during the year, what was the amount of cash payments for income tax? ANSWER:

(a) Sales Decrease in accounts receivable Cash received from customers

(b) Income tax expense Decrease in income tax payable Cash payments for income tax DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-03 - 16-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

$695,000 43,500 $738,500 $ 56,000 5,200 $ 61,200

188. Based on the following, what is free cash flow? Net cash flow from operating activities Net cash flow used for investing activities Net cash flow used for financing activities

$318,000 (30,000) 30,000

Cash flows from operations include $2,000 for depreciation. Cash flows from investing include the purchase of a replacement asset for $100,000 and the sale of the one used in production, which is now obsolete, for $70,000. Cash flows from financing include $70,000 of borrowing. $318,000 – $100,000 = $218,000 Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-04 - 16-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.24 - Statement of Cash Flows ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic ANSWER: DIFFICULTY:

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Chapter 16 - Statement of Cash Flows 189. Connor Designs Company has cash flows for operating activities of $425,000. Cash flows used for investments in property, plant, and equipment totaled $65,000, of which 70% was used to replace machinery to maintain existing capacity. What is the free cash flow for Connor Designs? ANSWER: Cash flows from operating activities Cash paid to maintain current production levels of property, plant, and equipment Free cash flow

$425,000 (45,500)* $379,500

*Property, plant, and equipment to maintain productive capacity: $65,000 × 70% = $45,500 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.16-04 - 16-04 ACCREDITING STANDARDS: ACBSP-APC-23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis True / False 1. Factors that reflect the ability of a business to pay its debts and earn a reasonable amount of income are referred to as solvency, profitability, and liquidity. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-01 - 17-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 2. When you are interpreting financial ratios, it is useful to compare a company's ratios to the same ratios from a prior period or to the ratios of another company in the same industry. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-01 - 17-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 3. Comparative financial statements are designed to compare the financial statements of two or more corporations. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 4. In horizontal analysis, the current year is the base year. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 17 - Financial Statement Analysis 5. On a common-sized income statement, all items are stated as a percent of total assets or equities at year-end. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 6. The analysis of increases and decreases in the amount and percentage of comparative financial statement items is referred to as horizontal analysis. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 7. A 15% change in sales will result in a 15% change in net income. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 8. A financial statement showing each item on the statement as a percentage of one key item on the statement is called a common-sized financial statement. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 9. The relationship of each asset item as a percent of total assets is an example of vertical analysis. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 10. Vertical analysis refers to comparing the financial statements of a single company over several years. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 11. In a common-sized income statement, each item is expressed as a percentage of net income. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 12. In the vertical analysis of a balance sheet, the base for current liabilities is total liabilities. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 13. Using vertical analysis of the income statement, a company's net income as a percentage of sales is 15%; therefore, the cost of goods sold as a percentage of sales must be 85%. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 14. In the vertical analysis of an income statement, each item is generally stated as a percentage of total assets. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 15. The excess of current assets over current liabilities is referred to as working capital. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 16. Dollar amounts of working capital are difficult to assess when comparing companies of different sizes or in comparing such amounts with industry figures. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 17. Using measures to assess a business's ability to pay its current liabilities is called current position analysis. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 18. Current position analysis is used by short-term creditors to assess how quickly they will be repaid. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 19. An advantage of the current ratio is that it considers the makeup of the current assets. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 20. If two companies have the same current ratio, their ability to pay short-term debt is the same. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.BB.07 - Critical Thinking ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 21. The ratio of the sum of cash, receivables, and marketable securities to current liabilities is referred to as the current ratio. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 22. A balance sheet shows cash, $75,000; marketable securities, $115,000; receivables, $150,000; and inventories, $222,500. Current liabilities are $225,000. The current ratio is 2.5. a. True b. False ANSWER: True RATIONALE: Current Ratio = Current Assets/Current Liabilities = (Cash + Marketable Securities + Receivables + Inventories)/Current Liabilities = ($75,000 + $115,000 + $150,000 + $222,500)/$225,000 = $562,500/$225,000 = 2.5 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 23. If a firm has a current ratio of 2, the subsequent collection of a 60-day note receivable on account will cause the ratio to decrease. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 24. If a firm has a quick ratio of 1, the subsequent payment of an account payable will cause the ratio to increase. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 25. If the accounts receivable turnover for the current year has decreased when compared with the ratio for the preceding year, there has been an acceleration in the collection of receivables. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 26. An increase in the accounts receivable turnover may be due to a change in how credit is granted and/or in collection practices. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 27. The number of days' sales in receivables is one means of expressing the relationship between average daily sales and accounts receivable. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 17 - Financial Statement Analysis 28. A firm selling food should have a higher inventory turnover rate than a firm selling office furniture. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.BB.07 - Critical Thinking ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 29. The number of days' sales in inventory is one means of expressing the relationship between the cost of goods sold and inventory. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 30. Assuming that the quantities of inventory on hand during the current year were sufficient to meet all demands for sales, a decrease in the inventory turnover for the current year when compared with the turnover for the preceding year indicates an improvement in inventory management. a. True b. False ANSWER: False DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 31. Solvency analysis focuses on the ability of a business to pay its long-term liabilities. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-04 - 17-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 17 - Financial Statement Analysis 32. The ratio of fixed assets to long-term liabilities provides a measure of a firm’s ability to pay dividends. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-04 - 17-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 33. A decrease in the ratio of liabilities to stockholders' equity indicates an improvement in the margin of safety for creditors. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-04 - 17-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 34. In computing the asset turnover ratio, long-term investments are excluded from average total assets. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 35. The return on total assets measures the profitability of total assets, without considering how the assets are financed. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 36. In computing the return on total assets, interest expense is subtracted from net income before dividing by average total assets. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 37. The denominator of the return on total assets ratio is the average total assets. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 38. When the return on total assets is greater than the return on common stockholders' equity, the management of the company has effectively used leverage. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 39. When computing the return on common stockholders' equity, preferred stock dividends are subtracted from net income. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 17 - Financial Statement Analysis 40. If a company has issued only one class of stock, the earnings per share are determined by dividing net income plus interest expense by the number of shares outstanding. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 41. The ratio of the market price per share of common stock on a specific date to the annual earnings per share is referred to as the price-earnings ratio. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 42. The dividend yield is equal to the dividends per share divided by the par value per share of common stock. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 43. Comparing dividends per share to earnings per share indicates the extent to which the corporation is retaining its earnings for use in operations. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 17 - Financial Statement Analysis 44. Ratios and various other analytical measures are not a substitute for sound judgment, nor do they provide definitive guides for action. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.BB.07 - Critical Thinking ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 45. Analyzing a company's performance should take into account conditions peculiar to the industry and the general economic conditions. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.BB.07 - Critical Thinking ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 46. A company can compare its financial data to the data of other companies and industry averages to evaluate its position. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.BB.07 - Critical Thinking ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 47. If Epsilon Company's price-earnings ratio on common stock is greater than Iota Company's, then Iota Company would be expected to have the best potential for future common stock price appreciation. a. True b. False ANSWER: False RATIONALE: The price-earnings (P/E) ratio on common stock measures a company’s future earnings prospects. Therefore, a smaller P/E ratio means Iota Company would be expected to have a less potential for future common stock price appreciation. DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN-03 - Measurement BUSPROG: Analytic 48. The effects of differences in accounting methods are of little importance when analyzing comparable data from competing businesses. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-06 - 17-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.BB.07 - Critical Thinking ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 49. The report on internal control required by the Sarbanes-Oxley Act of 2002 may be prepared by either management or the company’s auditors. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-06 - 17-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 50. The auditor's report is where the auditor certifies that the financial statements are correct and accurate. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-06 - 17-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic 51. In a company's annual report, the section called Management Discussion and Analysis provides critical information for interpreting the financial statements and assessing the future of the company. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-06 - 17-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic 52. A clean audit opinion is not the same as an unmodified opinion. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-06 - 17-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 53. Unusual items affecting the current period’s income statement consist of changes in accounting principles and discontinued operations. a. True b. False ANSWER: False DIFFICULTY: Bloom's: Remembering Easy LEARNING OBJECTIVES: ACCT.WARD.18.17-APP - 17-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 54. When a corporation discontinues a segment of its operations at a loss, the loss should be reported as a separate item after income from continuing operations on the income statement. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-APP - 17-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 55. An unusual item is often related to current operations and occurs infrequently. a. True b. False ANSWER: False DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-APP - 17-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 56. Reporting unusual items separately on the income statement allows investors to isolate the effects of these items on income and cash flows. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-APP - 17-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 57. Unusual items affecting the prior period’s income statement consist of changes in or errors in applying accounting principles. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-APP - 17-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 58. Earnings per share amounts are only required to be presented for income from continuing operations and net income on the face of the statement. a. True b. False ANSWER: True DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-APP - 17-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis Multiple Choice 59. Which of the following is not a characteristic evaluated in ratio analysis? a. liquidity b. profitability c. solvency d. marketability ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-01 - 17-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 60. Short-term creditors are typically most interested in analyzing a company's a. marketability b. profitability c. operating results d. liquidity ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-01 - 17-01 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 61. The percentage analysis of increases and decreases in individual items in comparative financial statements is called a. vertical analysis b. solvency analysis c. profitability analysis d. horizontal analysis ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 62. Which of the following is the most useful in analyzing companies of different sizes? a. comparative statements b. common-sized financial statements c. price-level accounting d. audit report ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 63. The percent of fixed assets to total assets is an example of a. vertical analysis b. solvency analysis c. profitability analysis d. horizontal analysis ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 64. What type of analysis is indicated by the following?

Current assets Fixed assets a. vertical analysis b. horizontal analysis c. liquidity analysis d. common-size analysis ANSWER: DIFFICULTY:

Current Year Preceding Year $ 430,000 $ 500,000 1,740,000 1,500,000

Increase (Decrease) Amount Percent $(70,000) (14)% 240,000 16

b Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 65. An analysis in which all the components of an income statement are expressed as a percentage of sales is a a. vertical analysis b. horizontal analysis c. liquidity analysis d. solvency analysis ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 66. A balance sheet that displays only component percentages is a a. trend balance sheet b. comparative balance sheet c. condensed balance sheet d. common-sized balance sheet ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 67. One reason that a common-sized statement is a useful tool in financial analysis is that it enables the user to a. judge the relative potential of two companies of similar size in different industries b. determine which companies in a single industry are of the same value c. determine which companies in a single industry are of the same size d. make a better comparison of two companies of different sizes in the same industry ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 68. Assume the following sales data for a company: Current year Preceding year

$325,000 250,000

What is the percentage increase in sales from the preceding year to the current year? a. 70% b. 76.9% c. 30% d. 50% ANSWER: c RATIONALE: Percentage Increase in Sales in Current Year = [(Current Year Sales – Preceding Year Sales)/Preceding Year Sales] × 100 = [($325,000 – $250,000)/$250,000] × 100 = ($75,000/$250,000) × 100 = 30% DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 69. On a common-sized balance sheet, 100% is a. total property, plant, and equipment b. total current assets c. total liabilities d. total assets ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 70. On a common-sized income statement, 100% is the a. net cost of goods sold b. net income c. gross profit d. sales ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 71. Horizontal analysis is a technique for evaluating financial statement data a. for one period of time b. over a period of time c. on a certain date d. as it may appear in the future ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 72. Horizontal analysis of comparative financial statements includes a. development of common-sized statements b. calculation of liquidity ratios c. calculation of dollar amount changes and percentage changes from the previous to the current year d. evaluation of each component in a financial statement to a total within the statement ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 73. In horizontal analysis, each item is expressed as a percentage of the a. base year figure b. retained earnings figure c. total assets figure d. net income figure ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 74. Assume the following sales data for a company: Current year Preceding year

$1,025,000 820,000

What is the percentage increase in sales from the preceding year to the current year? a. 100% b. 25% c. 125% d. 75% ANSWER: b RATIONALE: Percentage Increase in Sales in Current Year = [(Current Year Sales – Preceding Year Sales)/Preceding Year Sales] × 100 = [($1,025,000 – $820,000)/$820,000] × 100 = ($205,000/$820,000) × 100 = 25% DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 75. The following income statement information is for Sadie Company: Sales Cost of goods sold Gross profit

$175,000 115,000 $ 60,000

Using vertical analysis of the income statement for Sadie Company, determine the gross profit margin. a. 100% b. 66.5% c. 34.3% d. 29.4% ANSWER: c RATIONALE: Cost of Goods Sold as a Percent of Sales = (Cost of Goods Sold/Sales) × 100 = ($115,000/$175,000) × 100 = 65.7% Gross Profit Margin = 100% – Cost of Goods Sold as a Percent of Sales = 100% – 65.7% = 34.3% DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 76. In a vertical analysis, the base for cost of goods sold is a. total selling expenses b. sales c. total expenses d. gross profit ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 77. The relationship of $325,000 to $125,000, expressed as a ratio, is a. 2.0 b. 2.6 c. 2.5 d. 0.45 ANSWER: b RATIONALE: Ratio = $325,000/$125,000 = 2.6 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic Use the information below for Harding Company to answer the questions that follow. Harding Company Accounts payable Accounts receivable Accrued liabilities Cash Intangible assets Inventory Long-term investments Long-term liabilities Marketable securities Notes payable (short-term) Property, plant, and equipment Prepaid expenses

$ 40,000 65,000 7,000 30,000 40,000 72,000 110,000 75,000 36,000 30,000 625,000 2,000

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Chapter 17 - Financial Statement Analysis 78. Based on the data for Harding Company, what is the amount of quick assets? a. $205,000 b. $203,000 c. $131,000 d. $66,000 ANSWER: c RATIONALE: Quick Assets = Accounts Receivable + Cash + Marketable Securities = $65,000 + $30,000 + $36,000 = $131,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 79. Based on the data for Harding Company, what is the amount of working capital? a. $238,000 b. $128,000 c. $168,000 d. $203,000 ANSWER: b RATIONALE: Working Capital = (Accounts Receivable + Cash + Inventory + Marketable Securities + Prepaid Expenses) – (Accounts Payable + Accrued Liabilities + Notes Payable) = ($65,000 + $30,000 + $72,000 + $36,000 + $2,000) – ($40,000 + $7,000 + $30,000) = $128,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 80. Based on the data for Harding Company, what is the quick ratio, rounded to one decimal point? a. 2.7 b. 2.6 c. 1.7 d. 0.9 ANSWER: c RATIONALE: Quick Ratio = Quick Assets/Current Liabilities = (Accounts Receivable + Cash + Marketable Securities)/(Accounts Payable + Accrued Liabilities + Notes Payable) = ($65,000 + $30,000 + $36,000)/($40,000 + $7,000 + $30,000) = $131,000/$77,000 = 1.7 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 17 - Financial Statement Analysis 81. A company with working capital of $720,000 and a current ratio of 2.2 pays a $125,000 short-term liability. The amount of working capital immediately after payment is a. $845,000 b. $595,000 c. $720,000 d. $125,000 ANSWER: c RATIONALE: Current Ratio = Current Assets/Current Liabilities = 2.2 Current Assets = 2.2 × Current Liabilities Working Capital = Current Assets – Current Liabilities = $720,000 Working Capital = (2.2 × Current Liabilities) – Current Liabilities Working Capital = 1.2 × Current Liabilities = $720,000 Current Liabilities = $720,000/1.2 = $600,000 Therefore, Working Capital = Current Assets – $600,000 = $720,000 Current Assets = $720,000 + $600,000 = $1,320,000 Current Assets (after payment of short-term liability) = $1,320,000 – $125,000 = $1,195,000 Current Liabilities (after payment of short-term liabilities) = $600,000 – $125,000 = $475,000 Working Capital = $1,195,000 – $475,000 = $720,000 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 82. Which of the following measures a company’s ability to pay its current liabilities? a. earnings per share b. inventory turnover c. current ratio d. times interest earned ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCT.WARD.18.17-04 - 17-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 83. Which of the following is not included in the computation of the quick ratio? a. inventory b. marketable securities c. accounts receivable d. cash ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 84. The numerator in calculating the accounts receivable turnover is a. total assets b. sales c. accounts receivable at year-end d. average accounts receivable ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 85. Based on the following data, what is the accounts receivable turnover? Sales on account during year $700,000 Cost of goods sold during year 270,000 Accounts receivable, beginning of year 45,000 Accounts receivable, end of year 35,000 Inventory, beginning of year 90,000 Inventory, end of year 110,000 a. 17.5 b. 2.6 c. 20.0 d. 15.5 ANSWER: a RATIONALE: Accounts Receivable Turnover = Sales/Average Accounts Receivable = $700,000/[($45,000 + $35,000)/2] = 17.5 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 17 - Financial Statement Analysis 86. An acceleration in the collection of receivables will tend to cause the accounts receivable turnover to a. decrease b. remain the same c. either increase or decrease d. increase ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 87. Based on the following data for the current year, what is the number of days' sales in receivables? Sales on account during year $584,000 Cost of goods sold during year 300,000 Accounts receivable, beginning of year 45,000 Accounts receivable, end of year 35,000 Inventory, beginning of year 90,000 Inventory, end of year 110,000 a. 7.3 b. 2.5 c. 14.6 d. 25 ANSWER: d RATIONALE: Number of Days’ Sales in Receivables = Average Accounts Receivable/Average Daily Sales = [($45,000 + $35,000)/2]/($584,000/365 days) = 25 days DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 88. Based on the following data for the current year, what is the inventory turnover? Sales on account during year $700,000 Cost of goods sold during year 270,000 Accounts receivable, beginning of year 45,000 Accounts receivable, end of year 35,000 Inventory, beginning of year 90,000 Inventory, end of year 110,000 a. 2.7 b. 9.7 c. 2.5 d. 3.0 ANSWER: a RATIONALE: Inventory Turnover = Cost of Goods Sold/Average Inventory = $270,000/[($90,000 + $110,000)/2] = $270,000/$100,000 = 2.7 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 89. Based on the following data for the current year, what is the number of days' sales in inventory? Sales on account during year $1,204,500 Cost of goods sold during year 657,000 Accounts receivable, beginning of year 75,000 Accounts receivable, end of year 85,000 Inventory, beginning of year 85,600 Inventory, end of year 98,600 a. 51.2 b. 44.4 c. 6.5 d. 7.5 ANSWER: a RATIONALE: Number of Days’ Sales in Inventory = Average Inventory/Average Daily Cost of Goods Sold = Average Inventory/(Cost of Goods Sold/365 days) = [($85,600 + $98,600)/2]/($657,000/365 days) = 51.2 days DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 90. The current ratio is a. used to evaluate a company's liquidity and short-term debt-paying ability b. a solvency measure that indicates the margin of safety for bondholders c. calculated by dividing current liabilities by current assets d. calculated by subtracting current liabilities from current assets ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 91. A company with $70,000 in current assets and $50,000 in current liabilities pays a $1,000 current liability. As a result of this transaction, the current ratio and working capital will a. both decrease b. both increase c. increase and remain the same, respectively d. remain the same and decrease, respectively ANSWER: c RATIONALE: Before payment of current liability, Current Assets = $70,000 Current Liabilities = $50,000 Current Ratio = Current Assets/Current Liabilities = $70,000/$50,000 = 1.40 Working Capital = Current Assets – Current Liabilities = $70,000 – $50,000 = $20,000 After payment of current liability, Current Assets (after payment of current liability) = $70,000 – $1,000 = $69,000 Current Liabilities (after payment of current liability) = $50,000 – $1,000 = $49,000 Current Ratio (after payment of current liability) = $69,000/$49,000 = 1.41 Working Capital (after payment of current liability) = $69,000 – $49,000 = $20,000 Therefore, the current ratio will increase from 1.40 to 1.41 and working capital will remain $20,000 after the payment of the current liability of $1,000. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 92. Brock Company's financial information is listed below. Assume that all balance sheet amounts represent both average and ending balance figures and that all sales were on credit. Assets Cash and short-term investments Accounts receivable (net) Inventory Property, plant, and equipment Total assets

$ 40,000 30,000 25,000 215,000 $310,000

Liabilities and Stockholders’ Equity Current liabilities Long-term liabilities Stockholders’ equity—Common Total liabilities and stockholders’ equity

$ 60,000 95,000 155,000 $310,000

Income Statement Sales Cost of goods sold Gross margin Operating expenses Net income Number of shares of common stock Market price of common stock

$90,000 45,000 $45,000 20,000 $25,000 6,000 $20

What is the current ratio? a. 1.42 b. 1.17 c. 1.58 d. 0.67 ANSWER: RATIONALE:

c Current Ratio = Current Assets/Current Liabilities = [Cash and Short-Term Investments + Accounts Receivable (net) + Inventory]/Current Liabilities = ($40,000 + $30,000 + $25,000)/$60,000 = $95,000/$60,000 = 1.58 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis Use the information below for Privett Company to answer the questions that follow.

Privett Company Accounts payable Accounts receivable Accrued liabilities Cash Intangible assets Inventory Long-term investments Long-term liabilities Marketable securities Notes payable (short-term) Property, plant, and equipment Prepaid expenses

$ 30,000 35,000 7,000 25,000 40,000 72,000 100,000 75,000 36,000 20,000 400,000 2,000

93. Based on the data for Privett Company, what is the amount of quick assets? a. $168,000 b. $96,000 c. $60,000 d. $61,000 ANSWER: b RATIONALE: Quick Assets = Accounts Receivable + Cash + Marketable Securities = $35,000 + $25,000 + $36,000 = $96,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 94. Based on the data for Privett Company, what is the amount of working capital? a. $213,000 b. $113,000 c. $153,000 d. $39,000 ANSWER: b RATIONALE: Working Capital = Current Assets – Current Liabilities = (Accounts Receivable + Cash + Inventory + Marketable Securities + Prepaid Expenses) – (Accounts Payable + Accrued Liabilities + Notes Payable) = ($35,000 + $25,000 + $72,000 + $36,000 + $2,000) – ($30,000 + $7,000 + $20,000) = $170,000 – $57,000 = $113,000 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 17 - Financial Statement Analysis 95. Based on the data for Privett Company, what is the quick ratio, rounded to one decimal point? a. 1.7 b. 2.9 c. 1.1 d. 1.0 ANSWER: a RATIONALE: Quick Ratio = Quick Assets/Current Liabilities = (Accounts Receivable + Cash + Marketable Securities)/(Accounts Payable + Accrued Liabilities + Notes Payable) = ($35,000 + $25,000 + $36,000)/($30,000 + $7,000 + $20,000) = $90,000/$57,000 = 1.7 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 96. The ability of a business to pay its debts as they come due and to earn a reasonable net income includes a. solvency and leverage b. solvency and profitability c. solvency and liquidity d. solvency and equity ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-04 - 17-04 ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 97. Which of the following ratios provides a solvency measure that shows the margin of safety of bondholders and also gives an indication of the potential ability of the business to borrow additional funds on a long-term basis? a. ratio of fixed assets to long-term liabilities b. asset turnover ratio c. number of days' sales in receivables d. return on stockholders' equity ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-04 - 17-04 ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 98. Times interest earned is computed as a. net income plus interest expense, divided by interest expense b. income before income tax plus interest expense, divided by interest expense c. net income divided by interest expense d. income before income tax divided by interest expense ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-04 - 17-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 99. Balance sheet and income statement data indicate the following: Bonds payable, 10% (due in two years) Preferred 5% stock, $100 par (no change during year) Common stock, $50 par (no change during year) Income before income tax for year Income tax for year Common dividends paid Preferred dividends paid

$1,000,000 300,000 2,000,000 550,000 80,000 50,000 15,000

Based on the data presented, what is the times interest earned ratio? (Round to one decimal point.) a. 1.5 b. 6.4 c. 6.5 d. 5.5 ANSWER: c RATIONALE: Times Interest Earned = (Income Before Income Tax + Interest Expense)/Interest Expense = [$550,000 + ($1,000,000 × $10%)]/($1,000,000 × 10%) = $650,000/$100,000 = 6.5 times DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-04 - 17-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 100. Hsu Company reported the following on its income statement: Income before income taxes Income tax expense Net income

$420,000 120,000 $300,000

Interest expense was $80,000. Hsu Company's times interest earned ratio is a. 8 times b. 6.25 times c. 5.25 times d. 5 times ANSWER: b RATIONALE: Times Interest Earned = (Income Before Income Tax + Interest Expense)/Interest Expense = ($420,000 + $80,000)/$80,000 = 6.25 times DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-04 - 17-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 101. Percentage analyses, ratios, turnovers, and other measures of financial position and operating results are a. a substitute for sound judgment b. useful analytical measures c. enough information for analysis; industry information is not needed d. unnecessary for analysis if industry information is available ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 102. The tendency of the return on stockholders' equity to vary disproportionately from the return on total assets is because of a. leverage b. solvency c. yield d. quick assets ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 17 - Financial Statement Analysis Use this information for Kellman Company to answer the questions that follow. The balance sheets at the end of each of the first two years of operations indicate the following: Kellman Company Total current assets Total investments Total property, plant, and equipment Total current liabilities Total long-term liabilities Preferred 9% stock, $100 par Common stock, $10 par Paid-in capital in excess of par—Common stock Retained earnings

Year 2 $600,000 60,000 900,000 125,000 350,000 100,000 600,000 75,000 310,000

Year 1 $560,000 40,000 700,000 65,000 250,000 100,000 600,000 75,000 210,000

103. Using the balance sheets for Kellman Company, if net income is $150,000 and interest expense is $20,000 for Year 2, what is the return on total assets for the year? a. 10.4% b. 11.9% c. 10.5% d. 8.4% ANSWER: b RATIONALE: Return on Total Assets = (Net Income + Interest Expense)/Average Total Assets Average Total Assets = (Total Assets of Year 2 + Total Assets of Year 1)/2 Average Total Assets = [($600,000 + $60,000 + $900,000) + ($560,000 + $40,000 + $700,000)]/2 = ($1,560,000 + $1,300,000)/2 = $1,430,000 Return on Total Assets = (Net Income + Interest Expense)/Average Total Assets Return on Total Assets = ($150,000 + $20,000)/$1,430,000 = 11.9% DIFFICULTY: Bloom's: Applying Moderate LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 104. Using the balance sheets for Kellman Company, if net income is $150,000 and interest expense is $20,000 for Year 2, what is the return on stockholders' equity for Year 2? a. 6.9% b. 14.5% c. 16.04% d. 13.8% ANSWER: c RATIONALE: Return on Stockholders’ Equity = Net Income/Average Total Stockholders’ Equity Average Total Stockholders’ Equity = (Total Stockholders' Equity of Year 2 + Total Stockholders' Equity of Year 1)/2 Average Total Stockholders’ Equity = [($600,000 + $75,000 + $310,000) + ($600,000 + $75,000 + $210,000)]/2 Average Total Stockholders’ Equity = ($985,000 + $885,000)/2 = $1,870,000/2 = $935,000 Return on Stockholders’ Equity = $150,000/$935,000 = 16.04% DIFFICULTY: Bloom's: Applying Easy LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 105. Using the balance sheets for Kellman Company, if net income is $250,000 and interest expense is $30,000 for Year 2, what are the earnings per share on common stock for Year 2? a. $4.16 b. $4.32 c. $4.02 d. $2.49 ANSWER: c RATIONALE: Earnings per Share (EPS) on Common Stock for Year 2 = (Net Income − Preferred Dividends)/Shares of Common Stock Outstanding Preferred Dividends = $100,000 × 9% = $9,000 Earnings per Share (EPS) on Common Stock for Year 2 = ($250,000 – $9,000)/($600,000/$10) Earnings per Share (EPS) on Common Stock for Year 2 = $241,000/60,000 = $4.02 DIFFICULTY: Bloom's: Applying Moderate LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 106. Using the balance sheets for Kellman Company, if net income is $250,000 and interest expense is $20,000 for Year 2, and the market price of common shares is $30, what is the price-earnings ratio on common stock for Year 2? (Round intermediate calculation to two decimal places and final answers to one decimal place.) a. 7.5 b. 13.4 c. 12.1 d. 8.5 ANSWER: a RATIONALE: Price-Earnings (P/E) Ratio = Market Price per Share of Common Stock/Earnings per Share on Common Stock Earnings per Share (EPS) on Common Stock for Year 2 = (Net Income − Preferred Dividends)/Shares of Common Stock Outstanding Preferred Dividends = $100,000 × 9% = $9,000 Earnings per Share (EPS) on Common Stock for Year 2 = ($250,000 – $9,000)/($600,000/$10) Earnings per Share (EPS) on Common Stock for Year 2 = $241,000/60,000 = $4.02 Price-Earnings (P/E) Ratio = $30/$4.02 = 7.5 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 107. The numerator of the return on common stockholders' equity is a. net income b. net income minus preferred dividends c. income before income tax d. operating income minus interest expense ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 108. The numerator of the return on total assets is a. net income b. net income plus tax expense c. net income plus interest expense d. net income minus preferred dividends ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 109. The following information is available for Jase Company: Market price per share of common stock Earnings per share on common stock

$25.00 $1.25

Which of the following statements is correct? a. The price-earnings ratio is 20 and a share of common stock was selling for 20 times the amount of earnings per share at the end of the year. b. The price-earnings ratio is 5% and a share of common stock was selling for 5% more than the amount of earnings per share at the end of the year. c. The price-earnings ratio is 10 and a share of common stock was selling for 125 times the amount of earnings per share at the end of the year. d. The market price per share and the earnings per share are not statistically related to each other. ANSWER: a RATIONALE: Price-Earnings (P/E) Ratio = Market Price per Share of Common Stock/Earnings per Share on Common Stock = $25.00/$1.25 = 20 In other words, a share of common stock of Jase Company was selling for 20 times earnings per share. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 110. The following information is available for Meyer Company: Dividends per share of common stock Market price per share of common stock

$1.80 $30.00

Which of the following statements is correct? a. The dividend yield is 6.0%, which is of interest to investors seeking an increase in market price of their stocks. b. The dividend yield is 6.0%, which is of special interest to investors seeking to earn revenue on their investments. c. The dividend yield is 16.7%, which is of interest to bondholders. d. The dividend yield is 16.7%, which is an important measure of solvency. ANSWER: b RATIONALE: Dividend Yield = Dividends per Share of Common Stock/Market Price per Share of Common Stock = $1.80/$30.00 = 6.0% Dividend yield is of special interest to investors whose objective is to earn revenue (dividends) from their investment. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 111. The particular analytical measures chosen to analyze a company may be influenced by all of the following except a. industry type b. general economic environment c. diversity of business operations d. product quality or service effectiveness ANSWER: d DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 112. A common measure of liquidity is a. the asset turnover ratio b. dividends per share of common stock c. the accounts receivable turnover d. the profit margin ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 17 - Financial Statement Analysis 113. Richards Corporation had net income of $250,000 and paid dividends to common stockholders of $50,000. It had 50,000 shares of common stock outstanding during the entire year. Richards Corporation's common stock is selling for $35 per share. The price-earnings ratio is a. 7 times b. 14 times c. 2 times d. 5 times ANSWER: a RATIONALE: Price-Earnings (P/E) Ratio = Market Price per Share of Common Stock/Earnings per Share on Common Stock = $35/($250,000/50,000 shares) = 7 times DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 114. Leverage implies that a company a. contains debt financing b. contains equity financing c. has a high current ratio d. has a high earnings per share ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis The following information pertains to Diane Company. Assume that all balance sheet amounts represent both average and ending balance figures and that all sales were on credit. Use this information to answer the questions that follow. Assets Cash and short-term investments Accounts receivable (net) Inventory Property, plant, and equipment Total assets

$ 30,000 20,000 15,000 185,000 $250,000

Liabilities and Stockholders’ Equity Current liabilities Long-term liabilities Stockholders’ equity—Common Total liabilities and stockholders’ equity

$ 45,000 70,000 135,000 $250,000

Income Statement Sales Cost of goods sold Gross margin Operating expenses Interest expense Net income Number of shares of common stock outstanding Market price of common stock Total dividends paid Cash provided by operations

$ 85,000 45,000 $ 40,000 (15,000) (5,000) $ 20,000 6,000 $20 $9,000 $30,000

115. Using the data provided for Diane Company, what is the asset turnover? a. 1.00 b. 2.94 c. 0.18 d. 0.34 ANSWER: d RATIONALE: Asset Turnover = Sales/Average Total Assets = $85,000/$250,000 = 0.34 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 116. Using the data provided for Diane Company, what is the return on total assets? a. 10% b. 8% c. 0.1% d. 1% ANSWER: a RATIONALE: Return on Total Assets = (Net Income + Interest Expense)/Average Total Assets = ($20,000 + $5,000)/$250,000 = 10% DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 117. Using the data provided for Diane Company, what are the dividends per common share? a. $20.00 b. $3.00 c. $0.67 d. $1.50 ANSWER: d RATIONALE: Dividends per Common Share = Dividends on Common Stock/Shares of Common Stock Outstanding = $9,000/6,000 shares = $1.50 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 118. Using the data provided for Diane Company, what is the dividend yield? a. 7.5% b. 0.75% c. 13.3% d. 1.3% ANSWER: a RATIONALE: Dividend Yield = Dividends per Share of Common Stock/Market Price per Share of Common Stock = ($9,000/6,000)/$20 = $1.50/$20 = 7.5% DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 119. Using the data provided for Diane Company, what is the return on common stockholders’ equity? a. 6.75% b. 14.8% c. 7.4% d. 13.5% ANSWER: b RATIONALE: Return on Common Stockholders’ Equity = (Net Income – Preferred Dividends)/Average Common Stockholders’ Equity = ($20,000 – $0)/$135,000 = 14.8% DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 120. Using the data provided for Diane Company, what is the price-earnings ratio? a. 8.0 times b. 2.5 times c. 4.0 times d. 6.0 times ANSWER: d RATIONALE: Price-Earnings (P/E) Ratio = Market Price per Share of Common Stock/Earnings per Share on Common Stock Earnings per Share on Common Stock = Net Income/Shares of Common Stock Outstanding = $20,000/6,000 = $3.33 Price-Earnings (P/E) Ratio = $20/$3.33 = 6.0 times DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 121. The following information pertains to Newman Company. Assume that all balance sheet amounts represent both average and ending balance figures and that all sales were on credit. Assets Cash and short-term investments Accounts receivable (net) Inventory Property, plant, and equipment Total assets

$ 40,000 30,000 25,000 215,000 $310,000

Liabilities and Stockholders’ Equity Current liabilities Long-term liabilities Stockholders’ equity—Common Total liabilities and stockholders’ equity

$ 60,000 95,000 155,000 $310,000

Income Statement Sales Cost of goods sold Gross margin Operating expenses Net income Number of shares of common stock Market price of common stock Dividends per share Cash provided by operations

$90,000 45,000 $45,000 20,000 $25,000 6,000 $40 $1.00 $40,000

What is the return on total assets for this company? a. 8.1% b. 6.8% c. 10.5% d. 16.1% ANSWER: a RATIONALE: Return on Total Assets = (Net Income + Interest Expense)/Average Total Assets = ($25,000 + $0)/$310,000 = 8.1% DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 122. The following information pertains to Dallas Company. Assume that all balance sheet amounts represent both average and ending balance figures and that all sales were on credit. Assets Cash and short-term investments Accounts receivable (net) Inventory Property, plant, and equipment Total assets

$ 40,000 30,000 25,000 280,000 $375,000

Liabilities and Stockholders’ Equity Current liabilities Long-term liabilities Stockholders’ equity—Common Total liabilities and stockholders’ equity

$ 60,000 95,000 220,000 $375,000

Income Statement Sales Cost of goods sold Gross margin Operating expenses Net income Number of shares of common stock Market price of common stock Dividends per share Cash provided by operations

$90,000 45,000 $45,000 15,000 $30,000 6,000 $20 $1.00 $40,000

What is the return on stockholders’ equity? a. 7.3% b. 13.6% c. 20.5% d. 40.9% ANSWER: b RATIONALE: Return on Stockholders’ Equity = Net Income/Average Total Stockholders’ Equity = $30,000/$220,000 = 13.6% DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 123. A company reports the following: Net income Preferred dividends Shares of common stock outstanding Market price per share of common stock

$160,000 $10,000 20,000 $35

The company’s earnings per share on common stock is a. $13.33 b. $8.50 c. $7.50 d. $35.00 ANSWER: c RATIONALE: Earnings per Share (EPS) on Common Stock = (Net Income – Preferred Dividends)/Shares of Common Stock Outstanding = ($160,000 – $10,000)/20,000 = $150,000/20,000 = $7.50 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 124. The price-earnings ratio on common stock is calculated as a. market price per share of common stock, divided by earnings per share on common stock b. earnings per share of common stock, divided by market price per share of common stock c. market price per share of common stock, divided by dividends per share of common stock d. dividends per share of common stock, divided by earnings per share on common stock ANSWER: a DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN-03 - Measurement BUSPROG - Analytic 125. Dividend yield on common stock is calculated as a. dividends on common stock, divided by shares of common stock outstanding b. net income minus preferred dividends, divided by shares of common stock outstanding c. dividends per share of common stock, divided by earnings per share d. dividends per share of common stock, divided by market price per share of common stock ANSWER: d DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN-03 - Measurement BUSPROG - Analytic © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 17 - Financial Statement Analysis 126. Corporate annual reports typically do not contain a. management discussion and analysis b. an SEC statement expressing an opinion c. accompanying notes d. an auditor's report ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-06 - 17-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic 127. The independent auditor's report a. describes which financial statements are covered by the audit b. gives the auditor's opinion regarding the fairness of the financial statements c. summarizes what the auditor did d. states that the financial statements were presented on time ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-06 - 17-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic 128. The purpose of an audit is to a. determine whether or not a company is a good investment b. render an opinion on the fairness of the statements c. determine whether or not a company complies with corporate social responsibility d. determine whether or not a company is a good credit risk ANSWER: b DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-06 - 17-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.01 - Purpose ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 129. Which of the following is required by the Sarbanes-Oxley Act? a. price-earnings ratio b. report on internal control c. vertical analysis d. common-sized statement ANSWER: b DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-06 - 17-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.10 - Internal Control ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic 130. All of the following are typically included in the Management’s Discussion and Analysis in annual reports except a. explanations of any significant changes between the current and prior years’ financial statements b. management’s assessment of liquidity c. journal entries d. off-balance-sheet arrangements ANSWER: c DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-06 - 17-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.20 - Accounting for Corporations ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement ACCT.AICPA.FN.04 - Reporting BUSPROG: Analytic 131. Which of the following would appear as an unusual item on the income statement? a. loss resulting from the sale of fixed assets b. gain resulting from the disposal of a segment of the business c. presentation of earnings per share d. stock split ANSWER: b DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-APP - 17-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 132. A loss on disposal of a segment would be reported on the income statement as a(n) a. administrative expense b. other expense c. deduction from income from continuing operations d. selling expense ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-APP - 17-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 133. Which of the following is not an unusual item? a. a segment of the business being sold b. corporate income tax being paid c. a change from one accounting method to another acceptable accounting method d. closure of all outlet stores ANSWER: b DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-APP - 17-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 134. Which of the following is considered an unusual item affecting the prior period’s income statement? a. a change in accounting principles b. fixed asset impairments c. sale of company stores in Florida d. discontinued operations ANSWER: a DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-APP - 17-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 135. A loss due to a discontinued operation should be reported on the income statement a. above income from continuing operations b. without related tax effect c. below income from continuing operations d. as an operating expense ANSWER: c DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-APP - 17-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 136. A change from one acceptable accounting method to another is reported a. on the statement of retained earnings, as a correction to the beginning balance b. on the income statement, below income from continuing operations c. on the income statement, above income tax expense d. through a retroactive restatement of prior period earnings ANSWER: d DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-APP - 17-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 137. Which of the following items should be classified as an unusual item on an income statement? a. gain on the retirement of a bond payable b. gain on a sale of a long-term investment c. loss due to a discontinued operation in Colorado d. selling treasury stock for more than the company paid for it ANSWER: c DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-APP - 17-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 138. Which of the following items appear on the corporate income statement before income from continuing operations? a. cumulative effect of a change in accounting principle b. income tax expense c. presentation of earnings per share d. loss on discontinued operations ANSWER: b DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-APP - 17-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic Matching Match each definition that follows with the term (a–h) it defines. a. Solvency b. Leverage c. Times interest earned d. Horizontal analysis e. Vertical analysis f. Common-sized financial statements g. Current position analysis h. Profitability analysis DIFFICULTY: Easy Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-01 - 17-01 ACCT.WARD.18.17-02 - 17-02 ACCT.WARD.18.17-03 - 17-03 ACCT.WARD.18.17-04 - 17-04 ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 139. A percentage analysis of increases and decreases in related items on comparative financial statements ANSWER: d 140. Use debt to increase the return on an investment ANSWER: b 141. An analysis of a company’s ability to pay its current liabilities ANSWER: g 142. The percentage analysis of the relationship of each component in a financial statement to a total within the statement ANSWER: e © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 17 - Financial Statement Analysis 143. A company's ability to make interest payments and repay debt at maturity ANSWER: a 144. Focuses on a company’s ability to generate net income ANSWER: h 145. Useful for comparing one company to another or to industry averages ANSWER: f 146. Measures the risk that interest payments will not be made if earnings decrease ANSWER: c Match each ratio that follows to its use (items a–h). Items may be used more than once. a. Assess the profitability of the assets b. Assess how effectively assets are used c. Indicate the ability to pay current liabilities d. Indicate how much of the company is financed by debt and equity e. Indicate instant debt-paying ability f. Assess the profitability of the investment by common stockholders g. Indicate future earnings prospects h. Indicate the extent to which earnings are being distributed to common stockholders DIFFICULTY: Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCT.WARD.18.17-04 - 17-04 ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 147. Price-earnings (P/E) ratio ANSWER: g 148. Working capital ANSWER: c 149. Return on total assets ANSWER: a 150. Ratio of liabilities to stockholders’ equity ANSWER: d 151. Quick ratio ANSWER: e 152. Return on common stockholders’ equity ANSWER: f © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 17 - Financial Statement Analysis 153. Current ratio ANSWER: c 154. Asset turnover ratio ANSWER: b 155. Dividends per share ANSWER: h 156. Earnings per share (EPS) on common stock ANSWER: f Subjective Short Answer 157. Cash and accounts receivable for Adams Company are provided below. Cash Accounts receivable (net)

Current Year $70,000 70,400

Prior Year $50,000 80,000

What is the amount and percentage of increase or decrease that would be shown with horizontal analysis? ANSWER: Cash $20,000 increase ($70,000 – $50,000) or 40% Accounts receivable $9,600 decrease ($80,000 – $70,400) or (12%) DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 158. The following items were taken from the financial statements of Tilden, Inc., over a three-year period: Item Sales Cost of goods sold Gross profit

Year 3 $360,000

Year 2 $335,000

Year 1 $290,000

225,000

205,000

185,000

$135,000

$130,000

$105,000

Compute the following for each of the items listed. (a) The amount and percentage change from Year 2 to Year 3. (b) The amount and percentage change from Year 1 to Year 2. Round percentages to one decimal place. ANSWER: Sales Cost of goods sold Gross profit

(a) Year 2 to 3 Amount Percent $25,000 7.5% 20,000 9.8 $ 5,000 3.8

(b) Year 1 to 2 Amount Percent $45,000 15.5% 20,000 10.8 $25,000 23.8

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Chapter 17 - Financial Statement Analysis DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 159. Comparative information taken from Friction Company's financial statements is shown below. (a) (b) (c) (d) (e) (f)

Year 2 $ 25,500 106,200 77,000 654,000 160,000 28,000

Notes receivable Accounts receivable Retained earnings Sales Operating expenses Income taxes payable

Year 1 $ 30,000 90,000 70,000 600,000 200,000 20,000

Using horizontal analysis, show the percentage change and direction (increase or decrease) from Year 1 to Year 2 with Year 1 as the base year. ANSWER: (a) $4,500/$30,000 = 15% decrease (b) $16,200/$90,000 = 18% increase (c) $7,000/$70,000 = 10% increase (d) $54,000/$600,000 = 9% increase (e) $40,000/$200,000 = 20% decrease (f) $8,000/$20,000 = 40% increase DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 160. Revenue and expense data for Young Technologies Inc. are as follows: Sales Cost of goods sold Selling expenses Administrative expenses Income tax expense (a) (b)

Year 2 $500,000 325,000 70,000 75,000 10,500

Year 1 $440,000 242,000 79,200 70,400 16,400

Prepare an income statement in comparative form, stating each item for both years as an amount and as a percent of sales. Round to the nearest whole percent. Comment on the significant changes disclosed by the comparative income statement.

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Chapter 17 - Financial Statement Analysis ANSWER:

(a) Young Technologies Inc. Comparative Income Statement For the Years Ended December 31, Year 2 and Year 1

Sales Cost of goods sold Gross profit Selling expenses Administrative expenses Total expenses Income from operations Income tax expense Net income

Year 2 Amount Percent $500,000 100% 325,000 65 $175,000 35% $ 70,000 14% 75,000 15 $145,000 29% $ 30,000 6% 10,500 2 $ 19,500 4%

Year 1 Amount Percent $440,000 100% 242,000 55 $198,000 45% $ 79,200 18% 70,400 16 $149,600 34% $48,400 11% 16,400 4 $ 32,000 7%

(b) The vertical analysis indicates that the cost of goods sold as a percent of sales increased by 10% (65% vs. 55%) between the two years. Selling and administrative expenses as a percentage of sales decreased by 5%, and income tax expense decreased by 2%. Overall, net income as a percent of sales dropped by 3%. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 161. Cash and accounts receivable for Ashfall Co. are provided below. Cash Accounts receivable (net)

Current Year $62,400 42,000

Prior Year $58,000 50,000

Based on this information, what is the amount and percentage of increase or decrease that would be shown on a balance sheet with horizontal analysis? Round percentages to one decimal place. ANSWER: Cash $4,400 increase ($62,400 – $58,000) or 7.6% Accounts receivable $8,000 decrease ($42,000 – $50,000) or (16%) DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 162. Income statement information for Lucy Company is provided below. Sales Cost of goods sold Gross profit

$175,000 105,000 $ 70,000

Prepare a vertical analysis of the income statement for Lucy Company. ANSWER: Amount Percentage Sales $175,000 100% ($175,000/$175,000) Cost of goods sold 105,000 60 ($105,000/$175,000) Gross profit $ 70,000 40% ($70,000/$175,000) DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 163. Why would you or why wouldn’t you compare an organization like Ford Motor Company to the local car dealer “Johnson City Ford/Lincoln/Mercury” using vertical and horizontal analysis? ANSWER: Ford Motor Company is an automobile manufacturer with many aspects within the overall company such as military sales, foundries, and credit and financing operations, and its car sales are usually limited to resellers or large fleet purchasers. Johnson City Ford/Lincoln/Mercury is a local reseller that does not have the diverse operations of Ford Motor Company. Most of its sales, which would include new and used vehicles, would be to ultimate consumers and to smaller fleet operations. Major revenues may come from repairs and upgrades of vehicles. Its “credit” department may actually be a representative of another organization specializing in automobile financing. While they both sell Ford cars, they are not comparable companies. DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.BB.07 - Critical Thinking ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 164. The balance sheet data below for Randolph Company for two recent years. Current assets Plant assets Total assets

Assets

Year 2 $ 445 680 $1,125

Year 1 $280 520 $800

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

$ 285 255 325 260 $1,125

$120 160 320 200 $800

(a) Using horizontal analysis, show the percentage change for each balance sheet item using Year 1 as a base year. (b) Using vertical analysis, prepare a comparative balance sheet. Round percentages to one decimal place. ANSWER: (a) Assets Current assets Plant assets Total assets

Increase(Decrease) Year 2 Year 1 Amount Percent $ 445 $280 $165 58.9% 680 520 160 30.8 $1,125 $800 $325 40.6

Liabilities & Stockholders' Equity Current liabilities $ 285 $120 Long-term debt 255 160 Common stock 325 320 Retained earnings 260 200 Total liabilities and stockholders' $1,125 $800 equity (b) Assets Current assets Plant assets Total assets

$165 95 5 60

137.5% 59.4 1.6 30.0

$325

40.6

Year 2 Year 1 Amount Percent Amount Percent $ 445 39.6% $280 35.0% 680 60.4 520 65.0 $1,125 100.0% $800 100.0%

Liabilities & Stockholders' Equity Current liabilities $ 285 25.3% $120 Long-term debt 255 22.7 160 Common stock 325 28.9 320 Retained earnings 260 23.1 200 Total liabilities and stockholders' $1,125 100.0% $800 equity DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

15.0% 20.0 40.0 25.0

100.0%

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Chapter 17 - Financial Statement Analysis 165. Condensed data taken from the ledger of St. Louis Company at December 31, for the current and preceding years, are as follows: Current assets Property, plant, and equipment Intangible assets Current liabilities Long-term liabilities Common stock Retained earnings

Year 2 $160,000 450,000 20,700 70,000 210,000 225,000 125,700

Year 1 $130,000 400,000 30,000 80,000 250,000 150,000 80,000

Prepare a comparative balance sheet, with horizontal analysis, for December 31, Year 2 and Year 1. (Round percents to one decimal place.) ANSWER: St. Louis Company Comparative Balance Sheet December 31, Year 2 and Year 1 Increase (Decrease) Year 2 Year 1 Amount Percent Assets Current assets $160,000 $130,000 $ 30,000 23.1% Property, plant, and equipment 450,000 400,000 50,000 12.5% Intangible assets 20,700 30,000 (9,300) (31.0%) Total assets $630,700 $560,000 $ 70,700 12.6% Liabilities Current liabilities $ 70,000 $ 80,000 $(10,000) (12.5%) Long-term liabilities 210,000 250,000 (40,000) (16.0%) Total liabilities $280,000 $330,000 $(50,000) (15.2%) Stockholders' Equity Common stock $225,000 $150,000 $ 75,000 50.0% Retained earnings 125,700 80,000 45,700 57.1% Total stockholders' equity $350,700 $230,000 $120,700 52.5% Total liabilities and stockholders' equity $630,700 $560,000 $ 70,700 12.6% DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 166. Revenue and expense data for Bluestem Company are as follows: Year 2 $ 37,000 350,000 40,000 800,000 150,000

Administrative expenses Cost of goods sold Income tax Sales Selling expenses

Year 1 $ 20,000 320,000 32,000 700,000 110,000

(a) Prepare a comparative income statement, with vertical analysis, stating each item for both years as a percent of sales. (b) Comment on significant changes disclosed by the comparative income statement. Round percentages to one decimal place. ANSWER: (a) Bluestem Company Comparative Income Statement For Years Ended December 31, Year 2 and Year 1

Sales Cost of goods sold Gross profit Selling expenses Administrative expenses Total operating expenses Income before income tax Income tax Net income

Year 2 Amount Percent $800,000 100.0% 350,000 43.8 $450,000 56.2% $150,000 18.8% 37,000 4.6 $187,000 23.4% $263,000 32.8% 40,000 5.0 $223,000 27.8%

Year 1 Amount Percent $700,000 100.0% 320,000 45.7 $380,000 54.3% $110,000 15.7% 20,000 2.9 $130,000 18.6% $250,000 35.7% 32,000 4.6 $218,000 31.1%

(b) There was a 1.9% decrease in the cost of goods sold, and a 1.7% increase in administrative expenses. However, the more significant increase of 3.1% in selling expenses offset the 1.9% decrease in cost of goods sold and contributed greatly to the 3.3% decrease in net income. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 167. What is a major advantage of using percentages rather than dollar changes in doing horizontal and vertical analyses? ANSWER: When percentages are utilized rather than dollars, companies that are not the same size can be compared. If Carbondale Chemicals is a $10 billion per year sales company and Heartland Chemicals is a $500 million per year sales company, these two companies can still be compared by using percentages determined by the analysis. These companies' results can also be compared to industry averages. DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-02 - 17-02 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 168. The following items are reported on a company’s balance sheet: Cash Marketable securities Accounts receivable Inventory Accounts payable

$230,000 50,000 200,000 240,000 300,000

Determine the (a) current ratio and (b) quick ratio. Round your answers to one decimal place. ANSWER: (a) Current Ratio = Current Assets (Cash + Marketable Securities + Accounts Receivable + Inventory)/Current Liabilities (Accounts Payable) Current Ratio = ($230,000 + $50,000 + $200,000 + $240,000)/$300,000 Current Ratio = 2.4 (b) Quick Ratio = Quick Assets (Cash + Marketable Securities + Accounts Receivable)/Current Liabilities (Accounts Payable) Quick Ratio = ($230,000 + $50,000 + $200,000)/$300,000 Quick Ratio = 1.6 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 169. The following items are reported on a company’s balance sheet: Cash Marketable securities Accounts receivable Inventory Accounts payable

$400,000 50,000 150,000 200,000 250,000

Determine the (a) current ratio, and (b) quick ratio. Round your answers to one decimal place. ANSWER: (a) Current Ratio = Current Assets (Cash + Marketable Securities + Accounts Receivable + Inventory)/Current Liabilities (Accounts Payable) Current Ratio = ($400,000 + $50,000 + $150,000 + $200,000)/$250,000 Current Ratio = 3.2 (b) Quick Ratio = Quick Assets (Cash + Marketable Securities + Accounts Receivable)/Current Liabilities (Accounts Payable) Quick Ratio = ($400,000 + $50,000 + $150,000)/$250,000 Quick Ratio = 2.4 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 170. The following items are reported on Denver Company’s balance sheet: Cash Marketable securities Accounts receivable (net) Inventory Accounts payable

$190,000 160,000 240,000 350,000 600,000

Determine the (a) current ratio and (b) quick ratio. Round your answers to one decimal place. ANSWER: (a) Current Ratio = Current Assets/Current Liabilities Current Ratio = ($190,000 + $160,000 + $240,000 + $350,000)/$600,000 Current Ratio = 1.6 (b)

Quick Ratio = Quick Assets/Current Liabilities Quick Ratio = ($190,000 + $160,000 + $240,000)/$600,000 Quick Ratio = 1.0 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 171. For Garrison Corporation, the working capital at the end of the current year is $10,000 more than the working capital at the end of the preceding year, reported as follows: Current assets: Cash, marketable securities, and receivables Inventories Total current assets Current liabilities Working capital

Year 2

Year 1

$ 80,000 120,000 $200,000 100,000 $100,000

$ 84,000 66,000 $150,000 60,000 $ 90,000

Has the current position of Garrison Corporation improved? Explain. ANSWER: The amount of working capital and the change in working capital are just two indicators of the strength of the current position. A comparison of the current and quick ratios, along with the amount of working capital, gives a better analysis of the current position. Working capital Current ratio Quick ratio

Year 2 $100,000 2.0 0.8

Year 1 $90,000 2.5 1.4

Although working capital has increased, the current ratio has fallen from 2.5 to 2.0, and the quick ratio has fallen from 1.4 to 0.8. Reductions in the current and quick ratios imply that it has become difficult for the company to convert its assets into cash to pay off its short-term liabilities, so the current position has deteriorated. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 172. A company reports the following: Sales Average accounts receivable (net)

$720,000 45,000

Number of Days’ Sales in Receivables = Average Accounts Receivable/Average Daily Sales Number of Days’ Sales in Receivables = $45,000/($720,000/365) Number of Days’ Sales in Receivables = 22.8

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Chapter 17 - Financial Statement Analysis DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 173. A company reports the following: Sales Average accounts receivable (net)

$1,200,000 50,000

Determine the (a) accounts receivable turnover and (b) number of days’ sales in receivables. Round your answers to one decimal place. ANSWER: (a) Accounts Receivable Turnover = Sales/Average Accounts Receivable Accounts Receivable Turnover = $1,200,000/$50,000 Accounts Receivable Turnover = 24.0 (b) Number of Days’ Sales in Receivables = Average Accounts Receivable/Average Daily Sales Number of Days’ Sales in Receivables = $50,000/($1,200,000/365) Number of Days’ Sales in Receivables = 15.2 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 174. A company reports the following: Cost of goods sold Average inventory

$610,000 80,000

Determine the (a) inventory turnover and (b) number of days’ sales in inventory. Round your answers to one decimal place. ANSWER: (a) Inventory Turnover = Cost of Goods Sold/Average Inventory Inventory Turnover = $610,000/$80,000 Inventory Turnover = 7.6 (b)

Number of Days’ Sales in Inventory = Average Inventory/Average Daily Cost of Goods Sold Number of Days’ Sales in Inventory = $80,000/($610,000/365) Number of Days’ Sales in Inventory = 47.9 days

DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 175. The following data are available for Martin Solutions, Inc.: Year 2 Year 1 Sales $1,139,600 $1,192,320 Beginning inventory 80,000 64,000 Cost of goods sold 500,800 606,000 Ending inventory 72,000 80,000 (1) Determine for each year: (a) Inventory turnover (b) Number of days’ sales in inventory (Round intermediate calculation to the nearest whole number and your final answer to one decimal place.) (2) What conclusions can be drawn from these data concerning the inventories? ANSWER: (1) (a) Inventory Turnover = Cost of Goods Sold/Average Inventory Year 2 $500,800 ($72,000 + $80,000)/2 Year 1

$606,000 ($80,000 + $64,000)/2

= 6.6 = 8.4

(b) Number of Days’ Sales in Inventory = Average Inventory/ Average Daily Cost of Goods Sold Year 2

($72,000 + $80,000)/2 $1,372*

= 55.4

Year 1

($80,000 + $64,000)/2 $1,660**

= 43.4

*$1,372 = $500,800/365 days **$1,660 = $606,000/365 days (2)

The inventory position of the business has deteriorated. The inventory turnover has decreased, while the number of days’ sales in inventory has increased. The sales volume has declined faster than the inventory has declined, thus resulting in the deteriorating inventory position. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS ACCT.ACBSP.APC.23 - Financial Statement Analysis : ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 176. The following data are taken from the balance sheet at the end of the current year: Cash Accounts receivable Inventory Prepaid expenses Temporary investments Property, plant, and equipment Accounts payable Accrued liabilities Income tax payable Notes payable, short-term

$154,000 210,000 240,000 15,000 350,000 375,000 245,000 4,000 10,000 85,000

Determine the (a) working capital, (b) current ratio, and (c) quick ratio. Round ratios to one decimal place. ANSWER: (a) Current Assets ($969,000) – Current Liabilities ($344,000) = $625,000 (b) Current Assets ($969,000)/Current Liabilities ($344,000) = 2.8 (c) Cash + Temporary Investments + Accounts Receivable ($714,000)/Current Liabilities ($344,000) = 2.1 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 177. The following data are taken from the financial statements: Average accounts receivable (net) Accounts receivable (net), end of year Sales on account

Current Year Preceding Year $123,000 $ 95,000 129,012 87,516 950,000 825,000

(a) Assuming that credit terms on all sales are n/45, determine for each year: (1) Accounts receivable turnover (2) Number of days’ sales in receivables (Round intermediate calculation to the nearest whole number and your final answer to two decimal places.) (b) Comment on any significant trends revealed by the data. ANSWER: (a) Current Year Preceding Year (1) Sales on Account/Average Accounts Receivable (net) 7.72 8.68 (2)

Average Accounts Receivable/ Average Daily Sales on Account*

47.25

42.04

*Current: $950,000/365 = $2,603 Preceding: $825,000/365 = $2,260

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Chapter 17 - Financial Statement Analysis (b)

Although sales increased during the current year, a favorable trend, several unfavorable trends are disclosed by the analysis. The accounts receivable turnover has declined from 8.68 in the preceding year to 7.72 in the current year. Based on credit terms of n/45, a turnover of less than 8 indicates that some receivables are not being collected within the 45-day period. Likewise, the number of days' sales in receivables indicates an unfavorable trend, increasing from 42.04 at the end of the preceding year to 47.25 at the end of the current year.

DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 178. The following data are taken from the financial statements: Current Year $3,600,000 2,000,000 372,000 372,000

Sales Cost of goods sold Average inventory Inventory, end of year

Preceding Year $4,000,000 2,700,000 352,000 347,000

(a) Determine for each year: (1) Inventory turnover (Round answer to one decimal place.) (2) Number of days’ sales in inventory (Round intermediate calculation to the nearest whole number and your final answer to two decimal places.) (b) Comment on the favorable and unfavorable trends revealed by the data. ANSWER: (a) Current Preceding Year Year (1) Cost of Goods Sold/Average Inventory 5.4 7.7 (2)

Average Inventory/Average Daily Cost of Goods Sold* *Average Daily Cost of Goods Sold (Cost of Goods Sold ÷ 365 days)

67.90

45.59

5,479 days 7,397 days

(b) Sales decreased while gross profit increased. The inventory turnover declined and the number of days' sales in inventory increased, which are unfavorable trends. DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-03 - 17-03 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 179. The following information was taken from Slater Company’s balance sheet: Fixed assets (net) Long-term liabilities Total liabilities Total stockholders’ equity

$1,250,000 500,000 672,000 1,680,000

Determine the company’s (a) ratio of fixed assets to long-term liabilities and (b) ratio of liabilities to stockholders’ equity. Round your answers to one decimal place. ANSWER: Ratio of Fixed Assets to Long-Term Liabilities = Fixed (a) Assets/Long-Term Liabilities Ratio of Fixed Assets to Long-Term Liabilities = $1,250,000/$500,000 Ratio of Fixed Assets to Long-Term Liabilities = 2.5 Ratio of Liabilities to Stockholders' Equity = Total Liabilities/Total Stockholders’ Equity Ratio of Liabilities to Stockholders' Equity = $672,000/$1,680,000 Ratio of Liabilities to Stockholders' Equity = 0.4 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-04 - 17-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic (b)

180. A company reports the following: Income before income tax Interest expense

$600,000 150,000

Determine the times interest earned. Round your answer to one decimal place. ANSWER: Times Interest Earned = (Income Before Income Tax + Interest Expense)/Interest Expense Times Interest Earned = ($600,000 + $150,000)/$150,000 Times Interest Earned = 5.0 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-04 - 17-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 181. The balance sheet for Seuss Company at the end of the current fiscal year indicated the following: Bonds payable, 10% (20-year term) Preferred 10% stock, $100 par Common stock, $10 par

$5,000,000 1,000,000 2,000,000

Income before income tax was $1,500,000, and income taxes were $200,000 for the current year. Cash dividends paid on common stock during the current year totaled $150,000. The common stock sells for $75 per share at the end of the year. Determine each of the following: (a) Times interest earned (b) Earnings per share on common stock (c) Price-earnings ratio (d) Dividends per share of common stock (e) Dividend yield Round to one decimal place except earnings per share and dividends per share, which should be rounded to two decimal places. ANSWER: (a) Times Interest Earned = (Income Before Income Tax + Interest Expense)/Interest Expense ($1,500,000 + $500,000)/$500,000 = 4.0 times (b) Earnings per Share on Common Stock = (Net Income – Preferred Dividends)/Common Shares Outstanding ($1,300,000 – $100,000)/200,000 shares = $6.00 (c) Price-Earnings Ratio = Market Price per Share/Earnings per Share $75.00/$6.00 = 12.5 (d) Dividends per Share of Common Stock = Common Dividends/Common Shares Outstanding $150,000/200,000 shares = $0.75 (e) Dividend Yield = Common Dividend per Share/Share Price $0.75/$75.00 = 1% DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-04 - 17-04 ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 182. Define solvency and profitability. How are they alike? ANSWER: Solvency is the ability of a company to meet its financial obligations (debts) as they become due. Profitability is the ability of a company to earn income. They are interrelated because a company that cannot pay its debts will have difficulty obtaining credit. A lack of credit can prevent a company from taking actions (i.e., expansion) that would increase profitability. DIFFICULTY: Moderate Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-04 - 17-04 ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 183. The following information has been condensed from the December 31 balance sheets of Gabriel Co.: Assets: Current assets Fixed assets (net) Total assets Liabilities: Current liabilities Long-term liabilities Total liabilities Stockholders' equity Total liabilities and stockholders' equity

Year 2

Year 1

$ 825,500 1,473,600 $2,299,100

$ 674,300 1,275,300 $1,949,600

$ 313,500 703,000 $1,016,500 $1,282,600

$ 309,600 545,000 $ 854,600 $1,095,000

$2,299,100

$1,949,600

(a) Determine the ratio of fixed assets to long-term liabilities for each year. (b) Determine the ratio of liabilities to stockholders' equity for each year. (c) Comment on the year-to-year changes for both ratios. Round your answers to two decimal places. ANSWER: (a) Ratio of fixed assets to long-term liabilities (b) Ratio of liabilities to stockholders' equity

Year 2

Year 1

2.10

2.34

0.79

0.78

(c) In the second year, the margin of safety to creditors is lower. There are fewer fixed assets on a proportionate basis to protect the interests of the long-term creditors than in the first year. Also, the ratio of liabilities to stockholders’ equity has risen slightly in the second year, which indicates that more of the company is financed by debt and equity.

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Chapter 17 - Financial Statement Analysis DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-04 - 17-04 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 184. A company reports the following: Sales Average total assets (excluding long-term investments)

$2,400,000 1,500,000

Determine the asset turnover ratio. Round your answer to one decimal place. ANSWER: Asset Turnover Ratio = Sales/Average Total Assets Asset Turnover Ratio = $2,400,000/$1,500,000 Asset Turnover Ratio = 1.6 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 185. A company reports the following: Sales $2,520,000 Average total assets (excluding long-term investments) 1,400,000 Determine the asset turnover ratio. Round your answer to one decimal place. ANSWER: Asset Turnover Ratio = Sales/Average Total Assets Asset Turnover Ratio = $2,520,000/$1,400,000 Asset Turnover Ratio = 1.8 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 186. A company reports the following income statement and balance sheet information for the current year: Net income Interest expense Average total assets

$ 180,000 20,000 2,000,000

Determine the return on total assets. Round your answer to one decimal place. ANSWER: Return on Total Assets = (Net Income + Interest Expense)/Average Total Assets Return on Total Assets = ($180,000 + $20,000)/$2,000,000 Return on Total Assets = $200,000/$2,000,000 Return on Total Assets = 10%

Page 70

Chapter 17 - Financial Statement Analysis DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 187. A company reports the following: Net income Preferred dividends Shares of common stock outstanding Market price per share of common stock

$150,000 $10,000 20,000 $35

Calculate the company’s earnings per share on common stock. ANSWER: Earnings per Share on Common Stock = (Net Income – Preferred Dividends)/Shares of Common Stock Outstanding. Earnings per Share = ($150,000 – $10,000)/20,000 Earnings per Share = $7.00 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 188. A company reports the following: Net income Preferred dividends Average stockholders’ equity Average common stockholders’ equity

$ 350,000 50,000 1,000,000 800,000

Determine the (a) return on stockholders’ equity and (b) return on common stockholders’ equity. Round your answers to one decimal place. ANSWER: (a) Return on Stockholders’ Equity = Net Income/Average Stockholders’ Equity Return on Stockholders’ Equity = $350,000/$1,000,000 Return on Stockholders’ Equity = 35.0% Return on Common Stockholders’ Equity = (Net Income – Preferred Dividends)/ Average Common Stockholders’ Equity Return on Common Stockholders’ Equity = ($350,000 – $50,000)/$800,000 Return on Common Stockholders’ Equity = 37.5% DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic (b)

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Chapter 17 - Financial Statement Analysis 189. A company reports the following: Net income Preferred dividends Shares of common stock outstanding Market price per share of common stock

$270,000 $10,000 20,000 $36.40

Calculate the company’s price-earnings ratio. Round your answer to one decimal place. ANSWER:

Price-Earnings Ratio = Market Price per Share of Common Stock/Earnings per Share on Common Stock Earnings per Share on Common Stock = (Net Income – Preferred Dividends)/Shares of Common Stock Outstanding Earnings per Share = ($270,000 – $10,000)/20,000 Earnings per Share = $13.00

Price-Earnings Ratio = $36.40/$13.00 Price-Earnings Ratio = 2.8 DIFFICULTY: Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 190. The following selected data were taken from the financial statements of the Winter Group for the three most recent years of operations:

Total assets Notes payable (10% interest) Common stock Preferred $6 stock, $100 par Retained earnings

Dec. 31, Year 3 $3,000,000 1,000,000 400,000 200,000 1,126,000

Dec. 31, Year 2 $2,700,000 1,000,000 400,000 200,000 896,000

Dec. 31, Year 1 $2,400,000 1,000,000 400,000 200,000 600,000

The Year 3 net income was $242,000, and the Year 2 net income was $308,000. No dividends on common stock were declared during the three years. (a)

Determine the return on total assets, the return on stockholders' equity, and the return on common stockholders' equity for Years 2 and 3. Round to one decimal place. (b) What conclusion can be drawn from these data as to the company's profitability? ANSWER: (a) Return on Total Assets = (Net Income + Interest Expense )/Average Total Assets Year 3: ($242,000 + $100,000)/$2,850,000* = 12.0% Year 2: ($308,000 + $100,000)/$2,550,000** = 16.0% *($3,000,000 + $2,700,000)/2 **($2,700,000 + $2,400,000)/2 Return on Stockholders’ Equity = Net Income/Average Stockholders’ Equity Year 3: $242,000/$1,611,000* = 15.0% Year 2: $308,000/$1,348,000** = 22.8% *($1,726,000 + $1,496,000)/2 **($1,496,000 + $1,200,000)/2 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter 17 - Financial Statement Analysis Return on Common Stockholders’ Equity = (Net Income – Preferred Dividends)/Average Common Stockholders’ Equity Year 3: ($242,000 – $12,000)/$1,411,000* = 16.3% Year 2: ($308,000 – $12,000)/$1,148,000** = 25.8% *($1,526,000 + $1,296,000)/2 **($1,296,000 + $1,000,000)/2 (b) The profitability ratios indicate that the Winter Group’s profitability has deteriorated. Most of this change is from net income falling from $308,000 in Year 2 to $242,000 in Year 3. The cost of debt is 10%. Since the return on total assets exceeds this amount in either year, there is positive leverage from use of debt. However, this leverage is greater in Year 2 because the return on total assets exceeds the cost of debt by a greater amount in Year 2. DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 191. Selected data from Carmen Company at year-end are presented below. Total assets Average total assets Net income Sales Average common stockholders' equity Net cash provided by operating activities Shares of common stock outstanding Long-term investments

$2,000,000 $2,200,000 $250,000 $1,300,000 $1,000,000 $275,000 10,000 $400,000

Calculate: (a) Asset turnover ratio (b) Return on total assets (c) Return on common stockholders' equity (d) Earnings per share on common stock. Assume the company had no preferred stock or interest expense. Round dollar values to two decimal places and other final answers to one decimal place. ANSWER: With the information provided, the profitability ratios that can be calculated are as follows: (a) Asset Turnover Ratio

= Sales/Average Total Assets (excluding long-term investments) = $1,300,000/($2,200,000 – $400,000) = 0.7

(b) Return on Total Assets

= (Net Income + Interest Expense)/Average Total Assets = ($250,000 + 0)/$2,200,000 = 11.4%

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Chapter 17 - Financial Statement Analysis (c) Return on Common Stockholders' Equity = = (d) Earnings per Share on Common Stock

($250,000 – $0)/$1,000,000 25%

= $250,000/10,000 = $25.00 per share

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 192. The following information was taken from the financial statement of Fox Resources for December 31 of the current fiscal year: Common stock, $20 par value (no change during the year) Preferred 10% stock, $40 par (no change during the year)

$5,000,000 2,000,000

The net income was $600,000, and the declared dividends on the common stock were $125,000 for the current year. The market price of the common stock is $20 per share. Calculate for the common stock: (a) Earnings per share (b) Price-earnings ratio (c) Dividends per share and dividend yield Round to one decimal place except earnings per share, which should be rounded to two decimal places. ANSWER: (a) Earnings per Share = (Net Income – Preferred Dividends)/Common Shares Outstanding = ($600,000 – $200,000)/250,000 shares = $1.60 (b) Price-Earnings Ratio = Market Price per Share/Earnings per Share = $20.00/$1.60 = 12.5 (c) Dividends per Share = Common Dividends/Common Shares Outstanding = $125,000/250,000 shares = $0.50 Dividend Yield = Dividends per Share of Common Stock/Market Price per Share of Common Stock = $0.50/$20.00 = 2.5% DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 193. The following data are taken from the financial statements: Current assets Property, plant, and equipment Current liabilities (non-interest-bearing) Long-term liabilities, 12% Preferred 10% stock Common stock, $25 par Retained earnings, beginning of year Net income for year Preferred dividends declared Common dividends declared

Current Year $ 745,000 1,510,000

Preceding Year $ 820,000 1,400,000

160,000 400,000 250,000 1,200,000

140,000 400,000 250,000 1,200,000

230,000 110,000 (25,000) (70,000)

160,000 155,000 (25,000) (60,000)

Determine for the current year: (a) Return on total assets (b) Return on stockholders' equity (c) Return on common stockholders' equity (d) Earnings per share on common stock (e) Price-earnings ratio on common stock (f) Dividend yield The current market price per share of common stock is $25. Round dollar values to two decimal places and other final answers to one decimal place. ANSWER: (Net Income + Interest (a) Return on Total Assets = Expense)/Average Total Assets ($110,000 + $48,000)/[($2,255,000 = + $2,220,000)/2] = $158,000/$2,237,500 = 7.1% (b)

Return on Stockholders' Equity

(c)

Return on Common Stockholders' Equity

Net Income/Average Stockholders' Equity $110,000/[($1,680,000 + = $1,610,000)/2] $110,000/$1,645,000 = 6.7% =

($110,000 – $25,000)/[($1,430,000 + $1,360,000)/2] $85,000/$1,395,000 6.1%

= = = (d)

Earnings per Share on Common Stock = = =

($110,000 – $25,000)/48,000 $85,000/48,000 $1.77

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Chapter 17 - Financial Statement Analysis Price-Earnings Ratio on (e) Common Stock

(f) Dividend Yield

Market Price per Share of Common = Stock/Earnings per Share of Common Stock = $25/$1.77 = 14.1% Dividends per Share of Common = Stock/Market Price per Share of Common Stock = $1.46/$25 = 5.8%

DIFFICULTY:

Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 194. Abigail Company reports the following: Net income Preferred dividends Average stockholders’ equity Average common stockholders’ equity

$ 295,000 30,000 1,000,000 700,000

Return on Common Stockholders’ Equity = (Net Income – Preferred Dividends)/Average Common Stockholders' Equity Return on Common Stockholders’ Equity = ($295,000 – $30,000)/$700,000 Return on Common Stockholders’ Equity = 37.9%

DIFFICULTY:

Easy Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

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Chapter 17 - Financial Statement Analysis 195. Gallant Company reported net income of $2,500,000. The income statement included a $200,000 loss on discontinued operations, after applicable income tax. There were 100,000 shares of $10 par common stock and 40,000 shares of 4% preferred stock of $100 par outstanding throughout the current year. Prepare the earnings per share section of Gallant Company’s income statement. ANSWER: Earnings per common share: Income from continuing operations* Loss on discontinued operations ($200,000/ 100,000 shares) Net income *Net income Loss on discontinued operations Income from continuing operations

$25.40 (2.00) $23.40 $2,500,000 200,000 $2,700,000

Earnings per Share on Common Stock = (Income from Continuing Operations – Preferred Dividends)/ Common Shares Outstanding = ($2,700,000 – $160,000)/100,000 shares = $25.40 per share DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCT.WARD.18.17-APP - 17-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 196. Zeus Company reports the following for the current year: Income from continuing operations before income tax Loss from discontinued operations Weighted average number of common shares outstanding Applicable tax rate *Net of any tax effect

$500,000 $90,000* 40,000 40%

(a) Prepare a partial income statement for Zeus Company beginning with income from continuing operations before income tax. (b) Calculate the earnings per common share for Zeus. ANSWER: (a) Zeus Company Partial Income Statement For the Year Ended December 31 Income from continuing operations before income tax Income tax expense Income from continuing operations Loss from discontinued operations (net of tax) Net income

$500,000 200,000 $300,000 90,000 $210,000

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Chapter 17 - Financial Statement Analysis (b) Zeus Company Partial Income Statement For the Year Ended December 31 Earnings per common share: Income from continuing operations Loss from discontinued operations Net income 1 $7.50 = $300,000 ÷ 40,000 shares 2 $2.25 = $90,000 ÷ 40,000 shares DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCT.WARD.18.17-APP - 17-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

$7.501 2.252 $5.25

197. Rho, Sigma, and Tau companies have the following data for the current year: Price-earnings ratio

Rho Company 23.7

Sigma Company 16.9

Tau Company 30.1

Which company would be expected to have the best potential for future common stock price appreciation? ANSWER: The price-earnings (P/E) ratio on common stock measures a company’s future earnings prospects. Therefore, Tau Company, with the highest P/E ratio, would be expected to have the best potential for future common stock price appreciation. DIFFICULTY: Easy Bloom's: Understanding LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN-03 - Measurement BUSPROG: Analytic 198. CorpCo gathered the following information as of the end of the current fiscal year: Dividends on common stock Market price per share of common stock Shares of common stock outstanding Dividends on preferred stock Shares of preferred stock outstanding Earnings per share on common stock Dividends per share of common stock Net income

$125,000 $115 5,000 $65,000 600 $102 $25 $575,000

What is CorpCo's dividend yield? Write your answer as a percent, rounded to one decimal place.

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Chapter 17 - Financial Statement Analysis ANSWER:

CorpCo's dividend yield is 21.7%, calculated as follows: Dividends per Share of Common Stock/Market Price per Share of Common Stock = $25/$115 = 21.7% DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN-03 - Measurement BUSPROG: Analytic 199. CorpCo gathered the following information as of the end of the current fiscal year: Dividends on common stock Market price per share of common stock Shares of common stock outstanding Dividends on preferred stock Shares of preferred stock outstanding Earnings per share on common stock Dividends per share of common stock Net income

$125,000 $115 5,000 $65,000 600 $102 $25 $575,000

What is CorpCo's price-earnings ratio? Round your answer to one decimal place. ANSWER: CorpCo's price-earnings ratio is 1.1, calculated as follows: Market Price per Share of Common Stock/Earnings per Share of Common Stock = $115/$102 = 1.1 DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-05 - 17-05 ACCREDITING STANDARDS: ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN-03 - Measurement BUSPROG: Analytic 200. What information is generally included in the Management's Discussion and Analysis (MD&A) section of a corporate annual report? ANSWER: The MD&A section typically includes: 

Management’s analysis and explanations of any significant changes between the current and prior years’ financial statements.



Important accounting principles or policies that could affect interpretation of the financial statements, including the effect of changes in accounting principles or the adoption of new principles.



Management’s assessment of the company’s liquidity and the availability of capital to the company.



Significant risk exposures that might affect the company.



Any “off-balance-sheet” arrangements such as leases not included directly on the financial statements.

Page 79

Chapter 17 - Financial Statement Analysis DIFFICULTY:

Moderate Bloom's: Remembering LEARNING OBJECTIVES: ACCT.WARD.18.17-06 - 17-06 ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic 201. Prepare an income statement using the following data for New Orleans Adventures for the year ended December 31: Sales Cost of goods sold Operating expenses Income tax expense Loss on discontinued operations ANSWER:

$24,500,000 10,900,000 6,300,000 500,000 100,000 New Orleans Adventures Income Statement For the Year Ended December 31

Sales Cost of goods sold Gross profit Operating expenses Income from continuing operations before income tax Income tax expense Income from continuing operations Loss on discontinued operations Net income DIFFICULTY: Moderate Bloom's: Applying LEARNING OBJECTIVES: ACCT.WARD.18.17-APP - 17-APP ACCREDITING STANDARDS: ACCT.ACBSP.APC.02 - GAAP ACCT.ACBSP.APC.23 - Financial Statement Analysis ACCT.AICPA.FN.03 - Measurement BUSPROG: Analytic

$24,500,000 10,900,000 $13,600,000 6,300,000 $ 7,300,000 500,000 $ 6,800,000 100,000 $ 6,700,000

Page 80